Form 10-Q PVH CORP. /DE/ For: Nov 02
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E-mailUNITED 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�2, 2014 | |
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 |
(Registrants 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 2, 2014
was 82,450,867.
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, (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) we may be considered to be highly leveraged and we use a significant portion of our cash flows to service our 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 our acquisition of The Warnaco Group, Inc. ( 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 entitys 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 millions, except per share data)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 2, | November 3, | November 2, | November 3, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales���� | $ | 2,114.0 | $ | 2,145.1 | $ | 5,876.0 | $ | 5,852.6 | |||||||
Royalty revenue���� | 89.3 | 85.5 | 224.0 | 215.1 | |||||||||||
Advertising and other revenue���� | 29.8 | 28.5 | 72.4 | 66.4 | |||||||||||
Total revenue���� | 2,233.1 | 2,259.1 | 6,172.4 | 6,134.1 | |||||||||||
Cost of goods sold ���� | 1,065.6 | 1,087.3 | 2,917.0 | 2,984.3 | |||||||||||
Gross profit���� | 1,167.5 | 1,171.8 | 3,255.4 | 3,149.8 | |||||||||||
Selling, general and administrative expenses���� | 892.9 | 927.4 | 2,647.8 | 2,764.0 | |||||||||||
Debt modification and extinguishment costs | 93.1 | 40.4 | |||||||||||||
Equity in income of unconsolidated affiliates, net | 5.3 | 4.9 | 9.2 | 8.0 | |||||||||||
Income before interest and taxes | 279.9 | 249.3 | 523.7 | 353.4 | |||||||||||
Interest expense���� | 33.6 | 47.9 | 110.7 | 145.3 | |||||||||||
Interest income���� | 1.5 | 1.9 | 4.2 | 6.0 | |||||||||||
Income before taxes | 247.8 | 203.3 | 417.2 | 214.1 | |||||||||||
Income tax expense | 22.1 | 6.7 | 29.8 | 33.1 | |||||||||||
Net income | 225.7 | 196.6 | 387.4 | 181.0 | |||||||||||
Less: Net (loss) income attributable to redeemable non-controlling interest | (0.1 | ) | (0.1 | ) | 0.0 | ||||||||||
Net income attributable to PVH Corp. | $ | 225.7 | $ | 196.7 | $ | 387.5 | $ | 181.0 | |||||||
Basic net income per common share attributable to PVH Corp. | $ | 2.74 | $ | 2.41 | $ | 4.71 | $ | 2.24 | |||||||
Diluted net income per common share attributable to PVH Corp. | $ | 2.71 | $ | 2.37 | $ | 4.66 | $ | 2.19 | |||||||
Dividends declared per common share���� | $ | 0.0375 | $ | 0.0375 | $ | 0.1500 | $ | 0.1500 | |||||||
See accompanying notes.
1
PVH Corp.
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 2, | November 3, | November 2, | November 3, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income | $ | 225.7 | $ | 196.6 | $ | 387.4 | $ | 181.0 | |||||||
Other comprehensive (loss) income: | |||||||||||||||
Foreign currency translation adjustments, net of tax expense (benefit) of $1.2; $0.1; $(2.1) and $(0.2) | (217.6 | ) | 84.4 | (207.4 | ) | (65.9 | ) | ||||||||
Amortization of prior service credit related to pension and postretirement plans, net of tax (benefit) of $(0.1); $(0.1); $(0.3) and $(0.3) | (0.2 | ) | (0.2 | ) | (0.4 | ) | (0.4 | ) | |||||||
Net unrealized and realized gain (loss) on effective hedges, net of tax expense (benefit) of $1.3; $(1.0); $1.3 and $(1.7) | 28.5 | (7.1 | ) | 36.5 | 2.4 | ||||||||||
Comprehensive income | 36.4 | 273.7 | 216.1 | 117.1 | |||||||||||
Less: Comprehensive (loss) income attributable to redeemable non-controlling interest | (0.3 | ) | 0.5 | (1.9 | ) | ||||||||||
Total comprehensive income attributable to PVH Corp. | $ | 36.4 | $ | 274.0 | $ | 215.6 | $ | 119.0 | |||||||
See accompanying notes.
2
PVH Corp.
Consolidated Balance Sheets
(In millions, except share and per share data)
November 2, | February 2, | November 3, | |||||||||
2014 | 2014 | 2013 | |||||||||
UNAUDITED | AUDITED | UNAUDITED | |||||||||
ASSETS | |||||||||||
Current Assets: | |||||||||||
Cash and cash equivalents���� | $ | 365.1 | $ | 593.2 | $ | 542.5 | |||||
Trade receivables, net of allowances for doubtful accounts of $19.8, $26.4 and $21.4 | 879.7 | 730.3 | 875.3 | ||||||||
Other receivables���� | 31.0 | 30.9 | 40.6 | ||||||||
Inventories, net���� | 1,239.9 | 1,281.0 | 1,164.1 | ||||||||
Prepaid expenses���� | 177.9 | 151.9 | 227.4 | ||||||||
Other, including deferred taxes of $86.5, $155.1 and $91.1 | 173.1 | 211.3 | 164.7 | ||||||||
Assets held for sale | 47.5 | ||||||||||
Total Current Assets | 2,866.7 | 2,998.6 | 3,062.1 | ||||||||
Property, Plant and Equipment, net | 707.6 | 712.1 | 689.3 | ||||||||
Goodwill���� | 3,435.0 | 3,506.8 | 3,496.6 | ||||||||
Tradenames���� | 2,930.9 | 3,010.3 | 2,998.8 | ||||||||
Other Intangibles, net | 995.5 | 1,041.9 | 1,067.5 | ||||||||
Other Assets, including deferred taxes of $32.8, $35.2 and $104.3 | 330.0 | 305.9 | 339.2 | ||||||||
Total Assets | $ | 11,265.7 | $ | 11,575.6 | $ | 11,653.5 | |||||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS EQUITY | |||||||||||
Current Liabilities: | |||||||||||
Accounts payable���� | $ | 476.2 | $ | 582.9 | $ | 436.1 | |||||
Accrued expenses, including deferred taxes of $0.0, $1.2 and $0.4 | 745.6 | 844.2 | 748.4 | ||||||||
Deferred revenue���� | 17.7 | 33.5 | 18.3 | ||||||||
Short-term borrowings���� | 39.9 | 6.8 | 12.4 | ||||||||
Current portion of long-term debt���� | 99.3 | 85.0 | 85.0 | ||||||||
Total Current Liabilities���� | 1,378.7 | 1,552.4 | 1,300.2 | ||||||||
Long-Term Debt | 3,618.7 | 3,878.2 | 4,174.6 | ||||||||
Other Liabilities, including deferred taxes of $1,102.5, $1,016.6 and�$1,049.1 | 1,684.5 | 1,804.2 | 1,814.4 | ||||||||
Redeemable Non-Controlling Interest | 5.6 | 5.6 | |||||||||
Stockholders Equity: | |||||||||||
Preferred stock, par value $100 per share; 150,000 total shares authorized���� | |||||||||||
Common stock, par value $1 per share; 240,000,000 shares authorized; 83,044,291; 82,679,574 and 82,095,790 shares issued | 83.0 | 82.7 | 82.1 | ||||||||
Additional paid in capital - common stock���� | 2,752.3 | 2,696.6 | 2,646.4 | ||||||||
Retained earnings���� | 1,949.8 | 1,574.8 | 1,612.5 | ||||||||
Accumulated other comprehensive (loss) income | (129.6 | ) | 42.3 | 77.9 | |||||||
Less: 598,814; 512,702 and 504,845 shares of common stock held in treasury, at cost | (71.7 | ) | (61.2 | ) | (60.2 | ) | |||||
Total Stockholders Equity���� | 4,583.8 | 4,335.2 | 4,358.7 | ||||||||
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders Equity | $ | 11,265.7 | $ | 11,575.6 | $ | 11,653.5 | |||||
See accompanying notes.
3
PVH Corp.
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Thirty-Nine Weeks Ended | |||||||
November 2, | November 3, | ||||||
2014 | 2013 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 387.4 | $ | 181.0 | |||
Adjustments to reconcile to net cash provided by operating activities: | |||||||
Depreciation and amortization���� | 181.4 | 243.1 | |||||
Equity in income of unconsolidated affiliates, net | (9.2 | ) | (8.0 | ) | |||
Deferred taxes���� | (2.5 | ) | (83.5 | ) | |||
Stock-based compensation expense���� | 37.3 | 47.1 | |||||
Impairment of long-lived assets | 4.8 | 5.8 | |||||
Debt modification and extinguishment costs | 93.1 | 40.4 | |||||
Net gain on deconsolidation of subsidiaries and joint venture | (8.0 | ) | |||||
Write-down of assets held for sale | 16.0 | ||||||
Changes in operating assets and liabilities: | |||||||
Trade receivables, net���� | (168.8 | ) | (176.0 | ) | |||
Inventories, net���� | 4.4 | 73.7 | |||||
Accounts payable, accrued expenses and deferred revenue���� | (177.5 | ) | (303.4 | ) | |||
Prepaid expenses���� | (45.1 | ) | (22.3 | ) | |||
Employer pension contributions | (2.7 | ) | (60.0 | ) | |||
Other, net���� | 29.3 | 81.6 | |||||
Net cash provided by operating activities | 323.9 | 35.5 | |||||
INVESTING ACTIVITIES(1) | |||||||
Business acquisitions, net of cash acquired | (14.7 | ) | (1,815.3 | ) | |||
Cash received for sale of Chaps sportswear assets | 18.3 | ||||||
Purchase of property, plant and equipment���� | (173.5 | ) | (166.2 | ) | |||
Contingent purchase price payments | (35.5 | ) | (37.5 | ) | |||
Change in restricted cash | 9.7 | ||||||
Investments in unconsolidated affiliates | (26.2 | ) | (3.5 | ) | |||
Net cash used by investing activities���� | (240.2 | ) | (2,004.2 | ) | |||
FINANCING ACTIVITIES(1) | |||||||
Net proceeds from (payments on) short-term borrowings | 31.6 | (25.3 | ) | ||||
Repayment of 2011 facilities | (900.0 | ) | |||||
Redemption of 7 3/8% senior notes, including make whole premium | (667.6 | ) | |||||
Repayment of Warnacos previously outstanding debt | (197.0 | ) | |||||
Proceeds from 2014/2013 facilities, net of related fees | 586.7 | 2,993.4 | |||||
Repayment of 2014/2013 facilities | (244.7 | ) | (202.9 | ) | |||
Payment of fees associated with issuance of 4 1/2% senior notes | (16.3 | ) | |||||
Net proceeds from settlement of awards under stock plans | 9.5 | 27.0 | |||||
Excess tax benefits from awards under stock plans���� | 9.3 | 22.7 | |||||
Cash dividends���� | (12.5 | ) | (12.3 | ) | |||
Acquisition of treasury shares���� | (10.5 | ) | (60.5 | ) | |||
Payments of capital lease obligations | (6.6 | ) | (7.0 | ) | |||
Net cash (used) provided by financing activities | (304.8 | ) | 1,621.8 | ||||
Effect of exchange rate changes on cash and cash equivalents���� | (7.0 | ) | (2.8 | ) | |||
Decrease in cash and cash equivalents | (228.1 | ) | (349.7 | ) | |||
Cash and cash equivalents at beginning of period���� | 593.2 | 892.2 | |||||
Cash and cash equivalents at end of period���� | $ | 365.1 | $ | 542.5 | |||
(1) See Note 18 for information on noncash investing and financing transactions.
See accompanying notes.
4
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Warners and Olga, which are owned, and Speedo, which is licensed in perpetuity for North America and the Caribbean, 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, jeanswear, underwear, intimate apparel, swim products and, to a lesser extent, handbags, 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. The Companys Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see Note 5, Investments in Unconsolidated Affiliates, for a further discussion. As a result of the acquisition in the first quarter of 2013 of The Warnaco Group, Inc. ( Warnaco ), the Company acquired a majority interest in a joint venture in India that was consolidated and accounted for as a redeemable non-controlling interest during 2013. The redeemable non-controlling interest represented the minority shareholders proportionate share (49%) of the equity in that entity. During the first quarter of 2014, in connection with the sale of the minority shareholders interests to a third party, the Company and the new shareholder entered into a shareholder agreement with different governing arrangements between the Company and the new shareholder as compared to the arrangements with the prior minority shareholders. Based on the new arrangements, the joint venture was deconsolidated and is now accounted for using the equity method of accounting. Please see Note 6, Redeemable Non-Controlling Interest, for a further discussion.
The Companys 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 Companys 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 Companys Annual Report on Form 10-K for the year ended February�2, 2014.
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 these estimates.
The results of operations for the thirteen and thirty-nine weeks ended November�2, 2014 and November�3, 2013 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.
Certain reclassifications have been made to the consolidated financial statements for the prior year periods to present that information on a basis consistent with the current year.�
2. INVENTORIES
Inventories are comprised principally of finished goods and are stated at the lower of cost or market.
5
3. ACQUISITIONS AND DIVESTITURES
Acquisition of Warnaco
The Company acquired on February 13, 2013 all of the outstanding equity interests in Warnaco. The results of Warnacos operations since that date are included in the Companys consolidated financial statements. Warnaco designs, sources, markets and distributes a broad line of intimate apparel, underwear, jeanswear and swim products worldwide. Warnacos products are sold under the Calvin Klein, Speedo, Warners and Olga brand names and were also previously sold under the Chaps brand name. Ralph Lauren Corporation reacquired the�Chaps license on February 14, 2013 as a result of Companys acquisition of Warnaco.
The Warnaco acquisition provided the Company with complete direct global control of the Calvin Klein brand image and commercial decisions for the two largest Calvin Klein apparel categories jeanswear and underwear. In addition, the Company believes the acquisition takes advantage of its and Warnacos complementary geographic platforms. Warnacos operations in Asia and Latin America should enhance the Companys opportunities in those high-growth regions, and the Company has 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 Calvin Klein Underwear businesses in those regions.
Fair Value of the Acquisition Consideration
The acquisition date fair value of the acquisition consideration paid at closing totaled $3,137.1 million, which consisted of the following:
(In millions, except per share data) | ||||
Cash | $ | 2,180.0 | ||
Common stock (7.7 shares, par value $1.00 per share) | 926.5 | |||
Warnaco employee replacement stock awards | 39.8 | |||
Elimination of pre-acquisition liability to Warnaco | (9.2 | ) | ||
Total fair value of the acquisition consideration | $ | 3,137.1 | ||
The fair value of the 7.7 million common shares issued was equal to the aggregate value of the shares at the closing market price of the Companys 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 $9.2 million 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 Warnacos previously outstanding long-term debt with the net proceeds of (i) the issuance of $700.0 million of 4 1/2% senior notes due 2022; and (ii) the borrowing of $3,075.0 million of term loans under new senior secured credit facilities.
Please see 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 in 2012 and 2013 directly associated with the acquisition, including short-lived non cash valuation adjustments and amortization, totaling approximately $170.0 million, of which approximately $125.0 million was recorded during the thirty-nine weeks ended November�3, 2013. Please see Note 16, Exit Activity Costs, for a discussion of restructuring costs incurred during the thirty-nine weeks ended November�2, 2014 associated with the integration.
The operations acquired with Warnaco had total revenue of $1,567.6 million and a net loss, after non cash valuation adjustments and amortization and integration costs, of $(21.4) million for the period from the date of acquisition through November�3, 2013. These amounts were included in the Companys results of operations for the thirty-nine week period then ended.
6
Pro Forma Impact of the Transaction
The following table presents the Companys pro forma consolidated results of operations for the thirteen and thirty-nine weeks ended November�3, 2013, as if the acquisition and the related financing transactions had occurred at the beginning of the year prior to the acquisition date. The pro forma results were calculated applying the Companys 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 Warnacos property, plant and equipment and intangible assets recorded in connection with the acquisition; (iii) the impact on interest expense resulting from changes to the Companys 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 Companys results of operations for the thirteen and thirty-nine weeks ended November�3, 2013; 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 at the beginning of the year prior to the acquisition date, nor are they indicative of the future operating results of the combined company.
Pro Forma | Pro Forma | |||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||
(In millions) | 11/3/13 | 11/3/13 | ||||||
Total revenue | $ | 2,259.2 | $ | 6,197.2 | ||||
Net income attributable to PVH Corp. | 300.2 | 450.1 | ||||||
Allocation of the Acquisition Consideration
The following table summarizes the fair values of the assets acquired and liabilities and redeemable non-controlling interest assumed at the date of acquisition:
(In millions) | ||||
Cash and cash equivalents | $ | 364.7 | ||
Trade receivables | 286.7 | |||
Other receivables | 46.9 | |||
Inventories | 442.9 | |||
Prepaid expenses | 38.7 | |||
Other current assets | 56.0 | |||
Property, plant and equipment | 123.3 | |||
Goodwill | 1,513.2 | |||
Tradenames | 604.6 | |||
Other intangibles | 1,023.7 | |||
Other assets | 169.3 | |||
Total assets acquired | 4,670.0 | |||
Accounts payable | 180.1 | |||
Accrued expenses | 260.5 | |||
Short-term borrowings | 26.9 | |||
Current portion of long-term debt | 2.0 | |||
Long-term debt | 195.0 | |||
Other liabilities | 862.8 | |||
Total liabilities assumed | 1,527.3 | |||
Redeemable non-controlling interest | 5.6 | |||
Total fair value of acquisition consideration | $ | 3,137.1 | ||
7
The Company finalized the purchase price allocation during the fourth quarter of 2013 and applied applicable measurement period adjustments retrospectively in accordance with Financial Accounting Standards Board ( FASB ) guidance for business combinations.
During the process of finalizing the purchase price allocation, the Company received additional information about facts and circumstances that existed as of the Warnaco acquisition date.�As a result of the receipt of new information, which was included in the final valuation report received from a third-party valuation firm, and considering the results of that report, the Company estimated the fair value of the order backlog acquired as part of the Warnaco acquisition to be $24.1 million lower than the estimated provisional amount. As a result of this adjustment to fair value, the carrying amount of the order backlog (which was being amortized principally over six months) was retrospectively decreased as of February 13, 2013, with a corresponding increase to goodwill and other intangible assets (net of related deferred taxes), and the related order backlog amortization expense for the first and second quarters of 2013 was reduced by $11.6 million and $12.3 million, respectively. The difference between the decrease in backlog amortization expense and the decrease in the fair value of the intangible asset relates to changes in exchange rates subsequent to the acquisition date.�The Company recorded these measurement period adjustments in the fourth quarter of 2013 and applied the adjustments retrospectively to the first and second quarters of 2013. The measurement period adjustments were included in the results of the Calvin Klein International segment.
In connection with the acquisition, the Company recorded goodwill of $1,513.2 million, which was assigned to the Companys Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail segments in the amounts of $456.0 million, $658.6 million, $5.9 million, $296.5 million, $84.3 million and $11.9 million, respectively. In accordance with FASB guidance, the goodwill acquired in the Warnaco acquisition was assigned as of the acquisition date to the Companys reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before the acquisition and their estimated fair values after the acquisition. None of the goodwill is expected to be deductible for tax purposes.
The Company also recorded other intangible assets of $1,628.3 million, which included reacquired license rights of $593.3 million, order backlog of $73.0 million and customer relationships of $149.8 million, which are all amortizable, as well as tradenames of $604.6 million and perpetual license rights of $207.6 million, which have indefinite lives.
Sale of Chaps Sportswear Assets
As a result of the Companys acquisition of Warnaco, Ralph Lauren Corporation reacquired on February 14, 2013 the license for Chaps mens sportswear that Warnaco held from affiliates of Ralph Lauren Corporation. The Chaps sportswear business was previously operated by Warnaco under such license. In connection with this transaction, the Company sold all of the assets of the Chaps sportswear business, which consisted principally of inventory, to Ralph Lauren Corporation for gross proceeds of $18.3 million.
Acquisition of Russia Franchisee
The Company acquired three Tommy Hilfiger stores in Russia during the fourth quarter of 2013 and two additional stores during the first quarter of 2014 from a former Tommy Hilfiger franchisee. The Company paid $6.0 million during the fourth quarter of 2013 for the first three stores and $4.3 million during the first quarter of 2014 for the other two stores. These transactions were accounted for as business combinations.
Acquisition of Ireland Franchisee
The Company acquired six Tommy Hilfiger stores in Ireland from a former Tommy Hilfiger franchisee during the first quarter of 2014. The Company paid $3.1 million as consideration for this transaction. This transaction was accounted for as a business combination.
Acquisition of Calvin Klein Performance Wear Retail Businesses in Hong Kong and China
The Company acquired the Calvin Klein performance wear retail businesses in Hong Kong and China from a former Calvin Klein sublicensee during the third quarter of 2014. The Company paid $7.3 million as consideration for this transaction. This transaction was accounted for as a business combination. The Company and the former shareholders of the acquired entity are in the process of finalizing the value of the net assets acquired; thus the amount paid is subject to adjustment.
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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 ) business. The decision to sell these assets was based on the Companys strategy to drive growth through its higher-margin Calvin Klein and Tommy Hilfiger businesses. The Company recorded a net pre-tax loss of $19.5 million 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 $16.0 million during the third quarter of 2013 to reflect these assets in the Consolidated Balance Sheet as of November�3, 2013 at $47.5 million, representing their fair value, less estimated costs to sell. This loss was principally included in selling, general and administrative expenses in the Companys 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 $47.5 million. 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 Companys Consolidated Balance Sheet as of November�3, 2013 were included in the Heritage Brands Retail segment and consisted of the following:
(In millions) | ||||
Other receivables | $ | 0.2 | ||
Inventories, net | 49.0 | |||
Other current assets | 0.2 | |||
Property, plant and equipment, net | 14.0 | |||
Other noncurrent assets | 0.1 | |||
Allowance for reduction of assets held for sale | (16.0 | ) | ||
Total assets held for sale | $ | 47.5 | ||
A small number of the Companys Bass stores were excluded from the sale and were deemed to be impaired as of November�3, 2013. The Company recorded a loss of $1.2 million 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 $3.3 million 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 $1.2 million. The above-mentioned items were included in selling, general and administrative expenses in the Companys Consolidated Income Statements for the thirteen and thirty-nine weeks ended November�3, 2013 and were 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. The estimated fair value of these guarantee obligations as of November�3, 2013 was $4.4 million, which was recorded in the Heritage Brands retail segment and was included in selling, general and administrative expenses in the Companys Consolidated Income Statements for the thirteen and thirty-nine weeks ended November�3, 2013 and accrued expenses and other liabilities in the Companys Consolidated Balance Sheet as of November�3, 2013. The estimated fair value of these guarantee obligations as of November�2, 2014 is $3.2 million, which is included in accrued expenses and other liabilities in the Companys Consolidated Balance Sheet. Please see Note 20, Guarantees, for a further discussion.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Karl Lagerfeld
The Company acquired a 10% economic interest in Kingdom Holding 1 B.V., the parent company of the Karl Lagerfeld brand, during the first quarter of 2014 for $18.9 million. One of the Companys directors owns approximately 35% of Kingdom Holding 1 B.V. The Company has significant influence as defined under FASB guidance with respect to its investment in Kingdom Holding 1 B.V., therefore, this investment is being accounted for under the equity method of accounting.
Calvin Klein Australia
The Company formed a joint venture, PVH Brands Australia Pty. Limited ( PVH Australia ), in 2013 in which the Company owns a 50% economic interest. The joint venture licenses from a Company subsidiary the rights to distribute and sell certain Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the transaction,
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the Company contributed to the joint venture its subsidiaries that were operating the Calvin Klein Jeans businesses in Australia and New Zealand. In connection with this contribution, which took place on the first day of 2014, the Company deconsolidated these subsidiaries and recognized a net gain of $2.1 million during the first quarter of 2014, which was recorded in selling, general and administrative expenses. The gain was measured as the difference between the fair value of the Companys 50% interest as determined by a third-party valuation firm and the carrying value of the net assets and cash contributed. The Company made net payments of $7.3 million and $0.7 million to PVH Australia during the thirty-nine weeks ended November�2, 2014 and November�3, 2013, respectively, representing its 50% share of funding. This investment is being accounted for under the equity method of accounting.
�
Calvin Klein India
With the Warnaco acquisition, the Company acquired a 51% economic interest in a Calvin Klein joint venture in India, Premium Garments Wholesale Trading Private Limited ( CK India ). The joint venture licenses from a Company subsidiary the rights to the Calvin Klein trademark in India. Beginning in the first quarter of 2014, this investment is being accounted for under the equity method of accounting. Please see Note 6, Redeemable Non-Controlling Interest, for a further discussion.
Tommy Hilfiger Brazil
The Company formed a joint venture, Tommy Hilfiger do Brasil S.A., in Brazil in 2012, in which the Company owns a 40% economic interest. The joint venture licenses from a Company subsidiary the rights to the Tommy Hilfiger trademarks in Brazil. The Company made a payment of $2.8 million 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.
Tommy Hilfiger China
The Company formed a joint venture, TH Asia Ltd., in China in 2010, 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. The joint venture licenses from a Company subsidiary the rights to these businesses. This investment is being accounted for under the equity method of accounting.
Tommy Hilfiger India
The Company acquired in 2011 a 50% economic interest in a company that has since been renamed Tommy Hilfiger Arvind Fashion Private Limited ( TH India ). TH India licenses from a Company subsidiary the rights to 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. This investment is being accounted for under the equity method of accounting.
Included in other assets in the Companys Consolidated Balance Sheets as of November�2, 2014, February 2, 2014 and November�3, 2013 is $113.7 million, $71.3 million and $71.9 million, respectively, related to these investments in unconsolidated affiliates.
6. REDEEMABLE NON-CONTROLLING INTEREST
CK India was consolidated in the Companys financial statements during 2013. Please see Note 5, Investments in Unconsolidated Affiliates, for a further discussion.
The fair value of the non-controlling interest in CK India as of the date it was acquired by the Company was $5.6 million. During 2013, subsequent changes in the fair value of the redeemable non-controlling interest were recognized immediately as they occurred and the carrying amount of the redeemable non-controlling interest was adjusted to equal the fair value at the end of each reporting period, provided that this amount at the end of each reporting period was not lower than the initial fair value. Any fair value adjustment to the carrying amount of the redeemable non-controlling interest was recognized immediately in retained earnings of the Company. After adjusting the carrying amount for net income and other comprehensive income during the thirty-nine weeks ended November 3, 2013, an adjustment to retained earnings of $1.9 million was necessary to increase the fair value of the redeemable non-controlling interest as of November 3, 2013 to the initial fair value of $5.6 million.
During the first quarter of 2014, Arvind Limited, the Companys joint venture partner in TH India, purchased the Companys prior joint venture partners shares in�CK India and, as a result of the entry into a shareholder agreement with different
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governing arrangements between the Company and the new shareholder as compared to the arrangements with the prior minority shareholders, the Company no longer holds a controlling interest in the joint venture. CK India was deconsolidated, as a result, and the Company began reporting its�51%�interest as an equity method investment in the first quarter of 2014. The Company recognized a net gain of $5.9 million in connection with the deconsolidation of CK India during the first quarter of 2014, which was recorded in selling, general and administrative expenses. The gain was measured as the difference between the fair value of the Companys 51% interest as determined by a third-party valuation firm and the carrying value.
7. GOODWILL
The changes in the carrying amount of goodwill for the thirty-nine weeks ended November�2, 2014, by segment, were as follows:
(In millions) | Calvin Klein North America | Calvin Klein International | Tommy Hilfiger North America | Tommy Hilfiger International | Heritage Brands Wholesale | Heritage Brands Retail | Total | ||||||||||||||||||||
Balance as of February 2, 2014 | |||||||||||||||||||||||||||
Goodwill, gross���� | $ | 683.6 | $ | 877.8 | $ | 204.4 | $ | 1,489.9 | $ | 239.2 | $ | 11.9 | $ | 3,506.8 | |||||||||||||
Accumulated impairment losses���� | |||||||||||||||||||||||||||
Goodwill, net���� | 683.6 | 877.8 | 204.4 | 1,489.9 | 239.2 | 11.9 | 3,506.8 | ||||||||||||||||||||
Contingent purchase price payments to Mr. Calvin Klein | 21.5 | 17.0 | 38.5 | ||||||||||||||||||||||||
Goodwill from acquisition of Russia franchisee | 3.8 | 3.8 | |||||||||||||||||||||||||
Goodwill from acquisition of Ireland franchisee | 3.7 | 3.7 | |||||||||||||||||||||||||
Goodwill from acquisition of Calvin Klein performance wear retail businesses in Hong Kong and China | 7.2 | 7.2 | |||||||||||||||||||||||||
Currency translation���� | (0.2 | ) | (14.4 | ) | (110.4 | ) | (125.0 | ) | |||||||||||||||||||
Balance as of November 2, 2014 | |||||||||||||||||||||||||||
Goodwill, gross���� | 704.9 | 887.6 | 204.4 | 1,387.0 | 239.2 | 11.9 | 3,435.0 | ||||||||||||||||||||
Accumulated impairment losses���� | |||||||||||||||||||||||||||
Goodwill, net���� | $ | 704.9 | $ | 887.6 | $ | 204.4 | $ | 1,387.0 | $ | 239.2 | $ | 11.9 | $ | 3,435.0 | |||||||||||||
The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Companys 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.
8. RETIREMENT AND BENEFIT PLANS
The Company has five noncontributory defined benefit pension plans as of November�2, 2014 covering substantially all employees resident in the United States who meet certain age and service requirements. As part of the Warnaco acquisition, the Company acquired a frozen noncontributory defined benefit pension plan. Such plan was merged with an existing plan of the Companys during 2013. The plans provide monthly benefits upon retirement based on career compensation and years of credited service. Vesting in plan benefits occurs after five years of service. The Company refers to these five plans as its Pension Plans.
The Company also has for certain members of Tommy Hilfigers 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
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result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation plan, which is an unfunded non-qualified supplemental defined benefit plan. 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 Companys 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. This plan was frozen on January 1, 2014. The Company refers to these two plans as its Postretirement Plans.
Net benefit cost related to the Companys Pension Plans was recognized in selling, general and administrative expenses as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||
Service cost, including plan expenses���� | $ | 4.9 | $ | 4.9 | $ | 14.7 | $ | 14.3 | |||||||
Interest cost���� | 7.2 | 6.6 | 21.4 | 19.7 | |||||||||||
Expected return on plan assets���� | (10.8 | ) | (10.0 | ) | (32.6 | ) | (29.5 | ) | |||||||
Total���� | $ | 1.3 | $ | 1.5 | $ | 3.5 | $ | 4.5 | |||||||
Net benefit cost related to the Companys SERP Plans was recognized in selling, general and administrative expenses as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||
Service cost, including plan expenses���� | $ | 1.1 | $ | 1.1 | $ | 3.3 | $ | 3.3 | |||||||
Interest cost���� | 1.1 | 0.9 | 3.1 | 2.7 | |||||||||||
Amortization of prior service credit | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | |||||||
Total���� | $ | 2.1 | $ | 1.9 | $ | 6.3 | $ | 5.9 | |||||||
Net benefit cost related to the Companys Postretirement Plans was recognized in selling, general and administrative expenses as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||
Service cost, including plan expenses���� | $ | $ | 0.1 | $ | $ | 0.1 | |||||||||
Interest cost���� | 0.2 | 0.2 | 0.6 | 0.6 | |||||||||||
Amortization of prior service credit | (0.2 | ) | (0.2 | ) | (0.6 | ) | (0.6 | ) | |||||||
Total���� | $ | 0.0 | $ | 0.1 | $ | 0.0 | $ | 0.1 | |||||||
The Company made contributions of $2.7 million to its Pension Plans in the thirty-nine weeks ended November 2, 2014 and does not expect to make additional contributions to its Pension Plans during the remainder of 2014.
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9. DEBT
Short-Term Borrowings
One of the Companys Asian subsidiaries has a Yen-denominated overdraft facility with a Japanese bank, which provides for borrowings of up to �1,000.0 million (approximately $8.9 million based on exchange rates in effect on November�2, 2014) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the one-month Japanese interbank borrowing rate plus 0.30%. Such facility renews automatically unless the Company gives notice of termination. As of November�2, 2014, the Company had $8.9 million of borrowings outstanding under this facility. The weighted average interest rate on the funds borrowed at November�2, 2014 was 0.45%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was equal to the maximum amount of borrowings available under the facility.
One of the Companys European subsidiaries has short-term revolving notes with a number of banks at various interest rates, as well as a Euro-denominated overdraft facility, which provide for borrowings of up to �60.0 million (approximately $75.1 million based on exchange rates in effect on November�2, 2014). These facilities are used primarily to fund working capital needs. As of November�2, 2014, the Company had $5.7 million of borrowings outstanding under the overdraft facility. The weighted average interest rate on the borrowings outstanding at November�2, 2014 was 1.84%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was approximately $31.9 million.
One of the Companys European subsidiaries has a United States dollar-denominated short-term line of credit facility with a Turkish bank, which provides for borrowings of up to $3.0 million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish Central Bank lending rate plus 0.50%. As of November�2, 2014, the Company had $0.3 million of borrowings outstanding under this facility. The weighted average interest rate on the borrowings outstanding at November�2, 2014 was 11.75%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was approximately $2.7 million.
One of the Companys Asian subsidiaries has a short-term $10.0 million revolving credit facility to be used primarily 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 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�2, 2014.
One of the Companys Asian subsidiaries has a Won-denominated short-term revolving credit facility with one lender that provides for borrowings of up to �3,000.0 million (approximately $2.8 million based on exchange rates in effect on November�2, 2014) and is utilized primarily 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�2, 2014.
One of the Companys Latin American subsidiaries has Real-denominated short-term revolving credit facilities with a number of banks that provide for total available borrowings of R$69.0 million (approximately $28.1 million based on exchange rates in effect on November�2, 2014) and are utilized primarily to fund working capital needs. Borrowings 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�2, 2014.
As of November�2, 2014 the Company had drawn $25.0 million of revolving borrowings under its senior secured credit facilities as discussed in the section entitled 2014 Senior Secured Credit Facilities below. The weighted average interest rate on the borrowings outstanding at November�2, 2014 was 4.00%. The maximum amount of revolving borrowings outstanding under these facilities during the thirty-nine weeks ended November�2, 2014 was approximately $150.0 million. In addition, the Company has certain other facilities under which there were no borrowings outstanding as of or during the thirty-nine weeks ended November�2, 2014.
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Long-Term Debt
The carrying amounts of the Companys long-term debt were as follows:
(In millions) | 11/2/14 | 11/3/13 | |||||
Senior secured term loan A facility due 2019 | $ | 1,929.9 | $ | 1,651.5 | |||
Senior secured term loan B facility due 2020 | 988.4 | 1,208.4 | |||||
7 3/8% senior unsecured notes due 2020 | 600.0 | ||||||
4 1/2% senior unsecured notes due 2022 | 700.0 | 700.0 | |||||
7 3/4% debentures due 2023 | 99.7 | 99.7 | |||||
Total���� | 3,718.0 | 4,259.6 | |||||
Less: Current portion of long-term debt���� | 99.3 | 85.0 | |||||
Long-term debt���� | $ | 3,618.7 | $ | 4,174.6 | |||
As of November�2, 2014, the Companys mandatory long-term debt repayments for the next five years were as follows:
(In millions) | |||
Remainder of 2014 | $ | 24.8 | |
2015 | 99.3 | ||
2016 | 136.6 | ||
2017 | 186.2 | ||
2018 | 198.6 | ||
2019 | 1,291.1 | ||
As of November�2, 2014, after taking into account the effect of the Companys interest rate swap and cap agreements discussed in the section entitled 2014 Senior Secured Credit Facilities below, which were in effect as of such date, approximately 70% of the Companys long-term debt was at a fixed or capped rate, with the remainder at variable rates.
2013 Senior Secured Credit Facilities
On February 13, 2013, simultaneously with and related to the closing of the Warnaco acquisition, the Company entered into senior secured credit facilities (the 2013 facilities ), the proceeds of which were used to fund a portion of the acquisition, repay all outstanding borrowings under the Companys prior facilities, which were amended and restated during 2011 (the 2011 facilities ), and repay all of Warnacos previously outstanding long-term debt. The 2013 facilities consisted of a $1,700.0 million United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $7.3 million as of the acquisition date), a $1,375.0 million United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $6.9 million as of the acquisition date) and senior secured revolving credit facilities in an aggregate principal amount of $750.0 million (based on the applicable exchange rates on February 13, 2013), consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a �185.9 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs. In connection with entering into the 2013 facilities and repaying all outstanding borrowings under the 2011 facilities and all of Warnacos previously outstanding long-term debt, the Company paid debt issuance costs of $67.4 million (of which $34.6 million was expensed as debt modification and extinguishment costs and $32.8 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $5.8 million to write-off previously capitalized debt issuance costs.
The Company made payments of $202.9 million on its term loans under the 2013 facilities during the thirty-nine weeks ended November�3, 2013.
On March 21, 2014, the Company amended and restated the 2013 facilities, as discussed in the section entitled 2014 Senior Secured Credit Facilities below.
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2014 Senior Secured Credit Facilities
On March 21, 2014 (the Restatement Date ), the Company entered into an amendment (the Amendment ) to the 2013 facilities (as amended by the Amendment, the 2014 facilities ). The Amendment provided for an additional $350.0 million principal amount of loans under the Term Loan A facility and an additional $250.0 million principal amount of loans under the Term Loan B facility and extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2018 to February 13, 2019.�The maturity of the Term Loan B facility remains February 13, 2020. On the Restatement Date, the Company borrowed the additional principal amounts described above and used the proceeds to redeem all of its outstanding 7 3/8% senior notes, as discussed in the section entitled 7 3/8% Senior Notes Due 2020 below. In connection with entering into the Amendment, the Company paid debt issuance costs of $13.3 million (of which $8.0 million was expensed as debt modification and extinguishment costs and $5.3 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $3.2 million to write-off previously capitalized debt issuance costs.
The 2014 facilities consist of a $1,986.3 million United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $7.8 million), a $1,188.6 million United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $5.7 million) and senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a �185.9 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs.
The revolving credit facilities also include amounts available for letters of credit.�As of November�2, 2014, the Company had drawn $25.0 million of revolving credit borrowings and $40.5 million of letters of credit. A portion of each of the 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 sum of (1) the sum of (x) $1,350.0 million plus (y) the aggregate amount of all voluntary prepayments of term loans under the facilities and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an additional unlimited amount as long as the ratio of the Companys 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 2014 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase.�The lenders under the 2014 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
During the thirty-nine weeks ended November�2, 2014, the Company made payments of $244.7 million on its term loans under the 2014 facilities, the majority of which was voluntary. As of November�2, 2014, the Company had total term loans outstanding of $2,918.3 million, 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 previous voluntary payments, the Company is not required to make any additional mandatory payments under Term Loan B prior to maturity.
Obligations of the Company under the 2014 facilities are guaranteed by substantially all of the Companys existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European Borrower under the 2014 facilities are guaranteed by the Company, substantially all of its existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., a wholly owned subsidiary of the Company.�The Company and its domestic subsidiary guarantors have pledged certain of their assets as security for the obligations under the 2014 facilities.
The outstanding borrowings under the 2014 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2014 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 Companys net leverage ratio during the relevant fiscal period.
The United States dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Companys 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%
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(provided, that, with respect to the Term Loan B facility, 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 2014 facilities (provided, that, with respect to the Term Loan B facility, in no event will the adjusted Eurocurrency rate be deemed to be less than 0.75%).
Canadian dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Companys 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 2014 facilities.
The borrowings under the 2014 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 2014 facilities.
The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is 1.75% for adjusted Eurocurrency rate loans and 0.75% for base rate loans, respectively.�The current applicable margin with respect to the Term Loan B facility is 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 Companys fiscal quarter ending November�2, 2014, the applicable margin for borrowings under the Term Loan A facility, the Term Loan B facility and the revolving credit facilities is subject to adjustment based upon the Companys net leverage ratio.
The 2014 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by the Company and certain of its subsidiaries, and certain pledges of its assets and those of certain of its subsidiaries, as security for the obligations under the 2014 facilities; and a change in control (as defined in the 2014 facilities).
During the second quarter of 2014, the Company entered into an interest rate cap agreement for an 18-month term commencing on August 18, 2014. The agreement was designed with the intended effect of capping the interest rate on an initial notional amount of $514.2 million of the Companys variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms. Such agreement remains outstanding with a notional amount of $511.9 million as of November�2, 2014. Under the terms of this agreement, the one-month LIBOR that the Company will pay is capped at a rate of 1.50%. Therefore, the maximum amount of interest that the Company will pay on the then-outstanding notional amount will be at the 1.50% capped rate, plus the current applicable margin.
During the second quarter of 2014, the Company entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $682.6 million of the Companys variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms, to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Companys exposure to fluctuations in the one-month LIBOR is eliminated and it will pay a weighted average fixed rate of 1.924%, plus the current applicable margin.
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 $1,228.8 million of the Companys variable rate debt obligation under its previously outstanding 2013 facilities, or any replacement facility with similar terms, to fixed rate debt. Such agreement remains outstanding with a notional amount of $1,275.6 million as of November�2, 2014, and is now converting a portion of the Companys variable rate debt obligation under the 2014 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Companys 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.
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 $632.0 million of the Companys variable rate debt obligation under its previously outstanding 2011 facilities, or any replacement facility with similar terms, to fixed rate debt. Such swap agreement expired June 6, 2014.
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The notional amount of each interest rate swap and cap will be adjusted according to a pre-set schedule during the term of each swap and cap agreement such that, based on the Companys projections for future debt repayments, the Companys outstanding debt under the Term Loan A facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps and cap.
The 2014 facilities also contain covenants that restrict the Companys 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 Companys 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 Companys capital stock or certain debt; |
" | make acquisitions and investments; |
" | dispose of assets; |
" | engage in transactions with affiliates; |
" | enter into agreements restricting the Companys subsidiaries ability to pay dividends; |
" | create liens on the Companys assets or engage in sale/leaseback transactions; and |
" | effect a consolidation or merger, or sell, transfer, or lease all or substantially all of the Companys assets. |
The 2014 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 Companys 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 Companys other indebtedness.
4 1/2% Senior Notes Due 2022
On December 20, 2012, the Company issued $700.0 million principal amount of 4 1/2% senior notes due December 15, 2022 in connection with the Warnaco acquisition. The Company paid $16.3 million 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.
Subject to certain conditions, the Company may 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. 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. 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 Companys 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 $100.0 million of debentures due November 15, 2023 with a yield to maturity of 7.80%. The debentures accrue interest at the rate of 7 3/4%. 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.
7 3/8% Senior Notes Due 2020
On May 6, 2010, the Company issued $600.0 million principal amount of 7 3/8% senior notes due May 15, 2020. On March 24, 2014, in connection with the amendment and restatement of the 2013 facilities as discussed above in the section entitled 2014 Senior Secured Credit Facilities, the Company redeemed all of its outstanding 7 3/8% senior notes and, pursuant to the indenture under which the notes were issued, paid a make whole premium of $67.6 million to the holders of the notes. The Company also recorded costs of $14.3 million to write-off previously capitalized debt issuance costs associated with these notes.��
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10. INCOME TAXES
The effective income tax rates for the thirteen weeks ended November�2, 2014 and November�3, 2013 were 8.9% and 3.3%, respectively. The effective income tax rates for the thirty-nine weeks ended November�2, 2014 and November�3, 2013 were 7.1% and 15.5%, respectively.
The effective income tax rates for the thirteen and thirty-nine weeks ended November�2, 2014 and November�3, 2013 were lower than the United States statutory rate due to the benefit of lower tax rates in international jurisdictions where the Company files tax returns, the recognition of foreign tax credits generated from Warnaco integration activities and the benefit of discrete items related to uncertain tax positions. The benefit of discrete items for the thirty-nine weeks ended November 2, 2014 included the favorable resolution in the second quarter of 2014 of uncertain tax positions approximating�$24.0�million in international jurisdictions, and of an uncertain tax position approximating $6.0 million related to European and United States transfer pricing arrangements. Partially offsetting these benefits were the impacts of state and local taxes.
On May 14, 2014, the Company resolved for $179.0 million an uncertain tax position related to European and United States transfer pricing arrangements for which it had previously recorded a liability of approximately $185.0 million. The liability will be settled over three years. Accordingly, in the second quarter of 2014, the Company recognized a tax benefit of approximately $6.0 million and recorded a reduction of approximately $185.0 million in its liability for uncertain tax positions.
11. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has exposure to changes in foreign currency exchange rates related to certain anticipated cash flows principally associated with certain international inventory purchases and certain intercompany transactions. 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 and an interest rate cap agreement to hedge against this exposure. Please see Note 9, Debt, for a further discussion of the Companys senior secured term loan facilities and these agreements.
The Company records the foreign currency forward exchange contracts and interest rate contracts at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. 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 (loss) 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 amounts were excluded from effectiveness testing. In addition, the Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments ( undesignated contracts ), including all of the foreign currency forward exchange contracts related to intercompany loans that 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.
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The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for the Companys derivative financial instruments:
(In millions) | Asset Derivatives (Classified�in�Other�Current Assets and Other Assets) | Liability Derivatives (Classified�in�Accrued�Expenses and Other Liabilities) | |||||||||||||
11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | ||||||||||||
Contracts designated as cash flow hedges: | |||||||||||||||
Foreign currency forward exchange contracts�����(inventory purchases) | $ | 36.3 | $ | 1.2 | $ | 0.1 | $ | 9.2 | |||||||
Interest rate contracts | 2.6 | 2.3 | 9.9 | 8.2 | |||||||||||
Total contracts designated as cash flow hedges | 38.9 | 3.5 | 10.0 | 17.4 | |||||||||||
Undesignated contracts: | |||||||||||||||
Foreign currency forward exchange contracts�����(inventory purchases) | 0.1 | ||||||||||||||
Foreign currency forward exchange contracts (principally intercompany transactions) | 13.0 | 0.9 | 0.3 | 0.0 | |||||||||||
Total undesignated contracts | 13.0 | 0.9 | 0.3 | 0.1 | |||||||||||
Total | $ | 51.9 | $ | 4.4 | $ | 10.3 | $ | 17.5 | |||||||
At November�2, 2014, the notional amount outstanding of foreign currency forward exchange contracts was $911.4 million. Such contracts expire principally between November 2014 and October 2015.
The following table summarizes the effect of the Companys hedges designated as cash flow hedging instruments:
Gain (Loss) Recognized in Other Comprehensive (Loss) Income | Gain (Loss) Reclassified from AOCI into Income (Expense)�������� | ||||||||||||||||
(In millions) | Location | �Amount | |||||||||||||||
Thirteen Weeks Ended | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||||
Foreign currency forward exchange contracts�����(inventory purchases) | $ | 36.9 | $ | (8.0 | ) | Cost of goods sold | $ | 2.9 | $ | (1.8 | ) | ||||||
Interest rate contracts���� | (5.7 | ) | (3.9 | ) | Interest expense | (1.5 | ) | (2.0 | ) | ||||||||
Total���� | $ | 31.2 | $ | (11.9 | ) | $ | 1.4 | $ | (3.8 | ) | |||||||
Thirty-Nine Weeks Ended | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||||
Foreign currency forward exchange contracts�����(inventory purchases) | $ | 38.1 | $ | 2.6 | Cost of goods sold | $ | (2.6 | ) | $ | 1.1 | |||||||
Interest rate contracts | (8.0 | ) | (5.0 | ) | Interest expense | (5.1 | ) | (4.2 | ) | ||||||||
Total | $ | 30.1 | $ | (2.4 | ) | $ | (7.7 | ) | $ | (3.1 | ) | ||||||
There was no ineffective portion of hedges designated as cash flow hedging instruments during the thirty-nine weeks ended November�2, 2014 and November�3, 2013.
A net gain in AOCI on foreign currency forward exchange contracts at November�2, 2014 of $35.2 million is estimated to be reclassified in the next 12 months in the Consolidated Income Statements to cost of goods sold as the underlying inventory is purchased and sold. In addition, a net loss in AOCI for interest rate contracts at November�2, 2014 of $4.0 million is estimated to be reclassified to interest expense within the next 12 months.
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The following table summarizes the effect of the Companys foreign currency forward exchange undesignated contracts:
(In millions) | Gain (Loss) Recognized in Income | |||||||||
Thirteen Weeks Ended | Location | 11/2/14 | 11/3/13 | |||||||
Foreign currency forward exchange contracts (inventory purchases) | Selling, general and administrative expenses | $ | $ | (0.2 | ) | |||||
Foreign currency forward exchange contracts (principally intercompany transactions) | Selling, general and administrative expenses | 13.2 | (1.4 | ) | ||||||
Thirty-Nine Weeks Ended | Location | 11/2/14 | 11/3/13 | |||||||
Foreign currency forward exchange contracts (inventory purchases) | Selling, general and administrative expenses | $ | $ | 0.1 | ||||||
Foreign currency forward exchange contracts (principally intercompany transactions) | Selling, general and administrative expenses | 12.9 | (1.4 | ) | ||||||
The Company had no derivative financial instruments with credit risk related contingent features underlying the related contracts as of November�2, 2014.
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 Companys own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
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In accordance with the fair value hierarchy described above, the following table shows the fair value of the Companys financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
(In millions) | 11/2/14 | 2/2/14 | 11/3/13 | ||||||||||||||||||||||||||||||||||||||
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 | $ | 49.3 | N/A | $ | 49.3 | N/A | $ | 5.8 | N/A | $ | 5.8 | N/A | $ | 2.1 | N/A | $ | 2.1 | |||||||||||||||||||||||
Interest rate contracts | N/A | 2.6 | N/A | 2.6 | N/A | 2.2 | N/A | 2.2 | N/A | 2.3 | N/A | 2.3 | |||||||||||||||||||||||||||||
Total Assets | N/A | $ | 51.9 | N/A | $ | 51.9 | N/A | $ | 8.0 | N/A | $ | 8.0 | N/A | $ | 4.4 | N/A | $ | 4.4 | |||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||||
Foreign currency forward exchange contracts���� | N/A | $ | 0.4 | N/A | $ | 0.4 | N/A | $ | 6.2 | N/A | $ | 6.2 | N/A | $ | 9.3 | N/A | $ | 9.3 | |||||||||||||||||||||||
Interest rate contracts | N/A | 9.9 | N/A | 9.9 | N/A | 6.8 | N/A | 6.8 | N/A | 8.2 | N/A | 8.2 | |||||||||||||||||||||||||||||
Contingent purchase price payments related to reacquisition of the perpetual rights to the Tommy Hilfiger�trademarks in India���� | N/A | N/A | $ | 5.1 | 5.1 | N/A | N/A | $ | 4.2 | 4.2 | N/A | N/A | $ | 6.5 | 6.5 | ||||||||||||||||||||||||||
Total Liabilities | N/A | $ | 10.3 | $ | 5.1 | $ | 15.4 | N/A | $ | 13.0 | $ | 4.2 | $ | 17.2 | N/A | $ | 17.5 | $ | 6.5 | $ | 24.0 | ||||||||||||||||||||
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 (which the Company entered into in connection with its acquisition of its 50% economic interest in TH India), the Company is required to make annual contingent purchase price payments into 2016 (or, under certain circumstances, into 2017) based on a percentage of annual sales in excess of an agreed upon threshold of Tommy Hilfiger products in India. Such payments are subject to a $25.0 million aggregate maximum and are due within 60 days following each one-year period. The Company made annual contingent purchase price payments of $0.6 million, $0.4 million and $0.1 million during the third quarter of each of 2014, 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 liability 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 the payments made to reduce the liability, changes in the fair value are included within selling, general and administrative expenses.
The following table presents the change in the Level 3 contingent purchase price payment liability during the thirty-nine weeks ended November�2, 2014 and November�3, 2013:
(In millions) | Thirty-Nine Weeks Ended | ||||||
11/2/14 | 11/3/13 | ||||||
Beginning Balance | $ | 4.2 | $ | 7.0 | |||
Payments | (0.6 | ) | (0.4 | ) | |||
Adjustments included in earnings | 1.5 | (0.1 | ) | ||||
Ending Balance | $ | 5.1 | $ | 6.5 | |||
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Additional information with respect to assumptions used to value the contingent purchase price payment liability as of November�2, 2014 is as follows:
Unobservable Inputs | Amount | ||
Approximate compounded annual net sales growth rate | 38.0 | % | |
Approximate discount rate | 15.0 | % | |
A five percentage point increase or decrease in the discount rate would change the liability by approximately $0.5 million.
A five percentage point increase or decrease in the compounded annual net sales growth rate would change the liability by approximately $1.0 million.
There were no transfers between any levels of the fair value hierarchy for any of the Companys fair value measurements.
The following table shows the fair value of the Companys 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�2, 2014 and November 3, 2013, and the total impairments recorded as a result of the remeasurement process:
(In millions) | Fair Value Measurement Using | Fair Value As Of Impairment Date | Total �Impairments | ||||||||||||
� | Level 1 | Level 2 | Level 3 | ||||||||||||
November�2, 2014 | N/A | N/A | $ | $ | $ | 4.8 | |||||||||
November 3, 2013 | N/A | N/A | $ | $ | $ | 5.8 | |||||||||
Long-lived assets with a carrying amount of $4.8 million were written down to a fair value of zero during the thirty-nine weeks ended November 2, 2014 in connection with the financial performance in certain of the Companys 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 $4.8 million was included in selling, general and administrative expenses, of which $0.1 million was recorded in the Calvin Klein North America segment, $3.4 million was recorded in the Tommy Hilfiger North America segment and $1.3 million was recorded in the Heritage Brands Retail segment.
Long-lived assets with a carrying amount of $4.6 million 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 Companys 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 $4.6 million was included in selling, general and administrative expenses, of which $0.8 million was recorded in the Calvin Klein North America segment, $0.2 million was recorded in the Calvin Klein International segment, $3.1 million was recorded in the Tommy Hilfiger North America segment and $0.5 million was recorded in the Heritage Brands Retail segment.
Long-lived assets with a carrying amount of $1.2 million 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 Companys Bass business. 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.
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The carrying amounts and the fair values of the Companys cash and cash equivalents, short-term borrowings and long-term debt as of November�2, 2014, February 2, 2014 and November�3, 2013 were as follows:
(In millions) | 11/2/14 | 2/2/14 | 11/3/13 | ||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||
� | � | � | � | � | |||||||||||||||||||
Cash and cash equivalents | $ | 365.1 | $ | 365.1 | $ | 593.2 | $ | 593.2 | $ | 542.5 | $ | 542.5 | |||||||||||
Short-term borrowings | 39.9 | 39.9 | 6.8 | 6.8 | 12.4 | 12.4 | |||||||||||||||||
Long-term debt (including portion classified as�current) | 3,718.0 | 3,729.6 | 3,963.2 | 4,025.3 | 4,259.6 | 4,321.9 | |||||||||||||||||
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 Companys 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 Plans 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 Companys 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 shares; 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�2, 2014, 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, with the exception of the Warnaco employee replacement awards discussed below, 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. Each share underlying a Warnaco employee replacement stock option, restricted stock, RSU or performance share unit award reduces the number available by one share. The per share exercise price of options granted under 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 outstanding under the 2003 Plan. Such options were granted with an exercise price equal to the closing price of the Companys 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 in 2013 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 replacement stock options are generally exercisable in three equal annual installments commencing one year after the date of original grant and the replacement 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 $39.8 million 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
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period that had lapsed as of the acquisition date. The remaining fair value, net of estimated forfeitures, is being expensed over the awards remaining vesting periods.
Net income for the thirty-nine weeks ended November�2, 2014 and November�3, 2013 included $37.3 million and $47.1 million, 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 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�2, 2014 and November�3, 2013 (with the exception of the Warnaco employee replacement stock options):
Thirty-Nine Weeks Ended | |||||||
11/2/14 | 11/3/13 | ||||||
Weighted average risk-free interest rate | 2.15 | % | 1.05 | % | |||
Weighted average expected option term (in years)���� | 6.25 | 6.22 | |||||
Weighted average Company volatility | 44.12 | % | 45.20 | % | |||
Expected annual dividends per share���� | $ | 0.15 | $ | 0.15 | |||
Weighted average grant date fair value per option | $ | 56.21 | $ | 51.51 | |||
The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected option term. The expected option term represents the weighted average period of time that options granted are expected to be outstanding, based on vesting schedules and the contractual term of the options. Company volatility is based on the historical volatility of the Companys common stock over a period of time corresponding to the expected option term. Expected dividends are based on the Companys common stock cash dividend rate at the date of grant.
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.
The following summarizes the assumptions used to estimate the fair value of the Warnaco employee stock options that were replaced on February 13, 2013:
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�2, 2014 was as follows:
(In thousands, except per option data) | Options | Weighted Average Exercise Price Per Option | ||||
Outstanding at February 2, 2014 | 1,588 | $ | 58.47 | |||
��Granted | 140 | 124.27 | ||||
��Exercised | 169 | 56.50 | ||||
��Cancelled | 5 | 72.36 | ||||
Outstanding at November 2, 2014 | 1,554 | $ | 64.56 | |||
Exercisable at November 2, 2014 | 1,090 | $ | 49.01 | |||
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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 full one year after the date of grant. 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 recipients 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 Companys common stock on the date of grant and is expensed, net of estimated forfeitures, over the RSUs vesting periods.
RSU activity for the thirty-nine weeks ended November�2, 2014 was as follows:
(In thousands, except per RSU data) | RSUs | Weighted Average Grant Date Fair Value Per RSU | ||||
Non-vested at February 2, 2014 | 702 | $ | 89.06 | |||
��Granted | 233 | 124.70 | ||||
��Vested | 247 | 71.66 | ||||
��Cancelled | 31 | 108.68 | ||||
Non-vested at November 2, 2014 | 657 | $ | 107.33 | |||
The Companys restricted stock awards consist solely of awards to Warnaco employees that were replaced with the Companys 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 Companys common stock on February 12, 2013 and is expensed, net of forfeitures, over the vesting period.
Restricted stock activity for the thirty-nine weeks ended November�2, 2014 was as follows:
(In thousands, except per share data) | Restricted�Stock | Weighted Average Grant Date Fair Value Per Share | ||||
Non-vested at February 2, 2014 | 46 | $ | 120.72 | |||
��Granted | ||||||
��Vested | 22 | 120.72 | ||||
��Cancelled | 2 | 120.72 | ||||
Non-vested at November 2, 2014 | 22 | $ | 120.72 | |||
The Company granted contingently issuable performance share units to certain of the Companys senior executives during the first quarter of each of 2012, 2013 and 2014 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 Companys executives during the second quarter of 2013 subject to a performance period of three years. 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 Companys achievement of goals for the performance period, of which 50 percent is based upon the Companys absolute stock price growth during the performance period and 50 percent is based upon the Companys 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 2013 and 2014, the final number of shares that will be earned, if any, is contingent upon the Companys achievement of goals for the performance periods based on earnings per share growth during the applicable performance cycle. For the awards granted in the first quarter of 2012, the two year performance period has ended and the final number of shares earned, as determined based on both earnings per share growth and return on equity during the performance period, will vest following the additional one year service period.
For the contingently issuable performance share units granted during the first quarter of each 2012, 2013 and 2014, the Company records expense ratably over each applicable vesting period based on fair value and the Companys 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 Companys common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Companys 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.
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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:
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 | |
Performance share activity for the thirty-nine weeks ended November�2, 2014 was as follows:
(In thousands, except per share data) | Performance Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Non-vested at February 2, 2014 | 548 | $ | 118.60 | |||
��Granted | 83 | 125.15 | ||||
��Vested | ||||||
��Cancelled | 5 | 123.27 | ||||
Non-vested at November 2, 2014 | 626 | $ | 119.43 | |||
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�2, 2014 and November�3, 2013 were $15.8 million and $55.7 million, respectively. Of those amounts, $9.3 million and $22.7 million, 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.
14. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents the changes in AOCI, net of related taxes, by component for the thirty-nine weeks ended November�2, 2014:
(In millions) | Foreign currency translation adjustments | Retirement liability adjustment | Net unrealized and realized (loss) gain on effective hedges | Total | |||||||||||
Balance, February 2, 2014 | $ | 50.1 | $ | 1.0 | $ | (8.8 | ) | $ | 42.3 | ||||||
Other comprehensive (loss) income before reclassifications | (210.0 | ) | 30.6 | (179.4 | ) | ||||||||||
Less: Amounts reclassified from AOCI | (2.0 | ) | 0.4 | (5.9 | ) | (7.5 | ) | ||||||||
Other comprehensive (loss) income | (208.0 | ) | (0.4 | ) | 36.5 | (171.9 | ) | ||||||||
Balance at November 2, 2014 | $ | (157.9 | ) | $ | 0.6 | $ | 27.7 | $ | (129.6 | ) | |||||
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The following table presents reclassifications out of AOCI to earnings for the thirteen and thirty-nine weeks ended November�2, 2014 and November�3, 2013:
(In millions) | Amount Reclassified from AOCI | Affected Line Item in the Consolidated Income Statements | ||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||||
Realized gain (loss) on effective hedges: | ||||||||||||||||
Foreign currency forward exchange contracts | $ | 2.9 | $ | (1.8 | ) | $ | (2.6 | ) | $ | 1.1 | Cost of goods sold | |||||
Interest rate contracts | (1.5 | ) | (2.0 | ) | (5.1 | ) | (4.2 | ) | Interest expense | |||||||
Less: Tax effect | (0.7 | ) | (0.7 | ) | (1.8 | ) | 0.0 | Income tax expense | ||||||||
Total, net of tax | $ | 2.1 | $ | (3.1 | ) | $ | (5.9 | ) | $ | (3.1 | ) | |||||
Amortization of retirement liability items: | ||||||||||||||||
Prior service credit | $ | 0.3 | $ | 0.3 | $ | 0.7 | $ | 0.7 | Selling, general and administrative expenses | |||||||
Less: Tax effect | 0.1 | 0.1 | 0.3 | 0.3 | Income tax expense | |||||||||||
Total, net of tax | $ | 0.2 | $ | 0.2 | $ | 0.4 | $ | 0.4 | ||||||||
Foreign currency translation adjustments: | ||||||||||||||||
Deconsolidation of foreign subsidiaries and joint venture | $ | $ | $ | (2.0 | ) | $ | Selling, general and administrative expenses | |||||||||
��Less: Tax effect | Income tax expense | |||||||||||||||
Total, net of tax | $ | $ | $ | (2.0 | ) | $ | ||||||||||
15. STOCKHOLDERS EQUITY
Common Stock Issuance
On February 13, 2013, the Company issued 7.7 million shares of its common stock, par value $1.00 per share, as part of the consideration paid to the former stockholders of Warnaco in connection with the acquisition.
16. EXIT ACTIVITY COSTS
Warnaco Integration Costs
In connection with the Companys acquisition of Warnaco during the first quarter of 2013 and the related integration, the Company incurred certain costs related to severance and termination benefits, inventory liquidations and lease/contract terminations. Such costs were as follows:
(In millions) | Total Expected to be Incurred | Incurred During the Thirteen Weeks Ended 11/2/14 | Incurred During the Thirty-Nine Weeks Ended 11/2/14 | Cumulative Incurred To Date | |||||||||||
Severance, termination benefits and other costs | $ | 160.0 | $ | 1.8 | $ | 12.8 | $ | 144.3 | |||||||
Inventory liquidation costs | 36.1 | 1.0 | 36.1 | ||||||||||||
Lease/contract termination and related costs | 80.0 | 7.8 | 20.0 | 62.0 | |||||||||||
Total | $ | 276.1 | $ | 9.6 | $ | 33.8 | $ | 242.4 | |||||||
Of the charges for severance, termination benefits and lease/contract termination and other costs incurred during the thirty-nine weeks ended November�2, 2014, $4.6 million relate to selling, general and administrative expenses of the Calvin Klein North
27
America segment, $17.6 million relate to selling, general and administrative expenses of the Calvin Klein International segment, $6.6 million relate to selling, general and administrative expenses of the Heritage Brands Wholesale segment and $4.0 million relate to corporate expenses not allocated to any reportable segment. The remaining charges for severance and termination benefits and lease/contract termination and other costs expected to be incurred relate principally to the aforementioned segments and corporate expenses not allocated to any reportable segment. Inventory liquidation costs incurred during the thirty-nine weeks ended November�2, 2014 were included in gross margin of the Companys Calvin Klein North America segment (see Note 19, Segment Data ).
The liabilities at November�2, 2014 related to these costs were principally recorded in accrued expenses in the Companys Consolidated Balance Sheets and were as follows:
(In millions) | Liability at 2/4/14 | Costs Incurred During the Thirty-Nine Weeks Ended 11/2/14 | Costs Paid During the Thirty-Nine Weeks Ended 11/2/14 | Liability at�11/2/14 | |||||||||||
Severance, termination benefits and other�costs | $ | 33.6 | $ | 12.8 | $ | 36.1 | $ | 10.3 | |||||||
Lease/contract termination and related�costs | 15.3 | 20.0 | 27.3 | 8.0 | |||||||||||
Total | $ | 48.9 | $ | 32.8 | $ | 63.4 | $ | 18.3 | |||||||
17. NET INCOME PER COMMON SHARE
The Company computed its basic and diluted net income per common share as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(In millions, except per share data) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||
Net income attributable to PVH Corp. | $ | 225.7 | $ | 196.7 | $ | 387.5 | $ | 181.0 | |||||||
Weighted average common shares outstanding for basic net income per common share | 82.4 | 81.5 | 82.3 | 80.9 | |||||||||||
Weighted average impact of dilutive securities | 0.9 | 1.3 | 0.9 | 1.6 | |||||||||||
Total shares for diluted net income per common share | 83.3 | 82.8 | 83.2 | 82.5 | |||||||||||
Basic net income per common share attributable to PVH Corp. | $ | 2.74 | $ | 2.41 | $ | 4.71 | $ | 2.24 | |||||||
Diluted net income per common share attributable to PVH Corp. | $ | 2.71 | $ | 2.37 | $ | 4.66 | $ | 2.19 | |||||||
Potentially dilutive securities excluded from the calculation of diluted net income per common share were as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||
Weighted average potentially dilutive securities | 0.4 | 0.3 | 0.4 | 0.3 | |||||||
Shares underlying contingently issuable awards that have not met the necessary conditions as of the end of a reporting period are not included in the calculation of diluted net income per common share for that period. The Company had contingently issuable awards outstanding that did not meet the performance conditions as of November�2, 2014 and November�3, 2013 and, therefore, were excluded from the calculation of diluted net income per common share for the thirteen and thirty-nine weeks ended November�2, 2014 and November�3, 2013. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was 1.0 million and 0.5 million as of November�2, 2014 and November�3, 2013, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
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18. NONCASH INVESTING AND FINANCING TRANSACTIONS
During the thirty-nine weeks ended November�2, 2014 and November�3, 2013, the Company recorded increases to goodwill of $38.5 million and $39.1 million, respectively, related to liabilities incurred for contingent purchase price payments to Mr.�Calvin Klein. Such amounts are not due or paid in cash until 45 days subsequent to the Companys applicable quarter end. As such, during the thirty-nine weeks ended November�2, 2014 and November�3, 2013, the Company paid $34.9 million and $37.1 million, respectively, in cash related to contingent purchase price payments to Mr.�Calvin Klein that were recorded as additions to goodwill during the periods the liabilities were incurred.
During the first quarter of 2014, the Company recorded a loss of $17.5 million to write-off previously capitalized debt issuance costs in connection with the amendment and restatement of the 2013 facilities and the related redemption of its 7 3/8% senior notes due 2020.
During the first quarter of 2013, the Company recorded a loss of $5.8 million to write-off previously capitalized debt issuance costs in connection with the modification and extinguishment of the 2011 facilities.
During the first quarter of 2013, the Company issued 7.7 million shares of its common stock, par value $1.00 per share (of which 416 thousand shares were issued from treasury stock) as part of the consideration paid to the former stockholders of Warnaco in connection with the acquisition, which resulted in an increase in common stock of $7.3 million, an increase in additional paid in capital of $888.9 million and a decrease in treasury stock of $30.3 million. In addition, the Company issued awards valued at $39.8 million to replace outstanding stock awards made by Warnaco to its employees, which for accounting purposes are included in the total acquisition consideration. Also included in the acquisition consideration was the elimination of a $9.2 million pre-acquisition liability to Warnaco.
Omitted from purchases of property, plant and equipment in the Consolidated Statement of Cash Flows for�the thirty-nine weeks ended November�2, 2014 and November�3, 2013�are�$3.3�million and�$5.9 million, respectively, of assets acquired through capital leases.
Omitted from investments in unconsolidated affiliates in the Consolidated Statement of Cash Flows for�the thirty-nine weeks ended November�2, 2014 are noncash increases in the investment balances related to the Companys Calvin Klein Australia joint venture and Calvin Klein India joint venture of $3.7�million and�$6.2 million, respectively, resulting from the deconsolidation of these entities. Please see Note 5, Investments in Unconsolidated Affiliates, and Note 6, Redeemable Non-Controlling Interest, for a further discussion.
19. SEGMENT DATA
The Company manages its operations through its operating divisions, which are presented as six reportable segments: (i) Calvin Klein North America; (ii) Calvin Klein International; (iii) Tommy Hilfiger North America; (iv) Tommy Hilfiger International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.
Calvin Klein North America Segment - This segment consists of the Companys Calvin Klein North America division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale in North America, primarily to department and specialty stores; (ii) operating retail stores, which are primarily located in premium outlet centers in North America, and an e-commerce website in the United States, which sell Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the brand names Calvin Klein Collection, Calvin Klein (platinum label) and Calvin Klein (white label) for a broad array of products and retail services in North America.
Calvin Klein International Segment - This segment consists of the Companys Calvin Klein International division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale principally in Europe, Asia and Brazil, primarily to department and specialty stores, franchisees of Calvin Klein and distributors; (ii) operating retail stores and e-commerce websites in Europe, Asia and Brazil, which sell Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the brand names Calvin Klein Collection, Calvin Klein (platinum label) and Calvin Klein (white label) for a broad array of products and retail services outside of North America. This segment also includes the Companys proportionate share of the net income or loss of its investments in unconsolidated Calvin Klein foreign affiliates in Australia and India.
Tommy Hilfiger North America Segment - This segment consists of the Companys Tommy Hilfiger North America division. This segment derives revenue principally from (i) marketing Tommy Hilfiger branded apparel and related products at wholesale
29
in North America, primarily to department stores, principally Macys and Hudsons Bay; and (ii) operating retail stores, which are primarily located in premium outlet centers, and an e-commerce website, which sell Tommy Hilfiger branded apparel, accessories and related products. This segment also derives revenue from licensing and similar arrangements relating to the use by third parties of the Tommy Hilfiger brand name for a broad array of products in North America.
Tommy Hilfiger International Segment - This segment consists of the Companys Tommy Hilfiger International division. This segment derives revenue principally from (i) marketing Tommy Hilfiger branded apparel and related products at wholesale principally in Europe, primarily to department and specialty stores, franchisees of Tommy Hilfiger, distributors and licensees; and (ii) operating retail stores in Europe and Japan and an international e-commerce website, which sell Tommy Hilfiger branded apparel, accessories and related products. This segment also includes the Companys proportionate share of the net income or loss of its investments in unconsolidated Tommy Hilfiger foreign affiliates in Brazil, China and India. This segment also derives revenue from licensing and similar arrangements relating to the use by third parties of the Tommy Hilfiger brand name for a broad array of products outside of North America.
Heritage Brands Wholesale Segment - This segment consists of the Companys Heritage Brands wholesale division. This segment derives revenue primarily from the marketing to department, chain and specialty stores in North America of (i) dress shirts, neckwear and underwear under various owned and licensed brand names, including several private label brands; (ii) mens sportswear principally under the brand names Van Heusen, IZOD and ARROW; (iii) swimwear, fitness apparel, swim accessories and related products under the brand name Speedo; and (iv) womens intimate apparel under the brand names Warners and Olga.
Heritage Brands Retail Segment - This segment consists of the Companys Heritage Brands retail division. This segment derives revenue principally from operating retail stores, primarily located in outlet centers in North America, which sell apparel, accessories and related products under the brand names Van Heusen and IZOD. This segment also derived revenue through the third quarter of 2013 under the brand names Bass and G.H. Bass & Co., principally from operating outlet stores.
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The following tables present summarized information by segment:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | ||||||||||||||
Revenue Calvin Klein North America | ||||||||||||||||||
Net sales���� | $ | 404.2 | $ | 384.0 | $ | 1,038.8 | $ | 1,009.5 | ||||||||||
Royalty revenue���� | 38.6 | 38.1 | 87.7 | 86.1 | ||||||||||||||
Advertising and other revenue���� | 15.8 | 15.1 | 35.7 | 31.8 | ||||||||||||||
Total���� | 458.6 | 437.2 | 1,162.2 | 1,127.4 | ||||||||||||||
Revenue Calvin Klein International | ||||||||||||||||||
Net sales | 328.4 | 333.9 | 913.4 | 875.2 | (1)� | |||||||||||||
Royalty revenue | 20.5 | 20.0 | 56.9 | 54.1 | ||||||||||||||
Advertising and other revenue | 8.7 | 8.6 | 23.6 | 21.4 | ||||||||||||||
Total | 357.6 | 362.5 | 993.9 | 950.7 | ||||||||||||||
Revenue Tommy Hilfiger North America | ||||||||||||||||||
Net sales���� | 421.7 | 411.4 | 1,162.9 | 1,106.2 | ||||||||||||||
Royalty revenue���� | 10.0 | 8.4 | 22.3 | 20.9 | ||||||||||||||
Advertising and other revenue���� | 3.4 | 2.5 | 7.4 | 6.7 | ||||||||||||||
Total���� | 435.1 | 422.3 | 1,192.6 | 1,133.8 | ||||||||||||||
Revenue Tommy Hilfiger International | ||||||||||||||||||
Net sales���� | 478.3 | 483.7 | 1,424.0 | 1,356.0 | ||||||||||||||
Royalty revenue���� | 14.9 | 13.5 | 42.4 | 38.1 | ||||||||||||||
Advertising and other revenue���� | 1.3 | 1.2 | 3.4 | 3.5 | ||||||||||||||
Total���� | 494.5 | 498.4 | 1,469.8 | 1,397.6 | ||||||||||||||
Revenue Heritage Brands Wholesale | ||||||||||||||||||
Net sales | 393.8 | 373.1 | 1,079.8 | 1,056.2 | ||||||||||||||
Royalty revenue | 4.6 | 3.9 | 12.7 | 12.1 | ||||||||||||||
Advertising and other revenue | 0.5 | 0.7 | 1.9 | 2.1 | ||||||||||||||
Total | 398.9 | 377.7 | 1,094.4 | 1,070.4 | ||||||||||||||
Revenue Heritage Brands Retail | ||||||||||||||||||
Net sales | 87.6 | 159.0 | (2� | )� | 257.1 | 449.5 | (2� | )� | ||||||||||
Royalty revenue | 0.7 | 1.6 | 2.0 | 3.8 | ||||||||||||||
Advertising and other revenue | 0.1 | 0.4 | 0.4 | 0.9 | ||||||||||||||
Total | 88.4 | 161.0 | 259.5 | 454.2 | ||||||||||||||
Total Revenue | ||||||||||||||||||
Net sales���� | 2,114.0 | 2,145.1 | 5,876.0 | 5,852.6 | ||||||||||||||
Royalty revenue���� | 89.3 | 85.5 | 224.0 | 215.1 | ||||||||||||||
Advertising and other revenue���� | 29.8 | 28.5 | 72.4 | 66.4 | ||||||||||||||
Total���� | $ | 2,233.1 | $ | 2,259.1 | $ | 6,172.4 | $ | 6,134.1 | ||||||||||
(1)� | Includes $30.0 million of sales returns from certain wholesale customers in the acquired Asia business in connection with the Companys initiative to reduce excess inventory levels. |
(2)� | Includes net sales of $66.6 million and $175.6 million in the thirteen and thirty-nine weeks ended November�3, 2013, respectively, related to the Bass business which was sold in the fourth quarter of 2013. |
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Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||
(In millions) | 11/2/14 | 11/3/13 | 11/2/14 | 11/3/13 | |||||||||||||||
Income before interest and taxes Calvin Klein North America | $ | 76.5 | (2)� | $ | 71.2 | (6)� | $ | 172.9 | (3)� | $ | 123.1 | (9)� | |||||||
� | |||||||||||||||||||
Income (loss) before interest and taxes Calvin Klein International | 50.4 | (2)� | 41.2 | (6)� | 97.8 | (3)(4)� | (39.9 | ) | (9)� | ||||||||||
Income before interest and taxes Tommy Hilfiger North America | 75.4 | 79.5 | (8)� | 180.9 | 187.5 | (8)� | |||||||||||||
Income before interest and taxes Tommy Hilfiger International | 80.1 | 88.0 | (8)� | 205.4 | 198.0 | (8)� | |||||||||||||
Income before interest and taxes Heritage Brands Wholesale | 33.5 | (2)� | 33.6 | (6)� | 84.4 | (3)� | 91.1 | (9)� | |||||||||||
Loss before interest and taxes Heritage Brands Retail | (1.9 | ) | (19.6 | ) | (7)� | (3.8 | ) | (22.4 | ) | (7)� | |||||||||
Loss before interest and taxes Corporate(1)���� | (34.1 | ) | (2)� | (44.6 | ) | (6)� | (213.9 | ) | (3)(5)� | (184.0 | ) | (9)(10)� | |||||||
Income before interest and taxes | $ | 279.9 | $ | 249.3 | $ | 523.7 | $ | 353.4 | |||||||||||
(1)� | Includes corporate expenses not allocated to any reportable segments, as well as the Companys proportionate share of the net income or loss of its investment in Kingdom Holding 1 B.V., the parent company of the Karl Lagerfeld brand. Corporate expenses represent overhead operating expenses and include expenses for senior corporate management, corporate finance, information technology related to corporate infrastructure and actuarial gains and losses from the Companys pension and other postretirement plans (which are generally recorded in the fourth quarter). |
(2)� | Income (loss) before interest and taxes for the thirteen weeks ended November�2, 2014 includes costs of $29.1 million associated with the Companys integration of Warnaco and the related restructuring. Such costs were included in the Companys segments as follows: $2.1 million in Calvin Klein North America; $13.2 million in Calvin Klein International; $4.7 million in Heritage Brands Wholesale; and $9.1 million in corporate expenses not allocated to any reportable segments. |
(3)� | Income (loss) before interest and taxes for the thirty-nine weeks ended November�2, 2014 includes costs of $105.7 million associated with the Companys integration of Warnaco and the related restructuring. Such costs were included in the Companys segments as follows: $10.8 million in Calvin Klein North America; $36.5 million in Calvin Klein International; $13.0 million in Heritage Brands Wholesale; and $45.4 million in corporate expenses not allocated to any reportable segments. |
(4)� | Income before interest and taxes for the thirty-nine weeks ended November�2, 2014 includes a net gain of $8.0 million associated with the deconsolidation of certain Calvin Klein subsidiaries in Australia and the Companys previously consolidated Calvin Klein joint venture in India. Please refer to Note 5, Investments in Unconsolidated Affiliates and Note 6, Redeemable Non-Controlling Interest for a further discussion. |
(5)� | Loss before interest and taxes for the thirty-nine weeks ended November�2, 2014 includes costs of $93.1 million associated with the Companys amendment and restatement of the 2013 facilities and the related redemption of its 7 3/8% senior notes due 2020. Please refer to Note 9, Debt, for a further discussion. |
(6)� | Income (loss) before interest and taxes for the thirteen weeks ended November 3, 2013 includes costs of $61.0 million associated with the Companys acquisition and integration of Warnaco and the related restructuring. Such costs were included in the Companys segments as follows: $10.5 million in Calvin Klein North America; $21.3 million in Calvin Klein International; $8.2 million in Heritage Brands Wholesale; and $21.0 million in corporate expenses not allocated to any reportable segments. |
(7)� | Loss before interest and taxes for the�thirteen and thirty-nine weeks ended�November�3, 2013�includes a loss of $19.5�million associated with the sale of substantially all of the assets of the Companys Bass business. |
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(8)� | Income before interest and taxes for the�thirteen and thirty-nine weeks ended�November�3, 2013�includes income of $24.3 million�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 $24.3 million. Such income was included in the Companys segments as follows: $12.0�million in Tommy Hilfiger North America and $12.3 million�in Tommy Hilfiger International. |
(9)� | Income (loss) before interest and taxes for the thirty-nine weeks ended November 3, 2013 includes costs of $371.1 million associated with the Companys acquisition and integration of Warnaco and the related restructuring. Such costs were included in the Companys segments as follows: $79.2 million in Calvin Klein North America; $182.9 million in Calvin Klein International; $37.0 million in Heritage Brands Wholesale; and $72.0 million in corporate expenses not allocated to any reportable segments. |
(10)� | Loss before interest and taxes for the thirty-nine weeks ended November�3, 2013 includes costs of $40.4 million associated with the Companys debt modification and extinguishment. Please refer to Note 9, Debt, for a further discussion. |
Intersegment transactions consist of transfers of inventory principally from the Heritage Brands Wholesale segment to the Heritage Brands Retail segment and the Calvin Klein North America segment. These transfers are recorded at cost plus a standard markup percentage. Such markup percentage on ending inventory is eliminated principally in the Heritage Brands Retail segment and the Calvin Klein North America segment.
20. GUARANTEES
The Company guaranteed to a landlord the payment of rent and related costs by the tenant currently occupying space previously leased by the Company. The maximum amount guaranteed as of November�2, 2014 is approximately $3.8 million, which is subject to exchange rate fluctuation. The Company has the right to seek recourse of approximately $2.4 million as of November�2, 2014, which is subject to exchange rate fluctuation. The guarantee expires on May 19, 2016. The estimated fair value of this guarantee obligation was immaterial as of November�2, 2014.
In connection with the sale of substantially all of the assets of the Companys Bass business in the fourth quarter of 2013, 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 Companys guarantee remains in effect when an option is exercised to extend the term of the lease, which is the case for certain of the leases that have been extended to expire on various dates into 2028. The maximum amount guaranteed for all leases as of November�2, 2014 is $62.8 million 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�2, 2014 is $3.2 million, which is included in accrued expenses and other liabilities in the Companys Consolidated Balance Sheet.
The Company has certain other guarantees whereby it guaranteed the payment of amounts on behalf of certain other parties, none of which are material individually or in the aggregate.
21. RECENT ACCOUNTING GUIDANCE
The FASB issued in March 2013 guidance that requires an entity to release any related cumulative translation adjustment into net income when it ceases to have a controlling financial interest in a subsidiary that is a foreign entity if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment related to the investment should be�released into net income upon a partial sale of such investment. This guidance became effective for the Company in the first quarter of 2014.�The adoption did not have any impact on the Companys consolidated results of operations or financial position.
The FASB issued in July 2013 guidance that requires an entity to present an uncertain tax position, or a portion of an uncertain tax position, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. However, to the extent (i) a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the uncertain tax position should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance
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became effective prospectively for the Company in the first quarter of 2014. The adoption did not have any impact on the Companys consolidated results of operations or financial position.
The FASB issued in April 2014 guidance that revises the criteria for reporting discontinued operations. The guidance requires that a disposal of a component of an entity or group of components of an entity be reported as discontinued operations if such disposal represents a strategic shift that has or will have a major effect on an entitys operations and financial results. The guidance also requires additional disclosures for both discontinued operations and disposals of significant components of an entity that do not qualify as discontinued operations. This guidance is effective for the Company in the first quarter of 2015. The adoption is not expected to have a material impact on the Companys consolidated results of operations or financial position.
The FASB issued in May 2014 guidance that supersedes most of the current revenue recognition requirements.� The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.�New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required.�This guidance is effective for the Company in the first quarter of 2017 and early application is not permitted.�Entities must adopt the new guidance using one of two retrospective application methods.�The Company is currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
The FASB issued in June 2014 guidance to clarify accounting for stock-based compensation awards by requiring that a performance target that affects vesting and that can be met after the requisite service period be treated as a performance condition. This guidance is effective for the Company in the first quarter of 2016. The adoption is not expected to have any impact on the Companys consolidated results of operations or financial position.
The FASB issued in August 2014 guidance that requires an entitys management to evaluate the entitys ability to continue as a going concern on an interim and annual basis and requires additional disclosures if conditions give rise to substantial doubt. This guidance is effective for the Company in the fiscal year ending January 29, 2017, with early adoption permitted. The adoption is not expected to have any impact on the Companys consolidated results of operations or financial position.
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ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We aggregate our reporting segments into three main businesses: (i) Calvin Klein, which consists of the businesses we operate under our Calvin Klein�trademarks; (ii) Tommy Hilfiger, which consists of the businesses we operate under our Tommy Hilfiger�trademarks; and (iii) Heritage Brands, which consists of the businesses we operate under our Van Heusen, IZOD, ARROW, Warners�and�Olga trademarks, the Speedo�trademark we license in perpetuity for North America and the Caribbean, and other owned and licensed trademarks. References to the brand names Calvin Klein,�Tommy Hilfiger,�Van Heusen,�IZOD,�ARROW,�Warners,�Olga and�Speedo and to other brand names are to registered trademarks owned by us or licensed to us by third parties and are identified by italicizing the brand name. References to the sale of Bass refer to the sale of our G.H. Bass & Co. business and its trademarks, which we refer to collectively as Bass, on November 4, 2013, the first day of the fourth quarter of 2013. References to the acquisition of Warnaco refer to our February 13, 2013 acquisition of The Warnaco Group, Inc. and its subsidiaries, which we refer to collectively as Warnaco. |
OVERVIEW
The following discussion and analysis is intended to help you understand us, our operations and our financial performance. It should be read in conjunction with our consolidated financial statements and the accompanying notes, which are included in the immediately preceding item of this report.
We are one of the largest branded apparel companies in the world, with a heritage dating back over 130 years. Our brand portfolio consists of nationally and internationally recognized brand names, including�Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Speedo�(licensed in perpetuity for North America and the Caribbean from Speedo International, Ltd.), Warners and Olga. In addition, through the end of the third quarter of 2013, we owned and operated businesses under the�G.H. Bass & Co.�and�Bass�trademarks. We also license brands from third parties primarily for use on dress shirts, neckwear and underwear offered in the United States and Canada.
We acquired Warnaco on February 13, 2013 and, with it, acquired the global Calvin Klein Jeans and Calvin Klein Underwear businesses and the Core Intimates (Warners and Olga) and Speedo businesses, which operate primarily in North America. Prior to the acquisition, Warnaco was our largest Calvin Klein licensee. Our total consideration for the acquisition was $3.137 billion, consisting of $2.180 billion paid in cash, the issuance of approximately 8 million shares of our common stock (valued at $926 million), the issuance of stock awards valued at $40 million to replace outstanding stock awards made by Warnaco to its employees and the elimination of a $9 million pre-acquisition liability to Warnaco. We funded the cash portion and related costs of the acquisition, repaid all outstanding borrowings under our previously outstanding senior secured credit facilities and repaid all of Warnacos previously outstanding long-term debt with the net proceeds of (i) an offering during the fourth quarter of 2012 of $700 million of 4 1/2% senior notes due 2022; and (ii) $3.075 billion of term loans borrowed during the first quarter of 2013 under new senior secured credit facilities. These items are more fully described in the section entitled Liquidity and Capital Resources below.
Our business strategy is to manage and market a portfolio of nationally and internationally recognized apparel and lifestyle brands at multiple price points and across multiple channels of distribution and geographies. We believe this approach reduces our reliance on any one demographic group, merchandise preference, distribution channel or geographic region. Our acquisition of Warnaco is consistent with this strategy, as it gave us direct global control of the brand image and commercial operations for the two largest Calvin Klein apparel categories jeanswear and underwear. With these categories under our ownership, our teams have taken steps to strengthen management, improve operations, unify brand messaging, and coordinate and improve design, merchandising, retail distribution and marketing functions on a regional and global basis. We believe that these steps will strengthen�Calvin Kleins image, positioning and execution across all markets to drive sustainable growth. The Warnaco acquisition also provides a broader global platform for both the Calvin Klein and Tommy Hilfiger businesses and has enabled us to continue to transform from a primarily North American multi-brand business with strong European Tommy Hilfiger operations, to a more diversified, global organization. We intend to�take advantage of our and Warnacos complementary geographic operations; Warnacos operations in Asia and Brazil should enhance our opportunities in those high-growth regions, and we will have the opportunity to leverage our expertise and infrastructure in North America and Europe to enhance the growth and profitability of the Calvin Klein Jeans and Calvin Klein Underwear businesses in those regions. The acquisition also added the�Speedo,�Warners�and�Olga�brands to our Heritage Brands portfolio. Like our other Heritage Brands businesses, these businesses are largely replenishment-based and generally provide consistent profitability and strong cash flows. With a diversified brand portfolio and operations in every major consumer market around the world, we believe the
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acquisition made our business better balanced across geographies, channels of distribution, product categories and price points, and expanded our opportunity to realize revenue growth and enhanced profitability. In order to focus on our core competencies in apparel and continue to grow the�Calvin Klein�and�Tommy Hilfiger�brands globally, we sold substantially all of the assets of our Bass business on November 4, 2013. The sale enables us to further invest in our more profitable apparel businesses, while also reducing sales and earnings volatility.
OPERATIONS OVERVIEW
We generate net sales from (i) the wholesale distribution to retailers, franchisees, licensees and distributors of mens dress shirts, neckwear and underwear, mens and womens jeanswear, sportswear, intimate apparel, swim products, footwear, accessories and related products under owned and licensed trademarks; and (ii) the sale through company-operated free-standing retail store locations worldwide under our�Calvin Klein,�Tommy Hilfiger,�Van Heusen and IZOD trademarks, and company-operated concessions/shop-in-shops worldwide and e-commerce websites in certain regions under our�Calvin Klein and Tommy Hilfiger�trademarks, of apparel, footwear, accessories and other products. We operated�G.H. Bass & Co. stores through the end of the third quarter of 2013, at which time we sold substantially all of the assets of our Bass business. We also generate royalty, advertising and other revenue from fees for licensing the use of our trademarks.
We recorded pre-tax charges in the thirty-nine weeks ended November 2, 2014 and November 3, 2013 principally in connection with the Warnaco acquisition, integration and restructuring that totaled $109 million and $372 million, respectively. The amounts incurred in 2013 included non cash charges of $161 million, principally related to short-lived valuation adjustments and amortization. We also recorded pre-tax debt modification and extinguishment charges in the thirty-nine weeks ended November 2, 2014 and November 3, 2013 that totaled $93 million and $40 million, respectively. We recorded a net gain of $8 million in the thirty-nine weeks ended November 2, 2014 resulting from the deconsolidation of certain Calvin Klein subsidiaries in Australia and New Zealand and our previously consolidated Calvin Klein joint venture in India. In addition, we recorded a net pre-tax loss of $19 million in the thirty-nine weeks ended November 3, 2013 resulting from the sale of substantially all of the assets of the Bass business, which closed on November 4, 2013. We also recorded a gain of $24 million in the thirty-nine weeks ended November 3, 2013 due to the amendment of an unfavorable contract, which resulted in the reduction of a liability recorded at the time of the Tommy Hilfiger acquisition. We expect to incur additional pre-tax charges of approximately $30 million during the remainder of 2014 in connection with the Warnaco integration and related restructuring. Our future results of operations will continue to be significantly impacted by the Warnaco acquisition, particularly through the operations of the Calvin Klein business and through the changes in our capital structure that were necessary to complete the acquisition, as more fully discussed below.
SEASONALITY
Our business generally follows a seasonal pattern. Our wholesale businesses tend to generate higher levels of sales in the first and third quarters, while our retail businesses tend to generate higher levels of sales in the fourth quarter. Royalty, advertising and other revenue tends to be earned somewhat evenly throughout the year, although the third quarter has the highest level of royalty revenue due to higher sales by licensees in advance of the holiday selling season. We expect this seasonal pattern will generally continue.
Due to the above factors, our operating results for the thirty-nine weeks ended November�2, 2014 are not necessarily indicative of those for a full fiscal year.
RESULTS OF OPERATIONS
Thirteen Weeks Ended November 2, 2014 Compared With Thirteen Weeks Ended November 3, 2013
Total Revenue
Net sales in the third quarter of 2014 were $2.114 billion as compared to $2.145 billion in the third quarter of the prior year. The decrease in net sales of $31 million was due principally to the net effect of the following items:
" | The net addition of $5 million of net sales attributable to growth in our Tommy Hilfiger North America segment partially offset by a decline in our Tommy Hilfiger International segment. Net sales in the Tommy Hilfiger North America business increased 3%, principally due to retail comparable store sales growth of 1% and square footage expansion in Company-operated stores. Net sales in the Tommy Hilfiger International business decreased 1%, including a 3% negative impact from foreign currency translation, principally attributable to the weaker Euro. Revenue growth from square footage expansion in the Tommy Hilfiger Europe retail business was partially offset by a |
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comparable store sales decline of 5%, principally due to a significant deceleration in traffic across the region in the middle of the quarter, combined with less promotional activity compared to the third quarter of the prior year. The Tommy Hilfiger Europe business experienced positive retail comparable store sales towards the end of the quarter.
" | The net addition of $15 million of net sales attributable to growth in our Calvin Klein North America segment partially offset by a decline in our Calvin Klein International segment. Net sales for the North America business increased 5%, due to retail comparable store sales growth of 5% and square footage expansion in Company-operated stores. Also contributing to the net sales increase was moderate growth in the North America wholesale business, which was favorably impacted by the timing of shipments, as shipments planned for the fourth quarter of 2014 occurred in the third quarter. Net sales for the Calvin Klein International business decreased 2% compared to the prior year. This includes a 2% negative impact from foreign currency translation, principally attributable to the weaker Euro. Calvin Klein International retail comparable store sales declined 2% due to softness in Asia. |
" | The net reduction of $51 million of net sales attributable to a decline in our Heritage Brands Retail segment, which includes a $67 million loss of revenue related to the exited Bass business, partially offset by growth in our Heritage Brands Wholesale segment. Net sales for the ongoing Heritage Brands businesses increased 3%, as a 6% increase in the wholesale business was partially offset by a 6% comparable stores sales decline in our retail business. |
Royalty, advertising and other revenue in the third quarter of 2014 increased to $119 million from $114 million in the prior years third quarter. Calvin Klein royalty revenue in the third quarter increased 2% over the prior year, driven principally by continued strength in womenswear. Tommy Hilfiger royalty revenue increased 13% attributable to increases across most product categories.
Gross Profit on Total Revenue
Gross profit on total revenue is calculated as total revenue less cost of goods sold. Included as cost of goods sold are costs associated with the production and procurement of product, including inbound freight costs, purchasing and receiving costs, inspection costs and other product procurement related charges. All of our royalty, advertising and other revenue is included in gross profit because there is no cost of goods sold associated with such revenue. As a result, our gross profit may not be comparable to that of other entities.
Gross profit on total revenue in the third quarter of 2014 was $1.168 billion, or 52.3% of total revenue, compared with $1.172 billion, or 51.9% of total revenue in the third quarter of the prior year. The 40 basis point increase was principally attributable to gross margin increases in the Tommy Hilfiger businesses in both North America and Europe as a result of less promotional selling than in the prior year period, combined with growth in our higher-margin Calvin Klein and Tommy Hilfiger businesses. These increases were partially offset by a gross margin decline in the Heritage Brands business resulting from increased promotional activity in order to drive traffic and revenue.
Selling, General and Administrative ( SG&A ) Expenses
SG&A expenses in the third quarter of 2014 were $893 million, or 40.0% of total revenue, as compared to $927 million, or 41.0% of total revenue in the third quarter of the prior year. The 100 basis point decrease in SG&A expenses as a percentage of total revenue was due principally to (i) a 170 basis point reduction attributable to a decrease from the prior year in Warnaco acquisition, integration and restructuring costs and (ii) a 90 basis point reduction attributable to the absence in 2014 of the loss recorded in the third quarter of 2013 in connection with the sale of the Bass business. These decreases were partially offset by (i) a 110 basis point increase due to the absence in 2014 of income recorded in the third quarter of 2013 from the amendment of an unfavorable contract, which resulted in the reduction of a liability recorded at the time of the Tommy Hilfiger acquisition, (ii) faster growth in the higher-expense Tommy Hilfiger and Calvin Klein businesses and (iii) continued strategic investments in our acquired businesses, with a focus on enhancing the existing operating infrastructure, increasing investments in our people and elevating the Calvin Klein presentation at retail.
Equity in Income of Unconsolidated Affiliates, Net
The equity in income of unconsolidated affiliates, net, in the third quarter of 2014 was relatively flat to the third quarter of the prior year at $5 million. These amounts relate to our share of income from our joint ventures for the Tommy Hilfiger brand in China, India and Brazil, for the Calvin Klein brand in India and Australia (which we began accounting for under the equity method of accounting in the first quarter of 2014 in connection with our deconsolidation of certain subsidiaries), and for the Karl Lagerfeld brand (in which we acquired an equity interest in April 2014). Please refer to Note 5, Investments in
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Unconsolidated Affiliates, and Note 6, Redeemable Non-Controlling Interest, in the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report for further discussions.
Interest Expense, Net
Net interest expense decreased to $32 million in the third quarter of 2014 from $46 million in the third quarter of the prior year due to lower average debt balances as compared to the prior year, combined with the effect of the amendment and restatement of our senior secured credit facilities and the related redemption of our 7 3/8% senior notes due 2020 in the first quarter of 2014. Please see the section entitled Financing Arrangements within Liquidity and Capital Resources below for a further discussion.
Income Taxes
The effective tax rates for the third quarters of 2014 and 2013 were 8.9% and 3.3%, respectively.
The effective income tax rates for the third quarters of 2014 and 2013 were lower than the United States statutory rate due to the benefit of lower tax rates in international jurisdictions where we file tax returns, the recognition of foreign tax credits generated from Warnaco integration activities and the benefit of discrete items related to uncertain tax positions. Partially offsetting these benefits were the impacts of state and local taxes.
�
Thirty-Nine Weeks Ended November 2, 2014 Compared With Thirty-Nine Weeks Ended November 3, 2013
Total Revenue
Net sales in the thirty-nine weeks ended November�2, 2014 were $5.876 billion as compared to $5.853 billion in the thirty-nine week period of the prior year. The increase in net sales of $23 million was due principally to the net effect of the following items:
" | The aggregate addition of $125 million of net sales attributable to growth in our Tommy Hilfiger North America and Tommy Hilfiger International segments. Within the Tommy Hilfiger North America segment, net sales increased 5%, principally due to low single-digit wholesale growth, retail comparable store sales growth of 2% and square footage expansion in Company-operated stores. Net sales in the Tommy Hilfiger International segment increased 5%, driven principally by European retail comparable store sales growth of 1% and square footage expansion in Company-operated stores. Also contributing to the international revenue growth was the net positive impact of foreign currency translation for the thirty-nine week period, despite the Euro weakness experienced in the third quarter. |
" | The aggregate addition of $68 million of net sales in our Calvin Klein North America and Calvin Klein International segments. Net sales for the North America and International businesses increased 3% and 4%, respectively. The increases were driven principally by the ten additional days of operations in 2014 of the Calvin Klein businesses acquired through the Warnaco acquisition,�partially offset by a decline in the jeans business, primarily in North America and Europe. Retail comparable store sales increased 2% in North America and decreased 4% internationally. The Calvin Klein International segment also increased due to the absence in 2014 of $30 million of sales returns recorded in 2013 for certain wholesale customers in Asia in the acquired business in connection with an initiative to reduce excess inventory levels. |
" | The net reduction of $169 million of net sales attributable to a decline in our Heritage Brands Retail segment, which includes a reduction of $176 million related to the loss of revenue of the exited Bass business, partially offset by growth in our Heritage Brands Wholesale segment. Sales for the ongoing Heritage Brands businesses were relatively flat, as low single-digit growth in the wholesale business was offset by a 7% comparable store sales decline in our retail stores. |
Royalty, advertising and other revenue in the thirty-nine weeks ended November�2, 2014 increased to $296 million from $281 million in the prior years thirty-nine week period. Calvin Klein royalty revenue increased 3% from the prior year period due to 6% growth driven by continued strength in womenswear partially offset by a decline of 3% due to the absence of royalty revenue from Warnaco in the current year, as the prior years first quarter included royalty revenue from Warnaco for the ten days prior to the acquisition. Tommy Hilfiger royalty revenue increased 10% attributable to increases across most product categories.
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Revenue for the full year 2014 is currently projected to increase 1% to approximately $8.3 billion, which includes a negative impact of $176 million, or 2%, attributable to the exited Bass business. Revenue in 2014 reflects a negative impact from foreign currency translation compared to the prior year. It is currently projected that revenue for the Tommy Hilfiger and Calvin Klein businesses in 2014 will increase approximately 5% and 2%, respectively. Revenue for the ongoing Heritage Brands business in 2014 is currently projected to be relatively flat to the prior year. Including the negative impact related to the exited Bass business, revenue for the Heritage Brands business is currently projected to decrease approximately 8%.
Gross Profit on Total Revenue
Gross profit on total revenue in the thirty-nine weeks ended November�2, 2014 was $3.255 billion, or 52.7% of total revenue, compared with $3.150 billion, or 51.3% of total revenue in the thirty-nine week period of the prior year. Of this 140 basis point increase, 80 basis points was due to the absence in 2014 of short-lived non cash valuation adjustments recorded in connection with the Warnaco acquisition and integration and 20 basis points was due to the absence in 2014 of $30 million of sales returns recorded in 2013 for certain wholesale customers in the acquired Asia business. The remaining increase was due to growth in our higher-margin Tommy Hilfiger and Calvin Klein businesses. These increases were partially offset by a gross margin decline in the Heritage Brands business resulting from increased promotional activity in order to drive traffic and revenue.
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We currently expect that the gross profit percentage on total revenue for the full year 2014 will increase as compared with 2013 for the same reasons as the thirty-nine week increase mentioned above.
Selling, General and Administrative ( SG&A ) Expenses
SG&A expenses in the thirty-nine weeks ended November�2, 2014 were $2.648 billion, or 42.9% of total revenue, as compared to $2.764 billion, or 45.1% of total revenue, in the thirty-nine week period of the prior year. The 220 basis point decrease in SG&A expenses as a percentage of total revenue was due principally to (i) a 310 basis point reduction due to a decrease as compared to the prior year in Warnaco acquisition, integration and restructuring costs, (ii) a 30 basis point reduction attributable to the absence in 2014 of the loss recorded in the third quarter of 2013 in connection with the sale of the Bass business and (iii) a 10 basis point reduction due to the net gain recorded in the first quarter of 2014 resulting from the deconsolidation of certain Calvin Klein subsidiaries in Australia and New Zealand and our previously consolidated Calvin Klein joint venture in India. These decreases were partially offset by (i) a 40 basis point increase due to the absence in 2014 of income recorded in the third quarter of 2013 from the amendment of an unfavorable contract, which resulted in the reduction of a liability recorded at the time of the Tommy Hilfiger acquisition, (ii) faster growth in the higher-expense Tommy Hilfiger and Calvin Klein businesses and (iii) continued strategic investments in our acquired businesses, with a focus on enhancing the existing operating infrastructure, increasing investments in our people and elevating the Calvin Klein presentation at retail.
We currently expect that our SG&A expenses as a percentage of total revenue for the full year 2014 will decrease from 2013 for principally the same reasons as the thirty-nine week decrease mentioned above. Our SG&A expenses may also be significantly impacted by the amount of expense recorded for our pension plans. Pension expense recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in earnings, generally in the fourth quarter of the year. On October 27, 2014, the Society of Actuaries (SOA) issued new mortality tables. We consider SOA life expectancy information when developing the annual mortality assumptions to measure our United States pension and postretirement benefit plan obligations. While we are still in the process of evaluating the potential impact of this new information, we expect that it will result in an increase in our United States pension and postretirement benefit plan obligations as of the end of 2014.
Equity in Income of Unconsolidated Affiliates, Net
The equity in income of unconsolidated affiliates, net in the thirty-nine weeks ended November�2, 2014 was $9 million, as compared to $8 million during the thirty-nine week period of the prior year. These amounts relate to our share of income from our joint ventures for the Tommy Hilfiger brand in China, India and Brazil, for the Calvin Klein brand in India and Australia, and for the Karl Lagerfeld brand. Please refer to Note 5, Investments in Unconsolidated Affiliates, and Note 6, Redeemable Non-Controlling Interest, in the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report for a further discussion.
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Debt Modification and Extinguishment Costs
We incurred costs totaling $93 million during the first quarter of 2014 in connection with the amendment and restatement of our senior secured credit facilities and the related redemption of our 7 3/8% senior notes due 2020. Please refer to the section entitled Liquidity and Capital Resources below for a further discussion.
We incurred costs totaling $40 million during the first quarter of 2013 related to the modification and extinguishment of previously outstanding term loans and the replacement of such term loans with new senior secured credit facilities entered into in 2013 in connection with the Warnaco acquisition. Please refer to the section entitled Liquidity and Capital Resources below for a further discussion.
Interest Expense, Net
Net interest expense decreased to $107 million in the thirty-nine weeks ended November�2, 2014 from $139 million in the thirty-nine week period of the prior year due to lower average debt balances as compared to the prior year, combined with the effect of the amendment and restatement of our senior secured credit facilities and the related redemption of our 7 3/8% senior notes due 2020 in the first quarter of 2014.
Net interest expense is expected to decrease to approximately $140 million for the full year 2014 from $185 million in the prior year, due to lower average debt balances in 2014, combined with the effect of the amendment and restatement of our senior secured credit facilities and the related redemption of our 7 3/8% senior notes in the first quarter of 2014. We expect to make term loan repayments of approximately $400 million in 2014, of which $245 million was made during the thirty-nine weeks ended November�2, 2014.
Income Taxes
The effective tax rates for the thirty-nine weeks ended November�2, 2014 and November�3, 2013 were 7.1% and 15.5%, respectively.
The effective income tax rates for the thirty-nine weeks ended November�2, 2014 and November 3, 2013 were lower than the United States statutory rate due to the reasons noted above for the third quarter.
Our full year effective tax rate in 2013 was approximately 56%. We currently anticipate that our full year 2014 effective tax rate will be substantially less than that. In 2013, we recorded $145 million of tax expense related to changes in estimates for uncertain tax positions. This amount increased the 2013 effective tax rate by 44% and related principally to an increase to our previously established liability for an uncertain tax position related to European and United States transfer pricing arrangements. We expect the absence of this item, together with the impact of discrete tax benefits recognized in the thirty-nine weeks ended November 2, 2014 as noted above, to reduce significantly our effective tax rate in 2014. Such reduction is expected to be partially offset by reduced Warnaco integration and restructuring expenses in 2014, which would increase the proportion of our pre-tax earnings subject to United States tax. Our tax rate is affected by many factors, including the mix of international and domestic pre-tax earnings, discrete events arising from specific transactions and audits by tax authorities or the receipt of new information, any of which can cause us to change our estimate for uncertain tax positions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
Cash at November�2, 2014 was $365 million, a reduction of $228 million from cash at February 2, 2014 of $593 million. Cash flow for the full year 2014 will be impacted by various factors in addition to those noted below in this Liquidity and Capital Resources section, including the amount of debt repayments we make in 2014.
As of November�2, 2014, approximately $309 million of cash and cash equivalents was held by international subsidiaries whose undistributed earnings are considered permanently reinvested. Our intent is to continue to reinvest these funds in international operations. If management decides at a later date to repatriate these funds to the United States, we would be required to pay taxes on these amounts based on applicable United States tax rates, net of foreign taxes already paid.
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Operations
Cash provided by operating activities was $324 million in the thirty-nine weeks ended November�2, 2014 as compared with $36 million in the thirty-nine weeks ended November�3, 2013. The increase in cash provided by operating activities was primarily driven by an increase in net income as adjusted for noncash charges in the current year period and a $57 million reduction in pension contributions.
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Capital Expenditures
Our capital expenditures in the thirty-nine weeks ended November�2, 2014 were $174 million compared to $166 million in the thirty-nine weeks ended November�3, 2013. We currently expect that capital expenditures will increase for the full year 2014 to approximately $275 million from $237 million in 2013, including a shift into 2014 of expenditures originally expected to occur in 2013. The increase in spending from 2013 to 2014 is primarily driven by investments in the operations we acquired with Warnaco and combining Warnacos infrastructure with ours, including information systems, logistics and facilities.
Investments in Unconsolidated Affiliates
During the first quarter of 2014, we acquired a 10% economic interest in Kingdom Holding 1 B.V., the parent company of the Karl Lagerfeld brand, for $19 million.
In 2013, we formed a joint venture, PVH Brands Australia Pty. Limited ( PVH Australia ), in which we own a 50% economic interest. The joint venture licenses from one of our subsidiaries the rights to distribute and sell certain Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the transaction, we contributed to the joint venture on the first day of 2014 our subsidiaries that were operating the Calvin Klein Jeans businesses in Australia and New Zealand. In connection with this contribution, we deconsolidated these subsidiaries and recognized a net gain of $2 million during the first quarter of 2014. We also made net payments of $7 million and $1 million to PVH Australia during the thirty-nine weeks ended November�2, 2014 and November�3, 2013, respectively, representing our 50% share of the funding of the joint venture.
With the Warnaco acquisition, we acquired a 51% economic interest in a Calvin Klein joint venture in India, Premium Garments Wholesale Trading Private Limited ( CK India ). The joint venture licenses from one of our subsidiaries the rights to the Calvin Klein trademark in India. During the first quarter of 2014, Arvind Limited purchased our prior joint venture partners shares in�CK India and, as a result of the entry into a shareholder agreement with different governing arrangements between us and the new shareholder as compared to the arrangements with the prior minority shareholders, we no longer hold a controlling interest in the joint venture. The former CK India subsidiary was deconsolidated and we began reporting our 51% interest as an equity method investment in the first quarter of 2014. We recognized a net gain of $6 million in connection with the deconsolidation of CK India during the first quarter of 2014.
In 2012, we formed a joint venture, Tommy Hilfiger do Brasil S.A., in Brazil, in which we own a 40% economic interest. The joint venture licenses from one of our subsidiaries the rights to the Tommy Hilfiger trademarks in Brazil. We made a payment of $3 million to Tommy Hilfiger do Brasil S.A. during the thirty-nine weeks ended November 3, 2013 to contribute our 40% share of funding.
Acquisition of Calvin Klein Performance Wear Retail Businesses in Hong Kong and China
During the third quarter of 2014, we acquired the Calvin Klein performance wear retail businesses in Hong Kong and China from a former Calvin Klein sublicensee. We paid $7 million as consideration for this transaction. We and the former shareholders of the acquired entity are in the process of finalizing the value of the net assets acquired; thus the amount paid is subject to adjustment.
Acquisition of Russia Franchisee
During the first quarter of 2014, we acquired two Tommy Hilfiger stores in Russia from a former Tommy Hilfiger franchisee. We paid $4 million as consideration for this transaction.
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Acquisition of Ireland Franchisee
During the first quarter of 2014, we acquired six Tommy Hilfiger stores in Ireland from a former Tommy Hilfiger franchisee. We paid $3 million as consideration for this transaction.
Acquisition of Warnaco
We completed our acquisition of Warnaco on February 13, 2013. We paid $2.180 billion in cash and issued approximately 8 million shares of our common stock, valued at $926 million, as consideration for the acquisition. In addition, we issued replacement stock awards related to employee stock-based compensation grants valued at $40 million and eliminated a $9 million pre-acquisition liability to Warnaco, both of which for accounting purposes are included in the total consideration of approximately $3.137 billion. 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.
We funded the cash portion and related costs of the acquisition, repaid all outstanding borrowings under our previously outstanding senior secured credit facilities and repaid all of Warnacos previously outstanding long-term debt with the net proceeds of (i) an offering during the fourth quarter of 2012 of $700 million of 4 1/2% senior notes due 2022; and (ii) $3.075 billion of term loans borrowed during the first quarter of 2013 under new senior secured credit facilities. See the discussion in the sections entitled 4 1/2% Senior Notes Due 2022 and 2013 Senior Secured Credit Facilities below for further detail on these activities.
Sale of Bass
During the third quarter of 2013, we entered into an agreement to sell substantially all of the assets of our Bass business. We
classified these assets as held for sale and recorded a loss of $16 million during the third quarter of 2013 to reflect these assets
at their fair value, less estimated costs to sell. A small number of our Bass stores were excluded from the sale and were deemed
to be impaired as of November 3, 2013. We recorded a loss of $1 million during the third quarter of 2013 related to the
impaired stores. In addition, during the third quarter of 2013 we recorded a gain of $3 million from writing off certain liabilities as a result of the transaction. We also recognized costs during the third quarter of 2013 related to severance and termination benefits for certain Bass employees, which totaled $1 million. On November 4, 2013, we completed the sale of these assets for gross proceeds of $49 million. The sale price, net of costs to sell, was equal to the carrying value of the assets as of November 3, 2013.
In connection with the sale, we also 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. In certain instances, our guarantee remains in effect when an option is exercised to extend the term of the lease, which is the case for certain of the leases that have been extended to expire on various dates into 2028. We recorded an expense of $4 million during the third quarter of 2013 representing the estimated fair value of these guarantee obligations at the time of the sale.
Sale of Chaps Sportswear Assets
As a result of our acquisition of Warnaco, Ralph Lauren Corporation reacquired on February 14, 2013 the license for Chaps mens sportswear that Warnaco held from affiliates of Ralph Lauren Corporation. In connection with this transaction, we sold all of the assets of the Chaps sportswear business, which consisted principally of inventory, to Ralph Lauren Corporation for gross proceeds of $18 million.
Tommy Hilfiger India Contingent Purchase Price Payments
We reacquired in 2011 the rights in India to the Tommy Hilfiger trademarks that had been subject to a perpetual license
previously granted to GVM International Limited ( GVM ). We are required to make annual contingent purchase price payments into 2016 (or, under certain circumstances, into 2017) based on a percentage of annual sales in excess of an agreed upon threshold of Tommy Hilfiger products in India. Such payments are subject to a $25 million aggregate maximum and are due within 60 days following each one-year period. We made contingent purchase price payments of $556 thousand and $429 thousand during the third quarter of 2014 and 2013, respectively.
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Calvin Klein Contingent Purchase Price Payments
In connection with our acquisition of Calvin Klein in 2003, we are obligated to pay Mr.�Calvin Klein contingent purchase price payments based on 1.15% of total worldwide net sales (as defined in the agreement governing that acquisition, as amended) of products bearing any of the Calvin Klein brands 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 us and our licensees and other partners to retailers. Such contingent purchase price payments totaled $35 million and $37 million in the thirty-nine weeks ended November�2, 2014 and November�3, 2013, respectively. We currently expect that such payments will be approximately $52 million for the full year 2014.
Dividends
Our common stock currently pays annual dividends totaling $0.15 per share. Dividends on common stock totaled $12 million in each of the thirty-nine weeks ended November�2, 2014 and November�3, 2013, and no further common stock dividends are scheduled to be declared during 2014.
Financing Arrangements
Our capital structure was as follows:
(in millions) | November 2, 2014 | February 2, 2014 | November 3, 2013 | ||||||||
Short-term borrowings���� | $ | 40 | $ | 7 | $ | 12 | |||||
Current portion of long-term debt���� | 99 | 85 | 85 | ||||||||
Capital lease obligations | 21 | 25 | 29 | ||||||||
Long-term debt���� | 3,619 | 3,878 | 4,175 | ||||||||
Stockholders equity���� | 4,584 | 4,335 | 4,359 | ||||||||
In addition, we had $365 million, $593 million and $543 million of cash and cash equivalents as of November�2, 2014, February�2, 2014 and November�3, 2013, respectively.
Short-Term Borrowings
One of our Asian subsidiaries has a Yen-denominated overdraft facility with a Japanese bank, which provides for borrowings of up to �1.000 billion (approximately $9 million based on exchange rates in effect on November�2, 2014) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the one-month Japanese interbank borrowing rate plus 0.30%. Such facility renews automatically unless we give notice of termination. As of November�2, 2014, we had $9 million of borrowings outstanding under this facility. The weighted average interest rate on the funds borrowed at November�2, 2014 was 0.45%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was equal to the maximum amount of borrowings available under this facility.
One of our European subsidiaries has short-term revolving notes with a number of banks at various interest rates, as well as a Euro-denominated overdraft facility, which provide for borrowings of up to �60 million (approximately $75 million based on exchange rates in effect on November 2, 2014). These facilities are used primarily to fund working capital needs. As of November�2, 2014, we had $6 million of borrowings outstanding under the overdraft facility. The weighted average interest rate on the borrowings outstanding at November 2, 2014 was 1.84%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was approximately $32 million.
One of our European subsidiaries has a United States dollar-denominated short-term line of credit facility with a Turkish bank, which provides for borrowings of up to $3 million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish Central Bank lending rate plus 0.50%. As of November�2, 2014, we had $304 thousand of borrowings outstanding under this facility. The weighted average interest rate on the borrowings outstanding at November�2, 2014 was 11.75%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November�2, 2014 was approximately $3 million.
One of our Asian subsidiaries has a short-term $10 million revolving credit facility to be used primarily 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
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up to one year. 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�2, 2014.
One of our Asian subsidiaries has a Won-denominated short-term revolving credit facility with one lender that provides for borrowings of up to �3.000 billion (approximately $3 million based on exchange rates in effect on November�2, 2014) and is utilized primarily 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�2, 2014.
One of our Latin American subsidiaries has Real-denominated short-term revolving credit facilities with a number of banks that provide for total available borrowings of R$69 million (approximately $28 million based on exchange rates in effect on November�2, 2014) and are utilized primarily to fund working capital needs. Borrowings 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�2, 2014.
As of November�2, 2014 we had drawn $25 million of revolving borrowings under our senior secured credit facilities as discussed in the section entitled 2014 Senior Secured Credit Facilities below. The weighted average interest rate on the borrowings outstanding at November�2, 2014 was 4.00%. The maximum amount of revolving borrowings outstanding under these facilities during the thirty-nine weeks ended November�2, 2014 was approximately $150 million. In addition, we have certain other facilities under which we had no borrowings outstanding as of or during the thirty-nine weeks ended November�2, 2014.
Capital Lease Obligations
Our cash payments for capital lease obligations totaled $7 million during each of the thirty-nine weeks ended November 2, 2014 and November 3, 2013.
2013 Senior Secured Credit Facilities
On February 13, 2013, simultaneously with and related to the closing of the Warnaco acquisition, we entered into senior secured credit facilities (the 2013 facilities ), the proceeds of which were used to fund a portion of the acquisition, repay all outstanding borrowings under our prior facilities, which were amended and restated during 2011 (the 2011 facilities ), and repay all of Warnacos previously outstanding long-term debt. The 2013 facilities consisted of a $1.700 billion United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $7 million as of the acquisition date), a $1.375 billion United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $7 million as of the acquisition date) and senior secured revolving credit facilities in an aggregate principal amount of $750 million (based on the applicable exchange rates on February 13, 2013), consisting of (a) a $475 million United States dollar-denominated revolving credit facility, (b) a $25 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a �186 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs. In connection with entering into the 2013 facilities and repaying all outstanding borrowings under the 2011 facilities and all of Warnacos previously outstanding long-term debt, we paid debt issuance costs of $67 million (of which $35 million was expensed as debt modification and extinguishment costs and $33 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $6 million to write-off previously capitalized debt issuance costs.
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We made payments of $203 million on our term loans under the 2013 facilities during the thirty-nine weeks ended November 3, 2013.
On March 21, 2014, we amended and restated the 2013 facilities, as discussed in the section entitled 2014 Senior Secured Credit Facilities below.
2014 Senior Secured Credit Facilities
On March 21, 2014 (the Restatement Date ), we entered into an amendment (the Amendment ) to the 2013 facilities (as amended by the Amendment, the 2014 facilities ). The Amendment provided for an additional $350 million principal amount of loans under the Term Loan A facility and an additional $250 million principal amount of loans under the Term Loan B facility and extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2018 to February 13, 2019.�The maturity of the Term Loan B facility remains February 13, 2020. On the Restatement Date, we borrowed the additional principal amounts described above and used the proceeds to redeem all of our outstanding 7 3/8% senior notes, as
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discussed in the section entitled 7 3/8% Senior Notes Due 2020 below. In connection with entering into the Amendment, we paid debt issuance costs of $13 million (of which $8 million was expensed as debt modification and extinguishment costs and $5 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $3 million to write-off previously capitalized debt issuance costs.
The 2014 facilities consist of a $1.986 billion United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $8 million), a $1.189 billion United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $6 million) and senior secured revolving credit facilities consisting of (a) a $475 million United States dollar-denominated revolving credit facility, (b) a $25 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a �186 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs.
The revolving credit facilities also include amounts available for letters of credit. As of November 2, 2014, we had drawn $25 million of revolving credit borrowings and $41 million of letters of credit. A portion of each of the 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, we 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 sum of (1) the sum of (x) $1.350 billion plus (y) the aggregate amount of all voluntary prepayments of term loans under the facilities and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an additional unlimited amount as long as the ratio of our 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 2014 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase.�The lenders under the 2014 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
During the thirty-nine weeks ended November 2, 2014, we made payments of $245 million on our term loans under the 2014 facilities, the majority of which was voluntary. As of November 2, 2014, we had total term loans outstanding of $2.918 billion, 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 previous voluntary payments, we are not required to make any additional mandatory payments under Term Loan B prior to maturity.
Our obligations under the 2014 facilities are guaranteed by substantially all of our existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European Borrower under the 2014 facilities are guaranteed by us, substantially all of our existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., a wholly owned subsidiary of ours.�We and our domestic subsidiary guarantors have pledged certain of our assets as security for the obligations under the 2014 facilities.
The outstanding borrowings under the 2014 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2014 facilities require us 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 our net leverage ratio during the relevant fiscal period.
The United States dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at our 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, with respect to the Term Loan B facility, 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 2014 facilities (provided, that, with respect to the Term Loan B facility, in no event will the adjusted Eurocurrency rate be deemed to be less than 0.75%).
Canadian dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at our 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
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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 2014 facilities.
The borrowings under the 2014 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 2014 facilities.
The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is 1.75% for adjusted Eurocurrency rate loans and 0.75% for base rate loans, respectively. The current applicable margin with respect to the Term Loan B facility is 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 our fiscal quarter ending November�2, 2014, the applicable margin for borrowings under the Term Loan A facility, the Term Loan B facility and the revolving credit facilities is subject to adjustment based upon our net leverage ratio.
The 2014 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by us and certain of our subsidiaries, and certain pledges of our assets and those of certain of our subsidiaries, as security for the obligations under the 2014 facilities; and a change in control (as defined in the 2014 facilities).
During the second quarter of 2014, we entered into an interest rate cap agreement for an 18-month term commencing on August 18, 2014. The agreement was designed with the intended effect of capping the interest rate on an initial notional amount of $514 million of our variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms. Such agreement remains outstanding with a notional amount of $512 million as of November 2, 2014. Under the terms of this agreement, the one-month LIBOR that we will pay is capped at a rate of 1.50%. Therefore, the maximum amount of interest that we will pay on the then-outstanding notional amount will be at the 1.50% capped rate, plus the current applicable margin.
During the second quarter of 2014, we entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $683 million of our variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms, to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, our exposure to fluctuations in the one-month LIBOR is eliminated and we will pay a weighted average fixed rate of 1.924%, plus the current applicable margin.
During the second quarter of 2013, we 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 $1.229 billion of our variable rate debt obligation under the previously outstanding 2013 facilities, or any replacement facility with similar terms, to fixed rate debt. Such agreement remains outstanding with a notional amount of $1.276 billion as of November 2, 2014, and is now converting a portion of our variable rate debt obligation under the 2014 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, our exposure to fluctuations in the one-month LIBOR is eliminated and we will pay a fixed rate of 0.604%, plus the current applicable margin.
We 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 million of our variable rate debt obligation under the previously outstanding 2011 facilities, or any replacement facility with similar terms, to fixed rate debt. Such swap agreement expired June 6, 2014.
The notional amount of each interest rate swap and cap will be adjusted according to a pre-set schedule during the term of each swap and cap agreement such that, based on our projections for future debt repayments, our outstanding debt under the Term Loan A facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps and cap.
The 2014 facilities also contain covenants that restrict our ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in our interest or to satisfy our obligations under our other outstanding debt. These covenants restrict our 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, our capital stock or certain debt; |
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" | make acquisitions and investments; |
" | dispose of assets; |
" | engage in transactions with affiliates; |
" | enter into agreements restricting our subsidiaries ability to pay dividends; |
" | create liens on our assets or engage in sale/leaseback transactions; and |
" | effect a consolidation or merger, or sell, transfer, or lease all or substantially all of our assets. |
The 2014 facilities require us 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 our other debt. If we were unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of our other indebtedness.
4 1/2% Senior Notes Due 2022
On December 20, 2012, we issued $700 million principal amount of 4 1/2% senior notes due December 15, 2022 in connection with the Warnaco acquisition. We paid approximately $16 million 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.
Subject to certain conditions, we may 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. We 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. In addition, we may redeem some or all of these notes on or after December 15, 2017 at specified redemption prices plus any accrued and unpaid interest. Our 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
We have outstanding $100 million of debentures due November 15, 2023 with a yield to maturity of 7.80%. The debentures accrue interest at the rate of 7 3/4%. Pursuant to the indenture governing the debentures, we 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.
7 3/8% Senior Notes Due 2020
On May 6, 2010, we issued $600 million principal amount of 7 3/8% senior notes due May 15, 2020. On March 24, 2014, in connection with the amendment and restatement of our senior secured credit facilities discussed above in the section entitled 2014 Senior Secured Credit Facilities, we redeemed all of our outstanding 7 3/8% senior notes and, pursuant to the indenture under which the notes were issued, paid a make whole premium of $68 million to the holders of the notes. We also recorded costs of $14 million to write-off previously capitalized debt issuance costs associated with these notes.
As of November�2, 2014, we were in compliance with all applicable financial and non-financial covenants under our financing arrangements.
Please refer to Note 9, Debt, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for a schedule of mandatory long-term debt repayments over the next five years.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions.�Our significant accounting policies are outlined in Note�1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended February 2, 2014.�During the thirty-nine weeks ended November�2, 2014, there were no significant changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the year ended February 2, 2014.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments held by us as of November�2, 2014 include cash and cash equivalents, short and long-term debt, foreign currency forward exchange contracts and interest rate swap and interest rate cap agreements. Note 12, Fair Value Measurements, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report outlines the fair value of our financial instruments as of November�2, 2014. Cash and cash equivalents held by us are affected by short-term interest rates. Due to the currently low rates of return we are receiving on our cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on our interest income. However, there is potential for a more significant increase in short-term interest rates, which could have a more material impact on our interest income. Given our balance of cash and cash equivalents at November�2, 2014, the effect of a 10 basis point increase in short-term interest rates on our interest income would be approximately $400 thousand annually. Borrowings under our senior secured credit facilities bear interest at a rate equal to an applicable margin plus a variable rate. As such, our credit facilities expose us to market risk for changes in interest rates. We have entered into interest rate swap and interest rate cap agreements for the intended purpose of reducing our exposure to interest rate volatility. As of November�2, 2014, after taking into account the effect of our interest rate swap and interest rate cap agreements that were in effect at such date, approximately 70% of our long-term debt was at a fixed or capped rate, with the remainder at variable rates. Given our debt position at November�2, 2014, the effect of a 10 basis point increase in interest rates on our interest expense would be less than $700 thousand annually.�Such amount excludes any impact from our United States dollar-denominated Term Loan B facility, which would currently not be impacted by a 10 basis point increase in interest rates due to its adjusted Eurocurrency rate floor of 0.75%.�Please refer to Note 9, Debt, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for a further discussion of our new credit facilities and interest rate swap and interest rate cap agreements.
Our Calvin Klein and Tommy Hilfiger businesses each have substantial international components, which expose us to significant foreign exchange risk. Accordingly, the impact of a strengthening United States dollar, particularly against the Euro, the Brazilian Real, the Japanese Yen, the Korean Won, the British Pound, the Canadian dollar, the Mexican Peso, the Indian Rupee, the Russian Ruble and the Chinese Yuan, will have a negative impact on our results of operations. Our Calvin Klein and Tommy Hilfiger businesses purchase the majority of the products that they sell in United States dollars, which exposes the international operations of each of these businesses to foreign exchange risk as the United States dollar fluctuates. To help manage these exposures, we currently use and plan to continue to use foreign currency forward exchange contracts or other derivative instruments.
In addition, we have exposure to changes in foreign currency exchange rates on certain intercompany loans.�We currently use and plan to continue to use foreign currency forward exchange contracts to mitigate this exposure.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Operating & Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and our Chief Operating & Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including each of our Chief Executive Officer and Chief Operating & Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are a party to certain litigations which, in managements judgment based in part on the opinions of legal counsel, will not have a material adverse effect on our financial position.
ITEM 1A - RISK FACTORS
Please refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended February 2, 2014 for a description of certain significant risks and uncertainties to which our business, operations and financial condition are subject. There have been no material changes to these risk factors as of November�2, 2014.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
�����������Period | (a) Total Number of Shares (or Units) Purchased(1) | (b) Average Price Paid per Share (or Unit)(1) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||
August 4, 2014 | ||||||||||||
August 31, 2014 | 207 | $ | 109.65 | |||||||||
September 1, 2014 | ||||||||||||
October 5, 2014 | 1,479 | 120.66 | ||||||||||
October 6, 2014 | ||||||||||||
November 2, 2014 | 137 | 120.33 | ||||||||||
Total | 1,823 | $ | 119.39 | |||||||||
����������������������
(1) Our 2006 Stock Incentive Plan provides us with the right to deduct or withhold, or require employees to remit to us, an amount sufficient to satisfy any applicable tax withholding requirements applicable to stock-based compensation awards. To the extent permitted, employees may elect to satisfy all or part of such withholding requirements by tendering previously owned shares or by having us withhold shares having a fair market value equal to the minimum statutory tax withholding rate that could be imposed on the transaction. All shares shown in this table were withheld during the third quarter of 2014 principally in connection with the settlement of vested restricted stock units and restricted stock to satisfy tax withholding requirements.
49
ITEM 6 - EXHIBITS
The following exhibits are included herein: | |||
3.1 | Certificate of Incorporation (incorporated by reference to Exhibit 5 to the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 1977); Amendment to Certificate of Incorporation, filed June 27, 1984 (incorporated by reference to Exhibit 3B to the Companys Annual Report on Form 10-K for the fiscal year ended February 3, 1985); Amendment to Certificate of Incorporation, filed June 2, 1987 (incorporated by reference to Exhibit 3(c) to the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 1988); Amendment to Certificate of Incorporation, filed June 1, 1993 (incorporated by reference to Exhibit 3.5 to the Companys Annual Report on Form 10-K for the fiscal year ended January 30, 1994); Amendment to Certificate of Incorporation, filed June 20, 1996 (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period ended July 28, 1996); Certificate of Amendment of Certificate of Incorporation, filed June 29, 2006 (incorporated by reference to Exhibit 3.9 to the Companys Quarterly Report on Form 10-Q for the period ended May 6, 2007); Certificate of Amendment of Certificate of Incorporation, filed June 23, 2011 (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed on June 29, 2011). | ||
3.2 | Certificate of Designation of Series A Cumulative Participating Preferred Stock, filed June 10, 1986 (incorporated by reference to Exhibit A of the document filed as Exhibit 3 to the Companys Quarterly Report on Form 10-Q for the period ended May 4, 1986). | ||
3.3 | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Phillips-Van Heusen Corporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed on February 26, 2003); Corrected Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Phillips-Van Heusen Corporation, dated April 17, 2003 (incorporated by reference to Exhibit 3.9 to the Companys Annual Report on Form 10-K for the fiscal year ended February 2, 2003). | ||
3.4 | Certificate Eliminating Reference to Series B Convertible Preferred Stock From Certificate of Incorporation of Phillips-Van Heusen Corporation, filed June 12, 2007 (incorporated by reference to Exhibit 3.10 to the Companys Quarterly Report on Form 10-Q for the period ended May 6, 2007). | ||
3.5 | Certificate Eliminating Reference to Series A Cumulative Participating Preferred Stock From Certificate of Incorporation of Phillips-Van Heusen Corporation (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K, filed on September 28, 2007). | ||
3.6 | Certificate of Designations of Series A Convertible Preferred Stock of Phillips-Van Heusen Corporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed May 12, 2010). | ||
3.7 | Certificate Eliminating Reference to Series A Convertible Preferred Stock From Certificate of Incorporation of PVH Corp. (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed on May 3, 2013). | ||
3.8 | By-Laws of PVH Corp., as amended through February 2, 2012 (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed on February 3, 2012). | ||
4.1 | Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the period ended July 31, 2011). | ||
50
4.2 | Indenture, dated as of November 1, 1993, between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.01 to the Companys Registration Statement on Form S-3 (Reg. No. 33-50751) filed on October 26, 1993); First Supplemental Indenture, dated as of October 17, 2002 to Indenture dated as of November 1, 1993 between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.15 to the Companys Quarterly Report on Form 10-Q for the period ended November 3, 2002); Second Supplemental Indenture, dated as of February 12, 2002 to Indenture, dated as of November 1, 1993, between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K, filed on February 26, 2003); Third Supplemental Indenture, dated as of May 6, 2010, between Phillips-Van Heusen Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (incorporated by reference to Exhibit 4.16 to the Companys Quarterly Report on Form 10-Q for the period ended August 1, 2010); Fourth Supplemental Indenture, dated as of February 13, 2013 to Indenture, dated as of November 1, 1993, between PVH Corp. and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.11 to the Companys Quarterly Report on Form 10-Q for the period ended May 5, 2013). | ||
4.3 | Securities Purchase Agreement, dated as of March 15, 2010, by and among Phillips-Van Heusen Corporation, LNK Partners, L.P. and LNK Partners (Parallel), L.P. (incorporated by reference to Exhibit 4.10 to the Companys Quarterly Report on Form 10-Q for the period ended May 2, 2010). | ||
4.4 | Securities Purchase Agreement, dated as of March 15, 2010, by and between Phillips-Van Heusen Corporation and MSD Brand Investments, LLC (incorporated by reference to Exhibit 4.11 to the Companys Quarterly Report on Form 10-Q for the period ended May 2, 2010). | ||
4.5 | Stockholders Agreement, dated as of May 6, 2010, by and among Phillips-Van Heusen Corporation, LNK Partners, L.P. and LNK Partners (Parallel), L.P. (incorporated by reference to Exhibit 4.13 to the Companys Quarterly Report on Form 10-Q for the period ended August 1, 2010). | ||
4.6 | Stockholder Agreement, dated as of May 6, 2010, by and between Phillips-Van Heusen Corporation and MSD Brand Investments, LLC. (incorporated by reference to Exhibit 4.14 to the Companys Quarterly Report on Form 10-Q for the period ended August 1, 2010). | ||
4.7 | Indenture, dated as of May 6, 2010, between Phillips-Van Heusen Corporation and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.15 to the Companys Quarterly Report on Form 10-Q for the period ended August 1, 2010). | ||
4.8 | First Supplemental Indenture, dated as of November 8, 2012, to Indenture dated as of May 6, 2010, between PVH Corp. (formerly known as Phillips-Van Heusen Corporation ) and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.9 to the Companys Annual Report on Form 10-K for the fiscal year ended February 3, 2013). | ||
4.9 | Indenture, dated as of December 20, 2012, between PVH Corp. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, filed on December 20, 2012). | ||
+31.1 | Certification of Emanuel Chirico, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | ||
+31.2 | Certification of Michael Shaffer, Executive Vice President and Chief Operating & Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | ||
��*,+32.1 | Certification of Emanuel Chirico, Chairman and Chief Executive Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
��*,+32.2 | Certification of Michael Shaffer, Executive Vice President and Chief Operating & Financial Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
+101.INS | XBRL Instance Document | ||
51
+101.SCH | XBRL Taxonomy Extension Schema Document | ||
+101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
+101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
+101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
+101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
��+Filed or furnished herewith. | |||
* Exhibits 32.1 and 32.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PVH CORP. | |
Registrant | |
�
Dated: | December 11, 2014 | /s/ Bruce Goldstein |
Bruce Goldstein | ||
Senior Vice President and Controller (Chief Accounting Officer) | ||
53
Exhibit Index
Exhibit����Description
31.1 | Certification of Emanuel Chirico, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
31.2 | Certification of Michael Shaffer, Executive Vice President and Chief Operating & Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
32.1 | Certification of Emanuel Chirico, Chairman and Chief Executive Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. |
32.2 | Certification of Michael Shaffer, Executive Vice President and Chief Operating & Financial Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
54
EXHIBIT�31.1
I, Emanuel Chirico, certify that:
1. | I have reviewed this Quarterly Report on Form�10-Q of PVH Corp.; |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules�13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
d) | Disclosed in this Report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: | December�11, 2014 | /s/ EMANUEL CHIRICO |
Emanuel Chirico | ||
Chairman and Chief Executive Officer | ||
EXHIBIT�31.2
I, Michael Shaffer, certify that:
1. | I have reviewed this Quarterly Report on Form�10-Q of PVH Corp.; |
2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules�13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
d) | Disclosed in this Report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: | December�11, 2014 | /s/ MICHAEL SHAFFER |
Michael Shaffer | ||
Executive Vice President and Chief Operating & Financial Officer | ||
EXHIBIT�32.1
CERTIFICATE PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form�10-Q of PVH Corp. ( the Company ) for the quarterly period ended November�2, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, Emanuel Chirico, Chairman and Chief Executive Officer of the Company, certify, pursuant to section�906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section�1350, that:
(i) | the Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(ii) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: | December�11, 2014 | |
By: � | /s/ EMANUEL CHIRICO � | |
Name: | Emanuel Chirico | |
Chairman and Chief Executive Officer | ||
A signed original of this written statement required by Section�906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT�32.2
CERTIFICATE PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form�10-Q of PVH Corp. (the Company ) for the quarterly period ended November�2, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, Michael Shaffer, Executive Vice President and Chief Operating & Financial Officer of the Company, certify, pursuant to section�906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section�1350, that:
(i) | the Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(ii) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: | December�11, 2014 | |
By: | /s/ MICHAEL SHAFFER | |
Name: | Michael Shaffer Executive Vice President and Chief Operating & Financial Officer | |
A signed original of this written statement required by Section�906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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