10Q.3Q.2013


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
November 3, 2013
 

OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 


Commission File Number 001-07572
PVH CORP.
(Exact name of registrant as specified in its charter)

Delaware
 
13-1166910
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
200 Madison Avenue, New York, New York
 
10016
(Address of principal executive offices)
 
(Zip Code)

(212) 381-3500
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x     Accelerated filer  o     Non-accelerated filer  o     Smaller reporting company  o
(do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of common stock, par value $1.00 per share, of the registrant as of December 3, 2013 was 81,622,410.



PVH CORP.
INDEX
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Forward-looking statements in this Quarterly Report on Form 10-Q including, without limitation, statements relating to our future revenue and cash flows, plans, strategies, objectives, expectations and intentions are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated, including, without limitation, the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) in connection with the acquisition of The Warnaco Group, Inc. (“Warnaco”), we borrowed significant amounts, may be considered to be highly leveraged, and will have to use a significant portion of our cash flows to service such indebtedness, as a result of which we might not have sufficient funds to operate our businesses in the manner we intend or have operated in the past; (iii) the levels of sales of our apparel, footwear and related products, both to our wholesale customers and in our retail stores, the levels of sales of our licensees at wholesale and retail, and the extent of discounts and promotional pricing in which we and our licensees and other business partners are required to engage, all of which can be affected by weather conditions, changes in the economy, fuel prices, reductions in travel, fashion trends, consolidations, repositionings and bankruptcies in the retail industries, repositionings of brands by our licensors and other factors; (iv) our plans and results of operations will be affected by our ability to manage our growth and inventory, including our ability to realize benefits from Warnaco; (v) our operations and results could be affected by quota restrictions and the imposition of safeguard controls (which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and technical expertise needed), the availability and cost of raw materials, our ability to adjust timely to changes in trade regulations and the migration and development of manufacturers (which can affect where our products can best be produced), changes in available factory and shipping capacity, wage and shipping cost escalation, and civil conflict, war or terrorist acts, the threat of any of the foregoing, or political and labor instability in any of the countries where our or our licensees’ or other business partners’ products are sold, produced or are planned to be sold or produced; (vi) disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas, as well as reduced consumer traffic and purchasing, as consumers become ill or limit or cease shopping in order to avoid exposure; (vii) acquisitions and issues arising with acquisitions and proposed transactions, including, without limitation, the ability to integrate an acquired entity, such as Warnaco, into us with no substantial adverse effect on the acquired entity’s or our existing operations, employee relationships, vendor relationships, customer relationships or financial performance; (viii) the failure of our licensees to market successfully licensed products or to preserve the value of our brands, or their misuse of our brands; and (ix) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

We do not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding
revenue or cash flows, whether as a result of the receipt of new information, future events or otherwise.
PART I -- FINANCIAL INFORMATION

Item 1 - Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II -- OTHER INFORMATION
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

PVH Corp.
Consolidated Income Statements
Unaudited
(In thousands, except per share data)

 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 3,
 
October 28,
 
November 3,
 
October 28,
 
2013
 
2012
 
2013
 
2012
Net sales
$
2,145,165

 
$
1,501,442

 
$
5,852,649

 
$
4,033,911

Royalty revenue
85,443

 
103,944

 
215,071

 
271,917

Advertising and other revenue
28,517

 
37,384

 
66,412

 
100,971

Total revenue
2,259,125

 
1,642,770

 
6,134,132

 
4,406,799

Cost of goods sold
1,087,347

 
773,686

 
2,984,405

 
2,038,225

Gross profit
1,171,778

 
869,084

 
3,149,727

 
2,368,574

Selling, general and administrative expenses
927,370

 
631,139

 
2,787,846

 
1,823,143

Debt modification and extinguishment costs
—

 
—

 
40,395

 
—

Equity in income of unconsolidated affiliates, net
4,916

 
3,193

 
8,056

 
5,043

Income before interest and taxes
249,324

 
241,138

 
329,542

 
550,474

Interest expense
47,852

 
28,660

 
145,291

 
86,729

Interest income
1,884

 
376

 
5,995

 
846

Income before taxes
203,356

 
212,854

 
190,246

 
464,591

Income tax expense
6,721

 
45,156

 
29,533

 
111,499

Net income
$
196,635

 
$
167,698

 
$
160,713

 
$
353,092

Less: Net (loss) income attributable to redeemable non-controlling interest
(78
)
 
—

 
48

 
—

Net income attributable to PVH Corp.
$
196,713

 
$
167,698

 
$
160,665

 
$
353,092

Basic net income per common share attributable to PVH Corp.
$
2.41

 
$
2.31

 
$
1.98

 
$
4.88

Diluted net income per common share attributable to PVH Corp.
$
2.37

 
$
2.27

 
$
1.95

 
$
4.79

Dividends declared per common share
$
0.0375

 
$
0.0375

 
$
0.1500

 
$
0.1125


See accompanying notes.

1


PVH Corp.
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)


 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 3,
 
October 28,
 
November 3,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income
$
196,635

 
$
167,698

 
$
160,713

 
$
353,092

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $138; $449; $(192) and $(4)
82,070

 
99,391

 
(68,700
)
 
(33,796
)
Amortization of prior service credit related to pension and postretirement plans, net of tax (benefit) of $(85); $(85); $(253) and $(253)
(136
)
 
(135
)
 
(407
)
 
(406
)
Net unrealized and realized (loss) gain on effective hedges, net of tax (benefit) expense of $(970); $563; $(1,724) and $927
(7,129
)
 
(10,273
)
 
2,385

 
(8,174
)
Comprehensive income
271,440

 
256,681

 
93,991

 
310,716

Less: Comprehensive loss attributable to redeemable non-controlling interest
(215
)
 
—

 
(1,840
)
 
—

Total comprehensive income attributable to PVH Corp.
$
271,655

 
$
256,681

 
$
95,831

 
$
310,716


See accompanying notes.


2



PVH Corp.
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
November 3,
 
February 3,
 
October 28,
 
2013
 
2013
 
2012
 
UNAUDITED
 
AUDITED
 
UNAUDITED
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
542,533

 
$
892,209

 
$
276,630

Trade receivables, net of allowances for doubtful accounts of $21,108, $16,114 and $17,437
880,160

 
418,251

 
587,603

Other receivables
39,686

 
23,073

 
19,862

Inventories, net
1,168,188

 
878,415

 
855,359

Prepaid expenses
227,771

 
157,802

 
80,925

Other, including deferred taxes of $88,089, $38,310 and $53,530
159,161

 
67,256

 
91,740

Assets held for sale
47,454

 
—

 
—

Total Current Assets
3,064,953

 
2,437,006

 
1,912,119

Property, Plant and Equipment, net
693,089

 
561,335

 
519,863

Goodwill
3,460,505

 
1,958,887

 
1,855,195

Tradenames
2,998,785

 
2,413,809

 
2,374,513

Perpetual License Rights
206,996

 
—

 
—

Other Intangibles, net
842,745

 
167,196

 
153,812

Other Assets, including deferred taxes of $149,093, $61,465 and $3,671
384,547

 
243,316

 
170,469

Total Assets
$
11,651,620

 
$
7,781,549

 
$
6,985,971

 
 
 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
Current Liabilities:
 
 
 
 
 
Accounts payable
$
435,917

 
$
377,231

 
$
300,468

Accrued expenses, including deferred taxes of $2,481, $0 and $0
750,211

 
646,130

 
588,511

Deferred revenue
18,343

 
40,239

 
24,473

Short-term borrowings
12,441

 
10,847

 
142,514

Current portion of long-term debt
85,000

 
88,000

 
84,000

Total Current Liabilities
1,301,912

 
1,162,447

 
1,139,966

Long-Term Debt
4,174,552

 
2,211,642

 
1,647,596

Other Liabilities, including deferred taxes of $1,088,715, $589,796 and $522,327
1,833,989

 
1,154,891

 
1,152,342

Redeemable Non-Controlling Interest
5,600

 
—

 
—

Stockholders’ Equity:
 
 
 
 
 
Preferred stock, par value $100 per share; 150,000 total shares authorized
—

 
—

 
—

Series A convertible preferred stock, par value $100 per share; 0, 8,000 and 8,000 total shares authorized; 0, 0 and 4,000 shares issued and outstanding (with total liquidation preference of $0, $0 and $100,000)
—

 
—

 
94,298

Common stock, par value $1 per share; 240,000,000 shares authorized; 82,095,790; 73,324,491 and 71,037,023 shares issued
82,096

 
73,324

 
71,037

Additional paid in capital - common stock
2,646,397

 
1,623,693

 
1,511,574

Retained earnings
1,592,201

 
1,445,673

 
1,367,673

Accumulated other comprehensive income
75,048

 
139,882

 
31,459

Less: 504,845; 413,596 and 413,301 shares of common stock held in treasury, at cost
(60,175
)
 
(30,003
)
 
(29,974
)
Total Stockholders’ Equity
4,335,567

 
3,252,569

 
3,046,067

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity
$
11,651,620

 
$
7,781,549

 
$
6,985,971


See accompanying notes.

3



PVH Corp.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
 
Thirty-Nine Weeks Ended
 
November 3,
 
October 28,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
160,713

 
$
353,092

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization
267,016

 
102,544

Equity in income of unconsolidated affiliates, net
(8,056
)
 
(5,043
)
Deferred taxes
(87,089
)
 
30,777

Stock-based compensation expense
47,103

 
26,372

Impairment of long-lived assets
5,804

 
259

Debt modification and extinguishment costs
40,395

 
—

Write-down of assets held for sale
15,997

 
—

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
(176,011
)
 
(122,277
)
Inventories, net
98,649

 
(50,622
)
Accounts payable, accrued expenses and deferred revenue
(303,418
)
 
(38,849
)
Prepaid expenses
(22,153
)
 
30,011

Employer pension contributions
(60,000
)
 
(21,123
)
Other, net
74,968

 
(19,763
)
Net cash provided by operating activities
53,918

 
285,378

INVESTING ACTIVITIES(1)
 
 
 
Business acquisitions, net of cash acquired
(1,815,329
)
 
(13,104
)
Purchase of property, plant and equipment
(166,194
)
 
(137,048
)
Contingent purchase price payments
(37,576
)
 
(35,694
)
Investments in unconsolidated affiliates
(3,468
)
 
(1,900
)
Net cash used by investing activities
(2,022,567
)
 
(187,746
)
FINANCING ACTIVITIES(1)
 
 
 
Net proceeds from revolving credit facilities
1,325

 
130,000

Net payments on short-term borrowings
(26,658
)
 
(526
)
Repayment of old credit facilities
(900,000
)
 
(167,414
)
Repayment of new credit facilities
(202,938
)
 
—

Repayment of Warnaco’s previously outstanding debt
(197,000
)
 
—

Net proceeds from new credit facilities
2,993,430

 
—

Payment of fees associated with issuance of senior notes
(16,257
)
 
—

Net proceeds from settlement of awards under stock plans
27,004

 
7,121

Excess tax benefits from awards under stock plans
22,681

 
8,327

Cash dividends
(12,297
)
 
(8,237
)
Acquisition of treasury shares
(60,441
)
 
(13,955
)
Payments of capital lease obligations
(7,036
)
 
(8,565
)
Net cash provided (used) by financing activities
1,621,813

 
(53,249
)
Effect of exchange rate changes on cash and cash equivalents
(2,840
)
 
(950
)
(Decrease) increase in cash and cash equivalents
(349,676
)
 
43,433

Cash and cash equivalents at beginning of period
892,209

 
233,197

Cash and cash equivalents at end of period
$
542,533

 
$
276,630


(1) See Note 18 for information on noncash investing and financing transactions.

See accompanying notes.

4


PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Currency and share amounts in thousands, except per share data)

1. GENERAL

PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company whose brand portfolio consists of nationally and internationally recognized brand names, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner’s and Olga, which are owned, and Speedo, which is licensed, as well as various other owned, licensed and private label brands. In addition, through the end of the third quarter of 2013, the Company owned, and operated businesses under, the G.H. Bass & Co. and Bass trademarks. The Company designs and markets branded dress shirts, neckwear, sportswear, swim products, intimates and, to a lesser extent, footwear and other related products and licenses its owned brands over a broad range of products. References to the aforementioned and other brand names are to registered trademarks owned by the Company or licensed to the Company by third parties and are identified by italicizing the brand name.

The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. Please see Note 5, “Investments in Unconsolidated Affiliates,” for a further discussion. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. As a result of the acquisition of The Warnaco Group, Inc. (“Warnaco”), the Company owns a majority interest in a joint venture in India that is consolidated and accounted for as a redeemable non-controlling interest. Please see Note 6, “Redeemable Non-Controlling Interest,” for a further discussion. The redeemable non-controlling interest represents the minority shareholders’ proportionate share (49%) of the equity in that entity.

The Company’s fiscal years are based on the 52-53 week period ending on the Sunday closest to February 1 and are designated by the calendar year in which the fiscal year commences. References to a year are to the Company’s fiscal year, unless the context requires otherwise.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not contain all disclosures required by accounting principles generally accepted in the United States for complete financial statements. Reference should be made to the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2013.

The preparation of interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from the estimates.

The results of operations for the thirteen and thirty-nine weeks ended November 3, 2013 and October 28, 2012 are not necessarily indicative of those for a full fiscal year due, in part, to seasonal factors. The data contained in these financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods.

The results of operations for the thirteen and thirty-nine weeks ended November 3, 2013 includes income of $24,309 related to the amendment of an unfavorable contract. At the time of the Tommy Hilfiger acquisition in 2010, a liability was recorded for such unfavorable contract. The amendment executed in the third quarter of 2013 adjusted the contract terms thereby reducing the amount by which the contract was unfavorable and resulted in a reduction of the liability, amounting to $24,309. Please see Note 19, “Segment Data,” for a further discussion.

Certain reclassifications have been made to the consolidated financial statements and the notes thereto for the prior year periods to present that information on a basis consistent with the current year. Please see Note 7, “Goodwill and Other Intangible Assets,” Note 8, “Retirement and Benefit Plans,” and Note 19, “Segment Data,” for discussions of changes in accounting and/or reporting related to these areas.

2. INVENTORIES

Inventories are comprised principally of finished goods and are stated at the lower of cost or market.


5


3. ACQUISITIONS

Acquisition of Warnaco

The Company acquired on February 13, 2013 all of the outstanding equity interests in Warnaco. The results of Warnaco’s operations since that date are included in the Company’s consolidated financial statements. Warnaco designs, sources, markets and distributes a broad line of intimate apparel, sportswear and swim products worldwide. Warnaco’s products are sold under the Calvin Klein, Speedo, Warner’s and Olga brand names and were also previously sold under the Chaps brand name. Ralph Lauren Corporation reacquired the Chaps license effective contemporaneously with the Company’s acquisition of Warnaco.

The Warnaco acquisition provided the Company with direct global control of the Calvin Klein brand image and commercial decisions for the two largest Calvin Klein apparel categories—jeans and underwear. In addition, the Company believes the acquisition takes advantage of its and Warnaco’s complementary geographic platforms. Warnaco’s operations in Asia and Latin America should enhance the Company’s opportunities in those high-growth regions, and the Company will have the ability to leverage its expertise and infrastructure in North America and Europe to enhance the growth and profitability of the Calvin Klein jeans and underwear businesses in those regions.

Fair Value of the Acquisition Consideration

The acquisition date fair value of the acquisition consideration paid at closing totaled $3,137,056, which consisted of the following:

Cash
 
$
2,179,980

Common stock (7,674 shares, par value $1.00 per share)
 
926,452

Warnaco employee replacement stock awards
 
39,752

Elimination of pre-acquisition liability to Warnaco
 
(9,128
)
Total fair value of the acquisition consideration
 
$
3,137,056


The fair value of the 7,674 common shares issued was equal to the aggregate value of the shares at the closing market price of the Company’s common stock on February 12, 2013, the day prior to the closing. The value of the replacement stock awards was determined by multiplying the estimated fair value of the Warnaco awards outstanding at the time of the acquisition, reduced by an estimated value of awards to be forfeited, by the proportionate amount of the vesting period that had lapsed as of the acquisition date. Also included in the acquisition consideration was the elimination of a $9,128 pre-acquisition liability to Warnaco.

The Company funded the cash portion and related costs of the Warnaco acquisition, repaid all outstanding borrowings under its previously outstanding senior secured credit facilities and repaid all of Warnaco’s previously outstanding long-term debt with the net proceeds of (i) the issuance of $700,000 of 4 1/2% senior notes due 2022; and (ii) the borrowing of $3,075,000 of term loans under new senior secured credit facilities.

Please see Note 7, “Goodwill and Other Intangible Assets,” Note 9, “Debt,” Note 13, “Stock-Based Compensation,” and Note 15, “Stockholders’ Equity,” for a further discussion of these aspects of the acquisition.

The Company incurred certain pre-tax costs directly associated with the acquisition, including short-lived non-cash valuation adjustments and amortization, totaling approximately $192,000, of which approximately $43,000 was recorded in fiscal 2012 and approximately $149,000 was recorded during the thirty-nine weeks ended November 3, 2013. Please see Note 16, “Activity Exit Costs,” for a discussion of restructuring costs incurred during the thirty-nine weeks ended November 3, 2013 associated with the acquisition.

The operations acquired with Warnaco had total revenue of $1,567,596 and a net loss, after non-cash valuation adjustments and amortization and integration costs, of $(32,689) for the period from the date of acquisition through November 3, 2013. These amounts are included in the Company’s results of operations for the thirty-nine week period then ended.


6


Pro Forma Impact of the Transaction

The following table presents the Company’s pro forma consolidated results of operations for the thirteen and thirty-nine weeks ended November 3, 2013 and October 28, 2012, as if the acquisition and the related financing transactions had occurred on January 30, 2012 (the first day of its fiscal year ended February 3, 2013) instead of on February 13, 2013. The pro forma results were calculated applying the Company’s accounting policies and reflect (i) the impact on revenue, cost of goods sold and selling, general and administrative expenses resulting from the elimination of intercompany transactions; (ii) the impact on depreciation and amortization expense based on fair value adjustments to Warnaco’s property, plant and equipment and intangible assets recorded in connection with the acquisition; (iii) the impact on interest expense resulting from changes to the Company’s capital structure in connection with the acquisition; (iv) the impact on cost of goods sold resulting from acquisition date adjustments to the fair value of inventory; (v) the elimination of transaction costs related to the acquisition that were included in the Company’s results of operations for the thirteen and thirty-nine weeks ended November 3, 2013 and October 28, 2012; and (vi) the tax effects of the above adjustments. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Warnaco. Accordingly, such pro forma amounts are not indicative of the results that actually would have occurred had the acquisition been completed on January 30, 2012, nor are they indicative of the future operating results of the combined company.
 
 
Pro Forma
 
Pro Forma
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
11/3/13
 
10/28/12
 
11/3/13
10/28/12
Total revenue
 
$
2,259,125

 
$
2,142,800

 
$
6,197,162

$
5,886,639

Net income attributable to PVH Corp.
 
300,119

 
181,370

 
450,067

261,787



Allocation of the Acquisition Consideration

The following table summarizes the estimated fair values of the assets acquired and liabilities and redeemable non-controlling interest assumed at the date of acquisition:

Cash and cash equivalents
 
$
364,651

Trade receivables
 
291,644

Other receivables
 
42,894

Inventories
 
446,591

Prepaid expenses
 
39,210

Other current assets
 
56,649

Property, plant and equipment
 
127,059

Goodwill
 
1,481,375

Tradenames
 
604,600

Perpetual license rights
 
207,600

Other intangibles
 
823,300

Other assets
 
161,393

Total assets acquired
 
4,646,966

Accounts payable
 
179,931

Accrued expenses
 
262,570

Short-term borrowings
 
26,927

Current portion of long-term debt
 
2,000

Long-term debt
 
195,000

Other liabilities
 
837,882

Total liabilities assumed
 
1,504,310

Redeemable non-controlling interest
 
5,600

Total fair value of acquisition consideration
 
$
3,137,056



7


The Company is still in the process of valuing the assets acquired and liabilities and redeemable non-controlling interest assumed; thus, the allocation of the acquisition consideration is subject to change.

In connection with the acquisition, the Company recorded goodwill of $1,481,375, which was assigned to the Company’s Calvin Klein North America, Calvin Klein International and Heritage Brands Wholesale segments in the amounts of $451,427, $900,006 and $129,942, respectively. None of the goodwill is expected to be deductible for tax purposes. The Company also recorded other intangible assets of $1,635,500, which included reacquired license rights of $576,400, order backlog of $97,100 and customer relationships of $149,800, which are all amortizable, as well as tradenames of $604,600 and perpetual license rights of $207,600, which have indefinite lives.

Acquisition of Netherlands Franchisee

On August 1, 2012, the Company acquired from a former Tommy Hilfiger franchisee in the Netherlands 100% of the share capital of ten affiliated companies, which operate 13 Tommy Hilfiger stores in the Netherlands. The Company paid $13,104 as consideration for this transaction, which was accounted for as a business combination.

4. ASSETS HELD FOR SALE

During the third quarter of 2013, the Company entered into an agreement to sell substantially all of the assets of its G.H. Bass & Co. (“Bass”) division. The decision to sell these assets was based on the Company’s strategy to drive growth through its higher-margin Calvin Klein and Tommy Hilfiger businesses. The Company recorded a net pre-tax loss of $19,453 during the third quarter of 2013 in connection the sale, the details of which are discussed below.

The Company classified the Bass assets as held for sale and recorded a loss of $15,997 during the third quarter of 2013 to reflect these assets in the Consolidated Balance Sheet as of November 3, 2013 at $47,454, representing their fair value, less estimated costs to sell. This loss is principally included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013. On November 4, 2013, the Company completed the sale of these assets for net proceeds of $47,454. The sale price, net of costs to sell, was equal to the carrying value of the assets as of November 3, 2013.

The assets classified as held for sale in the Company’s Consolidated Balance Sheet as of November 3, 2013 are included in the Heritage Brands Retail segment and consisted of the following:
Other receivables
 
$
235

Inventories, net
 
48,997

Other current assets
 
178

Property, plant and equipment, net
 
13,989

Other noncurrent assets
 
52

Allowance for reduction of assets held for sale
 
(15,997
)
Total assets held for sale
 
$
47,454


A small number of the Company’s Bass stores were excluded from the sale and were deemed to be impaired as of November 3, 2013. The Company recorded a loss of $1,161 during the third quarter of 2013 related to the impaired stores. Please see Note 12, “Fair Value Measurements,” for a further discussion. In addition, during the third quarter of 2013, the Company recorded a gain of $3,255 as a result of writing off certain liabilities in connection with the transaction. The Company also recognized costs during the third quarter of 2013 related to severance and termination benefits for certain Bass employees, which totaled $1,177. The above-mentioned items are included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013 and are included in the Heritage Brands Retail segment.

In connection with the sale, the Company guaranteed lease payments for substantially all Bass retail stores included in the sale pursuant to the terms of noncancelable leases expiring on various dates through 2022. These guarantees include minimum rent payments and relate to leases that commenced prior to the sale of the Bass assets. In certain instances, the Company’s guarantee may remain in effect if an option is exercised to extend the term of the lease. The maximum amount guaranteed as of November 3, 2013 is approximately $84,000 and the Company has the right to seek recourse from the buyer of the Bass assets for the full amount. The estimated fair value of these guarantee obligations as of November 3, 2013 is $4,373, which was recorded in the Heritage Brands Retail segment and is included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013 and accrued

8


expenses and other liabilities in the Company’s Consolidated Balance Sheet as of November 3, 2013. Please see Note 12, “Fair Value Measurements,” for a further discussion.

5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Brazil

In 2012, the Company formed a joint venture, Tommy Hilfiger do Brasil S.A., in Brazil, in which the Company owns a 40% economic interest. The joint venture holds an exclusive license for the Tommy Hilfiger brand in Brazil that became effective on January 4, 2013. The Company made a payment of $2,760 to Tommy Hilfiger do Brasil S.A. during the thirty-nine weeks ended November 3, 2013 to contribute its 40% share of funding. This investment is being accounted for under the equity method of accounting.

China

In 2011, the Company formed a joint venture, TH Asia Ltd., in China, in which the Company owns a 45% economic interest. The joint venture assumed direct control of the Tommy Hilfiger wholesale and retail distribution businesses in China from the prior licensee on August 1, 2011. This investment is being accounted for under the equity method of accounting.

India

In 2011, the Company completed an acquisition of a 50% economic interest in a company that has since been renamed Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India is the direct licensee of the Tommy Hilfiger trademarks in India for all categories (other than fragrance), operates a wholesale apparel, footwear and handbags business in connection with its license, and sublicenses the trademarks for certain other product categories. The Company made a payment of $1,900 to TH India during the thirty-nine weeks ended October 28, 2012 to contribute its 50% share of funding. This investment is being accounted for under the equity method of accounting.

Australia

During the third quarter of 2013, the Company announced that it formed a joint venture, PVH Brands Australia Pty. Limited, in which the Company owns a 50% economic interest. The joint venture will license from a subsidiary of the Company the rights to operate, manage and distribute Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the joint venture agreement, the Company will contribute to the joint venture its subsidiaries currently operating the Calvin Klein jeans businesses in Australia and New Zealand. Upon completion of this contribution, which is expected to occur on February 3, 2014, the Company will deconsolidate these subsidiaries. The Company made a payment of $708 to PVH Brands Australia Pty. Limited during the thirty-nine weeks ended November 3, 2013. The Company will account for its investment in this joint venture under the equity method of accounting.

Included in other assets in the Company’s Consolidated Balance Sheets as of November 3, 2013, February 3, 2013 and October 28, 2012 is $71,899, $62,021 and $53,377, respectively, related to these investments in unconsolidated affiliates.

6. REDEEMABLE NON-CONTROLLING INTEREST
As a result of the acquisition of Warnaco, the Company owns a 51% interest in a joint venture in India, Premium Garments Wholesale Trading Private Limited (“CK India”), that is consolidated in the Company’s financial statements.
The Shareholders Agreement entered into by the parties to the joint venture (the “Shareholders Agreement”) contains a put option under which the non-controlling shareholders can require the Company to purchase all or a portion of their shares in the joint venture (i) at any date with respect to one of the non-controlling shareholders, who holds a 24% ownership, and (ii) after July 8, 2015, or at any date if the Company commits a material breach, as defined in the Shareholders Agreement, that is not cured, or becomes insolvent, with respect to the other non-controlling shareholder, who holds a 25% ownership. The put price is the fair market value of the shares on the redemption date based upon a multiple of the joint venture’s earnings before interest, taxes, depreciation and amortization for the prior 12 months, less the joint venture’s net debt and any amounts owed to the Company by the non-controlling shareholders.
The Shareholders Agreement also contains a call option, under which the Company can require any of the non-controlling shareholders to sell their shares to the Company (i) at any date in the event that any non-controlling shareholder commits a material breach, as defined in the Shareholders Agreement, under any of the agreements related to the joint venture, that is not

9


cured; or (ii) at any date after July 8, 2015. The call price is determined by the same method as the put price (as described above). During the second quarter of 2013, the Company gave notice to the non-controlling shareholders that it was exercising the call option due to a continuing material breach by the non-controlling shareholders. The sale of the non-controlling interests has not yet been consummated.
The fair value of the non-controlling interest as of the date of the Warnaco acquisition was estimated to be $5,600, which is subject to change pending the finalization of the valuation of the acquisition consideration allocation. Subsequent changes in the fair value of the redeemable non-controlling interest are recognized immediately as they occur, since a portion of the non-controlling interest is currently redeemable and it is probable that the other portion will become redeemable in the future based on the passage of time. The carrying amount of the redeemable non-controlling interest is adjusted to equal the fair value at the end of each reporting period, provided that this amount at the end of each reporting period cannot be lower than the initial fair value. Any fair value adjustment to the carrying amount is determined after attribution of net income and other comprehensive income of the non-controlling interest. After initial measurement, the attribution of any net losses of the non-controlling interest cannot exceed the amount of any increase in fair value above the initial fair value. Any fair value adjustment to the carrying amount of the redeemable non-controlling interest will be recognized immediately in retained earnings of the Company. After adjusting the carrying amount for the net income and other comprehensive loss attributable to the non-controlling interest during the thirty-nine weeks ended November 3, 2013, an adjustment to the Company’s retained earnings of $1,840 was necessary to increase the fair value of the redeemable non-controlling interest, as of November 3, 2013, to the initial fair value of $5,600.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The acquisition of Warnaco has significantly impacted the way the Company and its chief operating decision maker manage and analyze the Company’s operating results. As such, the Company has changed its reportable segments. Please see Note 19, “Segment Data,” for a further discussion. This change in segments resulted in a reallocation of goodwill amongst some of the Company’s reportable segments. Prior period data has been retrospectively adjusted to reflect this reallocation.

The changes in the carrying amount of goodwill for the thirty-nine weeks ended November 3, 2013, by segment, were as follows:

 
Calvin Klein North America
 
Calvin Klein International
 
Tommy Hilfiger North America
 
Tommy Hilfiger International
 
Heritage Brands Wholesale
 
Total
Balance as of February 3, 2013
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross
$
207,083

 
$
201,542

 
$
198,501

 
$
1,196,619

 
$
155,142

 
$
1,958,887

Accumulated impairment losses
—

 
—

 
—

 
—

 
—

 
—

Goodwill, net
207,083

 
201,542

 
198,501

 
1,196,619

 
155,142

 
1,958,887

Contingent purchase price payments to Mr. Calvin Klein
24,044

 
15,082

 
—

 
—

 
—

 
39,126

Goodwill from acquisition of Warnaco
451,427

 
900,006

 
—

 
—

 
129,942

 
1,481,375

Currency translation
(3,437
)
 
(7,269
)
 
—

 
(7,853
)
 
(324
)
 
(18,883
)
Balance as of November 3, 2013
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross
679,117

 
1,109,361

 
198,501

 
1,188,766

 
284,760

 
3,460,505

Accumulated impairment losses
—

 
—

 
—

 
—

 
—

 
—

Goodwill, net
$
679,117

 
$
1,109,361

 
$
198,501

 
$
1,188,766

 
$
284,760

 
$
3,460,505


The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Company’s acquisition in 2003 of all of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies (collectively, “Calvin Klein”). Such payments are based on 1.15% of total worldwide net sales, as defined in the acquisition agreement (as amended), of products bearing any of the Calvin Klein brands and are required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by the Company and its licensees and other partners to retailers.


10


The Company’s intangible assets consisted of the following:
 
11/3/13
 
2/3/13
 
10/28/12
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships(1)
$
337,061

 
$
(61,319
)
 
$
275,742

 
$
190,383

 
$
(41,158
)
 
$
149,225

 
$
176,988

 
$
(38,125
)
 
$
138,863

Covenants not to compete
2,220

 
(2,220
)
 
—

 
2,220

 
(2,220
)
 
—

 
2,220

 
(2,205
)
 
15

Order backlog(1)
128,116

 
(128,116
)
 
—

 
32,287

 
(32,287
)
 
—

 
32,287

 
(32,287
)
 
—

Reacquired license rights(1)
571,796

 
(17,698
)
 
554,098

 
8,565

 
(3,636
)
 
4,929

 
5,927

 
(3,332
)
 
2,595

Total intangible assets subject to amortization
1,039,193

 
(209,353
)
 
829,840

 
233,455

 
(79,301
)
 
154,154

 
217,422

 
(75,949
)
 
141,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames(1)
2,998,785

 
—

 
2,998,785

 
2,413,809

 
—

 
2,413,809

 
2,374,513

 
—

 
2,374,513

Perpetual license rights(1)
206,996

 
—

 
206,996

 
—

 
—

 
—

 
—

 
—

 
—

Reacquired perpetual license rights
12,905

 
—

 
12,905

 
13,042

 
—

 
13,042

 
12,339

 
—

 
12,339

Total intangible assets not subject to amortization
3,218,686

 
—

 
3,218,686

 
2,426,851

 
—

 
2,426,851

 
2,386,852

 
—

 
2,386,852

Total intangible assets
$
4,257,879

 
$
(209,353
)
 
$
4,048,526

 
$
2,660,306

 
$
(79,301
)
 
$
2,581,005

 
$
2,604,274

 
$
(75,949
)
 
$
2,528,325


(1) Change from February 3, 2013 to November 3, 2013 primarily relates to intangible assets recorded in connection with the acquisition of Warnaco. The acquired customer relationships are amortized principally over 10 years, order backlog is amortized principally over 6 months and reacquired license rights are amortized principally over 33 years from the date of the acquisition. As of November 3, 2013, the weighted average life of the amortizable intangible assets recorded in connection with the acquisition of Warnaco was 27.8 years.

Amortization expense related to the Company’s amortizable intangible assets was $130,052 and $9,550 for the thirty-nine weeks ended November 3, 2013 and October 28, 2012, respectively.

Assuming constant exchange rates and no change in the gross carrying amount of the intangible assets, amortization expense for the remainder of 2013 and the next five years thereafter related to the Company’s intangible assets as of November 3, 2013 is expected to be as follows:

Fiscal Year
 
Amount
Remainder of 2013
 
$
11,770

2014
 
45,337

2015
 
44,989

2016
 
44,989

2017
 
44,989

2018
 
44,989


8. RETIREMENT AND BENEFIT PLANS

The Company has six noncontributory defined benefit pension plans (including a plan acquired as part of the Warnaco acquisition, which is frozen) covering substantially all employees resident in the United States who meet certain age and service requirements. For those vested (after five years of service), the plans provide monthly benefits upon retirement based on career compensation and years of credited service. The Company refers to these six plans as its “Pension Plans.”

The Company also has for certain members of Tommy Hilfiger’s domestic senior management a supplemental executive retirement plan, which is an unfunded non-qualified supplemental defined benefit pension plan. Such plan is frozen and, as a result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation program, which is an

11



unfunded non-qualified supplemental defined benefit plan, covering two current and 15 retired executives as of November 3, 2013. Under the individual participants’ agreements, the participants in this plan will receive a predetermined amount during the 10 years following the attainment of age 65, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least 10 years and has attained age 55. The Company also has for certain employees resident in the United States who meet certain age and service requirements an unfunded non-qualified supplemental defined benefit pension plan, which provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. The Company refers to these three plans as its “SERP Plans.”

The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. During 2002, the postretirement plan was amended to eliminate the Company contribution, which partially subsidized benefits, for active participants who, as of January 1, 2003, had not attained age 55 and 10 years of service. As a result of the Company’s acquisition of Warnaco, the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. The Company refers to these two plans as its “Postretirement Plans.”

During the fourth quarter of 2012, the Company changed its method of accounting for actuarial gains and losses for its pension and other postretirement plans. Historically, the Company recognized actuarial gains and losses for its pension and other postretirement obligations and pension plan assets as a component of other comprehensive income in the periods in which they arose. As set forth in the Financial Accounting Standards Board (“FASB”) guidance for pension and other postretirement plans, the Company amortized actuarial gains and losses (to the extent they exceeded a 10% corridor) in future periods over the average remaining service period of active employees or, if substantially all plan participants were inactive, over the average remaining life expectancy of inactive participants, as a component of its net periodic benefit cost. The Company elected in the fourth quarter of 2012 to begin to immediately recognize actuarial gains and losses in its operating results in the year in which they occur. These gains and losses are measured at least annually as of the end of the Company’s fiscal year and, as such, will generally be recognized during the fourth quarter of each year. Additionally, beginning in the fourth quarter of 2012, the Company no longer calculates expected return on plan assets using a permitted averaging technique for market-related value of plan assets but instead uses the fair value of plan assets. The financial data for all prior periods presented has been retrospectively adjusted to reflect the effect of these accounting changes.

Net benefit cost related to the Company’s Pension Plans was recognized in selling, general and administrative expenses as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
 
11/3/13
 
10/28/12
 
 
 
 
 
 
 
 
Service cost, including plan expenses
$
4,831

 
$
3,932

 
$
14,251

 
$
11,797

Interest cost
6,664

 
4,493

 
19,731

 
13,479

Expected return on plan assets
(9,960
)
 
(5,237
)
 
(29,488
)
 
(15,713
)
Amortization of prior service cost
1

 
1

 
4

 
3

Total
$
1,536

 
$
3,189

 
$
4,498

 
$
9,566


Net benefit cost related to the Company’s SERP Plans was recognized in selling, general and administrative expenses as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
 
11/3/13
 
10/28/12
 
 
 
 
 
 
 
 
Service cost, including plan expenses
$
1,085

 
$
894

 
$
3,254

 
$
2,681

Interest cost
904

 
837

 
2,714

 
2,510

Amortization of prior service credit
(17
)
 
(17
)
 
(51
)
 
(50
)
Total
$
1,972

 
$
1,714

 
$
5,917

 
$
5,141



12



Net benefit cost related to the Company’s Postretirement Plans was recognized in selling, general and administrative expenses as follows:

 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
 
11/3/13
 
10/28/12
 
 
 
 
 
 
 
 
Service cost, including plan expenses
$
22

 
$
—

 
$
62

 
$
—

Interest cost
217

 
200

 
646

 
599

Amortization of prior service credit
(205
)
 
(204
)
 
(613
)
 
(612
)
Total
$
34

 
$
(4
)
 
$
95

 
$
(13
)

The Company made contributions of $60,000 to its Pension Plans in 2013, which includes a $30,000 contribution made during the first quarter of 2013 to fund the pension plan that the Company acquired with the Warnaco acquisition and a $30,000 contribution made during the third quarter of 2013 to fund the Company’s pre-existing pension plans. The Company currently does not expect to make additional contributions to its Pension Plans in 2013.

9. DEBT

Short-Term Borrowings

One of the Company’s Asian subsidiaries has a Yen-denominated overdraft facility with a Japanese bank, which provides for borrowings of up to ¥1,000,000 (approximately $10,000 based on exchange rates in effect on November 3, 2013) and is utilized to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the one-month Japanese interbank borrowing rate (“TIBOR”) plus 0.15%. Such facility renews automatically unless the Company gives notice of termination. The full amount of this facility was borrowed as of November 3, 2013. The weighted average interest rate on the funds borrowed at November 3, 2013 was 0.34%.

One of the Company’s European subsidiaries acquired as part of the Warnaco acquisition has short-term revolving notes with a number of banks at various interest rates, as well as a Euro-denominated overdraft facility, which are used to fund working capital needs. There were no borrowings outstanding under these facilities as of November 3, 2013. The maximum amount of borrowings outstanding under these facilities during the thirty-nine weeks ended November 3, 2013 was approximately $25,300.

One of the Company’s Asian subsidiaries acquired as part of the Warnaco acquisition has Rupee-denominated short-term revolving credit facilities with a local lender. These facilities provide for total borrowings of up to ₨195,000 (approximately $3,200 based on exchange rates in effect on November 3, 2013) and are utilized to fund working capital needs. Borrowings under these facilities bear interest at various interest rates, primarily based on a base rate set by the lending bank. As of November 3, 2013, the Company had $2,279 of borrowings outstanding under these facilities and the weighted average interest rate on the funds borrowed at November 3, 2013 was 6.77%. The maximum amount of borrowings outstanding under these facilities during the thirty-nine weeks ended November 3, 2013 was approximately $2,700.

One of the Company’s Asian subsidiaries acquired as part of the Warnaco acquisition has a short-term $10,000 revolving credit facility to be used to fund working capital needs. Borrowings under this facility bear interest at 1.75% plus the one-month London interbank borrowing rate (“LIBOR”). At the end of each month, amounts outstanding under this facility may be carried forward for additional one-month periods for up to one year. This facility was renewed in December 2013 and may be renewed annually in the future. This facility is subject to certain terms and conditions and may be terminated at any time at the discretion of the lender. There were no borrowings outstanding under this facility as of or during the thirty-nine weeks ended November 3, 2013.

One of the Company’s Asian subsidiaries acquired as part of the Warnaco acquisition has a Won-denominated short-term revolving credit facility with one lender that provides for borrowings of up to ₩3,000,000 (approximately $2,800 based on exchange rates in effect on November 3, 2013) and is utilized to fund working capital needs. Borrowings under this facility bear interest at the three-month Cost of Funds Index rate plus a specified margin. There were no borrowings outstanding under this facility as of or during the thirty-nine weeks ended November 3, 2013.

One of the Company’s Latin American subsidiaries acquired as part of the Warnaco acquisition has Real-denominated short-term revolving credit facilities with a number of banks that provide for total available borrowings of R$44,000 (approximately $20,000 based on exchange rates in effect on November 3, 2013) and are utilized to fund working capital needs. Borrowings

13



under these facilities bear interest at various interest rates. There were no borrowings outstanding under these facilities as of or during the thirty-nine weeks ended November 3, 2013.

Long-Term Debt

The carrying amounts of the Company’s long-term debt were as follows:
 
11/3/13
 
10/28/12
 
 
 
 
Senior secured term loan A facility due 2018
$
1,651,450

 
$
—

Senior secured term loan B facility due 2020
1,208,444

 
—

4 1/2% senior unsecured notes
700,000

 
—

7 3/8% senior unsecured notes
600,000

 
600,000

7 3/4% debentures
99,658

 
99,637

Senior secured term loan A facility due 2016 - United States dollar-denominated
—

 
576,000

Senior secured term loan A facility due 2016 - Euro-denominated
—

 
61,959

Senior secured term loan B facility due 2016 - United States dollar-denominated
—

 
394,000

Senior secured term loan B facility due 2016 - Euro-denominated
—

 
—

Total
4,259,552

 
1,731,596

Less: Current portion of long-term debt
85,000

 
84,000

Long-term debt
$
4,174,552

 
$
1,647,596


As of November 3, 2013, the Company’s mandatory long-term debt repayments for the next five years were as follows:

Remainder of 2013
$
21,250

2014
85,000

2015
116,875

2016
159,375

2017
170,000

2018
1,105,000


As of November 3, 2013, after taking into account the interest rate swap agreements discussed in the section entitled “New Senior Secured Credit Facilities” below, which were in effect as of such date, approximately 70% of the Company’s long-term debt was at a fixed rate, with the remainder at variable rates.

Prior Senior Secured Credit Facilities

On May 6, 2010, the Company entered into senior secured credit facilities, which it amended and restated on March 2, 2011 (“the amended facilities”). The amended facilities consisted of a Euro-denominated term loan A facility, a United States dollar-denominated term loan A facility, a Euro-denominated term loan B facility, a United States dollar-denominated term loan B facility, a United States dollar-denominated revolving credit facility and two multi-currency (one United States dollar and Canadian dollar, and the other Euro, Japanese Yen and British Pound) revolving credit facilities. The amended facilities provided for initial borrowings of up to an aggregate of approximately $1,970,000 (based on applicable exchange rates on March 2, 2011), consisting of (i) an aggregate of approximately $1,520,000 of term loan facilities; and (ii) approximately $450,000 of revolving credit facilities.

The Company made payments of $167,414 on its term loans under the amended facilities during the thirty-nine weeks ended October 28, 2012.

On February 13, 2013, in connection with the Warnaco acquisition, the Company modified and extinguished the amended facilities and repaid all outstanding borrowings thereunder, as discussed in the section entitled “New Senior Secured Credit Facilities” below.


14



New Senior Secured Credit Facilities

On February 13, 2013, simultaneously with and related to the closing of the Warnaco acquisition, the Company entered into new senior secured credit facilities (“the new facilities”), the proceeds of which were used to fund a portion of the acquisition, repay all outstanding borrowings under the amended facilities and repay all of Warnaco’s previously outstanding long-term debt. The new facilities consist of a $1,700,000 United States dollar-denominated Term Loan A (recorded net of an original issue discount of $7,325 as of the acquisition date), a $1,375,000 United States dollar-denominated Term Loan B (recorded net of an original issue discount of $6,875 as of the acquisition date) and senior secured revolving credit facilities in an aggregate principal amount of $750,000 (based on the applicable exchange rates on February 13, 2013), consisting of (a) a $475,000 United States dollar-denominated revolving credit facility, (b) a $25,000 United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185,850 Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs. In connection with entering into the new facilities and repaying all outstanding borrowings under the amended facilities and all of Warnaco’s previously outstanding long-term debt, the Company paid debt issuance costs of $67,370 (of which $34,638 was expensed as debt modification and extinguishment costs and $32,732 is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $5,757 to write-off previously capitalized debt issuance costs.

The revolving credit facilities include amounts available for letters of credit. As of November 3, 2013, the Company had drawn no revolving credit borrowings and approximately $65,959 of letters of credit. A portion of both United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more term loan facilities or increase the commitments under the revolving credit facilities by an aggregate amount not to exceed the greater of (a) $750,000 and (b) $1,250,000 as long as the ratio of the Company’s senior secured net debt to consolidated adjusted earnings before interest, taxes, depreciation and amortization (in each case calculated as set forth in the documentation relating to the new facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase, plus, in either case, an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated). The lenders under the new facilities are not required to provide commitments with respect to such additional facilities or increased commitments.

The Company made payments of $202,938 on its term loans under the new facilities during the thirty-nine weeks ended November 3, 2013, the majority of which was voluntary. As of November 3, 2013, the Company had total term loans outstanding of $2,859,894, net of original issue discounts. The terms of each of Term Loan A and Term Loan B contain a mandatory quarterly repayment schedule. Due to the above-mentioned voluntary payments, the Company is not required to make any additional mandatory repayments under Term Loan B prior to maturity.

The outstanding borrowings under the new facilities are prepayable at any time without penalty. The terms of the new facilities require the Company to repay certain amounts outstanding thereunder with (a) net cash proceeds of the incurrence of certain indebtedness, (b) net cash proceeds of certain asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds, to the extent such proceeds are not reinvested or committed to be reinvested in the business in accordance with customary reinvestment provisions and (c) a percentage of excess cash flow, which percentage is based upon the Company’s net leverage ratio during the relevant fiscal period.

The United States dollar-denominated borrowings under the new facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds rate plus 1/2 of 1.00% and (iii) a one-month adjusted Eurocurrency rate plus 1.00% (provided that, in the case of Term Loan B, in no event will the base rate be deemed to be less than 1.75%) or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the new facilities (provided that, in the case of Term Loan B, in no event will the adjusted Eurocurrency rate be deemed to be less than 0.75%).

Canadian dollar-denominated borrowings under the new revolving credit facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes at its main office in Toronto, Ontario as the reference rate of interest in order to determine interest rates for loans in Canadian Dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian Dollar bankers’ acceptances having a term of one month that appears on the display referred to as “CDOR Page” of Reuters Monitor Money Rate Services as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the administrative agent (and if such screen is not available, any successor or similar service as may be selected by the administrative agent), and (y) 0.75%, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the new facilities.

15




The borrowings under the new revolving credit facilities in currencies other than United States dollars or Canadian dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the new facilities.

The current applicable margins are in the case of Term Loan A and the revolving credit facilities, 2.00% for adjusted Eurocurrency rate loans and 1.00% for base rate loans, as applicable. The applicable margins in the case of Term Loan B are fixed at 2.50% for adjusted Eurocurrency rate loans and 1.50% for base rate loans, respectively. After the date of delivery of the compliance certificate and financial statements with respect to the Company’s fiscal quarter ending November 3, 2013, the applicable margin for borrowings under Term Loan A and the revolving credit facilities is subject to adjustment based on the Company’s quarter-end net leverage ratio.

During the second quarter of 2013, the Company entered into an interest rate swap agreement for a three-year term commencing on August 19, 2013. The agreement was designed with the intended effect of converting an initial notional amount of $1,228,750 of the Company’s variable rate debt obligation under its United States dollar-denominated senior secured Term Loan A facility, or any replacement facility with similar terms, to fixed rate debt. As of November 3, 2013, the notional amount outstanding was equal to the initial notional amount of $1,228,750. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated, and it will pay a fixed rate of 0.604%, plus the current applicable margin.

During the second quarter of 2011, the Company entered into an interest rate swap agreement for a three-year term commencing on June 6, 2011. The agreement was designed with the intended effect of converting an initial notional amount of $632,000 of the Company’s variable rate debt obligation under its previously outstanding United States dollar-denominated senior secured term loan A facility, or any replacement facility with similar terms, to fixed rate debt. Such agreement remains outstanding, with a notional amount of $342,808 as of November 3, 2013, subsequent to the repayment of the Company’s previously outstanding amended facility and is now converting a portion of the Company’s variable rate debt obligation under its new Term Loan A facility to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the three-month LIBOR is eliminated, and it will pay a fixed rate of 1.197%, plus the current applicable margin.

The outstanding notional amount of each interest rate swap will be adjusted according to pre-set schedules during the term of each swap agreement such that, based on the Company’s projections for future debt repayments, the Company’s outstanding debt under the Term Loan A facility is expected to always equal or exceed the then-outstanding combined notional amount of the interest rate swaps.

The new facilities contain covenants that restrict the Company’s ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in its interest or to satisfy its obligations under its other outstanding debt. These covenants restrict the Company’s ability to, among other things:

•
incur or guarantee additional debt or extend credit;
•
make restricted payments, including paying dividends or making distributions on, or redeeming or repurchasing, the Company’s capital stock or certain debt;
•
make acquisitions and investments;
•
dispose of assets;
•
engage in transactions with affiliates;
•
enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends;
•
create liens on the Company’s assets or engage in sale/leaseback transactions; and
•
effect a consolidation or merger, or sell, transfer, or lease all or substantially all of the Company’s assets.

The new facilities require the Company to comply with certain financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the applicable facility. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable which would result in acceleration of the Company’s other debt. If the Company was unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of the Company’s other indebtedness.


16



4 1/2% Senior Notes Due 2022

On December 20, 2012, the Company issued $700,000 principal amount of 4 1/2% senior notes due December 15, 2022 in connection with the Warnaco acquisition. Interest on the 4 1/2% notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2013. The Company paid $16,257 of fees in the first quarter of 2013 in connection with the issuance of these notes, which will be amortized over the term of the notes.

The Company may redeem some or all of these notes at any time prior to December 15, 2017 by paying a “make whole” premium plus any accrued and unpaid interest. Subject to certain conditions, the Company may also redeem up to 35% of these notes prior to December 15, 2015 with the net cash proceeds of certain equity offerings without having to pay a penalty or “make whole” premium. In addition, the Company may redeem some or all of these notes on or after December 15, 2017 at specified redemption prices plus any accrued and unpaid interest. The Company’s ability to pay cash dividends and make other restricted payments is limited, in each case, over specified amounts as defined in the indenture governing the notes.

7 3/8% Senior Notes Due 2020

On May 6, 2010, the Company issued $600,000 principal amount of 7 3/8% senior notes due May 15, 2020. Interest on the 7 3/8% notes is payable semi-annually in arrears on May 15 and November 15 of each year.

The Company may redeem some or all of these notes on or after May 15, 2015 at specified redemption prices plus any accrued and unpaid interest. The Company may redeem some or all of these notes at any time prior to May 15, 2015 by paying a “make whole” premium plus any accrued and unpaid interest. The Company’s ability to pay cash dividends and make other restricted payments is limited, in each case, over specified amounts as defined in the indenture governing the notes.

7 3/4% Debentures Due 2023

The Company has outstanding $100,000 of debentures due on November 15, 2023 with a yield to maturity of 7.80%. The debentures accrue interest at the rate of 7 3/4%, which is payable semi-annually. Pursuant to the indenture governing the debentures, the Company must maintain a certain level of stockholders’ equity in order to pay cash dividends and make other restricted payments, as defined in the indenture governing the debentures.

10. INCOME TAXES

The effective income tax rates for the thirteen weeks ended November 3, 2013 and October 28, 2012 were 3.3% and 21.2%, respectively. The effective income tax rates for the thirty-nine weeks ended November 3, 2013 and October 28, 2012 were 15.5% and 24.0%, respectively.
The effective income tax rates for the thirteen and thirty-nine weeks ended November 3, 2013 were lower than the United States statutory rate due to the impact of the benefit of lower tax rates in international jurisdictions where the Company files tax returns. In addition, the effective tax rate in the third quarter of 2013 was positively impacted by the recognition of foreign tax credits, which were generated from Warnaco integration activities and discrete items related to uncertain tax positions. Partially offsetting these benefits are the impact of state and local taxes.

The effective income tax rates for the thirteen and thirty-nine weeks ended October 28, 2012 were lower than the United States statutory rate due to the benefit of the overall lower tax rates in international jurisdictions where the Company files tax returns and, to a lesser extent, discrete items related to uncertain tax positions. Also contributing to the rate differential in 2012 was a benefit resulting from previously unrecognized tax credits. Partially offsetting these benefits are the impact of state and local taxes.

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company has exposure to changes in foreign currency exchange rates related to certain anticipated cash flows associated with certain international inventory purchases. In addition, the Company has exposure to changes in foreign currency exchange rates on certain intercompany loans. To help manage these exposures, the Company periodically uses foreign currency forward exchange contracts.

The Company also has exposure to interest rate volatility related to its senior secured term loan facilities. The Company has entered into interest rate swap agreements to hedge against this exposure. Please see Note 9, “Debt,” for a further discussion of

17



the Company’s senior secured term loan facilities and these agreements. The Company had also entered into an interest rate cap agreement, which expired on September 6, 2012.

The Company records the foreign currency forward exchange contracts and interest rate contracts at fair value in its Consolidated Balance Sheets. Changes in fair value of the foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate contracts (collectively referred to as “cash flow hedges”) that are designated as effective hedging instruments are recorded in equity as a component of accumulated other comprehensive income (“AOCI”). The cash flows from such hedges are presented in the same category on the Consolidated Statements of Cash Flows as the items being hedged. Any ineffectiveness in such cash flow hedges is immediately recognized in earnings and no contracts were excluded from effectiveness testing. In addition, changes in the fair value of foreign currency forward exchange contracts that are not designated as effective hedging instruments are immediately recognized in earnings, including the changes in fair value of all of the foreign exchange contracts related to intercompany loans which are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts related to intercompany loans are largely offset by the remeasurement of the underlying intercompany loan balances. The Company does not use derivative financial instruments for trading or speculative purposes.

The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for the Company’s derivative financial instruments:
 
Asset Derivatives (Classified in Other Current Assets and Other Assets)
Liability Derivatives (Classified in Accrued Expenses and Other Liabilities)
 
11/3/13
 
10/28/12
 
11/3/13
 
10/28/12
Contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
$
1,244

 
$
3,725

 
$
9,172

 
$
2,567

Interest rate contracts
2,314

 
—

 
8,190

 
6,066

Total contracts designated as cash flow hedges
3,558

 
3,725

 
17,362

 
8,633

Undesignated contracts:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
—

 
—

 
56

 
30

Foreign currency forward exchange contracts (intercompany loans)
881

 
—

 
17

 
90

Total undesignated contracts
881

 
—

 
73

 
120

Total
$
4,439

 
$
3,725

 
$
17,435

 
$
8,753


At November 3, 2013, the notional amount outstanding of foreign currency forward exchange contracts for inventory purchases and intercompany loans was approximately $559,000 and $86,000, respectively. Such contracts expire principally between November 2013 and December 2014 for inventory purchases and between November 2013 and January 2014 for intercompany loans.


18



The following table summarizes the effect of the Company’s hedges designated as cash flow hedging instruments:

 
 
(Loss) Gain Recognized in Other Comprehensive (Loss) Income (Effective Portion)
 
(Loss) Gain Reclassified from AOCI into (Expense) Income (Effective Portion)             
 
 
 
Location
 Amount
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
11/3/13
 
10/28/12
 
 
11/3/13
 
10/28/12
Foreign currency forward exchange contracts (inventory purchases)
 
$
(8,003
)
 
$
(2,079
)
 
Cost of goods sold
$
(1,793
)
 
$
8,294

Interest rate contracts
 
(3,888
)
 
(432
)
 
Interest expense
(1,999
)
 
(1,095
)
Total
 
$
(11,891
)
 
$
(2,511
)
 
 
$
(3,792
)
 
$
7,199

 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
 
 
11/3/13
 
10/28/12
Foreign currency forward exchange contracts (inventory purchases)
 
$
2,587

 
$
2,837

 
Cost of goods sold
$
1,108

 
$
11,925

Interest rate contracts
 
(4,994
)
 
(1,434
)
 
Interest expense
(4,176
)
 
(3,275
)
Total
 
$
(2,407
)
 
$
1,403

 
 
$
(3,068
)
 
$
8,650


There was no ineffective portion of hedges designated as cash flow hedging instruments during the thirty-nine weeks ended November 3, 2013 and October 28, 2012.

A net loss in AOCI on foreign currency forward exchange contracts at November 3, 2013 of $8,664 is estimated to be reclassified in the next 12 months in the Consolidated Income Statements to costs of goods sold as the underlying inventory is purchased and sold. In addition, a net loss in AOCI for interest rate contracts at November 3, 2013 of $6,511 is estimated to be reclassified to interest expense within the next 12 months.

The following table summarizes the effect of the Company’s foreign currency forward exchange contracts that were not designated as cash flow hedges:
 
(Loss) Gain Recognized in Income
Thirteen Weeks Ended
Location
 
11/3/13
 
10/28/12
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
Selling, general and administrative expenses
 
$
(214
)
 
$
504

Foreign currency forward exchange contracts (intercompany loans)
Selling, general and administrative expenses
 
(1,328
)
 
574

 
 
 
 
 
 
Thirty-Nine Weeks Ended
Location
 
11/3/13
 
10/28/12
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
Selling, general and administrative expenses
 
$
135

 
$
1,183

Foreign currency forward exchange contracts (intercompany loans)
Selling, general and administrative expenses
 
(1,366
)
 
(650
)

The Company had no derivative financial instruments with credit risk related contingent features underlying the related contracts as of November 3, 2013.


19




12. FAIR VALUE MEASUREMENTS

FASB guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.

Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
 
11/3/13
 
2/3/13
 
10/28/12
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
2,125

 
N/A
 
$
2,125

 
N/A
 
$
4,693

 
N/A
 
$
4,693

 
N/A
 
$
3,725

 
N/A
 
$
3,725

Interest rate contracts
N/A
 
2,314

 
N/A
 
2,314

 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A

 
N/A
 
N/A

Total Assets
N/A
 
$
4,439

 
N/A
 
$
4,439

 
N/A
 
$
4,693

 
N/A
 
$
4,693

 
N/A
 
$
3,725

 
N/A
 
$
3,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
9,245

 
N/A
 
$
9,245

 
N/A
 
$
13,460

 
N/A
 
$
13,460

 
N/A
 
$
2,687

 
N/A
 
$
2,687

Interest rate contracts
N/A
 
8,190

 
N/A
 
8,190

 
N/A
 
5,058

 
N/A
 
5,058

 
N/A
 
6,066

 
N/A
 
6,066

Contingent purchase price payments related to reacquisition of the perpetual rights to the Tommy Hilfiger trademarks in India    
N/A
 
N/A
 
$
6,469

 
6,469

 
N/A
 
N/A
 
$
7,003

 
7,003

 
N/A
 
N/A
 
$
9,639

 
9,639

Total Liabilities
N/A
 
$
17,435

 
$
6,469

 
$
23,904

 
N/A
 
$
18,518

 
$
7,003

 
$
25,521

 
N/A
 
$
8,753

 
$
9,639

 
$
18,392


The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair values of the interest rate contracts are based on observable interest rate yield curves and represent the expected discounted cash flows underlying the financial instruments.

Pursuant to the agreement governing the reacquisition of the rights in India to the Tommy Hilfiger trademarks, the Company is required to make annual contingent purchase price payments based on a percentage of annual sales in excess of an agreed upon threshold of Tommy Hilfiger products in India for a period of five years (or, under certain circumstances, a period of six years) following the acquisition date. Such payments are subject to a $25,000 aggregate maximum and are due within 60 days following each one-year period. The first one-year period commenced on July 1, 2011. The Company made contingent annual purchase price payments of $429 and $185 during the third quarter of 2013 and 2012, respectively. The Company is required to remeasure this liability at fair value on a recurring basis and classifies this as a Level 3 measurement. The fair value of such contingent purchase price payments was determined using the discounted cash flow method, based on net sales projections for the Tommy Hilfiger apparel and accessories businesses in India, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, changes in the fair value are included within selling, general and administrative expenses.

20




The following table presents the change in the Level 3 contingent purchase price payment liability during the thirty-nine weeks ended November 3, 2013 and October 28, 2012:

 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
Beginning Balance
$
7,003

 
$
9,559

Payments
(429
)
 
(185
)
Adjustments included in earnings
(105
)
 
265

Ending Balance
$
6,469

 
$
9,639


Additional information with respect to assumptions used to value the contingent purchase price payment liability as of November 3, 2013 is as follows:

Unobservable Inputs
 
Amount
Approximate compounded annual net sales growth rate
 
45.0
%
Approximate
discount rate
 
20.0
%

A five percentage point increase or decrease in the discount rate would change the liability by approximately $1,000.

A five percentage point increase or decrease in the compounded annual net sales growth rate would change the liability by approximately $1,000.

There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.

The following table shows the fair value of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a nonrecurring basis (consisting of property, plant and equipment and other long-lived assets) during the thirty-nine weeks ended November 3, 2013 and the thirty-nine weeks ended October 28, 2012, and the total impairments recorded as a result of the remeasurement process:
 
 
     Fair Value Measurement Using      
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value As Of Impairment Date
 
Total Impairments
 
 
 
 
 
 
 
 
 
 
 
Thirty-nine weeks ended 11/3/13
 
N/A
 
N/A
 
$
—

 
$
—

 
$
5,804

Thirty-nine weeks ended 10/28/12
 
N/A
 
N/A
 
$
—

 
$
—

 
$
259


Long-lived assets with a carrying amount of $4,643 were written down to a fair value of zero during the thirty-nine weeks ended November 3, 2013 in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using current sales trends and market participant assumptions. The impairment charge of $4,643 was included in selling, general and administrative expenses, of which $808 was recorded in the Calvin Klein North America segment, $220 was recorded in the Calvin Klein International segment, $3,121 was recorded in the Tommy Hilfiger North America segment and $494 was recorded in the Heritage Brands Retail segment.

Long-lived assets with a carrying amount of $1,161 were written down to a fair value of zero during the thirty-nine weeks ended November 3, 2013 in connection with the sale of substantially all of the assets of the Company’s Bass division. The impairment charge was included in selling, general and administrative expenses in the Heritage Brands Retail segment. Please see Note 4, “Assets Held for Sale,” for a further discussion.


21



Long-lived assets with a carrying amount of $259 were written down to a fair value of zero during the thirty-nine weeks ended October 28, 2012 in connection with the exit of a facility as part of the Company’s integration of Tommy Hilfiger. Such assets were deemed to have no future use or economic benefit based on the Company’s analysis using market participant assumptions, and therefore no expected future cash flows. The impairment charge was included in selling, general and administrative expenses in corporate expenses not allocated to any reportable segment.

In connection with the sale of substantially all of the assets of the Company’s Bass division, the Company guaranteed lease payments for principally all Bass retail stores under the current terms of noncancelable leases expiring on various dates through 2022. These guarantees include minimum rent payments and relate to leases that commenced prior to the sale of the Bass assets. In certain instances, the Company’s guarantee may remain in effect if an option is exercised to extend the term of the lease. The estimated fair value of these guarantee obligations as of November 3, 2013 is $4,373, which is included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheet. The Company classifies this as a Level 3 measurement. The fair value of such guarantee obligations was determined using the discounted cash flow method, based on the guaranteed lease payments, the estimated probability of lease extensions and estimates of the risk of default by the buyer of the Bass assets, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Please see Note 4, “Assets Held for Sale,” for a further discussion.

The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt as of November 3, 2013, February 3, 2013 and October 28, 2012 were as follows:

 
11/3/13
 
2/3/13
 
10/28/12
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 

 
 

 
 
 
 
 
 

 
 

Cash and cash equivalents
$
542,533

 
$
542,533

 
$
892,209

 
$
892,209

 
$
276,630

 
$
276,630

Short-term borrowings
12,441

 
12,441

 
10,847

 
10,847

 
142,514

 
142,514

Long-term debt (including portion classified as current)
4,259,552

 
4,321,886

 
2,299,642

 
2,398,200

 
1,731,596

 
1,831,695


The fair values of cash and cash equivalents and short-term borrowings approximate their carrying values due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable quarter. The Company classifies the measurement of its long-term debt as a Level 1 measurement.

13. STOCK-BASED COMPENSATION

The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan replaced the Company’s 2003 Stock Option Plan (the “2003 Plan”) and certain other prior stock option plans. The 2003 Plan and these other plans terminated upon the 2006 Plan’s initial stockholder approval in June 2006, other than with respect to outstanding options, which continued to be governed by the applicable prior plan. Only awards under the 2003 Plan continue to be outstanding insofar as these prior plans are concerned. Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

The Company may grant the following types of incentive awards under the 2006 Plan: (i) non-qualified stock options (“NQs”); (ii) incentive stock options (“ISOs”); (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance share units; and (vii) other stock-based awards. Each award granted under the 2006 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, applicable performance period(s) and performance measure(s), and such other terms and conditions as the plan committee determines.

Through November 3, 2013, the Company has granted under the 2006 Plan: (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable performance share units; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share, each share underlying a restricted stock award reduces the number available by two shares and each share underlying an RSU or performance share unit award reduces the number available by three shares for awards made before April 29, 2009 and by two shares for awards made on or after April 29, 2009. The per share exercise price of options granted under

22



the 2006 Plan cannot be less than the closing price of the common stock on the date of grant (the business day prior to the date of grant for awards granted prior to September 21, 2006).

The Company currently has service-based NQs and ISOs outstanding under the 2003 Plan. Such options were granted with an exercise price equal to the closing price of the Company’s common stock on the business day immediately preceding the date of grant.

Under the terms of the merger agreement in connection with the Warnaco acquisition, each outstanding award of Warnaco stock options, restricted stock and restricted stock units was assumed by the Company and converted into an award of the same type, and, subject to the same terms and conditions, but payable in shares of Company common stock. The stock options are generally exercisable in three equal annual installments commencing one year after the date of original grant and the RSUs and restricted stock awards generally vest three years after the date of original grant, principally on a cliff basis. The Company accounted for the replacement awards as a modification of the existing awards. As such, a new fair value was assigned to the awards, a portion of which is included as part of the merger consideration. The merger consideration of $39,752 was determined by multiplying the estimated fair value of the Warnaco awards outstanding at the effective time of the Warnaco acquisition, net of the estimated value of awards to be forfeited, by the proportionate amount of the vesting period that had lapsed as of the acquisition date. The remaining fair value, net of estimated forfeitures, is being expensed on a straight-line basis over the awards’ remaining vesting periods.

Net income for the thirty-nine weeks ended November 3, 2013 and October 28, 2012 included $47,103 and $26,372, respectively, of pre-tax expense related to stock-based compensation.

Stock options currently outstanding, with the exception of the Warnaco employee replacement awards discussed above, are generally cumulatively exercisable in four equal annual installments commencing one year after the date of grant. The vesting of such options outstanding is also generally accelerated upon retirement (as defined in the applicable plan). Such options are generally granted with a 10-year term.

The Company estimates the fair value of stock options granted at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the options, net of estimated forfeitures, is expensed on a straight-line basis over the options’ vesting periods.

The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during the thirty-nine weeks ended November 3, 2013 (with the exception of the Warnaco employee replacement stock options) and October 28, 2012:
 
Thirty-Nine Weeks Ended
 
11/3/13
 
10/28/12
Weighted average risk-free interest rate
1.05
%
 
1.20
%
Weighted average expected option term (in years)
6.22

 
6.25

Weighted average Company volatility
45.20
%
 
45.16
%
Expected annual dividends per share
$
0.15

 
$
0.15

Weighted average grant date fair value per option
$
51.51

 
$
40.59


The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving option grants, mainly due to acquisitions. The Company will continue to evaluate the appropriateness of utilizing such method.


23



The following summarizes the assumptions used to estimate the fair value of the Warnaco employee stock options that were replaced at the effective time of the acquisition:
 
Thirty-Nine Weeks Ended
 
11/3/13
Weighted average risk-free interest rate

0.24
%
Weighted average expected option term (in years)

1.70

Weighted average Company volatility
29.40
%
Expected annual dividends per share
$
0.15

Weighted average grant date fair value per option
$
40.60


Service-based stock option activity for the thirty-nine weeks ended November 3, 2013 was as follows:
 
Options
 
Weighted Average Price Per Option
Outstanding at February 3, 2013
1,958

 
$
44.17

  Replacement of Warnaco awards
443

 
86.26

  Granted
182

 
117.03

  Exercised
411

 
66.13

  Cancelled
14

 
93.51

Outstanding at November 3, 2013
2,158

 
$
54.47

Exercisable at November 3, 2013
1,528

 
$
43.10


RSUs granted to employees, with the exception of the Warnaco employee replacement awards, generally vest in three annual installments of 25%, 25% and 50% commencing two years after the date of grant. Service-based RSUs granted to non-employee directors vest in four equal annual installments commencing one year after the date of grant for awards granted prior to 2010 and vest in full one year after the date of grant for awards granted during or after 2010. The underlying RSU award agreements (excluding agreements for non-employee director awards made during or after 2010) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of service-based RSUs, with the exception of the Warnaco employee replacement awards, is equal to the closing price of the Company’s common stock on the date of grant and is expensed, net of estimated forfeitures, on a straight-line basis over the RSUs’ vesting periods.

RSU activity for the thirty-nine weeks ended November 3, 2013 was as follows:
 
RSUs
 
Weighted Average Grant Date Fair Value
Non-vested at February 3, 2013
660

 
$
62.24

  Replacement of Warnaco awards
120

 
120.72

  Granted
242

 
119.00

  Vested
261

 
63.91

  Cancelled
30

 
83.53

Non-vested at November 3, 2013
731

 
$
89.16


The Company’s restricted stock awards consist solely of awards to Warnaco employees that were replaced with the Company’s restricted stock as of the effective time of the acquisition. The fair value of restricted stock with respect to awards for which the vesting period had not lapsed as of the acquisition date was equal to the closing price of the Company’s common stock on February 12, 2013 and is expensed, net of forfeitures, on a straight-line basis over the vesting period.


24



Restricted stock activity for the thirty-nine weeks ended November 3, 2013 was as follows:
 
Restricted Stock
 
Weighted Average Grant Date Fair Value
Non-vested at February 3, 2013
—

 
$
—

  Replacement of Warnaco awards
271

 
120.72

  Granted
—

 
—

  Vested
212

 
120.72

  Cancelled
9

 
120.72

Non-vested at November 3, 2013
50

 
$
120.72


The Company granted contingently issuable performance share units to certain of the Company’s senior executives during the first quarter of each of 2012 and 2013 subject to a performance period of two years and a service period of one year beyond the performance period. The Company granted contingently issuable performance share units to certain of the Company’s executives during the second quarter of each of 2010 and 2013 subject to performance periods of three years each. The holders of the awards granted on May 6, 2010 that were subject to a performance period of three years earned an aggregate of 498 shares as a result of the Company’s performance during such three-year period. For the awards granted in the second quarter of 2013, the final number of shares that will be earned, if any, is contingent upon the Company’s achievement of goals for the performance period, of which 50 percent is based upon the Company’s absolute stock price growth during the performance period and 50 percent is based upon the Company’s total shareholder return during the performance period relative to other companies included in the S&P 500 as of the date of grant. For the awards granted in the first quarter of each of 2012 and 2013, the final number of shares that will be earned, if any, is contingent upon the Company’s achievement of goals for each of the performance periods based on both earnings per share growth and return on equity for the awards granted in the first quarter of 2012 and earnings per share growth for the awards granted in the first quarter of 2013 during the applicable performance cycle.

For the contingently issuable performance share units granted prior to the second quarter of 2013, the Company records expense ratably over each applicable vesting period based on fair value and the Company’s current expectations of the probable number of shares that will ultimately be issued. The fair value of these contingently issuable performance share units is equal to the closing price of the Company’s common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Company’s common stock during the performance cycle, as these contingently issuable performance share units do not accrue dividends prior to the completion of the performance cycle.

For the contingently issuable performance share units granted during the second quarter of 2013, because the awards are subject to market conditions, the Company records expense ratably over the vesting period, net of estimated forfeitures, regardless of whether the market condition is satisfied. The fair value of such awards was established on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:
 
Thirty-Nine Weeks Ended
 
11/3/13
Risk-free interest rate
0.34
%
Expected Company volatility
38.67
%
Expected annual dividends per share
$
0.15

Grant date fair value per performance share unit
$
123.27



25



Performance share unit activity for the thirty-nine weeks ended November 3, 2013 was as follows:
 
Performance Shares
 
Weighted Average Grant Date Fair Value
Non-vested at February 3, 2013
594

 
$
57.08

  Granted
926

 
122.62

  Vested
498

 
51.07

  Cancelled
40

 
122.52

Non-vested at November 3, 2013
982

 
$
119.31


The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions for the thirty-nine weeks ended November 3, 2013 and October 28, 2012 were $55,736 and $14,324, respectively. Of those amounts, $22,681 and $8,327, respectively, were reported as excess tax benefits. Excess tax benefits arise when the actual tax benefit resulting from a stock plan award transaction exceeds the tax benefit associated with the grant date fair value of the related stock award. The Company recognizes these excess tax benefits in additional paid in capital only if an incremental tax benefit would be realized after considering all other tax benefits presently available to the Company.

14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in AOCI (net of tax) by component for the thirty-nine weeks ended November 3, 2013:

 
Foreign currency translation adjustments
 
Retirement liability adjustment
 
Net unrealized and realized (loss) gain on effective hedges
 
Total
Balance at February 3, 2013
$
153,648

 
$
1,552

 
$
(15,318
)
 
$
139,882

Other comprehensive (loss) before reclassifications
(66,812
)
 
—

 
(716
)
 
(67,528
)
Less: Amounts reclassified from AOCI
—

 
407

 
(3,101
)
 
(2,694
)
Other comprehensive (loss) income
(66,812
)
 
(407
)
 
2,385

 
(64,834
)
Balance at November 3, 2013
$
86,836

 
$
1,145

 
$
(12,933
)
 
$
75,048


The following table presents reclassifications out of AOCI to earnings:
 
Amount Reclassified from AOCI
Affected Line Item in the Consolidated Income Statements
 
Thirteen Weeks Ended 11/3/13
 
Thirty-Nine Weeks Ended 11/3/13
 
Realized (loss) gain on effective hedges
 
 
 
 
Foreign currency forward exchange contracts
$
(1,793
)
 
$
1,108

Cost of goods sold
Interest rate contracts
(1,999
)
 
(4,176
)
Interest expense
Less: Tax effect
(702
)
 
33

Income tax expense
Total, net of tax
$
(3,090
)
 
$
(3,101
)
 
 
 
 
 
 
Amortization of retirement liability items
 
 
 
 
Prior service credit
$
221

 
$
660

Selling, general and administrative expenses
Less: Tax effect