UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED JANUARY 2, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 1-10857
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
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95-4032739
(I.R.S. Employer
Identification No.) |
501 Seventh Avenue
New York, New York 10018
(Address of principal executive offices)
Registrants telephone number, including area code: (212) 287-8000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, par value $0.01 per share
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New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ 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
o No o *
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* |
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Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time. |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
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 definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of July 2, 2009 (the last business day of the Registrants most recently completed second
fiscal quarter), the aggregate market value of the Registrants Common Stock (the only common
equity of the registrant) held by non-affiliates was $1,282,335,520 based upon the last sale price
of $31.94 reported for such date on the New York Stock Exchange.
The number of shares outstanding of the registrants Common Stock, par value $.01 per share,
as of February 22, 2010: 45,681,857.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this report is incorporated by reference from the
Proxy Statement of the registrant relating to the 2010 Annual Meeting of Stockholders, to be filed
with the Securities and Exchange Commission within 120 days of the Fiscal 2009 year-end.
THE WARNACO GROUP, INC.
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Introduction
The Warnaco Group, Inc. (Warnaco Group), a Delaware corporation organized in 1986
(collectively with its subsidiaries, the Company), designs, sources, markets, licenses and
distributes a broad line of intimate apparel, sportswear and swimwear worldwide. The Companys
products are sold under several highly recognized brand names, including, but not limited to,
Calvin Klein®, Speedo®, Chaps®, Warners® and Olga®.
The Companys products are distributed domestically and internationally, primarily to
wholesale customers through various distribution channels, including major department stores,
independent retailers, chain stores, membership clubs, specialty and other stores, mass
merchandisers and the internet. In addition, the Company distributes its Calvin Klein branded
products through dedicated Calvin Klein retail stores, and as of January 2, 2010, the Company
operated 1,097 Calvin Klein retail stores worldwide (consisting of 131 full price free-standing
stores, 109 outlet free-standing stores, 857 shop-in-shop/concession stores) and three on-line
stores: SpeedoUSA.com, Calvinkleinjeans.com, and CKU.com. There were also 624 Calvin Klein retail
stores operated by third parties under retail licenses or franchise and distributor agreements. For
the fiscal year ended January 2, 2010, approximately 45% of the Companys net revenues were
generated from domestic sales and approximately 55% were generated from international sales. In
addition, approximately 77% of net revenues were generated from sales to customers in the wholesale
channel and approximately 23% of net revenues were generated from customers in the
direct-to-consumer channel.
The Company owns and licenses a portfolio of highly recognized brand names. The trademarks
owned or licensed in perpetuity by the Company generated approximately 45% of the Companys
revenues during Fiscal 2009. Brand names the Company licenses for a term generated approximately
55% of its revenues during Fiscal 2009. Owned brand names and brand names licensed for extended
periods (at least through 2044) accounted for over 89% of the Companys net revenues in Fiscal
2009. The Companys highly recognized brand names have been established in their respective markets
for extended periods and have attained a high level of consumer awareness.
The following table sets forth the Companys trademarks and licenses as of January 2, 2010:
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Owned Trademarks (a) |
Calvin
Klein and formatives (beneficially owned for mens/ womens/childrens underwear, loungewear and sleepwear: see Trademarks and Licensing Agreements)
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Warners |
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Olga |
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Body Nancy Ganz®/Bodyslimmers ® |
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Trademarks Licensed in Perpetuity |
Trademark |
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Territory |
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Speedo (a)
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United States, Canada, Mexico, Caribbean Islands |
Fastskin® (secondary Speedo mark)
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United States, Canada, Mexico, Caribbean Islands |
1
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Trademarks Licensed for a Term |
Trademark |
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Territory |
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Expires (j) |
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Calvin Klein (for mens/womens/juniors jeans
and certain jeans-related products) (b)
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North, South and Central America
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12/31/2044 |
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CK/Calvin Klein Jeans (for retail stores selling mens/womens/juniors
jeans and certain jeans-related products and ancillary
products bearing the Calvin Klein marks) (b)
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Canada, Mexico and Central and South America
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12/31/2044 |
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CK/Calvin Klein (for bridge apparel, bridge accessories
and retail stores selling bridge apparel and accessories) (c)
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All countries constituting European
Union, Norway, Switzerland
Monte Carlo, Vatican City, Liechtenstein,
Iceland and parts of Eastern Europe, Russia,
Middle East and Africa
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12/31/2046 |
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CK/Calvin Klein (for retail stores selling bridge accessories
and jeans accessories) (d)
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Central and South America (excluding Mexico)
Europe and Asia
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12/31/2044
12/31/2046 |
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Calvin Klein and CK/Calvin Klein (for mens/womens/childrens
jeans and other related apparel as well as retail stores
selling such items and ancillary products) (c)
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Western Europe including Ireland,
Great Britain, France, Monte Carlo,
Germany, Spain, Portugal, Andorra, Italy,
San Marino, Vatican City, Benelux, Denmark,
Sweden, Norway, Finland, Austria, Switzerland,
Lichtenstein, Greece, Cyprus, Turkey and Malta
and parts of Eastern Europe, Russia, the Middle East
and Africa, Japan, China, South Korea and
Rest of Asia (Hong Kong, Thailand,
Australia, New Zealand, Philippines, Taiwan,
Singapore, Malaysia, Indonesia, New Guinea,
Vietnam, Cambodia, Laos, Myanmar,
Macau and the Federated State
of Micronesia)
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12/31/2046 |
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CK/Calvin Klein (for independent or common internet sites
for the sale of jeanswear apparel and jeanswear accessories)(d)
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North America, Europe and Asia
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12/31/2046 |
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CK/Calvin Klein (for independent or common internet sites
for the sale of jeanswear apparel and jeanswear accessories) (d)
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Central and South America (excluding Mexico)
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12/31/2044 |
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Calvin Klein (for jeans accessories) (c)
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All countries constituting European
Union, Norway, Switzerland,
Monte Carlo, Vatican City, Liechtenstein,
Iceland and parts of Eastern Europe, Russia,
Middle East, Africa and Asia
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12/31/2046 |
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Chaps (for mens sportswear, jeanswear,
activewear, sport shirts and mens swimwear) (e)
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United States, Canada, Mexico,
Puerto Rico and Caribbean Islands
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12/31/2018 |
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Calvin Klein and CK/Calvin Klein (for womens
and juniors swimwear)
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Worldwide with respect to Calvin
Klein; Worldwide in approved forms with
respect to CK/Calvin Klein
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12/31/2014 |
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Calvin Klein (for mens swimwear)
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Worldwide
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12/31/2014 |
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Lifeguard® (for wearing apparel excluding
underwear and loungewear) (f)
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Worldwide (United States, Canada,
Mexico, Caribbean Islands and all other
countries where trademark filings are or
will be made)
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6/30/2030 |
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(a) |
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Licensed in perpetuity from Speedo International, Ltd. (SIL). |
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(b) |
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Expiration date reflects a renewal option, which permits the Company to extend for an
additional ten-year term through 12/31/2044 (subject to compliance with certain terms and
conditions). |
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(c) |
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In January 2006, the Company acquired the companies that operate the license and
related wholesale and retail businesses of Calvin Klein Jeans and accessories in Europe and
Asia and the CK/Calvin Klein bridge line of sportswear and accessories in Europe. In
connection with the acquisition, the Company acquired various exclusive license agreements. In
addition, the Company entered into amendments to certain of its existing license agreements
with Calvin Klein, Inc. (in its capacity as licensor). See -Trademarks and Licensing
Agreements. |
2
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(d) |
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By agreement dated January 31, 2008, the Company acquired the rights to operate CK/Calvin
Klein retail stores for the sale of bridge and jeans accessories (in countries constituting
Europe, Asia and Central and South America (excluding Mexico)) as well as the rights to
operate CK/Calvin Klein independent or common internet sites for the sale of jeanswear apparel
and jeanswear accessories in the Americas (excluding Mexico), Europe and Asia. See Trademarks
and Licensing Agreements |
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(e) |
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Expiration date reflects a renewal option, which permits the Company to extend for an
additional five-year term beyond the current expiration date of December 31, 2013 (subject to
compliance with certain terms and conditions) for the trademark Chaps and the Chaps mark and
logo. |
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(f) |
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Expiration date reflects four successive renewal options of five years each (each subject
to compliance with certain terms and conditions). |
The Company relies on its highly recognized brand names to appeal to a broad range of
consumers. The Companys products are sold in over 100 countries throughout the world. The Company
designs products across a wide range of price points to meet the needs and shopping preferences of
male and female consumers across a broad age spectrum. The Company believes that its ability to
service multiple domestic and international distribution channels with a diversified portfolio of
products under widely recognized brand names at varying price points distinguishes it from many of
its competitors and reduces its reliance on any single distribution channel, product, brand or
price point.
The Company operates on a fiscal year basis ending on the Saturday closest to December 31.
References in this Form 10-K to Fiscal 2009 refer to the operations for the twelve months ended
January 2, 2010. References to Fiscal 2008 refer to the operations for the twelve months ended
January 3, 2009. References to Fiscal 2007 refer to the operations for the twelve months ended
December 29, 2007. References to Fiscal 2006 refer to the operations for the twelve months ended
December 30, 2006. References to Fiscal 2005 refer to the operations for the twelve months ended
December 31, 2005. There were 52 weeks per year for each of Fiscal 2005 through Fiscal 2007 and
Fiscal 2009 and 53 weeks in Fiscal 2008.
Warnaco Group, Warnaco Inc. (Warnaco), the principal operating subsidiary of Warnaco Group
and certain of Warnacos subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy
Code, 11 U.S.C. Sections 101-1330, as amended, effective February 4, 2003 (the Effective Date).
Acquisitions, Dispositions and Discontinued Operations
Acquisitions
Acquisition of Remaining Non-controlling Interest and Retail Stores in Brazil
During the fourth quarter of 2009, the Company finalized agreements to acquire the remaining
49% of the equity of its Brazilian subsidiary and acquired the assets and assumed the leases of
eight retail stores that sell Calvin Klein products (including
jeanswear and underwear) in Brazil, effective October 1, 2009. Prior to the consummation of
the acquisition of the remaining 49% of the equity of the Brazilian subsidiary, the subsidiary paid
a dividend of 7 million Brazilian Real (approximately $4 million), representing the distribution of
the Brazilian partners accumulated equity in the subsidiary through September 30, 2009. The
Company made an initial payment of 21 million Brazilian Real (approximately $12 million based on
the currency exchange rate on the date of acquisition) to acquire the equity of the Brazilian
subsidiary and the retail stores. The Company may be required to make three future annual payments
totaling up to 43 million Brazilian Real (approximately $24 million) through March 31, 2012, which
are contingent on the operating activity of the subsidiary through December 31, 2011. Based on the
operating income achieved by the Brazilian subsidiary in the fourth quarter of 2009, the first
payment of 6 million Brazilian Real (approximately $3.5 million) will be paid by March 31, 2010.
The consummation of the Brazilian acquisitions continues the Companys strategy of expansion of its
operations in South America. See Note 2 to Notes to Consolidated Financial Statements.
The Company is in the process of finalizing the allocation of the purchase price and is also
in the process of finalizing the determination of the fair values of the assets acquired and
liabilities assumed in the purchase of the retail stores.
Businesses in Chile and Peru: On June 10, 2009, the Company acquired from Fashion Company
S.A. (formerly Clemente Eblen S.A.) and Battery S.A. (collectively, Eblen), for cash
consideration of $2.5 million, businesses relating to distribution and sale at wholesale and retail
of jeanswear and underwear products bearing the Calvin Klein trademarks in Chile and Peru,
including the transfer and assignment to the Company by Eblen of the right to operate and conduct
business at three retail locations in Chile and one retail location in Peru. The Company acquired
these businesses in order to increase its presence in South America.
3
2008 CK Licenses: In connection with the consummation of the January 31, 2006 acquisition of
100% of the shares of the companies (the CKJEA Business) that operate the wholesale and retail
businesses of Calvin Klein jeanswear and accessories in Europe and Asia and the CK /Calvin Klein
bridge line of sportswear and accessories in Europe (the CKJEA Acquisition), the Company became
obligated to acquire from the seller of the CKJEA Business, for no additional consideration and
subject to certain conditions which were ministerial in nature, 100% of the shares of the company
(the Collection License Company) that operates the license (the Collection License) for the
Calvin Klein mens and womens Collection apparel and accessories worldwide. The Company acquired
the Collection License Company on January 28, 2008. The Collection License was scheduled
to expire in December 2013. However, pursuant to an agreement (the Transfer Agreement) entered
into on January 30, 2008, the Company transferred the Collection License Company to Phillips-Van
Heusen Corporation (PVH), the parent company of Calvin Klein, Inc. (CKI). In connection
therewith, the Company paid approximately $43.0 million (including final working capital
adjustments) to, or on behalf of, PVH and entered into certain new, and amended certain existing,
Calvin Klein licenses (collectively, the 2008 CK Licenses).
The rights acquired by the Company pursuant to the 2008 CK Licenses include: (i) rights to
operate Calvin Klein Jeanswear Accessories Stores in Europe, Eastern Europe, Middle East, Africa
and Asia, as defined; (ii) rights to operate Calvin Klein Jeanswear Accessories Stores in Central
and South America (excluding Canada and Mexico, which is otherwise included in the underlying grant
of rights to the company to operate Calvin Klein Jeanswear retail stores in Central and South
America); (iii) rights to operate CK/Calvin Klein Bridge Accessories Stores in Europe, Eastern
Europe, Middle East and Africa, as defined; (iv) rights to operate CK/Calvin Klein Bridge
Accessories Stores in Central and South America (excluding Canada and Mexico, which is otherwise
included in the underlying grant of rights to the Company to operate Calvin Klein Bridge
Accessories Stores in Central and South America); and (v) e-commerce rights in the Americas, Europe
and Asia for Calvin Klein Jeans and for Calvin Klein jeans accessories. Each of the 2008 CK
Licenses are long-term arrangements. In addition, pursuant to the Transfer Agreement, the Company
had entered into negotiations with respect to a grant of rights to sublicense and distribute Calvin
Klein Golf apparel and golf related accessories. During Fiscal 2008, the Company recorded $24.7
million of intangible assets related to the 2008 CK Licenses and Calvin Klein Golf license and
recorded a restructuring charge (included in selling, general and administrative expenses) of $18.5
million (the Collection License Company Charge) related to the transfer of the Collection License
Company to PVH. During the third quarter of Fiscal 2009, the Company decided to discontinue its
Calvin Klein Golf business and wrote off the related remaining $0.8 million of intangible assets.
Retail Stores in China: Effective March 31, 2008, the Company acquired a business which
operates 11 retail stores in China (which acquisition included the assumption of the leases related
to the stores) for a total consideration of approximately $2.5 million.
See Note 2 of Notes to Consolidated Financial Statements for further discussion of
acquisitions.
Dispositions and Discontinued Operations
Calvin Klein Golf and Calvin Klein Collection Businesses: During the third quarter of Fiscal
2009, the Company discontinued its Calvin Klein Golf (Golf) business and classified, as available
for sale its, Calvin Klein Collection (Collection) business, both of which operated in Korea. As
a result, those business units have been classified as discontinued operations for all periods
presented. During the third quarter of Fiscal 2009, the Company wrote off the carrying value of the
Golf license of $0.8 million. In addition, for Fiscal 2009, the Company reclassified, as
discontinued operations, net revenues of $0.2 million and expenses of $0.4 million for Fiscal 2009
in connection with the shut down of the Golf business. The Companys Collection business had
operated as a distributor of Calvin Klein Collection merchandise at retail locations in Korea both
before and subsequent to the transfer of the Collection License Company to PVH. During Fiscal 2009,
the Company reclassified, as discontinued operations, net revenues of $2.3 million and expenses of
$3.1 million in connection with the shut down of the Collection business.
Exit of Designer Swimwear Business (except Calvin Klein): During Fiscal 2007, pursuant to an
initiative to exit the Swimwear Groups private label and designer swimwear businesses (except
Calvin Klein swimwear), the Company disposed of its OP womens and junior swimwear business. The
Company had operated the OP womens and junior swimwear business under a license it was granted in
connection with the Companys 2006 sale of its OP business (including the associated trademarks and
goodwill) in 2006. In addition, during Fiscal 2007, the Company sold its Catalina, Anne Cole and
Cole of California businesses to InMocean Group, LLC (InMocean) for total consideration of
approximately $25 million, of which $20.6 million was
received in cash on December 28, 2007. The remaining portion of the purchase price relates to raw
materials and work-in-process acquired on December 28, 2007. Cash related to raw material and
work-in-process at the sale date is collected by drawing on letters of credit as the related
finished goods are shipped. During Fiscal 2008, the Company recorded charges of approximately $6.9
million, primarily related to working capital adjustments associated with the disposition of these
brands. The Company recorded a loss of $2.3 million related to the sale of the Catalina, Anne Cole
and Cole of California businesses. As a result of these dispositions, the OP womens and juniors,
Catalina, Anne Cole and Cole of California business units have been classified as discontinued
operations as of January 2, 2010 and January 3, 2009.
In addition, during Fiscal 2008, the Company ceased operations of its Nautica, Michael Kors
and private label swimwear businesses (all of which are components of the Companys designer
swimwear businesses). As a result, these business units have been classified as discontinued
operations for all periods presented. During Fiscal 2009 and Fiscal 2008, the Company recognized
gains of $0.3 million and losses of $2.0 million, respectively, (as part of Loss from discontinued
operations, net of taxes) related to the discontinuation of the Nautica, Michael Kors and private
label swimwear businesses.
4
Lejaby Sale
On February 14, 2008, the Company entered into a stock and asset purchase agreement with
Palmers Textil AG (Palmers) whereby, effective March 10, 2008, Palmers acquired the Lejaby
business for a base purchase price of 32.5 million (approximately $47.4 million) payable in cash
and 12.5 million (approximately $18.2 million) evidenced by an interest free promissory note
(payable on December 31, 2013), subject to certain adjustments, including adjustments for working
capital. Pursuant to a transition services agreement (TSA) with Palmers, the Company operated the
Canadian portion of the Lejaby business through December 10, 2008, the term of the TSA. As a
result, the Lejaby business (including the Companys Canadian Lejaby division) has been classified
as a discontinued operation as of January 2, 2010 and January 3, 2009. During Fiscal 2008, the
Company recorded a gain (as part of Loss from discontinued operations, net of taxes) of $3.4
million related to the sale of Lejaby. In addition, during Fiscal 2008, the Company repatriated, in
the form of a dividend to the United States of America (U.S.), the net proceeds received in
connection with the Lejaby sale. The repatriation of the proceeds from the Lejaby sale, net of
adjustments for working capital, resulted in an income tax charge of approximately $14.6 million,
which was recorded as part of Provision for income taxes in the Companys consolidated condensed
statement of operations. In Fiscal 2009, the Company recorded a charge of $3.4 million related to
the correction of an error in amounts recorded in prior periods. See Note 6 of Notes to
Consolidated Financial Statements.
See Note 3 of Notes to Consolidated Financial Statements for further discussion of
discontinued operations.
Business Groups
The Company operates in three business groups (segments): (i) Sportswear Group, (ii) Intimate
Apparel Group, and (iii) Swimwear Group.
The following table sets forth, for each of the last three fiscal years, net revenues and
operating income for each of the Companys business groups and for the Company on a consolidated
basis. Each segments performance is evaluated based upon operating income after restructuring
charges and shared services expenses but before unallocated corporate expenses. The Company has
revised net revenues and operating income for each of its business groups for Fiscal 2008 and
Fiscal 2007 to eliminate the results of discontinued operations as discussed above.
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Fiscal 2009 |
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Fiscal 2008 |
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Fiscal 2007 |
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(in thousands of dollars) |
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% of Total |
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% of Total |
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% of Total |
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Net revenues: |
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Sportswear Group |
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$ |
1,091,165 |
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54.0 |
% |
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$ |
1,100,597 |
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53.4 |
% |
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$ |
939,147 |
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51.6 |
% |
Intimate Apparel Group |
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677,315 |
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33.6 |
% |
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702,252 |
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34.0 |
% |
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627,014 |
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34.5 |
% |
Swimwear Group |
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251,145 |
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12.4 |
% |
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260,000 |
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12.6 |
% |
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253,418 |
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13.9 |
% |
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Net revenues (a), (b), (c) |
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$ |
2,019,625 |
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100.0 |
% |
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$ |
2,062,849 |
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100.0 |
% |
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$ |
1,819,579 |
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100.0 |
% |
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(a) |
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International operations accounted for 54.6%, 54.4% and 49.0% of net revenues in
Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. |
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(b) |
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Direct to consumer businesses accounted for 22.5%, 20.6% and 18.3% of net
revenues in Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. |
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(c) |
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Sales of products bearing the Calvin Klein brand name accounted for 73.5%, 72.7%
and 68.2% of net revenues in Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. |
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% of Total Net |
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% of Total Net |
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% of Total Net |
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Fiscal 2009 |
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Revenues |
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Fiscal 2008 |
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Revenues |
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Fiscal 2007 |
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Revenues |
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(in thousands of dollars) |
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Operating income (loss): |
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Sportswear Group |
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$ |
124,950 |
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$ |
89,782 |
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$ |
97,946 |
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Intimate Apparel Group |
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117,070 |
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126,132 |
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108,343 |
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|
|
|
|
Swimwear Group |
|
|
15,558 |
|
|
|
|
|
|
|
11,478 |
|
|
|
|
|
|
|
(24,499 |
) |
|
|
|
|
Unallocated corporate
expenses (a) |
|
|
(64,043 |
) |
|
|
|
|
|
|
(85,947 |
) |
|
|
|
|
|
|
(38,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (b) |
|
$ |
193,535 |
|
|
|
9.6 |
% |
|
$ |
141,445 |
|
|
|
6.9 |
% |
|
$ |
143,690 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $20.4 million and $31.5 million of pension expense and $9.0 million of pension
income for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. |
|
(b) |
|
Includes $3.2 million, $4.3 million, $3.0 million and $1.5 million of restructuring expenses
for Fiscal 2009 in the Sportswear Group, Intimate Apparel Group, Swimwear Group and
Unallocated corporate expenses, respectively, $27.8 million, $1.3 million, $3.9 million and
$2.2 million of restructuring expenses for Fiscal 2008 in the Sportswear Group, Intimate
Apparel Group, Swimwear Group and Unallocated corporate expenses, respectively, and $0.1
million, $2.1 million, $29.8 million and $0.3 million of restructuring expenses for Fiscal
2007 in the Sportswear Group, Intimate Apparel Group, Swimwear Group and Unallocated corporate
expenses, respectively. |
5
The following table sets forth, as of January 2, 2010 and January 3, 2009, total assets
for each of the Companys business groups, unallocated corporate/other and for the Company on a
consolidated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
%
of Total |
|
|
January 3, 2009 |
|
|
%
of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group |
|
$ |
875,304 |
|
|
|
52.8 |
% |
|
$ |
801,038 |
|
|
|
53.5 |
% |
Intimate Apparel Group |
|
|
390,610 |
|
|
|
23.5 |
% |
|
|
304,724 |
|
|
|
20.4 |
% |
Swimwear Group |
|
|
144,198 |
|
|
|
8.7 |
% |
|
|
147,685 |
|
|
|
9.9 |
% |
Corporate/Other |
|
|
249,682 |
|
|
|
15.0 |
% |
|
|
242,646 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,659,794 |
|
|
|
100.0 |
% |
|
$ |
1,496,093 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group
The Sportswear Group designs, sources and markets moderate to premium priced mens and womens
jeanswear, sportswear and accessories. Net revenues of the Sportswear Group accounted for 54.0% of
the Companys net revenues in Fiscal 2009. The following table sets forth the Sportswear Groups
brand names and their apparel price ranges and types:
|
|
|
|
|
Brand Name |
|
Price Range |
|
Type of Apparel |
Calvin Klein
|
|
Better to premium
|
|
Mens, womens and childrens (a) designer
jeanswear (bottoms and tops) and bridge
sportswear in Europe; jeans accessories in
Europe and Asia and bridge accessories in
Europe |
Chaps
|
|
Moderate
|
|
Mens sportswear, jeanswear, activewear, knit
and woven sports shirts and swimwear (b) |
|
|
|
(a) |
|
The Sportswear Group sub-licenses the rights to produce childrens designer jeanswear to a
third party. |
|
(b) |
|
The Sportswear Group sub-licenses the rights to produce mens leather outerwear to a third
party. |
The Calvin Klein business includes mens and womens jeans and jeans-related products,
including outerwear, knit and woven tops and shirts, jeans accessories in Europe and Asia and the
CK Calvin Klein bridge line of sportswear and accessories in Europe. As a result of the CKJEA
Acquisition, the Company has been able to expand the distribution of its Calvin Klein products in
Europe and Asia, primarily in its direct-to-consumer business, to $561.2 million of Sportswear
Group net revenues in Fiscal 2009 and $570.6 million of Sportswear Group net revenues in Fiscal
2008, which represent increases of 23.1% and 25.1%, respectively, over the $456.0 million of
Sportswear Group net revenues in Fiscal 2007. Direct-to-consumer products accounted for 25.3% of
the Sportswear segments Fiscal 2009 net revenues.
In addition, under the terms of the 2008 CK Licenses with CKI, the Company entered into
certain license agreements with CKI whereby, among other items, the Company acquired (i) the rights
to operate Calvin Klein jeans accessories retail stores in Europe, Asia and Latin America, as well
as retail stores for Calvin Klein accessories in Europe; (ii) e-commerce rights in the Americas,
Europe and Asia for Calvin Klein Jeans; (iii) e-commerce rights in Europe, Asia and Latin America
for Calvin Klein jeans accessories and (iv) the right to enter into a sublicense and distribution
rights for Calvin Klein Golf apparel and golf related accessories in department stores, specialty
stores and other channels in Asia. During the third quarter of Fiscal 2009, the Company decided to
discontinue its Calvin Klein Golf business.
Chaps is a moderately priced mens sportswear line providing a more casual product offering to
the consumer. The Company negotiated an amendment and extension of the Chaps license through 2013,
which allows further renewal through 2018, assuming the exercise of a renewal option and
satisfaction of certain conditions. The renegotiated license granted the Company certain rights to
extend the brand in terms of both product and distribution channels, which allowed the Company to
launch Chaps sportswear in Fiscal 2004 in the mid-tier distribution channel.
The Sportswear Groups apparel products are distributed primarily through department stores,
independent retailers, chain stores, membership clubs, mass merchandisers and, to a lesser extent,
specialty stores.
6
The following table sets forth, as of January 2, 2010, the Sportswear Groups principal
distribution channels and certain major customers:
|
|
|
|
|
Channels of Distribution |
|
Customers |
|
Brands |
United States |
|
|
|
|
Department Stores
|
|
Macys Inc./ Carsons/Bon Ton
Stage Stores
|
|
Calvin Klein Jeans
Chaps |
|
|
|
|
|
Independent Retailers
|
|
Nordstrom/ Dillards
Belk
|
|
Calvin Klein Jeans
Calvin Klein Jeans and Chaps |
|
|
|
|
|
Chain Stores
|
|
Kohls
|
|
Chaps |
|
|
|
|
|
Membership Clubs
|
|
Sams Club and BJs
Costco
|
|
Calvin Klein Jeans and Chaps
Calvin Klein Jeans |
|
|
|
|
|
Other
|
|
Military
|
|
Calvin Klein Jeans and Chaps |
|
|
|
|
|
Europe
|
|
Company operated retail stores,
stores operated under shop-in-shop
and concession agreements
|
|
Calvin Klein Jeans |
|
|
E1 Corte Ingles
|
|
|
|
|
|
|
|
Canada
|
|
Hudson Bay Company and
Sears
Costco and Sams Club
|
|
Calvin Klein Jeans and Chaps
Calvin Klein Jeans and Chaps |
|
|
|
|
|
Mexico, Central and South America
|
|
Company operated retail stores
Liverpool and Sears
Sams Clubs
Stores operated under
distributor agreements
|
|
Calvin Klein Jeans and Chaps
Calvin Klein Jeans and Chaps
Calvin Klein Jeans and Chaps
Calvin Klein Jeans |
|
|
|
|
|
Asia
|
|
Company operated retail stores,
shop-in-shop/concession locations/stores
under retail licenses or distributor
agreements/direct wholesale distributors
|
|
Calvin Klein Jeans and Accessories |
The Sportswear Group generally markets its products for four retail selling seasons (Spring,
Summer, Fall and Holiday). New styles, fabrics and colors are introduced based upon consumer
preferences and market trends, and coincide with the appropriate selling season. The Sportswear
Group recorded 46.1%, 49.8% and 45.6% of its net revenues in the first halves of Fiscal 2009,
Fiscal 2008 and Fiscal 2007, respectively.
During Fiscal 2009, the Sportswear Group had operations in the United States, Canada, Mexico,
Central and South America, Europe, Asia, Australia and South Africa. The Sportswear Groups
products are entirely sourced from third-party suppliers worldwide.
The following table sets forth the domestic and international net revenues of the Sportswear
Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
|
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
412,085 |
|
|
|
37.8 |
% |
|
$ |
420,388 |
|
|
|
38.2 |
% |
|
$ |
405,188 |
|
|
|
43.1 |
% |
International |
|
|
679,080 |
|
|
|
62.2 |
% |
|
|
680,209 |
|
|
|
61.8 |
% |
|
|
533,959 |
|
|
|
56.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,091,165 |
|
|
|
100.0 |
% |
|
$ |
1,100,597 |
|
|
|
100.0 |
% |
|
$ |
939,147 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Intimate Apparel Group
The Intimate Apparel Group designs, sources and markets upper moderate to premium priced
intimate apparel and other products for women and better to premium priced mens underwear and
loungewear. Net revenues of the Intimate Apparel Group accounted for approximately 33.6% of the
Companys net revenues in Fiscal 2009.
The Intimate Apparel Group targets a broad range of consumers and provides products across a
wide range of price points. The Companys design team strives to design products of a price,
quality, fashion and style that meet its customers demands.
The following table sets forth the Intimate Apparel Groups brand names and the apparel price
ranges and types as of January 2, 2010:
|
|
|
|
|
Brand Name |
|
Price Range |
|
Type of Apparel |
Calvin Klein Underwear
|
|
Better to premium
|
|
Womens intimate apparel and
sleepwear and mens underwear
and loungewear |
Warners
|
|
Moderate to better
|
|
Womens intimate apparel |
Olga
|
|
Moderate to better
|
|
Womens intimate apparel |
Olgas Christina
|
|
Better
|
|
Womens intimate apparel |
Body Nancy Ganz/Bodyslimmers
|
|
Better to premium
|
|
Womens intimate apparel |
The Calvin Klein Underwear womens lines consist primarily of womens underwear, bras,
panties, daywear, loungewear and sleepwear. The Calvin Klein mens lines consist primarily of mens
underwear, briefs, boxers, T-shirts, loungewear and sleepwear. According to The NPD Group (NPD),
a market research firm, Calvin Klein mens underwear was the number two selling brand of mens
underwear in Fiscal 2009 and Fiscal 2008 in U.S. department stores participating in the surveys.
For womens underwear, Calvin Klein was the number four and number three selling brand of panties
in Fiscal 2009 and Fiscal 2008, respectively, in U.S. department stores participating in the
surveys. Calvin Klein was the number five selling brand of bras in Fiscal 2009 and Fiscal 2008 in
U.S. department stores participating in the surveys.
The Companys Intimate Apparel brands are distributed primarily through department stores,
independent retailers, chain stores, membership clubs, Company operated retail stores,
shop-in-shop/concession locations, stores operated under retail licenses or franchise and
distributor agreements, the Companys CKU.com internet website and, to a lesser extent, specialty
stores. The Intimate Apparel Groups Calvin Klein direct to consumer business has experienced
rapid growth and accounted for $162.5 million of the Intimate Apparel Groups net revenues in
Fiscal 2009 and $146.3 million of the Intimate Apparel Groups net revenues in Fiscal 2008,
representing increases of 41.9% and 27.8%, respectively, compared to $114.5 million of the Intimate
Apparel Groups net revenues in Fiscal 2007. In addition, the Company uses its design and sourcing
expertise to produce private label intimate apparel for customers that may not carry the Companys
branded products.
The following table sets forth, as of January 2, 2010, the Intimate Apparel Groups principal
distribution channels and certain major customers:
|
|
|
|
|
Channels of Distribution |
|
Customers |
|
Brands |
United States |
|
|
|
|
Department Stores
|
|
Macys Inc.
Carsons/Bon-Ton
|
|
Warners, Olgas Christina,Olga
and Calvin Klein Underwear |
|
Independent Retailers
|
|
Nordstrom, Dillards,
and Belk
|
|
Calvin Klein Underwear |
|
|
|
|
|
Chain Stores
|
|
Kohls, JCPenney and Sears
|
|
Warners, Olga, and private label |
|
|
|
|
|
Membership Clubs
|
|
Costco and Sams Club
|
|
Warners and Calvin Klein Underwear |
|
|
|
|
|
Canada
|
|
Hudson Bay Company,
Zellers, Sears and
Wal-Mart
Costco
Company operated retail stores
|
|
Warners, Olga, Body Nancy
Ganz/Bodyslimmers and Calvin Klein
Underwear
Calvin Klein Underwear
Calvin Klein Underwear |
|
|
|
|
|
Mexico, Central
and South America
|
|
Liverpool, Palacio de
Hierro, Suburbia and Sears
Sams Clubs
Costco
Company operated retail stores
|
|
Warners, Olga, Body Nancy
Ganz/Bodyslimmers and Calvin
Klein Underwear
Warners
Calvin Klein Underwear
Calvin Klein Underwear |
8
|
|
|
|
|
Channels of Distribution |
|
Customers |
|
Brands |
Europe
|
|
Harrods, House of Fraser,
Galeries Lafayette, Selfridges
Debenhams, Au Printemps,
Karstadt, Kaufhof and El Corte
Ingles
|
|
Calvin Klein Underwear
|
|
|
Company operated retail stores,
shop-in-shop/concession locations
and stores under retail licenses or
distributor agreements
|
|
Calvin Klein Underwear |
|
|
|
|
|
Asia
|
|
Company operated retail stores,
shop-in-shop/concession locations
and stores under retail licenses or
distributor agreements
|
|
Calvin Klein Underwear |
The Intimate Apparel Group generally markets its product lines for three retail-selling
seasons (Spring, Fall and Holiday). Its revenues are generally consistent throughout the year, with
47.3%, 48.3% and 43.9% of the Intimate Apparel Groups net revenues recorded in the first halves of
Fiscal 2009, 2008 and 2007, respectively.
The Intimate Apparel Group has operations in North America (U.S., Canada and Mexico), Central
and South America, Europe, Asia, Australia and South Africa. The Intimate Apparel Groups products
are sourced entirely from third parties.
The following table sets forth the domestic and international net revenues of the Intimate
Apparel Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
|
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
295,283 |
|
|
|
43.6 |
% |
|
$ |
308,119 |
|
|
|
43.9 |
% |
|
$ |
304,765 |
|
|
|
48.6 |
% |
International |
|
|
382,032 |
|
|
|
56.4 |
% |
|
|
394,133 |
|
|
|
56.1 |
% |
|
|
322,249 |
|
|
|
51.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
677,315 |
|
|
|
100.0 |
% |
|
$ |
702,252 |
|
|
|
100.0 |
% |
|
$ |
627,014 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group
The Swimwear Group designs, sources and markets moderate to premium priced swimwear, swim
accessories and related products and sub-licenses the Speedo label to suppliers of apparel and
other products in widely diversified channels of distribution. Net revenues of the Swimwear Group
accounted for 12.4% of the Companys net revenues in Fiscal 2009.
The following table sets forth the Swimwear Groups significant brand names and their apparel
price ranges and types:
|
|
|
|
|
Brand Name |
|
Price Range |
|
Type of Apparel |
|
|
|
|
|
Speedo
|
|
Moderate to premium
|
|
Mens and womens competitive
swimwear, competitive and non-
competitive swim accessories,
mens swimwear and coordinating
T-shirts, womens fitness swimwear,
fashion swimwear, footwear and
childrens swimwear |
|
|
|
|
|
Calvin Klein
|
|
Better to premium
|
|
Mens and womens swimwear |
|
|
|
|
|
Lifeguard
|
|
Upper moderate to better
|
|
Mens and womens swimwear and
related products |
9
The Company believes that Speedo is the pre-eminent competitive swimwear brand in the world.
Innovations by the Swimwear Group and its licensor, SIL, have led and continue to lead the
competitive swimwear industry. At the 2008 U.S. Olympic Swim Trials in Omaha, Nebraska a total of
nine world records were set at these Trials and all by athletes wearing Speedo swimwear. During
the 2008 Summer Olympics in Beijing, China, the worlds top swimmers wore Speedo swimwear. In
total, 91% (29 gold medals) of all swimming gold medals and 86% of all swimming medals awarded in
Beijing were won by athletes wearing Speedo swimwear.
Speedo competitive swimwear is primarily distributed through sporting goods stores, team
dealers, swim specialty shops and the Companys SpeedoUSA.com internet website. Speedo
competitive swimwear accounted for approximately 20.3% of the Swimwear Groups net revenues in
Fiscal 2009.
The Company capitalizes on the competitive Speedo image in marketing its Speedo brand fitness
and fashion swimwear by incorporating performance elements in the Companys more fashion-oriented
products. Speedo fitness and fashion swimwear and Speedo swimwear for children are distributed in
the U.S., Mexico, Canada and the Caribbean through department and specialty stores, independent
retailers, chain stores, sporting goods stores, team dealers, catalog retailers, membership clubs
and the Companys SpeedoUSA.com internet website. Speedo fashion swimwear and related products
accounted for approximately 26.5% of the Swimwear Groups net revenues in Fiscal 2009.
Speedo accessories, including swim goggles, water-based fitness products, electronics and
other swim and fitness-related products for adults and children, are primarily distributed through
sporting goods stores, chain stores, swim specialty shops, membership clubs and mass merchandisers.
Speedo accessories accounted for approximately $71.1 million of net revenues in Fiscal
2009, or approximately 28.3% of the Swimwear Groups net revenues. Swimwear Groups net
revenues also included $26.6 million (10.6% of the Swimwear Groups net revenues) from the sale of
Speedo footwear products. In addition, the SpeedoUSA.com internet website generated
approximately $9.2 million of net revenues (3.7% of the Swimwear Groups net revenues).
The Company designs, sources and sells a broad range of Calvin Klein fashion swimwear and
beachwear for men and women. Calvin Klein swimwear is distributed through department stores and
independent retailers in the U.S., Mexico, Canada and Europe. Calvin Klein swimwear accounted for
approximately 10.7% of the Swimwear Groups net revenues in Fiscal 2009.
The following table sets forth, as of January 2, 2010, the Swimwear Groups principal
distribution channels and certain major customers:
|
|
|
|
|
Channels of Distribution |
|
Customers |
|
Brands |
|
|
|
|
|
United States |
|
|
|
|
Department Stores
|
|
Macys Inc.
|
|
Speedo swimwear and accessories,
Calvin Klein swimwear |
|
|
|
|
|
Independent Retailers
|
|
Nordstrom, Dillards,
and Belk
|
|
Speedo swimwear,
Calvin Klein swimwear |
|
|
|
|
|
Chain Stores
|
|
JCPenney, Kohls and
Sears
|
|
Speedo swimwear and accessories, |
|
|
|
|
|
Membership Clubs
|
|
Costco and Sams Club
|
|
Speedo swimwear, active apparel
and accessories |
|
|
|
|
|
Mass Merchandisers
|
|
Target
|
|
Speedo accessories |
|
Other
|
|
Military, Victorias Secret
Catalog and The Sports
Authority, team dealers
|
|
Speedo swimwear and accessories,
Lifeguard, Calvin Klein swimwear |
|
|
|
|
|
Canada
|
|
Hudson Bay Company and
Sears
Costco and Sams Clubs
|
|
Speedo swimwear and accessories,
Calvin Klein
Speedo swimwear and accessories |
|
|
|
|
|
Mexico, Central and South America
|
|
Liverpool, Palacio De
Hierro, Marti, Wal-Mart and
Costco
|
|
Speedo swimwear and accessories,
Calvin Klein
Speedo swimwear and accessories |
|
|
|
|
|
Europe
|
|
El Corte Ingles, House of Fraser,
La Rinascente and Company-owned
stores/stores operated under
distributor agreements
|
|
Calvin Klein swimwear |
10
The Swimwear Group generally markets its products for three retail selling seasons (Cruise,
Spring and Summer). New styles, fabrics and colors are introduced based upon consumer preferences
and market trends and coincide with the appropriate selling season. The swimwear business is
seasonal. Approximately 67.8%, 70.1% and 69.9% of the Swimwear Groups net revenues were recorded
in the first halves of Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
The Swimwear Group has operations in the U.S., Mexico, Canada and Europe. All of the Swimwear
Groups products are sourced from third-party contractors primarily in the U.S., Mexico, Europe and
Asia.
The following table sets forth the domestic and international net revenues of the Swimwear
Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
Net |
|
|
% of |
|
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|
|
(in thousands of dollars) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
209,317 |
|
|
|
83.3 |
% |
|
$ |
213,696 |
|
|
|
82.2 |
% |
|
$ |
217,199 |
|
|
|
85.7 |
% |
International |
|
|
41,828 |
|
|
|
16.7 |
% |
|
|
46,304 |
|
|
|
17.8 |
% |
|
|
36,219 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
251,145 |
|
|
|
100.0 |
% |
|
$ |
260,000 |
|
|
|
100.0 |
% |
|
$ |
253,418 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
The Companys products are widely distributed to department and specialty stores, independent
retailers, chain stores and membership clubs in North America, Asia, Europe, South America,
Australia and South Africa. No single customer accounted for more than 7% of the Companys net
revenue in Fiscal 2009. No single customer accounted for more than 7% of the Companys net revenue
in Fiscal 2008. No single customer accounted for more than 8% of the Companys net revenue in
Fiscal 2007.
The Company offers a diversified portfolio of brands across virtually all distribution
channels to a wide range of customers. The Company utilizes focus groups, market research and
in-house and licensor design staffs to align its brands with the preferences of consumers. The
Company believes that this strategy reduces its reliance on any single distribution channel and
allows it to market products with designs and features that appeal to a wide range of consumers at
varying price points.
Advertising, Marketing, and Promotion
The Company devotes significant resources to advertising and promoting its various brands to
increase awareness of its products with retail consumers and, consequently, to increase consumer
demand.
Total advertising, marketing and promotion expense (including cooperative advertising programs
whereby the Company reimburses customers for a portion of the cost incurred by the customer in
placing advertisements featuring its products) was $100.2 million, $118.8 million and $99.1 million
for Fiscal 2009, Fiscal 2008 and 2007, respectively. The Company focuses its advertising and
promotional spending on brand and/or product-specific advertising, primarily through point of sale
product displays, visuals, individual in-store promotions and magazine and other print
publications. In addition, the Swimwear Group sponsors a number of world-class swimmers and divers
who wear its products in competition and participate in various promotional activities on behalf of
the Speedo brand. The Companys Swimwear Group incurred approximately $3.4 million of marketing
expenses in Fiscal 2008 primarily related to programs associated with the Summer Olympics in
Beijing, China during August 2008.
The Companys licenses for the Calvin Klein and Chaps trademarks include provisions requiring
the Company to spend a specified percentage (ranging from 1% to 4%) of revenues on advertising and
promotion related to the licensed products. The Company also benefits from general advertising
campaigns conducted by its licensors. Though some of these advertising campaigns do not focus
specifically on the Companys licensed products and often include the products of other licensees
in addition to its own, the Company believes it benefits from the general brand recognition that
these campaigns generate.
11
Sales
The Companys wholesale customers are served by sales representatives who are generally
assigned to specific brands and products. In addition, the Company has customer service departments
for each business unit that assist the Companys sales representatives and customers in tracking
goods available for sale, determining order and shipping lead times and tracking the status of open
orders.
The Company utilizes Electronic Data Interchange programs (EDI) wherever possible, which
permit it to receive purchase
orders electronically from customers and, in some cases, to transmit invoices electronically
to customers. EDI helps the Company ensure that its customers receive its products in a timely and
efficient manner.
Distribution
As of January 2, 2010, the Company distributed its products to its wholesale customers and
retail stores from various distribution facilities and distribution contractors located in the U.S.
(eight facilities), Canada (one facility), Mexico (one facility), China (two facilities), Hong Kong
(two facilities), Italy (two facilities), Korea (two facilities), Australia (one facility), the
Netherlands (one facility), Argentina (one facility), Brazil (two facilities), Chile (one facility)
and Peru (one facility). Several of the Companys facilities are shared by more than one of its
business units and/or operating segments. The Company owns one, leases eleven and uses third-party
services for thirteen of its distribution facilities. See Item 2. Properties.
Raw Materials and Sourcing
The Companys products are comprised of raw materials which consist principally of cotton,
wool, silk, synthetic and cotton-synthetic blends of fabrics and yarns. Raw materials are generally
available from multiple sources. Historically, neither the Company, nor, to the Companys
knowledge, any of its third-party contractors, have experienced any significant shortage of raw
materials.
Substantially all of the Companys products sold in North America, South America and Europe
are imported and are subject to various customs laws. See -Government Regulations. The Company
seeks to maintain a balanced portfolio of sourcing countries and factories worldwide to ensure
continuity in supply of product.
All of the Companys products are produced by third party suppliers. Sourcing from third-party
manufacturers allows the Company to maximize production flexibility while avoiding significant
capital expenditures, work-in-process inventory buildups and the costs of managing a large
production work force. The Company regularly inspects products manufactured by its suppliers to
seek to ensure that they meet the Companys quality and production standards.
The Company monitors all of its contracted production facilities to ensure their continued
human rights and labor compliance and adherence to all applicable laws and the Companys own
business partner manufacturing guidelines. All suppliers are required by the Company to execute an
acknowledgment confirming their obligation to comply with the Companys guidelines.
In addition, the Company has engaged third-party labor compliance auditing companies to
monitor its facilities and those of its contractors. These auditing companies periodically audit
all the Companys foreign and domestic contractors payroll records, age certificates, compliance
with local labor laws, security procedures and compliance with the Companys business partner
manufacturing guidelines. These auditing companies also conduct unannounced visits, surveillance
and random interviews with contractors, employees and supervisors.
Trademarks and Licensing Agreements
The Company owns and licenses a portfolio of highly recognized brand names. Most of the
trademarks used by the Company are either owned, licensed in perpetuity or, in the case of Calvin
Klein Jeans, licensed for terms extending through 2044 (in the U.S.) and 2046 (in Europe and Asia).
The Companys Core Brands (as defined below) have been established in their respective markets for
extended periods and have attained a high level of consumer awareness. The Speedo brand has been in
existence for 82 years, and the Company believes Speedo is the dominant competitive swimwear brand
in the United States. The Warners and Olga brands have been in existence for 137 and 70 years,
respectively, and Calvin Klein and Chaps have each been in existence for more than 25 years.
The Company regards its intellectual property in general and, in particular, its owned
trademarks and licenses, as its most valuable assets. The Company believes the trademarks and
licenses have substantial value in the marketing of its products. The Company has protected its
trademarks by registering them with the U.S. Patent and Trademark Office and with governmental
agencies
in other countries where its products are manufactured and sold. The Company works vigorously
to enforce and protect its trademark rights by engaging in regular market reviews, helping local
law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters
against third parties infringing or denigrating its trademarks and initiating litigation as
necessary. The Company also works with trade groups and industry participants seeking to strengthen
laws relating to the protection of intellectual property rights in markets around the world.
12
Although the specific terms of each of the Companys license agreements vary, generally the
agreements provide for minimum royalty payments and/or royalty payments based on a percentage of
net sales. The license agreements generally also grant the licensor the right to approve any
designs marketed by the Company.
Intimate Apparel Group
All of the Calvin Klein trademarks (including all variations and formatives thereof) for all
products and services in the Intimate Apparel Group are owned by the Calvin Klein Trademark Trust.
The trust is co-owned by CKI and the Company. The Class B and C Series Estates of the trust
correspond to the Calvin Klein trademarks for mens, womens and childrens underwear, intimate
apparel, loungewear and sleepwear and are owned by the Company. Accordingly, as owner of the Class
B and C Estate Shares of the trust corresponding to these product categories, the Company is the
beneficial owner of the Calvin Klein trademarks for mens, womens and childrens underwear,
intimate apparel, loungewear and sleepwear throughout the entire world.
Sportswear Group
The Company has a license to develop, manufacture and market designer jeanswear products under
the Calvin Klein trademark in North, South and Central America, Europe, Asia and Australia.
In July 2004, the Company acquired the license to open retail stores to sell jeanswear and
ancillary products bearing the Calvin Klein marks in Central and South America. In addition, in
connection with the CKJEA Acquisition, the Company expanded the territory covered by the retail
stores license to include Mexico and Canada. The initial terms of these licenses expire on December
31, 2034 and are extendable by the Company for a further ten-year term expiring on December 31,
2044 if the Company achieves certain sales targets in the U.S., Mexico and Canada. In January
2006, the Company acquired certain Calvin Klein accessories licenses as part of the CKJEA
Acquisition (as discussed above and in - Acquisitions,
Dispositions and Discontinued Operations).
In January 2006, as part of the CKJEA Acquisition, the Company acquired the companies that
operate the license and related wholesale and retail businesses of Calvin Klein Jeans and jeans
accessories in Europe and Asia and the CK Calvin Klein bridge line of sportswear and accessories
in Europe. In connection with the acquisition, the Company acquired various exclusive license
agreements and entered into amendments to certain of its existing license agreements with CKI (in
its capacity as licensor). Under these agreements the Company has licenses to develop,
manufacture, distribute and market, and to open retail stores to sell, bridge apparel and
accessories under the CK/Calvin Klein trademark and service mark in Europe (countries constituting
the European Union at May 1, 2004), Norway, Switzerland, Monte Carlo, Vatican City, Liechtenstein,
Iceland and parts of Eastern Europe, Russia, the Middle East and Africa. These licenses extend
through December 31, 2046, provided the Company achieves certain minimum sales targets.
In connection with the CKJEA Acquisition, the Company also acquired the licenses to develop,
manufacture, distribute and market, and to open retail stores to sell, jeans apparel and
accessories under the Calvin Klein and/or CK/Calvin Klein trademark and service mark in the forms
of the logos Calvin Klein Jeans and/or CK/Calvin Klein Jeans in Japan, China, South Korea and
Rest of Asia (Hong Kong, Thailand, Australia, New Zealand, Philippines, Taiwan, Singapore,
Malaysia, Indonesia, New Guinea, Vietnam, Cambodia, Laos, Myanmar, Macau and the Federated State of
Micronesia) and parts of Western Europe, the Middle East, Egypt, Eastern Europe and Southern
Africa. These licenses also extend through December 31, 2046, provided the Company achieves
certain minimum sales targets.
In January 2008, the Company acquired rights pursuant to the 2008 CK Licenses which include:
(i) rights to operate Calvin Klein Jeanswear Accessories Stores in Europe, Eastern Europe, Middle
East, Africa and Asia, as defined; (ii) rights to operate Calvin Klein Jeanswear Accessories Stores
in Central and South America (excluding Canada and Mexico, which is otherwise included in the
underlying grant of rights to the company to operate Calvin Klein Jeanswear retail stores in
Central and South America); (iii) rights to operate CK/Calvin Klein Bridge Accessories Stores in
Europe, Eastern Europe, Middle East and Africa, as defined; (iv) rights to operate CK/Calvin Klein
Bridge Accessories Stores in Central and South America (excluding Canada and Mexico, which is
otherwise included in the underlying grant of rights to the Company to operated Calvin Klein Bridge
Accessories Stores in Central and South America); and (v) e-commerce rights in the Americas, Europe
and Asia for Calvin Klein Jeans and for Calvin Klein jeans accessories. Each of the 2008 CK
Licenses are long-term arrangements. In addition, pursuant to the Transfer Agreement, the Company
had entered into negotiations with respect to a grant of rights to sublicense and distribute Calvin
Klein Golf apparel and golf related accessories in department stores, specialty stores and other
channels in Asia. During the third quarter of Fiscal 2009, the Company decided to discontinue its
Calvin Klein Golf business.
13
The Company has the exclusive right to use the Chaps trademark for mens sportswear,
jeanswear, activewear, sports shirts, outerwear and swimwear in the U.S. and its territories and
possessions, including Puerto Rico, Mexico and Canada and has rights of first refusal with respect
to Europe. During Fiscal 2008, the Company extended its license through December 31, 2013 by
exercising the first of two five-year renewal options. Pursuant to the terms of the license, the
Company paid approximately $2.0 million associated with the renewal of this license. The Company
has the right to renew the license for an additional five-year term up to and including December
31, 2018, provided that the Company has achieved certain levels of minimum earned royalties.
Swimwear Group
The Company has license agreements in perpetuity with SIL which permit the Company to design,
manufacture and market certain mens, womens and childrens apparel, including swimwear,
sportswear and a wide variety of other products, using the Speedo trademark and certain other
trademarks. The Companys license to use Speedo and other trademarks was granted in perpetuity
subject to certain conditions and is exclusive in the U.S. and its territories and possessions,
Canada, Mexico and the Caribbean. The license agreements provide for minimum royalty payments to be
credited against future royalty payments based on a percentage of net sales. The license agreements
may be terminated with respect to a particular territory in the event the Company does not pay
royalties or abandons the trademark in such territory. Moreover, the license agreements may be
terminated in the event the Company manufactures, or is controlled by a company that manufactures,
racing/competitive swimwear, swimwear caps or swimwear accessories under a different trademark, as
specifically defined in the license agreements. The Company generally may sublicense the Speedo
trademark within the geographic regions covered by the licenses. SIL retains the right to use or
license the Speedo trademark in other jurisdictions and actively uses or licenses the Speedo
trademark throughout the world outside of the Companys licensed territory.
The Company also has a license to develop, manufacture and market womens and juniors
swimwear under the Calvin Klein and CK Calvin Klein trademarks in the approved forms as designated
by the licensor worldwide and mens swimwear under the Calvin Klein mark in the form designated by
the licensor worldwide. During Fiscal 2009, the Company extended these licenses for a further
five-year term expiring on December 31, 2014 by exercising its five-year renewal option for each
license.
In July 1995, the Company entered into a license agreement with Lifeguard Licensing Corp.
Under the license agreement, the Company has the exclusive right to manufacture, source,
sublicense, distribute, promote and advertise Lifeguard apparel worldwide. In September 2003, the
Lifeguard license was amended and extended to add other product categories, namely accessories and
sporting equipment. In 2008, the Lifeguard license was further amended and extended to add other
product categories, namely performance and athletic training equipment. The current term of the
license agreement expires on June 30, 2012. The agreement includes four renewal options, each of
which permits the Company to extend for an additional five-year term (through June 30, 2032)
subject to compliance with certain conditions.
On an ongoing basis, the Company evaluates entering into distribution or license agreements
with other companies that would permit those companies to market products under the Companys
trademarks. In evaluating a potential distributor or licensee, the Company generally considers the
experience, financial stability, manufacturing performance and marketing ability of the proposed
licensee.
Certain of the Companys license agreements with third parties will expire by their terms over
the next several years. There can be no assurance that the Company will be able to negotiate and
conclude extensions of such agreements on similar economic
terms or at all.
International Operations
In addition to its operations in the U.S., the Company has operations in Canada, Mexico,
Central and South America, Europe, Asia, Australia and Africa. The Companys products are sold in
over 100 countries worldwide. Each of the Companys international operations engages in sales,
sourcing, distribution and/or marketing activities. International operations generated $1,102.9
million, or 54.6% of the Companys net revenues in Fiscal 2009 compared with $1,120.6 million, or
54.3% of the Companys net revenues in Fiscal 2008 and $892.4 million, or 49.0% of net revenues, in
Fiscal 2007. International operations generated operating income of $140.7 million, $135.2 million
and $141.5 million (representing 54.6%, 59.4% and 77.8%, respectively, of the operating income
generated by the Companys business groups) in Fiscal 2009, Fiscal 2008 and Fiscal 2007,
respectively. Operating income from international operations includes $5.0 million, $28.1 million
and $3.9 million of restructuring charges in Fiscal 2009, Fiscal 2008 and Fiscal 2007,
respectively.
The Company has many potential sources of supply and believes a disruption at any one facility
would not have a material adverse effect on the Company. The Company maintains insurance policies
designed to substantially mitigate the financial effects of disruptions in its sources of supply.
The movement of foreign currency exchange rates affects the Companys results of operations.
For further discussion of certain of the risks involved in the Companys foreign operations,
including foreign currency exposure, see Item 1A. Risk Factors and Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity.
14
Competition
The apparel industry is highly competitive. The Company competes with many domestic and
foreign apparel suppliers, some of which are larger and more diversified and have greater financial
and other resources than the Company. In addition to competition from other apparel suppliers, the
Company competes in certain product lines with department stores, mass merchandisers and specialty
store private label programs.
The Company offers a diversified portfolio of brands across a wide range of price points in
many channels of distribution in an effort to appeal to all consumers. The Company competes on the
basis of product design, quality, brand recognition, price, product differentiation, marketing and
advertising, customer service and other factors. Although some of its competitors have greater
sales, the Company does not believe that any single competitor dominates any channel in which the
Company operates. The Company believes that its ability to serve multiple distribution channels
with a diversified portfolio of products under widely recognized brand names distinguishes it from
many of its competitors. See Item 1A. Risk Factors.
Government Regulations
The Company is subject to federal, state and local laws and regulations affecting its
business, including those promulgated under the Occupational Safety and Health Act, the Consumer
Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the
rules and regulations of the Consumer Products Safety Commission and various environmental laws and
regulations. The Companys international businesses are subject to similar regulations in the
countries where they operate. The Company believes that it is in compliance in all material
respects with all applicable governmental regulations.
The Companys operations are also subject to various international trade agreements and
regulations such as the North American Free Trade Agreement, the Central American Free Trade
Agreement, the Africa Growth & Opportunity Act, the Israel & Jordan Free Trade Agreements, the
Andean Agreement, the Caribbean Basin Trade Partnership Act and the activities and regulations of
the World Trade Organization (WTO). The Company believes that these trade agreements generally
benefit the Companys business by reducing or eliminating the duties and/or quotas assessed on
products manufactured in a particular country; however, the elimination of quotas with respect to
certain countries could adversely affect the Company as a result of increased competition from such
countries. See Item 1A. Risk Factors. In addition, trade agreements can also impose requirements
that negatively affect the
Companys business, such as limiting the countries from which it can purchase raw materials
and setting quotas on products that may be imported from a particular country. The Company monitors
trade-related matters pending with the U.S. government for potential positive or negative effects
on its operations.
Employees
As of January 2, 2010, the Company employed approximately 5,400 employees, approximately 13%
of whom were either represented by labor unions or covered by collective bargaining agreements. The
Company considers labor relations with its employees to be satisfactory and has not experienced any
significant interruption of its operations due to labor disagreements. During Fiscal 2009, the
Company reduced its workforce by 232 employees as part of a reduction in force initiative which
commenced in the fourth quarter of 2008 and in connection with the consolidation of its European
operations. See Note 4 to Notes to Consolidated Financial Statements.
Backlog
As relates to its continuing operations, the Companys Swimwear Group (due to the seasonal
nature of its operations) had unfilled customer orders (consisting of both confirmed and
unconfirmed orders) of approximately $105.0 million as of January 2, 2010 and $130.0 million as of
January 3, 2009. A substantial portion of net revenues of the Companys other businesses is based
on orders for immediate delivery and, therefore, backlog is not necessarily indicative of future
net revenues.
15
Executive Officers of the Registrant
The executive officers of the Company, their age and their position as of February 22, 2010
are set forth below:
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
Joseph R. Gromek |
|
63 |
|
Director, President and Chief Executive Officer |
Lawrence R. Rutkowski |
|
51 |
|
Executive Vice President and Chief Financial Officer |
Helen McCluskey |
|
54 |
|
PresidentIntimate Apparel and Swimwear Groups |
Dwight Meyer |
|
57 |
|
PresidentGlobal Sourcing, Distribution and Logistics |
Frank Tworecke |
|
63 |
|
PresidentSportswear Group |
Stanley P. Silverstein |
|
57 |
|
Executive Vice PresidentInternational Strategy and Business Development |
Jay A. Dubiner |
|
46 |
|
Senior Vice President, General Counsel and Secretary |
Elizabeth Wood |
|
48 |
|
Senior Vice PresidentHuman Resources |
Mr. Gromek has served as the Companys President and Chief Executive Officer since April 2003,
at which time he was also elected to the Board of Directors. From 1996 to 2002, Mr. Gromek served
as President and Chief Executive Officer of Brooks Brothers, Inc., a clothing retailer. From
January 2002 until he joined the Company in April 2003, Mr. Gromek worked as an independent
consultant. Over the last 25 years, Mr. Gromek has held senior management positions with Saks Fifth
Avenue, Limited Brands, Inc. and AnnTaylor Stores Corporation. Mr. Gromek is a member of the Board
of Directors of Wolverine World Wide, Inc., a footwear and apparel company. Mr. Gromek also serves
on the Board of Directors of Volunteers of America, Ronald McDonald House, Stanley M. Proctor
Company and the American Apparel & Footwear Association; as a member of the Board of Governors of
the Parsons School of Design; as a member of the Board of Trustees of the Trevor Day School and as
a member of the Advisory Board of the Fashion Institute of Technology.
Mr. Rutkowski currently serves as the Companys Executive Vice President and Chief Financial
Officer. From September 2003 until March 2005, Mr. Rutkowski served as the Companys Senior Vice
President and Chief Financial Officer. From December 1999 to June 2003, he served as Executive Vice
President and Chief Financial Officer at Primedia, Inc., a targeted media company. From November
1993 to December 1999, he served at National Broadcasting Company/General Electric as Senior Vice
President and Chief Financial Officer Strategic Business Development and Controller of Corporate
Finance. Previously, Mr. Rutkowski held a
senior management position at Walt Disney Studios.
Ms. McCluskey joined the Company in July 2004 as Group President-Intimate Apparel and in June
2007, also assumed global responsibility for the Companys Swimwear brands. She is responsible for
all aspects of the Companys intimate apparel and swimwear brands including Calvin Klein underwear
and swimwear, Warners, Olga, Body Nancy Ganz and Speedo. Prior to joining the Company, Ms.
McCluskey served as Group President of the Moderate Womens Sportswear division of Liz Claiborne
Corporation from August 2001 to June 2004. Previously, she spent 18 years at Sara Lee Corporations
intimate apparel units where she held executive positions in marketing, operations and general
management, including President of Playtex Apparel from 1999 to 2001.
Mr. Meyer currently serves as the Companys President-Global Sourcing, Distribution and
Logistics. Mr. Meyer is responsible for all aspects of the Companys worldwide sourcing,
distribution and logistics operations. From April 2005 until March 2007, Mr. Meyer served as the
Companys President-Global Sourcing. Prior to joining the Company, Mr. Meyer served as Executive
Vice President of Global Sourcing of Ann Taylor Stores Corporation, a specialty clothing retailer
of womens apparel, shoes and accessories, from 1996 until April 2005. Previously, he served as
President and Chief Operating Officer of C.A.T. (a joint venture between Ann Taylor Stores
Corporation and Cygne Design) and Vice President, Sourcing for the Abercrombie & Fitch division of
M.A.S.T. Industries.
Mr. Tworecke joined the Company as Group President-Sportswear in May 2004. From November 1999
to April 2004, Mr. Tworecke served at Bon-Ton Stores, a department store operatorfrom June 2000 to
April 2004 as President and Chief Operating Officer and from November 1999 to June 2000 as Vice
Chairman. Previously, he was President and Chief Operating Officer of Jos. A. Bank. Mr. Tworecke
has also held senior management positions with other specialty and department store retailers
including MGR, Inc., Richs Lazarus Goldsmith (now known as Macys), and John Wanamaker. In
addition, Mr. Tworecke is a member of the Board of Advisors of Grafton-Fraser Inc., a private,
Toronto-based mens apparel retailer, and a member of the Business Advisory Council of the
Department of Applied Economics and Management of Cornell University.
Mr. Silverstein currently serves as the Companys Executive Vice President-International
Strategy and Business Development. From March 2005 until January 2006, Mr. Silverstein served as
our Executive Vice President-Corporate Development. From March 2003 to March 2005, Mr. Silverstein
served as our Senior Vice President-Corporate Development and served as our Chief Administrative
Officer from December 2001 until January 2006. Mr. Silverstein served as the Companys Vice
President and General Counsel from December 1990 until February 2003 and as its Secretary from
January 1987 until May 2003. In May 2004, Mr. Silverstein, without admitting or denying the
findings, entered into a settlement with the Securities and Exchange Commission (SEC) pursuant to
which the SEC found that Mr. Silverstein had willfully aided and abetted and caused certain
violations by the Company of the federal securities laws and issued an administrative order
requiring that Mr. Silverstein cease and desist from causing any violations and any future
violations of such laws.
16
Mr. Dubiner joined the Company in September 2008 as Senior Vice President, General Counsel and
Corporate Secretary.
Prior to this, Mr. Dubiner served as Of Counsel for Paul, Hastings, Janofsky & Walker, LLP from
April 2006 until August 2008. Previously, he held the position of Executive Vice President,
Corporate Development & General Counsel for Martha Stewart Living Omnimedia, Inc. from February
2004 until January 2006. Prior to this, Mr. Dubiner provided legal and corporate development
consulting services to clients primarily in the media industry. From February 2000 to March 2002,
he served as Senior Vice President, Business Development & Strategic Planning for a division of The
Universal Music Group. Mr. Dubiner was an associate in the corporate department of the New York law
firm of Paul Weiss Rifkind Wharton & Garrison from September 1993 to February 2000 where he
specialized in mergers and acquisitions. He has an additional 2 years experience practicing law at
the law firm of Osler Hoskin & Harcourt in Toronto, Canada.
Ms. Wood joined the Company as Senior Vice President-Human Resources in September 2005. From
May 2002 to August 2005, Ms. Wood served as a consultant for Breakthrough Group, a consulting
company that focuses on executive and employee training and development. From May 1996 to February
2002, Ms. Wood served as the Executive Vice President of Human Resources of Brooks Brothers, Inc.
Previously, Ms. Wood served as Corporate Human Resources Director of Marks and Spencer Group, plc.
Website Access to Reports
The Companys internet website is http://www.warnaco.com. The Company makes available free of
charge on its website (under the heading SEC Filings) its SEC filings, including its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the SEC. The Companys website address is provided as an
inactive textual reference only. The information provided on the Companys website is not part of
this Annual Report on Form 10-K, and is not incorporated by reference.
In addition, the public may read and copy any materials that the Company files with the SEC at
the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Additional information required by this Item 1 of Part I is incorporated by reference to Note
5 of Notes to Consolidated Financial Statements.
Item 1A. Risk Factors
In this Item 1A, the terms we, us and our refer to The Warnaco Group, Inc. and its
consolidated subsidiaries.
Our business, operations and financial condition are subject to various risks and
uncertainties. The most significant of these risks include those described below; however, there
may be additional risks and uncertainties not presently known to us or that we currently consider
immaterial. If any of the events or circumstances described in the following risk factors occur,
our business, financial condition or results of operations may suffer, and, among other things, the
trading price of our common stock, par value $0.01 per share (Common Stock) could decline. These
risk factors should be read in conjunction with the other information in this Annual Report on Form
10-K and in the other documents that we file from time to time with the SEC.
Recent and future economic conditions, including turmoil in the financial and credit markets, may
adversely affect our business.
Recent economic conditions may adversely affect our business, our customers and our financing
and other contractual arrangements. In addition, conditions may remain depressed in the future or
may be subject to further deterioration. Recent or future developments in the U.S. and global
economies may lead to a reduction in consumer spending overall, which could have an adverse impact
on sales of our products. Similarly, such events could adversely affect the businesses of our
wholesale and retail customers, which may, among other things, result in financial difficulties
leading to restructurings, bankruptcies, liquidations and other unfavorable events for our
customers, and may cause such customers to reduce or discontinue orders of our products.
Tightening of the credit markets could also make it difficult for our customers to obtain credit to
purchase our products, which could adversely affect our results of operations. A significant
adverse change in a customers financial and/or credit position could also require us to assume
greater credit risk relating to that customers receivables or could limit our ability to collect
amounts related to previous purchases by that customer. Recent and future economic conditions may
also adversely affect third parties that source certain of our products, which could adversely
affect our results of operations.
17
Tightening of the credit markets and recent or future turmoil in the financial markets could
also make it more difficult for us to refinance our existing indebtedness (if necessary), to enter
into agreements for new indebtedness or to obtain funding through the issuance of the Companys
securities. Worsening economic conditions could also result in difficulties for financial
institutions (including bank failures) and other parties that we may do business with, which could
potentially impair our ability to access financing under existing arrangements or to otherwise
recover amounts as they become due under our other contractual arrangements. Our inability to
borrow sufficient funds when needed could have a material negative impact on our ability to conduct
our business. We continue to monitor the creditworthiness of our lenders. We expect that we will be
able to obtain needed funds when requested. However, in the event that such funds are not
available, we may have to delay certain capital expenditures or plans to expand our business, to
scale back operations and/or raise capital through the sale of our equity or debt securities. There
can be no assurance that we would be able to sell our equity or debt securities on terms that are
satisfactory.
In addition, our stock price has experienced, and could continue to experience in the future,
significant declines and volatility. For example, during the period between May 15, 2008 and
February 22, 2010 the trading price of our common stock as reported on the New York Stock Exchange
ranged from a high of $53.89 to a low of $12.22. Our stock price may fluctuate as a result of many
factors (many of which are beyond our control), including recent global economic conditions and
broad market fluctuations, public perception of the prospects for the apparel industry and other
factors described in this Item 1A.
The worldwide apparel industry is heavily influenced by general economic conditions.
The apparel industry is highly cyclical and heavily dependent upon the overall level of
consumer spending. Purchases of apparel and related goods tend to be highly correlated with cycles
in the disposable income of consumers. Our wholesale customers may anticipate and respond to
adverse changes in economic conditions and uncertainty by reducing inventories and canceling
orders. Accordingly, a reduction in consumer spending in any of the regions in which we compete as
a result of any substantial deterioration in general economic conditions (including as a result of
uncertainty in world financial markets, weakness in the credit markets, the recent housing slump in
the U.S., increases in the price of fuel, international turmoil or terrorist attacks) or increases
in interest rates could adversely affect the sales of our products.
We have foreign currency exposures relating to buying, selling and financing in currencies other
than the U.S. dollar, our functional currency.
We have significant foreign currency exposure related to foreign denominated revenues and
costs, which must be translated into U.S. dollars. Fluctuations in foreign currency exchange rates
(particularly any strengthening of the U.S. dollar relative to the Euro, Canadian dollar, British
pound, Korean won, Mexican peso and Brazilian real) may adversely affect our reported earnings and
the comparability of period-to-period results of operations. In addition, while certain currencies
(notably the Hong Kong dollar and Chinese yuan) are currently fixed or managed in value in relation
to the U.S. dollar by foreign central banks or governmental entities, such conditions may change,
thereby exposing us to various risks as a result.
Certain of our foreign operations purchase products from suppliers denominated in U.S. dollars
and Euros, which may expose such operations to increases in cost of goods sold (thereby lowering
profit margins) as a result of foreign currency fluctuations. Our exposures are primarily
concentrated in the Euro, Canadian dollar, British pound, Korean won and Mexican peso. Changes in
currency exchange rates may also affect the relative prices at which we and our foreign competitors
purchase and sell products in the same market and the cost of certain items required in our
operations. In addition, certain of our foreign operations have receivables or payables denominated
in currencies other than their functional currencies, which exposes such operations to foreign
exchange losses as a result of foreign currency fluctuations. We have instituted foreign currency
hedging programs to mitigate the effect of foreign currency fluctuations on our operations.
However, management of our foreign currency exposure may not sufficiently protect us from
fluctuations in foreign currency exchange rates, which could have an adverse effect on our
business, results of operations and financial condition.
The apparel industry is subject to constantly changing fashion trends and if we misjudge consumer
preferences, the image of one or more of our brands may suffer and the demand for our products may
decrease.
The apparel industry is subject to shifting consumer demands and evolving fashion trends both
in domestic and overseas markets and our success is dependent upon our ability to anticipate and
promptly respond to these changes. Failure to anticipate, identify or promptly react to changing
trends, styles or brand preferences may result in decreased demand for our products, as well as
excess inventories and markdowns, which could have an adverse effect on our results of operations.
In addition, if we misjudge consumer preferences, the brand image of our products may be impaired,
which would adversely affect our business.
18
The apparel industry is subject to pricing pressures that may require us to lower the prices we
charge for our products.
Prices in the apparel industry have been declining over the past several years, primarily as a
result of the trend to move manufacturing operations offshore, the elimination of certain trade
quotas, the introduction of new manufacturing technologies, growth of the mass retail channel of
distribution, increased competition and consolidation in the retail industry. We and our
competitors source a significant portion of products from developing countries to achieve lower
costs, primarily because labor costs are lower offshore. Certain of our competitors may be able to
source their products at lower costs than ours, and use these cost savings to reduce their prices.
Prices may also decline as a result of new manufacturing technologies (which enable manufacturers
to produce goods on a more cost effective basis), increases in sales through the mass retail
channel of distribution (which retailers seek to sell their products at discounted prices) or
consolidation in the retail industry (which could result in larger customers with greater
negotiating leverage).
To remain competitive, we must adjust our prices from time to time in response to these
industry-wide pricing pressures. In addition, certain of our customers seek allowances, incentives
and other forms of economic support. Our profitability may be negatively affected by these pricing
pressures if we are forced to reduce our prices but are unable to reduce our production or other
operating costs. Similarly, our margins may also suffer if our production costs increase and we
are unable to increase the prices we charge for our products.
The markets in which we operate are highly competitive and we may not be able to compete
effectively.
The apparel industry is extremely competitive. We compete with many domestic and foreign
apparel manufacturers and distributors, some of which are larger, more diversified and have greater
financial and other resources than us. This competition could cause reduced unit sales or prices,
or both, which could adversely affect us. We compete on the basis of a variety of factors,
including:
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product quality; |
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brand recognition; |
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price; |
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product differentiation (including product innovation); |
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sourcing and distribution expertise and efficiency; |
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marketing and advertising; and |
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customer service. |
Our ability to remain competitive in these areas will, in large part, determine our future
success. Our failure to compete successfully could adversely affect our business.
Increases in the prices of raw materials used to manufacture our products or increases in costs to
transport our products could materially increase our costs and decrease our profitability.
The principal fabrics used in our business are made from cotton, wool, silk, synthetic and
cotton-synthetic blends. The prices we pay for these fabrics are dependent on the market prices for
the raw materials used to produce them, primarily cotton and chemical components of synthetic
fabrics. These raw materials are subject to price volatility caused by weather, supply conditions,
government regulations, energy costs, economic climate and other unpredictable factors.
Fluctuations in petroleum prices may also influence the prices of related items such as chemicals,
dyestuffs and polyester yarn as well as the costs we incur to transport products from our suppliers
and costs we incur to distribute products to our customers. Any raw material price increase or
increase in costs related to the transport of our products (primarily petroleum costs) could
increase our cost of sales and decrease our profitability unless we are able to pass higher prices
on to our customers. In addition, if one or more of our competitors is able to reduce its
production costs by taking greater advantage of any reductions in raw material prices or favorable
sourcing agreements, we may face pricing pressures from those competitors and may be forced to
reduce our prices or face a decline in net sales, either of which could have an adverse effect on
our business, results of operations or financial condition.
19
Shortages in the supply of sourced goods, difficulties encountered by the third parties that source
certain of our products, or interruptions in production facilities owned by our third party
contractors or in our distribution operations could result in difficulty in procuring, producing
and distributing our products.
We seek to secure and maintain favorable relationships with the companies that source our
products and to ensure the proper operation of production facilities owned by third party
contractors. We generally utilize multiple sources of supply. An unexpected interruption in the
supply of our sourced products, including as a result of a disruption in operations at any of our
production facilities owned by third party contractors or distribution facilities or at the
facilities which source our products, our failure to secure or maintain favorable sourcing
relationships, shortages of sourced goods or disruptions in shipping, could adversely affect our
results of operations until alternate sources or facilities can be secured. In addition, any delay
in the completion of our new consolidated distribution facility in the Netherlands, or any
construction issues, problems relating to equipment, systems failures or difficulties with the
Companys transition to the use of this facility could result in delays of shipments to our
customers and additional costs to us. Any of the events noted above could result in difficulty in
procuring or producing our products on a cost-effective basis or at all, which could have an
adverse effect on our results of operations.
In addition, although we monitor the third-party facilities that produce our products to
ensure their continued human rights and labor compliance and adherence to all applicable laws and
our own business partner manufacturing guidelines, we do not control these independent
manufacturers. Accordingly, vendors may violate labor or other laws, or fail to adhere to our
business partner manufacturing guidelines, including by engaging in business or labor practices
that would generally be regarded as unethical in the U.S. In such case, our reputation may be
damaged, our supply of sourced goods may be interrupted and we may terminate our relationship with
such vendors, any of which could have an adverse effect on our business.
The failure of our suppliers or contractors to adhere to quality and production standards and the
failure of our inspections to identify and correct such quality or production problems could have a
material adverse effect on our business, financial condition and results of operations.
Concerns about the safety of our products, including but not limited to concerns about those
products manufactured in developing countries, where a significant portion of our products are
manufactured, may cause us to recall selected products, either voluntarily or at the direction of a
foreign or domestic governmental authority. Product safety concerns, recalls, defects or errors in
production could result in the rejection of our products by customers, damage to our reputation,
lost sales, product liability litigation and increased costs, any of which could harm our business.
We depend on a limited number of customers for a significant portion of our sales, and our
financial success is linked to the success of our customers, our customers commitment to our
products and our ability to satisfy and/or maintain our customers.
Net revenues from our ten largest customers represented approximately 31.6% and 29.4% of our
worldwide net revenues during Fiscal 2009 and Fiscal 2008, respectively. No one customer accounted
for 10% or more of our Fiscal 2009 or 2008 net revenues.
We do not have long-term contracts with any of our customers. Sales to customers are
generally on an order-by-order basis. If we cannot fill customers orders on time, orders may be
cancelled and relationships with customers may suffer, which could have an adverse effect on us,
especially if the relationship is with a major customer. Furthermore, if any of our customers
experiences a significant downturn in its business, or fails to remain committed to our programs or
brands, the customer may reduce or discontinue purchases from us. The loss of a major customer or a
reduction in the amount of our products purchased by our major customers could have an adverse
effect on our results of operations.
During the past several years, various retailers, including some of our customers, have
experienced significant changes and difficulties, including consolidation of ownership,
restructurings, bankruptcies and liquidations. Consolidation of retailers or other events that
eliminate our customers could result in fewer stores selling our products and could increase our
reliance on a smaller group of customers. In addition, if our retailer customers experience
significant problems in the future, including as a result of general weakness in the retail
environment, our sales may be reduced and the risk of extending credit to these retailers may
increase. A significant adverse change in a customer relationship or in a customers financial
position could cause us to limit or discontinue
business with that customer, require us to assume greater credit risk relating to that
customers receivables or limit our ability to collect amounts related to previous purchases by
that customer. These or other events related to our significant customers could have an adverse
effect on our business, results of operations or financial condition.
Our success depends upon the continued protection of our trademarks and other intellectual property
rights and we may be forced to incur substantial costs to maintain, defend, protect and enforce our
intellectual property rights.
Our registered and common law trademarks, as well as certain of our licensed trademarks, have
significant value and are instrumental to our ability to market our products. Third parties may
assert claims against any such intellectual property and we may not be able to successfully resolve
such claims. In addition, we may be required to assert legal claims or take other enforcement
actions against third parties who infringe on our intellectual property rights. We may be
required to incur substantial costs in defending such claims or in taking such actions. In
addition, the laws of some foreign countries may not allow us to protect, defend or enforce our
intellectual property rights to the same extent as the laws of the U.S. Our failure to
successfully protect our intellectual property rights, or the substantial costs that we may incur
in doing so, may have an adverse effect on our operations.
20
A significant portion of our operations is dependent on license agreements with third parties that
allow us to design, produce, source and market our products.
As of January 2, 2010, approximately 66% of our revenues was derived from sales of products
which we design, source and/or market pursuant to license agreements with third parties. The
success of this portion of our business requires us to maintain favorable relationships with our
licensors; deterioration in these relationships could impair our ability to market our brands and
distribute our products.
Certain of our license agreements, including the license agreements with Speedo International,
Ltd., CKI and Polo Ralph Lauren, Inc require us to make minimum royalty payments, meet certain
minimum sales thresholds, subject us to restrictive covenants, require us to provide certain
services (such as design services) and may be terminated or not renewed if certain of these
conditions are not met. We may not be able to continue to meet our obligations or fulfill the
conditions under these agreements in the future. The termination or non-renewal of certain of
these license agreements could have an adverse effect on our business, results of operations or
financial condition.
Our success depends on the reputation of our owned and licensed brand names, including, in
particular, Calvin Klein.
The success of our business depends on the reputation and value of our owned and licensed
brand names. The value of our brands could be diminished by actions taken by licensors or others
who have interests in the brands for other products and/or territories. Because we cannot control
the quality of other products produced and sold under such licensed brand names, if such products
are of poor quality, the value of the brand name could be damaged, which could have an adverse
effect on our sales. In addition, some of the brand names licensed to us reflect the names of
living individuals, whose actions are outside our control. If the reputation of one of these
individuals is significantly harmed, our products bearing such individuals name may fall into
disfavor, which could adversely affect our business. In addition, we may from time to time license
our owned and licensed brand names to third parties. The actions of these licensees may diminish
the reputation of the licensed brand, which could adversely affect our business.
The Calvin Klein brand name is significant to our business. Sales of over 73% of our products
are in large part tied to the success of the Calvin Klein brand name. In the event that consumer
demand in the U.S. or overseas for the Calvin Klein brand declines, including as a result of
changing fashion trends or an adverse change in the perception of the Calvin Klein brand image, our
businesses which rely on the Calvin Klein brand name, including the businesses acquired in the
CKJEA Acquisition, would be significantly harmed.
We are subject to local laws and regulations in the U.S. and abroad.
We are subject to U.S. federal, state and local laws and regulations affecting our business,
including those promulgated under the Occupational Safety and Health Act, the Consumer Product
Safety Act, the Flammable Fabrics Act, the Textile Fiber Product
Identification Act, the rules and regulations of the Consumer Products Safety Commission, the
Department of Homeland Security and various labor, workplace and related laws, as well as
environmental laws and regulations. Our international businesses and the companies which source our
products are subject to similar regulations in the countries where they operate. Our efforts to
maintain compliance with local laws and regulations may require us to incur significant expenses,
and our failure to comply with such laws may expose us to potential liability, which could have an
adverse effect on our results of operations. Similarly, local laws could have an adverse effect on
our sourcing vendors, which could affect our ability to procure our products.
We may have additional tax liabilities.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant
judgment is required in determining our worldwide provision for income taxes. In the ordinary
course of our business, there are many transactions and calculations where the ultimate tax
determination is uncertain. We regularly are under audit by tax authorities. Although we believe
our tax estimates are reasonable, the final determination of our tax liabilities as a result of tax
audits and any related litigation could be materially different from our historical income tax
provisions and accruals. The results of an audit or litigation could have a material effect on our
financial position, results of operations, or cash flows in the period or periods for which that
determination is made. In addition, there have been proposals to reform U.S. tax laws that would
significantly impact how U.S. multinational corporations are taxed on foreign earnings. We earn a
substantial portion of our income in foreign countries. Although we cannot predict whether or in
what form this proposed legislation will pass, if enacted it could have a material adverse impact
on our tax expense and cash flow.
Changing international trade regulation may increase our costs and limit the amount of products or
raw materials that we may import from or export to a given country.
Substantially all of our operations are subject to bilateral textile agreements. These
agreements include free trade agreements and other preference agreements with and between various
countries. Our non-compliance with, or changes associated with, such agreements and regulations
may limit the amount of products that may be imported from a particular country or may impact our
ability to obtain favorable duty rates, which could impair our ability to source our products on a
cost-effective basis.
21
In addition, the countries in which our products are sourced or into which they are imported,
may from time to time impose new quotas, duties, tariffs and requirements as to where raw materials
must be purchased or additional workplace regulations or other restrictions, or may adversely
modify existing restrictions. Changes in international trade regulation, including future trade
agreements, could provide our competitors an advantage over us, or increase our costs, either of
which could have an adverse effect on our business, results of operations or financial condition.
Our business outside of the U.S. exposes us to uncertain conditions in overseas markets.
Our foreign operations subject us to risks customarily associated with foreign operations. As
of January 2, 2010, we sold our products throughout the world and had warehousing and distribution
facilities in twelve countries. We also source our products from third-party vendors substantially
all of which are based in foreign countries. For Fiscal 2009, we had net revenues outside of the
U.S. of $1,102.9 million, representing 54.6% of our total net revenues, with the majority of these
sales in Europe and Asia. We are exposed to the risk of changes in social, political and economic
conditions inherent in operating in foreign countries, including:
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currency fluctuations; |
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import and export license requirements; |
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trade restrictions; |
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changes in quotas, tariffs, taxes and duties; |
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restrictions on repatriating foreign profits back to the U.S.; |
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foreign laws and regulations; |
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international trade agreements; |
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difficulties in staffing and managing international operations; |
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economic conditions overseas; |
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political or social unrest; and |
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disruptions or delays in shipments. |
In addition, transactions between our foreign subsidiaries and us may be subject to U.S. and
foreign withholding taxes. Applicable tax rates in foreign jurisdictions differ from those of the
U.S., and change periodically.
We are subject to certain risks as a result of our indebtedness.
As of January 2, 2010, we had total debt of approximately $210.7 million. During August 2008,
we entered into the New Credit Agreements (see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Capital Resources and Liquidity Financing
Arrangements), which are revolving lines of credit, initially totaling $300.0 million. At January
2, 2010, there was a total of $0.2 million outstanding loans under the New Credit Agreements. Our
ability to service our indebtedness using cash flows from operations is dependent on our financial
and operating performance, which is subject to prevailing economic and competitive industry
conditions and to certain other factors beyond our control, including the factors described in this
Item 1A. In the event that we are unable to satisfy our debt obligations as they come due, we may
be forced to refinance our indebtedness, and there can be no assurance that we will be able to
refinance our indebtedness on terms favorable to us, or at all. Our debt service obligations may
also limit cash flow available for our operations and adversely affect our ability to obtain
additional financing, if necessary. In addition, the New Credit Agreements are subject to floating
interest rates; accordingly, our results of operations may be adversely affected if market interest
rates increase.
The terms of the agreements governing our indebtedness may also limit our operating and
financial flexibility. The indenture governing the Companys 87/8% Senior Notes due 2013
(Senior Notes) and the New Credit Agreements each contain a number of significant restrictions
and other covenants, including financial covenants (see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity
Financing Arrangements). In addition, in the event that we are unable to comply with these
restrictions and other covenants and are not able to obtain waivers from our lenders, we would be
in default under these agreements and, among other things, our debt may be accelerated by our
lenders. In such case, we may not be able to repay our debt or borrow sufficient funds to
refinance it on commercially reasonable terms, or terms that are acceptable to us, which could have
an adverse effect on our financial condition.
Our business depends on our senior management team and other key personnel.
Our success is, to a significant extent, dependent on our ability to attract, retain and
motivate senior management and other key employees, including managerial, operational, design and
sales personnel. Demand and competition for qualified personnel in our industry is intense, and we
compete for personnel with companies which may have greater financial resources than we do. The
unexpected loss of our current senior management or other key employees, or our inability to
attract and retain such persons in the future, could harm our ability to operate our business,
including our ability to effectively service our customers, generate new business or formulate and
execute on our strategic initiatives.
22
We rely significantly on information technology. Any inadequacy, interruption, integration failure
or security failure of that technology could harm our ability to effectively operate our business.
Our ability to effectively manage and operate our business depends significantly on our
information technology systems. The failure of these systems to operate effectively, problems with
transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems
of acquired businesses or a breach in security of any of our systems could adversely impact the
operations of our business. Any such failure, problem, difficulty or breach could also require
significant expenditures to remediate.
Fluctuations in the valuation of our pension plans investments can have a negative effect on our
financial condition and results of operations.
We maintain, among other plans, a defined benefit pension plan for certain U.S.-based
employees, who completed service prior to January 1, 2003. The plan provides for specified payments
after retirement. Under our direction, our U.S. pension plan invests in a variety of assets
including marketable equity and debt securities, mutual funds and pooled investment accounts and
limited partnerships. The value of these pension plan investments may fluctuate due to, among
other things, changing economic conditions, interest rates and investment returns, and we cannot
predict with certainty the value that any individual asset or investment will have
in the future. Decreases in the value of U.S. pension plan investments can have a significant
effect on our results of operations in the fourth quarter of each fiscal year because they increase
our pension expense and our unfunded pension liability. Moreover, as a result of such decreases,
we may be required to make larger cash contributions to the U.S. pension plan in the future, which
could limit us from making investments in our business, reduce cash available to fund operations or
service our indebtedness, or otherwise be detrimental to our results of operations and financial
condition.
Businesses that we may acquire may fail to perform to expectations. In addition, we may be unable
to successfully integrate acquired businesses with our existing business.
From time to time, we evaluate potential acquisition opportunities to support and strengthen
our business. We may not be able to realize all or a substantial portion of the anticipated
benefits of acquisitions that we may consummate. Newly acquired businesses may not achieve
expected results of operations, including expected levels of revenues, and may require
unanticipated costs and expenditures. Acquired businesses may also subject us to liabilities that
we were unable to discover in the course of our due diligence, and our rights to indemnification
from the sellers of such businesses, even if obtained, may not be sufficient to offset the relevant
liabilities. In addition, acquired businesses may be adversely affected by the risks described in
this Item 1A, or other risks, including as a result of factors of which we are not currently aware.
In addition, the integration of newly acquired businesses and products may be expensive and
time-consuming and may not be entirely successful. The success of integrating acquired businesses
is dependent on our ability to, among other things, merge operational and financial systems, retain
customers of acquired businesses, realize cost reduction synergies and retain key management and
other personnel of the acquired companies. Integration of the acquired businesses may also place
additional pressures on our systems of internal control over financial reporting. If we are unable
to successfully integrate newly acquired businesses or if acquired businesses fail to produce
targeted results, it could have an adverse effect on our results of operations or financial
condition.
The restructuring activities that we engage in may not be successfully implemented and may have an
adverse effect on our results of operations or financial condition.
The Company periodically implements restructuring initiatives in order to streamline its
operations and increase its profitability. Restructuring initiatives may be expensive and time
consuming and may not achieve desired goals. In addition, certain restructuring initiatives (such
as reductions in workforce and the relocation of facilities and functions from one location to
another), if not successfully implemented, may have an adverse effect on our results of operations
or financial condition.
We have restated certain financial statements in the past and in certain prior periods we have had
insufficient disclosure controls and procedures and internal control over financial reporting, the
recurrence of which could impair our ability to provide timely and reliable financial information
in the future and have a negative effect on our business and stock price.
In Fiscal 2006, we identified material weaknesses in our internal control over financial
reporting and, as a result of such material weaknesses, concluded that our disclosure controls and
procedures and internal control over financial reporting were not effective. We were also required
to restate our Fiscal 2005 and quarter ended April 1, 2006 financial statements (including
restatements required in connection with the identified material weaknesses). Although we have, in
each case, taken actions that we believe have effectively remediated the material weaknesses
identified, and our management has concluded that our internal control was effective as of January
2, 2010 and January 3, 2009, there can be no assurance that in the future we will not suffer from
ineffective disclosure controls and procedures or internal control over financial reporting, which
would impair our ability to provide reliable and timely financial reports. Moreover, because of
the inherent limitations of any control system, material misstatements due to error or fraud may
not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable
and timely financial reports, or if we are required to restate our financial statements, our
business may be harmed, including as a result of adverse publicity, litigation, SEC proceedings,
exchange delisting or consequences under (or the need for waivers of) our debt covenants. Failures
in internal control and restated financial statements may also cause investors to lose confidence
in our financial reporting process, which could have a negative effect on the price of our Common
Stock.
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Item 1B. |
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Unresolved Staff Comments. |
None.
The Companys principal executive offices are located at 501 Seventh Avenue, New York, New
York, which the Company leases pursuant to a 13-year lease that commenced in May 2003 (expiring
August 2016) and a second lease expiring February 2020. In addition to the Companys executive
offices, the Company leases offices in California and Connecticut pursuant to leases that expire
between 2015 and 2020.
As of January 2, 2010, the Company owned or leased five primary domestic distribution and
warehousing facilities located in California and Pennsylvania. In addition, the Company owned or
leased seven international, warehousing and distribution facilities in Brazil (two), Canada (one),
Mexico (one), the Netherlands (one), Italy (one), and Argentina (one). Some of the Companys
warehouse facilities are also used for administrative functions. The Company owns one of its
domestic facilities. The owned domestic facility is subject to liens in favor of the lenders under
the New Credit Agreements. Eleven of the Companys facilities are leased with terms expiring
between 2010 and 2025, except for certain leases which operate on a month-to-month basis. The
Company sold its manufacturing, warehousing and distribution facilities in France in February 2008
as part of the sale of the Lejaby business. See Item 1. Acquisitions, Dispositions and Discontinued
Operations Dispositions and Discontinued Operations. In addition, in connection with the
consolidation of its European operations during Fiscal 2009, the Company entered into a 15-year
lease for a distribution center in the Netherlands.
The Company leases sales offices in a number of major cities, including Los Angeles and New
York in the U.S.; Rio Piedras, Puerto Rico, Buenas Aires, Argentina, Melbourne, Australia,
Brussels, Belgium, Sao Paulo, Brazil, Copenhagen, Denmark, London, England; Madrid, Spain; Toronto,
Canada; Paris and Toulouse, France; Dusseldorf, Germany; Shanghai and Beijing, China; Hong Kong;
Seoul, Korea, Florence, Italy; Milan, Italy, Santiago, Chile, Amersfoort, Netherlands, Mexico City,
Mexico, Lima, Peru, and Zurich, Switzerland. The sales office leases expire between 2010 and 2020
and are generally renewable at the Companys option. As of January 2, 2010, the Company leased
1,097 retail store sites in the U.S., Canada, Mexico, Central and South America, Europe, Australia
and Asia. The retail store leases expire between 2010 and 2018 (except for one retail store lease
which expires in 2028) and are generally renewable at the Companys option.
All of the Companys distribution and warehouse facilities are located in appropriately
designed buildings, which are kept in good repair. All such facilities have well-maintained
equipment and sufficient capacity to handle present and expected future volumes.
|
|
|
Item 3. |
|
Legal Proceedings. |
SEC Inquiry: On August 8, 2006, the Company announced that it would restate its previously
reported financial statements for the fourth quarter 2005, Fiscal 2005 and the three months ended
April 1, 2006. The restatements were required as a result of certain irregularities discovered by
the Company during the Companys 2006 second quarter closing review and certain other errors. The
irregularities primarily related to the accounting for certain returns and customer allowances at
the Companys Chaps menswear division. These matters were reported to the Companys Audit
Committee, which engaged outside counsel, who in turn retained independent forensic accountants to
investigate and report to the Audit Committee. Based on information obtained in that
investigation, and also to correct for an error which resulted from the implementation of the
Companys new systems infrastructure at its Swimwear Group during the first quarter 2006, and
certain immaterial errors, the Audit Committee accepted managements recommendation that the
Company restate its financial statements.
In connection with the restatements, the Company contacted the SEC staff to inform them of the
restatements and the Companys related investigation. Thereafter, the SEC staff initiated an
informal inquiry, and on February 22, 2008, informed the Company that in September 2007 the SEC had
issued a formal order of investigation, with respect to these matters. The Company is cooperating
fully with the SEC.
24
OP Litigation: On August 19, 2004, the Company acquired 100% of the outstanding common stock
of Ocean Pacific Apparel Corp. (OP). The terms of the acquisition agreement required the Company
to make certain contingent payments to the sellers (the
Sellers) under certain circumstances. On November 6, 2006, the Company sold the OP
business. The Sellers of OP have filed an action against the Company alleging that certain
contingent purchase price payments are due to them as a result of the Companys sale of the OP
business in November 2006. The Company believes that the Sellers lawsuit is without merit and
intends to defend itself vigorously. The Company believes that it is adequately reserved for any
potential settlements.
Lejaby Claims: On March 10, 2008, the Company sold its Lejaby business to Palmers. The
purchase price paid by Palmers for the Lejaby business was subject to certain post-closing
adjustments, including adjustments for working capital. The Company and Palmers have been unable
to agree on the amount of these adjustments to the purchase price. The Company expects that the
matter will be settled by an independent arbitrator. Palmers also has filed an action against the
Company alleging that, as a result of the Company making certain misrepresentations, the sale
agreement is null and void. The Company believes that the Palmers lawsuit is without merit and
intends to defend itself vigorously. The Company believes that it is adequately reserved for these
claims.
Tyr Litigation: On May 12, 2008, Tyr Sport, Inc. (Tyr Sport) filed an action against
the Company and certain third-party co-defendants alleging restraint of trade and false advertising
in connection with the Speedo LZR Racer swimsuit. Certain of Tyr Sports false advertising claims were
dismissed pursuant to a motion to dismiss filed by the Company and its co-defendants. Further, on
December 31, 2009, the Company and its co-defendants filed a motion for summary judgment
relating to all of Tyr Sports remaining claims. The Company believes that Tyr Sports lawsuit is
without merit and continues to defend itself vigorously. The Company believes that it is
adequately reserved in this matter.
Other: In addition, from time to time, the Company is involved in arbitrations or legal
proceedings that arise in the ordinary course of its business. The Company cannot predict the
timing or outcome of these claims and proceedings. Currently, the Company is not involved in any
such arbitration and/or legal proceeding that it expects to have a material effect on its financial
condition, results of operations or business.
25
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
Beginning on May 15, 2008, the Companys Common Stock is traded on the New York Stock Exchange
under the ticker symbol WRC. Previous to that date, the Companys Common Stock was traded on the
NASDAQ Global Select Market under the ticker symbol WRNC and had been traded on NASDAQ since
February 5, 2003 following the Companys emergence from bankruptcy. The table below sets forth the
high and low sales prices of the Common Stock as reported on the New York Stock Exchange or NASDAQ
Composite Tape from January 1, 2008 through February 22, 2010:
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
44.74 |
|
|
$ |
28.70 |
|
Second Quarter |
|
$ |
51.22 |
|
|
$ |
40.50 |
|
Third Quarter |
|
$ |
53.89 |
|
|
$ |
36.38 |
|
Fourth Quarter |
|
$ |
39.76 |
|
|
$ |
12.22 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27.60 |
|
|
$ |
15.99 |
|
Second Quarter |
|
$ |
36.42 |
|
|
$ |
24.02 |
|
Third Quarter |
|
$ |
45.75 |
|
|
$ |
30.17 |
|
Fourth Quarter |
|
$ |
44.97 |
|
|
$ |
39.45 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
First Quarter (through February 22, 2010) |
|
$ |
47.07 |
|
|
$ |
37.86 |
|
As of February 22, 2010, there were 14,195 holders of the Common Stock, based upon the number
of holders of record and the number of individual participants in certain security position
listings.
The last reported sale price of the Common Stock as reported on the New York Stock Exchange
Composite Tape on February 22, 2010 was $41.81 per share. The New Credit Agreements and the
indenture governing the Senior Notes place restrictions on the Companys ability to pay dividends
on the Common Stock, and the Company has not paid any dividends on the Common Stock (See Note 12 of
Notes to Consolidated Financial Statements and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Capital Resources and Liquidity Financing
Arrangements Senior Notes).
Repurchases of Shares
In May 2007, the Companys Board of Directors authorized a share repurchase program (the 2007
Share Repurchase Program) for the repurchase of up to 3,000,000 shares of Common Stock. The
Company expects that, in order to comply with the terms of applicable debt instruments, purchases
under the 2007 Share Repurchase Program will be made from time to time over a period of up to four
years beginning from the date the program was approved. The 2007 Share Repurchase Program may be
modified or terminated by the Companys Board of Directors at any time. No shares were repurchased
during Fiscal 2009 under the 2007 Share Repurchase Program. During the fourth quarter of Fiscal
2008, under the 2007 Share Repurchase Program, the Company repurchased a total of 943,000 shares in
the open market. No other shares were repurchased in Fiscal 2008 under the 2007 Share Repurchase
Program. During Fiscal 2007, the Company purchased a total of 566,869 shares. At January 2, 2010,
there were 1,490,131 shares remaining for repurchase under the 2007 Share Repurchase Program.
In addition, an aggregate of 1,650 shares included below as repurchased during the fourth
quarter of Fiscal 2009 reflect the surrender of shares in connection with the vesting of certain
restricted stock awarded by the Company to its employees. At the election of an employee, shares
having an aggregate value on the vesting date equal to the employees withholding tax obligation
may be surrendered to the Company in satisfaction thereof. The repurchase of these shares is not a
part of the 2007 Share Repurchase
Program.
Repurchased shares are held in treasury pending use for general corporate purposes.
26
The following table summarizes repurchases of the Companys Common Stock during the fourth
quarter of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
that May Yet Be |
|
|
|
Total Number |
|
|
Average |
|
|
Purchased as |
|
|
Repurchased |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
Under the |
|
Period |
|
Repurchased |
|
|
per Share |
|
|
Announced Plan |
|
|
Announced Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 4, 2009 - October 31, 2009 |
|
|
429 |
|
|
$ |
42.17 |
|
|
|
|
|
|
|
1,490,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2009 - November 28, 2009 |
|
|
596 |
|
|
$ |
42.18 |
|
|
|
|
|
|
|
1,490,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 29, 2009 - January 2, 2010 |
|
|
625 |
|
|
$ |
43.19 |
|
|
|
|
|
|
|
1,490,131 |
|
|
|
|
Item 6. |
|
Selected Financial Data. |
The following table sets forth the Companys selected historical consolidated financial and
operating data for Fiscal 2009, Fiscal 2008, Fiscal 2007, Fiscal 2006 and Fiscal 2005. All fiscal
years for which financial information is set forth below had 52 weeks, except Fiscal 2008, which
had 53 weeks.
For all periods presented, income from continuing operations excludes the results of the
Companys discontinued operations (i.e. Calvin Klein Golf, Calvin Klein Collection, Nautica,
Michael Kors, Private Label, Lejaby, Anne Cole, Cole of California, Catalina, OP, JLO, Lejaby Rose,
Axcelerate Activewear and its three Speedo retail outlet store businesses). The results of
operations of these business units are presented separately in the following table.
The information set forth in the following table should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Companys consolidated financial statements and related notes thereto included elsewhere in this
Annual Report on Form 10-K.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
|
(Dollars in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,019.6 |
|
|
$ |
2,062.8 |
|
|
$ |
1,819.6 |
|
|
$ |
1,611.2 |
|
|
$ |
1,259.5 |
|
Gross profit |
|
|
864.3 |
|
|
|
920.8 |
|
|
|
749.7 |
|
|
|
629.2 |
|
|
|
428.7 |
|
Selling, general and administrative expenses |
|
|
638.9 |
|
|
|
738.2 |
|
|
|
601.7 |
|
|
|
500.0 |
|
|
|
335.5 |
|
Amortization of intangible assets |
|
|
11.0 |
|
|
|
9.4 |
|
|
|
13.2 |
|
|
|
12.3 |
|
|
|
4.0 |
|
Pension expense (income) |
|
|
20.9 |
|
|
|
31.6 |
|
|
|
(8.8 |
) |
|
|
(2.4 |
) |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
193.5 |
|
|
|
141.4 |
|
|
|
143.7 |
|
|
|
119.2 |
|
|
|
88.0 |
|
Other (income) loss |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
(7.1 |
) |
|
|
(2.9 |
) |
|
|
0.7 |
|
Interest expense |
|
|
23.9 |
|
|
|
29.5 |
|
|
|
37.7 |
|
|
|
38.5 |
|
|
|
22.4 |
|
Interest income |
|
|
(1.2 |
) |
|
|
(3.1 |
) |
|
|
(3.8 |
) |
|
|
(2.9 |
) |
|
|
(3.6 |
) |
Income from continuing operations |
|
|
102.2 |
|
|
|
51.0 |
|
|
|
86.9 |
|
|
|
66.5 |
|
|
|
43.2 |
|
Income (loss) from discontinued operations,
net of taxes |
|
|
(6.2 |
) |
|
|
(3.8 |
) |
|
|
(7.8 |
) |
|
|
(15.7 |
) |
|
|
6.3 |
|
Net income |
|
|
96.0 |
|
|
|
47.3 |
|
|
|
79.1 |
|
|
|
50.8 |
|
|
|
49.5 |
|
|
Net income applicable to Common Stock |
|
|
96.0 |
|
|
|
47.3 |
|
|
|
79.1 |
|
|
|
50.8 |
|
|
|
49.5 |
|
Dividends on Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.22 |
|
|
$ |
1.11 |
|
|
$ |
1.90 |
|
|
$ |
1.45 |
|
|
$ |
0.94 |
|
Diluted |
|
|
2.19 |
|
|
|
1.08 |
|
|
|
1.84 |
|
|
|
1.42 |
|
|
|
0.92 |
|
Income (loss) from discontinued operations,
net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.13 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
(0.34 |
) |
|
|
0.14 |
|
Diluted |
|
|
(0.14 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
(0.34 |
) |
|
|
0.13 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
2.09 |
|
|
|
1.03 |
|
|
|
1.73 |
|
|
|
1.11 |
|
|
|
1.08 |
|
Diluted |
|
|
2.05 |
|
|
|
1.00 |
|
|
|
1.67 |
|
|
|
1.08 |
|
|
|
1.06 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,433,874 |
|
|
|
45,351,336 |
|
|
|
44,908,028 |
|
|
|
45,719,910 |
|
|
|
45,872,308 |
|
Diluted |
|
|
46,196,397 |
|
|
|
46,595,038 |
|
|
|
46,618,307 |
|
|
|
46,882,399 |
|
|
|
46,804,053 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
|
(Dollars in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating
activities |
|
$ |
264.9 |
|
|
$ |
125.9 |
|
|
$ |
160.4 |
|
|
$ |
86.7 |
|
|
$ |
138.1 |
|
Cash flows from
investing
activities |
|
|
(52.6 |
) |
|
|
(44.3 |
) |
|
|
(20.8 |
) |
|
|
(187.1 |
) |
|
|
(36.7 |
) |
Cash flows from
financing
activities |
|
|
(40.9 |
) |
|
|
(120.7 |
) |
|
|
(121.7 |
) |
|
|
99.7 |
|
|
|
(0.1 |
) |
Depreciation and
amortization |
|
|
46.8 |
|
|
|
46.2 |
|
|
|
65.3 |
|
|
|
47.6 |
|
|
|
30.7 |
|
Capital expenditures |
|
|
42.8 |
|
|
|
41.0 |
|
|
|
41.8 |
|
|
|
30.2 |
|
|
|
36.7 |
|
Ratio of earnings
to fixed charges
(a) |
|
|
3.4 |
|
|
|
2.6 |
|
|
|
2.6 |
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
December 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
560.2 |
|
|
$ |
474.6 |
|
|
$ |
588.0 |
|
|
$ |
453.9 |
|
|
$ |
494.8 |
|
Total assets |
|
|
1,659.8 |
|
|
|
1,496.1 |
|
|
|
1,606.5 |
|
|
|
1,681.0 |
|
|
|
1,220.1 |
|
Long-term debt (b) |
|
|
112.8 |
|
|
|
163.8 |
|
|
|
310.5 |
|
|
|
332.5 |
|
|
|
210.0 |
|
Stockholders equity |
|
|
916.1 |
|
|
|
787.7 |
|
|
|
772.9 |
|
|
|
682.9 |
|
|
|
629.5 |
|
|
|
|
(a) |
|
For the purposes of computing the ratio of earnings of fixed charges, earnings are defined
as income from continuing operations before income taxes, plus fixed charges, less
non-controlling interest in pre-tax income and less capitalized interest. Fixed charges are
defined as the sum of interest expense, including the amortization of deferred financing
costs, capitalized interest and that portion of rental expense which the Company believes to
be representative of an interest factor. |
|
(b) |
|
Does not include current maturities of Senior Notes or long-term debt. See Note 12 of Notes
to Consolidated Financial Statements. |
29
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
The Company is subject to certain risks and uncertainties that could cause its future results
of operations to differ materially from its historical results of operations and those expected in
the future and that could affect the market value of the Companys Common Stock. Except for the
historical information contained herein, this Annual Report on Form 10-K, including the following
discussion, contains forward-looking statements that involve risks and uncertainties. See
-Statement Regarding Forward-Looking Disclosure and Item 1A. Risk Factors.
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial statements and related
notes thereto, which are included in this Annual Report on Form 10-K. References to Calvin Klein
Jeans refer to jeans, accessories and bridge products. Core Intimates refer to the Intimate
Apparel Groups Warners, Olga and Body Nancy Ganz /Bodyslimmers brand names. References to
Retail within each operating Group refer to the Companys owned full price free standing stores,
owned outlet stores, concession / shop-in-shop stores and on-line stores. Results related to
stores operated by third parties under retail licenses or distributor agreements are included in
Wholesale within each operating Group.
Overview
The Company designs, sources, markets, licenses and distributes intimate apparel, sportswear
and swimwear worldwide through highly recognized brand names. The Companys products are
distributed domestically and internationally in over 100 countries, primarily to wholesale
customers through various distribution channels, including major department stores, independent
retailers, chain stores, membership clubs, specialty and other stores, mass merchandisers and the
internet. As of January 2, 2010, the Company operated 1,097 Calvin Klein retail stores worldwide
(consisting of 131 full price free-standing stores, 109 outlet free-standing stores, three on-line
stores and 857 shop-in-shop/concession stores) and three on-line internet stores: SpeedoUSA.com,
Calvinkleinjeans.com and CKU.com. As of January 2, 2010, there were also 624 Calvin Klein retail
stores operated by third parties under retail licenses or franchise and distributor agreements.
The Companys mission is to become the premier global, branded apparel company. To accomplish
its mission, the Company has identified the following key strategic objectives:
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Build and maintain powerful global brands. The Company
believes that one of its strengths is its portfolio of highly recognized brand
names. The Company strives to enhance its brand image through superior design,
product innovation, focused marketing and high quality product construction. |
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Leverage the Companys international platform. The Companys
international design, sales and distribution network allows it to reach consumers
around the world. The Company works to effectively utilize its international
presence to enhance and expand the worldwide reach of its branded apparel
products. In Fiscal 2009 the Company derived over 54% of its net revenue from
its foreign business. The Company believes that there are opportunities for
significant continued growth in Europe, Asia and South America. |
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Grow the Companys direct- to- consumer business. As noted above,
as of January 2, 2010, the Company had (either directly or through licensees)
1,724 direct-to-consumer outlets throughout the world. The Company expects to
continue to expand this aspect of its business, particularly in Europe and Asia. |
The Company notes the following significant highlights with respect to Fiscal 2009:
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Net revenue decreased $43.2 million, or 2.1%, to $2,019.6 million for Fiscal
2009, reflecting decreases of $9.4 million, $24.9 million, and $8.9 million in the
Sportswear Group, the Intimate Apparel Group and the Swimwear Group, respectively.
Net revenue includes a decrease of $85.0 million due to the adverse effect of
fluctuations in foreign currency exchange rates (see below). In addition, Fiscal
2008 benefitted from one additional week of operating activity as Fiscal 2009
contained fifty-two weeks of operations while Fiscal 2008 contained fifty-three
weeks of operations. Net revenues related to the extra week of operations during
Fiscal 2008 were approximately $23.0 million. Net revenues were favorably affected by
the Companys use of its diversified channels of distribution which helped it to
mitigate the effects of the challenging global economy. |
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Operating income increased $52.1 million, or 36.8%, to $193.5 million for Fiscal
2009 from $141.4 million for Fiscal 2008. Operating income includes a decrease of
$40.5 million due to the adverse effect of fluctuations in foreign currency exchange
rates (see below). Operating income includes restructuring charges of $12.1 million
for Fiscal 2009. Operating income for Fiscal 2008 includes restructuring expenses of
$35.3 million, including a charge of $18.5 million (the Collection License Company
Charge) recorded in the Sportswear segment related to the transfer of the
Collection License Company to PVH. The increase in operating income, despite a
decline in net revenues, for Fiscal 2009 as compared to Fiscal 2008, was primarily
due to a reduction in selling, general and administrative costs of
$99.3 million.
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30
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Both net revenues and operating income for Fiscal 2009 were negatively affected
by fluctuations in foreign currencies. On average, for Fiscal 2009 compared to
Fiscal 2008, the U.S. dollar strengthened relative to the functional currencies of
countries where the Company conducts a majority of its operations overseas
(primarily the Euro, Korean Won, Canadian Dollar and Mexican Peso), as follows: the
U.S. dollar strengthened relative to the Euro by 5%, the Korean Won by 15%, the
Canadian Dollar by 7%, and the Mexican Peso by 19%, respectively. (see Part II Item
7A. Quantitative and Qualitative Disclosure About Market Risk Foreign Exchange
Risk, below). |
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Income from continuing operations for Fiscal 2009 was $2.19 per diluted share, a
102.8% increase compared to the $1.08 per diluted share for Fiscal 2008. Included
in income from continuing operations for Fiscal 2009 are restructuring charges of
$8.6 million (net of income tax benefits of $3.5 million), or $0.19 per diluted
share and pension expense of $12.7 million (net of income tax benefits of $8.2
million) or $0.27 per diluted share. Income from continuing operations for Fiscal
2008 included an estimated tax charge of approximately $14.6 million, or $0.31 per
diluted share, related to the repatriation, to the U.S., of the proceeds received in
connection with the sale of the Companys Lejaby business, net of adjustments for
working capital, as well as restructuring charges of $31.1 million (net of income
tax benefit of $4.2 million), or $0.67 per diluted share and pension expense of
$19.0 million (net of income tax benefits of $12.6 million) or $0.41 per diluted
share. |
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During the third quarter of 2009, the Federation Internationale de Natation
(FINA), the international federation recognized by the International Olympic
Committee for administering swimming competitions, as well as other professional and
academic swimming organizations, banned the use of body-length swimsuits made of
fabrics that were not woven. The Companys Speedo LZR Racer and other similar racing
swimsuits were among the swimsuits that were banned by FINA. In response to the FINA
ruling, the Company wrote off a total of $3.6 million of inventory of its LZR Racer
and other similar racing swimsuits during the third quarter of 2009. Income from
continuing operations included a charge, related to this inventory write off, of
$2.2 million (net of income tax benefits of $1.4 million), or $0.05 per diluted
share for Fiscal 2009. The Company has developed a new LZR Racer Elite swimsuit,
which meets competitive swimming requirements. |
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During 2009, in order to align its cost structure to match economic conditions,
the Company continued its workforce reduction, which commenced in the fourth quarter
of Fiscal 2008. In addition, the Company reduced its workforce in connection with
the consolidation of its European operations. During Fiscal 2009, these reductions
resulted in the termination of 232 employees (in both the Companys domestic and
foreign operations) at a cost of approximately $8.3 million. |
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At January 2, 2010, the Company had cash and cash equivalents of $320.8 million,
which exceeded its total debt of $210.7 million, by $110.1 million. Inventories at
January 2, 2010 were down $72.9 million, or 22%, from the balance at January 3,
2009, reflecting the Companys initiative to reduce inventories in light of the
downturn in the global economy. |
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During Fiscal 2009, the Company shut down its Calvin Klein Golf business and
classified as available for sale its Calvin Klein Collection business, both of which
operated in Korea. As a result, those businesses have been classified as
discontinued operations for all periods presented. See Note 3 to Notes to
Consolidated Financial Statements). |
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Pursuant to its strategy of increasing its presence in South America by
purchasing businesses, on June 10, 2009, the Company paid cash consideration of $2.5
million to acquire businesses relating to distribution and sale at wholesale and
retail of jeanswear and underwear products bearing the Calvin Klein trademarks in
Chile and Peru, including the transfer and assignment to the Company of the right to
operate and conduct business at three retail locations in Chile and one retail
location in Peru. |
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During the fourth quarter of 2009, the Company finalized agreements to acquire
the remaining 49% of the equity of its Brazilian subsidiary and acquired the assets
and assumed the leases of eight retail stores that sell Calvin Klein products
(including jeanswear and underwear) in Brazil, effective October 1, 2009. Prior to
the consummation of the acquisition of the remaining 49% of the equity of the
Brazilian subsidiary, the subsidiary paid a dividend of 7 million Brazilian Real
(approximately $4 million), representing the distribution of the Brazilian partners
accumulated equity in the subsidiary through September 30, 2009. The Company made an
initial payment of 21 million Brazilian Real (approximately $12 million based on the
currency exchange rate on the date of acquisition) to acquire the equity of the
Brazilian subsidiary and the retail stores. The Company may be required to make
three future annual payments totaling up to 43 million Brazilian Real (approximately
$24 million) through March 31, 2012, which are contingent on the operating activity
of the subsidiary through December 31, 2011. Based on the operating income achieved
by the Brazilian subsidiary in the fourth quarter of 2009, the first payment of 6
million Brazilian Real (approximately $3.5 million) will be paid by March 31, 2010.
The consummation of the Brazilian acquisitions continues the Companys strategy of
expansion of its operations in South America. See Note 2 to Notes to Consolidated
Financial Statements. |
31
In addition to the many near-term opportunities for growth and operational improvement
referenced above, the Company acknowledges that there are a number of challenges and uncertainties
relating to its businesses. See Item 1A. Risk Factors and Statement Regarding Forward-Looking
Disclosure.
Non-GAAP Measures
The Companys reported financial results are presented in accordance with U.S. generally
accepted accounting principles (GAAP). The reported operating income, income from continuing
operations and diluted earnings per share from continuing operations reflect certain items which
affect the comparability of those reported results. Those financial results are also presented on a
non-GAAP basis, as defined by Regulation S-K section 10(e) of the Securities and Exchange
Commission (SEC), to exclude the effect of these items. The Companys computation of these
non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not
intended to be, and should not be, considered separately from or as an alternative to the most
directly comparable GAAP financial measure to which they are reconciled, as presented in the
following table:
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|
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|
|
|
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Fiscal 2009 |
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|
Fiscal 2008 |
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Fiscal 2007 |
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(Dollars in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
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Operating income, as reported |
|
$ |
193,535 |
|
|
$ |
141,445 |
|
|
$ |
143,690 |
|
Restructuring charges and pension (a) |
|
|
32,999 |
|
|
|
66,904 |
|
|
|
23,522 |
|
Other (b) |
|
|
1,095 |
|
|
|
(11 |
) |
|
|
(1,084 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income, as adjusted |
|
$ |
227,629 |
|
|
$ |
208,338 |
|
|
$ |
166,128 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations, as reported |
|
$ |
102,225 |
|
|
$ |
51,046 |
|
|
$ |
86,909 |
|
Restructuring charges and pension (a) |
|
|
21,144 |
|
|
|
50,046 |
|
|
|
23,520 |
|
Other (b) |
|
|
657 |
|
|
|
3,191 |
|
|
|
(1,084 |
) |
Taxation (c) |
|
|
7,717 |
|
|
|
20,403 |
|
|
|
(4,778 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, as adjusted |
|
$ |
131,743 |
|
|
$ |
124,686 |
|
|
$ |
104,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted earnings per share from continuing operations, as reported |
|
$ |
2.19 |
|
|
$ |
1.08 |
|
|
$ |
1.84 |
|
Restructuring charges and pension (a) |
|
|
0.46 |
|
|
|
1.05 |
|
|
|
0.51 |
|
Other (b) |
|
|
0.01 |
|
|
|
0.07 |
|
|
|
(0.01 |
) |
Taxation (c) |
|
|
0.16 |
|
|
|
0.44 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations, as adjusted |
|
$ |
2.82 |
|
|
$ |
2.64 |
|
|
$ |
2.24 |
|
|
|
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(a) |
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This adjustment seeks to present the Companys consolidated condensed statement of operations
on a continuing basis without the effects of restructuring charges of $12,126, $35,260 and
$32,360 for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively, and pension expense of
$20,873 and $31,644 for Fiscal 2009 and Fiscal 2008, respectively, and pension income of
$8,838 for Fiscal 2007. |
|
(b) |
|
For Fiscal 2009, this adjustment seeks to present the Companys consolidated condensed
statement of operations on a continuing basis without the effect of an additional amortization
charge of $1,095 recorded during Fiscal 2009 which amount related to the correction of amounts
recorded in prior periods in connection with the COD income error described in Note 6 of Notes
to Consolidated Financial Statements. For Fiscal 2008, primarily excludes a charge of $5,329
related to the refinancing/repurchase of its debt during Fiscal 2008. For Fiscal 2007, relates
to a charge of $1,084 for depreciation expense recorded in Fiscal 2008 which corrected
depreciation expense for Fiscal 2007. |
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(c) |
|
Adjustment to reflect the Companys income from continuing operations at a tax rate of 33.9%,
32% and 24.9%, which reflects the Companys tax rate for Fiscal 2009, Fiscal 2008 and Fiscal
2007, respectively, excluding the effect of items (a) and (b), above, and for Fiscal 2009, a
non-recurring charge for amortization expense (which amount related to the correction of
amounts recorded in prior periods) and certain other tax related items including, among other
items, the charge related to the correction of the COD income error described in (b) above,
and for Fiscal 2008, a tax charge of approximately $14,600 related to the repatriation to
the United States of the net proceeds received in connection with the sale of the Lejaby
business. |
32
The Company believes it is valuable for users of its financial statements to be made aware of
the non-GAAP financial information, as such measures are used by management to evaluate the
operating performance of the Companys continuing businesses on a comparable basis and to make
operating and strategic decisions. Such non-GAAP measures will also enhance users ability to
analyze trends in the Companys business. In addition, the Company uses performance targets based
on non-GAAP operating income and diluted earnings per share as a component of the measurement of
incentive compensation.
Discussion of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires the Company to use judgment in making estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and expenses in its
consolidated financial statements and accompanying notes.
Critical accounting policies are those that are most important to the portrayal of the
Companys financial condition and results of operations and require difficult, subjective and
complex judgments by management in order to make estimates about the effect of matters that are
inherently uncertain. The Companys most critical accounting policies pertain to revenue
recognition, cost of goods sold, accounts receivable, inventories, long-lived assets, goodwill and
other intangible assets, income taxes, pension plans, stock-based compensation and advertising
costs. In applying such policies, management must record income and expense amounts that are based
upon informed judgments and best estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the critical accounting
policies. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods. Management is not aware of any
reasonably likely events or circumstances which would result in different amounts being reported
that would materially affect the Companys financial condition or results of operations.
Use of Estimates The Company uses estimates and assumptions in the preparation of its
financial statements which affect (i) the reported amounts of assets and liabilities at the date of
the consolidated financial statements and (ii) the reported amounts of revenues and expenses.
Actual results could materially differ from these estimates. The estimates the Company makes are
based upon historical factors, current circumstances and the experience and judgment of the
Companys management. The Company evaluates its assumptions and estimates on an ongoing basis. The
Company believes that the use of estimates affects the application of all of the Companys
significant accounting policies and procedures.
Revenue Recognition The Company recognizes revenue when goods are shipped to customers and
title and risk of loss have passed, net of estimated customer returns, allowances and other
discounts. The Company recognizes revenue from its retail stores when goods are sold to consumers,
net of allowances for future returns. The determination of allowances and returns involves the use
of significant judgment and estimates by the Company. The Company bases its estimates of allowance
rates on past experience by product line and account, the financial stability of its customers, the
expected rate of sales to the end customer, forecasts of demand for its products and general
economic and retail forecasts. The Company also considers its accounts receivable collection rate
and the nature and amount of customer deductions and requests for promotion assistance. The Company
believes it is likely that its accrual rates will vary over time and could change materially if the
Companys mix of customers, channels of distribution or products change. Current rates of accrual
for sales allowances, returns and discounts vary by customer. Revenues from the licensing or
sub-licensing of certain trademarks are recognized when the underlying royalties are earned.
Cost of Goods Sold Cost of goods sold consists of the cost of products purchased and certain
period costs related to the product procurement process. Product costs include: (i) cost of
finished goods; (ii) duty, quota and related tariffs; (iii) in-bound freight and traffic costs,
including inter-plant freight; (iv) procurement and material handling costs; (v) inspection,
quality control and cost accounting and (vi) in-stocking costs in the Companys warehouse
(in-stocking costs may include but are not limited to costs to receive, unpack and stock product
available for sale in its distribution centers). Period costs included in cost of goods sold
include: (a) royalty; (b) design and merchandising; (c) prototype costs; (d) loss on seconds; (e)
provisions for inventory losses (including provisions for shrinkage and losses on the disposition
of excess and obsolete inventory); and (f) direct freight charges incurred to ship finished goods
to customers. Costs incurred to store, pick, pack and ship inventory to customers (excluding direct
freight charges) are included in shipping and handling costs and are classified in selling, general
and administrative (SG&A) expenses. The Companys gross profit and gross margin may not be
directly comparable to those of its competitors, as income statement classifications of certain
expenses may vary by company.
33
Accounts Receivable The Company maintains reserves for estimated amounts that the Company
does not expect to collect from its trade customers. Accounts receivable reserves include amounts
the Company expects its customers to deduct for returns, allowances, trade discounts, markdowns,
amounts for accounts that go out of business or seek the protection of the Bankruptcy Code and
amounts in dispute with customers. The Companys estimate of the allowance amounts that are
necessary includes amounts for specific deductions the Company has authorized and an amount for
other estimated losses. Adjustments to estimate accruals for specific account allowances and
negotiated settlements of customer deductions are recorded as deductions to revenue in the period
the related revenue is recognized. The provision for accounts receivable allowances is affected by
general economic conditions, the financial condition of the Companys customers, the inventory
position of the Companys customers and many other factors. The determination of accounts
receivable reserves is subject to significant levels of judgment and estimation by the Companys
management. If circumstances change or economic conditions deteriorate, the Company may need to
increase the reserve significantly. As of January 2, 2010 and January 3, 2009, the Company recorded
$90.0 million and $87.4 million, respectively, of accounts receivable reserves.
Inventories The Company records purchases of inventory when it assumes title and the risk of
loss. The Company values its inventories at the lower of cost, determined on a first-in, first-out
basis, or market. The Company evaluates its inventories to determine excess units or slow-moving
styles based upon quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors that are obsolete,
the Company estimates the net amount that it expects to realize from the sale of such items. The
Companys objective is to recognize projected inventory losses at the time the
loss is evident rather than when the goods are ultimately sold. The Companys calculation of
the reduction in carrying value necessary for the disposition of excess inventory is highly
dependent on its projections of future sales of those products and the prices it is able to obtain
for such products. The Company reviews its inventory position monthly and adjusts its carrying
value for excess or obsolete goods based on revised projections and current market conditions for
the disposition of excess and obsolete inventory.
Long-Lived Assets Long-lived and intangible assets (including property, plant and equipment)
acquired as part of business combinations accounted for using the purchase method of accounting and
long-lived and intangible assets existing at the Effective Date are recorded at fair value based
upon the appraised value of such assets, net of accumulated depreciation and amortization. The
Company determines the fair value of acquired assets based upon the planned future use of each
asset or group of assets, quoted market prices where a market exists for such assets, the expected
future revenue and profitability of the business unit utilizing such assets and the expected future
life of such assets. In its determination of fair value, the Company also considers whether an
asset will be sold either individually or with other assets and the proceeds the Company expects to
receive from any such sale. Preliminary estimates of the fair value of acquired assets are based
upon managements estimates. Adjustments to the preliminary estimates of fair value that are made
within one year of an acquisition date are recorded as adjustments to goodwill. Subsequent
adjustments are recorded in earnings in the period of the adjustment.
Long-lived assets acquired in the ordinary course of the Companys operations are recorded at
historical costs, net of accumulated depreciation. Assumptions relating to the expected future use
of individual assets could affect the fair value of such assets and the depreciation expense
recorded related to such assets in the future.
The Company reviews its long-lived assets for possible impairment when events or circumstances
indicate that the carrying value of the assets may not be recoverable. Such events may include (a)
a significant adverse change in legal factors or the business climate; (b) an adverse action or
assessment by a regulator; (c) unanticipated competition; (d) a loss of key personnel; (e) a
more-likely-than-not expectation that a reporting unit, or a significant part of a reporting unit,
will be sold or disposed of; (f) the determination of a lack of recoverability of a significant
asset group within a reporting unit; (g) reporting a goodwill impairment loss by a subsidiary
that is a component of a reporting unit; and (h) a significant decrease in the Companys stock
price.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of
future cash flows expected to result from the use of the asset and its eventual disposition. To the
extent that estimated future undiscounted net cash flows attributable to the asset are less than
the carrying amount, an impairment loss is recognized equal to the difference between the carrying
value of such asset and its fair value, which is determined based on discounted cash flows. Assets
to be disposed of and for which there is a committed plan of disposal are reported at the lower of
carrying value or fair value less costs to sell.
The Company conducted an annual evaluation of the long-lived assets of its retail stores for
impairment during the fourth quarter of Fiscal 2009. None of those assets were impaired except for
$0.2 million of assets in two stores in Mexico, which will be closed early in 2010. The Company
recognized a loss for the full amount of that impairment in the fourth quarter of Fiscal 2009.
Since the determination of future cash flows is an estimate of future performance, there may
be future impairments to the carrying value of long-lived and intangible assets and impairment
charges in future periods in the event that future cash flows do not meet expectations. In
addition, depreciation and amortization expense is affected by the Companys determination of the
estimated useful lives of the related assets. The estimated useful lives of fixed assets and
finite-lived intangible assets are based on their classification and expected usage, as determined
by the Company.
Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over
the fair value of net assets acquired in business combinations after the Effective Date accounted
for under the purchase method of accounting. Goodwill is not amortized and is subject to an annual
impairment test which the Company performs in the fourth quarter of each fiscal year.
34
Goodwill impairment is determined using a two-step process. Goodwill is allocated to various
reporting units, which are either the operating segment or one reporting level below the operating
segment. As of January 2, 2010, the Companys reporting units for purposes of applying the goodwill
impairment test are: Core Intimate Apparel (consisting of the Warners® /Olga® /Body Nancy
Ganz®/Bodyslimmers ® business units), Calvin Klein Underwear, Calvin Klein Jeans, Chaps® and
Swimwear. The first step of the goodwill impairment test is to compare the fair value of each
reporting unit to its carrying amount to determine if there is potential
impairment. If the fair value of the reporting unit is less than its carrying value, the
second step of the goodwill impairment test is performed to measure the amount of impairment loss.
The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized
in an amount equal to that excess. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. That is, the fair value of
the reporting unit is allocated to all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had been acquired in a business
combination and the fair value was the purchase price paid to acquire the reporting unit.
Determining the fair value of a reporting unit under the first step of the goodwill impairment
test and determining the fair value of individual assets and liabilities of a reporting unit
(including unrecognized intangible assets) under the second step of the goodwill impairment test is
judgmental in nature and often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the fair value of other intangible
assets. These estimates and assumptions could have a significant impact on whether or not an
impairment charge is recognized and the magnitude of any such charge. Estimates of fair value are
primarily determined using discounted cash flows, market multiples or appraised values, as
appropriate.
Intangible assets primarily consist of licenses and trademarks. Licenses and trademarks in
existence as of the Effective Date are recorded at their fair values net of accumulated
amortization since the Effective Date and net of any adjustments after the Effective Date for
reductions in valuation allowances related to deferred tax assets arising before the Effective
Date. Licenses and trademarks acquired in business combinations after the Effective Date under the
purchase method of accounting are recorded at their fair values net of accumulated amortization
since the acquisition date. Licenses and trademarks acquired in the normal course of the Companys
operations are recorded at cost, net of accumulated amortization. The majority of the Companys
license and trademark agreements cover extended periods of time, some in excess of forty years. The
estimates and assumptions used in the determination of the value of indefinite-lived intangible
assets will not have an effect on the Companys future earnings unless a future evaluation of
trademark or license value indicates that such asset is impaired. Costs incurred to renew or extend
the term of a recognized intangible asset are capitalized and amortized, where appropriate, through
the extension or renewal period of the asset.
Intangible assets with indefinite lives are not amortized and are subject to an annual
impairment test which the Company performs in the fourth quarter of each fiscal year. The Company
also reviews its indefinite-lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an indefinite-lived intangible asset exceeds its
fair value, as for goodwill. If the carrying value of an indefinite-lived intangible asset exceeds
its fair value (determined based on discounted cash flows), an impairment loss is recognized.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over the
estimated useful lives of the assets. The Company reviews its finite-lived intangible assets for
impairment in the fourth quarter of each fiscal year or whenever events or changes in circumstances
indicate that the carrying amount of finite-lived intangible asset may not be recoverable.
Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying
amount to the undiscounted future cash flows expected to be generated by the asset. If the asset
is considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the fair value of the asset, which is determined based on
discounted cash flows. See Note 10 of Notes to Consolidated Financial Statements. The Company did
not identify any reporting units that failed or are at risk of failing the first step of the
goodwill impairment test (comparing fair value to carrying amount) or impairment of any intangible
assets for continuing operations for any period presented.
Income Taxes Deferred income taxes are determined using the asset and liability method.
Deferred tax assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates
and laws to taxable years in which such differences are expected to reverse. Realization of the
Companys deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the
timing and amount of which are uncertain. Management assesses the Companys income tax positions
and records tax benefits for all years subject to examination based upon an evaluation of the
facts, circumstances, and information available at the reporting dates. In addition, valuation
allowances are established when management determines that it is more-likely-than-not that some
portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed
periodically and adjusted as events occur, or circumstances change, that warrant adjustments to
those balances.
35
The Company accounts for uncertainty in income taxes by considering whether a tax position is
more-likely-than-not of being sustained upon audit, based solely on the technical merits of the
position. If so, the Company recognizes the tax benefit. The Company measures the tax benefit by
determining the largest amount that is greater than 50% likely of being realized upon settlement,
presuming that the tax position is examined by the appropriate taxing authority that has full
knowledge of all relevant information. These assessments can be complex and require significant
judgment. To the extent that the Companys estimates change or the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the income tax
provision in the period in which such determinations are made. If the initial assessment fails to
result in the recognition of a tax benefit, the Company regularly monitors its position and
subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law
that sufficiently raise the likelihood of prevailing on the technical merits of the position to
more-likely-than-not, (ii) the statute of limitations expires, or (iii) there is a completion of an
audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax
positions are classified as current only when the Company expects to pay cash within the next
twelve months. Interest and penalties, if any, are recorded within the provision for income taxes
in the Companys consolidated statements of operations and are classified on the consolidated
balance sheets with the related liability for unrecognized tax benefits.
Pension Plans The Company has a defined benefit pension plan covering certain full-time
non-union domestic employees and certain domestic employees covered by a collective bargaining
agreement who completed service prior to January 1, 2003 (the Pension Plan). The assumptions
used, in particular the discount rate, can have a significant effect on the amount of pension
liability recorded by the Company. The discount rate is used to estimate the present value of
projected benefit obligations at each valuation date. The Company evaluates the discount rate
annually and adjusts the rate based upon current market conditions. For the Pension Plan, the
discount rate is estimated using a portfolio of high quality corporate bond yields (rated Aa or
higher by Moodys or Standard & Poors Investors Services) which matches the projected benefit
payments and duration of obligations for participants in the Pension Plan. The discount rate that
is developed considers the unique characteristics of the Pension Plan and the long-term nature of
the projected benefit obligation. The Company believes that a discount rate of 6.1% for Fiscal
2009 reasonably reflects current market conditions and the characteristics of the Pension Plan. An
increase or decrease of 1% in the discount rate would result in an increase/decrease of
approximately $17 million in pension expense (decrease/increase in pension income) for Fiscal 2009.
A 1% increase/decrease in the actual return earned on pension plan assets (an increase in the
return on plan assets from 8% to 9% or a decrease in the return on plan assets from 8% to 7%) would
result in a decrease/increase of approximately $1.2 million in pension expense (increase/decrease
in pension income) for Fiscal 2009.
The investments of each plan are stated at fair value based upon quoted market prices, if
available. The Pension Plan invests in certain funds or asset pools that are managed by investment
managers for which no quoted market price is available. These investments are valued at estimated
fair value as reported by each funds administrators to the Pension Plan trustee. The individual
investment managers estimates of fair value are based upon the value of the underlying investments
in the fund or asset pool. These amounts may differ significantly from the value that would have
been reported had a quoted market price been available for each underlying investment or the
individual asset pool in total.
Effective January 1, 2003, the Pension Plan was amended and, as a result, no future benefits
accrue to participants in the Pension Plan. As a result of the amendment, the Company has not
recorded pension expense related to current service for all periods presented and will not record
pension expense for current service for any future period.
The Company uses a method that accelerates recognition of gains or losses which are a result
of (i) changes in projected benefit obligations related to changes in assumptions and (ii) returns
on plan assets that are above or below the projected asset return rate (currently 8% for the
Pension Plan) (Accelerated Method) to account for its defined benefit pension plans. The Company
has recorded pension obligations equal to the difference between the plans projected benefit
obligations and the fair value of plan assets in each fiscal year since the adoption of the
Accelerated Method. The Company believes the Accelerated Method is preferable because the pension
liability using the Accelerated Method approximates fair value.
The Company recognizes one-quarter of its estimated annual pension expense (income) in each of
its first three fiscal quarters. Estimated pension expense (income) consists of the interest cost
on projected benefit obligations for the Pension Plan, offset by the expected return on pension
plan assets. The Company records the effect of any changes in actuarial assumptions (including
changes in the discount rate) and the difference between the assumed rate of return on plan assets
and the actual return on plan assets in the fourth quarter of its fiscal year. The Companys use
of the Accelerated Method results in increased volatility in reported
pension expense and therefore the Company reports pension income/expense on a separate line in
its consolidated statement of operations. The Company recognizes the funded status of its pension
and other post-retirement benefit plans in the statement of financial position.
The Company makes annual contributions to all of its defined benefit pension plans that are at
least equal to the minimum required contributions and any other premiums due under the Employee
Retirement Income Security Act of 1974, as amended, the U.S. Internal Revenue Code of 1986, as
amended and the Pension Protection Act of 2006. The Companys cash contribution to the Pension Plan
during Fiscal 2009 was $10.5 million and is expected to be approximately $6.3 million in Fiscal
2010. See Note 7 of Notes to Consolidated Financial Statements.
36
Stock-Based Compensation The Company uses the Black-Scholes-Merton model to calculate the
fair value of stock option awards. The Black-Scholes-Merton model uses assumptions which involve
estimating future uncertain events. The Company is required to make significant judgments regarding
these assumptions, the most significant of which are the stock price volatility, the expected life
of the option award and the risk-free rate of return.
|
|
|
In determining the stock price volatility assumption used, the Company considers
the historical volatility of the stock prices of selected companies in the apparel
industry, the nature of those companies, the Companys own historical stock price
volatility since its emergence from bankruptcy and other factors. Historical
volatilities are based upon daily quoted market prices of the Companys common stock
on the New York Stock Exchange and, prior to May 15, 2008, on the NASDAQ Stock
Market LLC, over a period equal to the expected term of the related equity
instruments. The Company relies only on historical volatility since it provides the
most reliable indication of future volatility. Future volatility is expected to be
consistent with historical; historical volatility is calculated using a simple
average calculation method; historical data is available for the length of the
options expected term and a sufficient number of price observations are used
consistently. Since the Companys stock options are not traded on a public market,
the Company does not use implied volatility. A higher volatility input to the
Black-Scholes-Merton model increases the resulting compensation expense. |
|
|
|
During Fiscal 2009, the Company had accumulated sufficient historical data
regarding stock option exercises and forfeitures to be able to rely on that data for
the calculation of expected option life. Accordingly, for options granted during
Fiscal 2009, the Company revised its method of calculating expected option life from
the simplified method as described in the SECs Staff Accounting Bulletin No. 110
(SAB 110) (which yielded an expected term of 6 years) to the use of historical
data (which yielded an expected life of 3.72 years for Fiscal 2009). For the stock
options granted in 2009, the Company estimates that the change from the simplified
to the current method for calculating the expected option life will result in lower
stock-based compensation expense of approximately $0.7 million over the three year
vesting period. Historical data will be used for stock options granted in all future
periods. The Company based its Fiscal 2008 and Fiscal 2007 estimates of the expected
life of a stock option of six years upon the average of the sum of the vesting
period of 36-42 months and the option term of ten years for issued and outstanding
options in accordance with the simplified method as detailed in SAB 110. A shorter
expected term would result in a lower compensation expense. |
|
|
|
The Companys risk-free rate of return assumption for options granted in Fiscal
2009, Fiscal 2008 and Fiscal 2007 was equal to the quoted yield for U.S. treasury
bonds as of the date of grant. |
Compensation expense related to stock option grants is determined based on the fair value of
the stock option on the grant date and is recognized over the vesting period of the grants on a
straight-line basis. Compensation expense related to restricted stock grants is determined based on
the fair value of the underlying stock on the grant date and recognized over the vesting period of
the grants on a straight-line basis. The Company applies a forfeiture rate to the number of
unvested awards in each reporting period in order to estimate the number of awards that are
expected to vest. Estimated forfeiture rates are based upon historical data on vesting behavior of
employees. The Company adjusts the total amount of compensation cost recognized for each award, in
the period in which each award vests, to reflect the actual forfeitures related to that award.
Changes in the Companys estimated forfeiture rate will result in changes in the rate at which
compensation cost for an award is recognized over its vesting period.
Advertising Costs Advertising costs are included in SG&A expenses and are expensed when the
advertising or promotion is published or presented to consumers. Cooperative advertising expenses
are charged to operations as incurred and are also included in SG&A expenses. The amounts charged
to operations for advertising, marketing and promotion expenses (including cooperative advertising,
marketing and promotion expenses) for Fiscal 2009, Fiscal 2008 and Fiscal 2007 were $100.2 million,
$118.8 million and $99.1 million, respectively. Cooperative advertising expenses for Fiscal 2009,
Fiscal 2008 and Fiscal 2007 were $21.6 million, $24.6 million and $24.8 million, respectively.
Acquisitions
See Note 2 of Notes to Consolidated Financial Statements.
Dispositions and Discontinued Operations
See Note 3 of Notes to Consolidated Financial Statements
37
Results of Operations
Statement of Operations (Selected Data)
The following tables summarize the historical results of operations of the Company for Fiscal
2009, Fiscal 2008 and Fiscal 2007. The results of the Companys discontinued operations are
included in Loss from discontinued operations, net of taxes for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
Fiscal 2009 |
|
|
Revenues |
|
|
Fiscal 2008 |
|
|
Revenues |
|
|
Fiscal 2007 |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Net revenues |
|
$ |
2,019,625 |
|
|
|
100.0 |
% |
|
$ |
2,062,849 |
|
|
|
100.0 |
% |
|
$ |
1,819,579 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
1,155,278 |
|
|
|
57.2 |
% |
|
|
1,142,076 |
|
|
|
55.4 |
% |
|
|
1,069,904 |
|
|
|
58.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
864,347 |
|
|
|
42.8 |
% |
|
|
920,773 |
|
|
|
44.6 |
% |
|
|
749,675 |
|
|
|
41.2 |
% |
Selling, general and administrative expenses |
|
|
638,907 |
|
|
|
31.6 |
% |
|
|
738,238 |
|
|
|
35.8 |
% |
|
|
601,656 |
|
|
|
33.1 |
% |
Amortization of intangible assets |
|
|
11,032 |
|
|
|
0.5 |
% |
|
|
9,446 |
|
|
|
0.5 |
% |
|
|
13,167 |
|
|
|
0.7 |
% |
Pension expense (income) |
|
|
20,873 |
|
|
|
1.0 |
% |
|
|
31,644 |
|
|
|
1.5 |
% |
|
|
(8,838 |
) |
|
|
-0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
193,535 |
|
|
|
9.6 |
% |
|
|
141,445 |
|
|
|
6.9 |
% |
|
|
143,690 |
|
|
|
7.9 |
% |
Other (income) loss |
|
|
1,889 |
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
(7,063 |
) |
|
|
|
|
Interest expense |
|
|
23,897 |
|
|
|
|
|
|
|
29,519 |
|
|
|
|
|
|
|
37,718 |
|
|
|
|
|
Interest income |
|
|
(1,248 |
) |
|
|
|
|
|
|
(3,120 |
) |
|
|
|
|
|
|
(3,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
provision for income taxes and minority interest |
|
|
168,997 |
|
|
|
|
|
|
|
113,120 |
|
|
|
|
|
|
|
116,801 |
|
|
|
|
|
Provision for income taxes |
|
|
64,272 |
|
|
|
|
|
|
|
60,727 |
|
|
|
|
|
|
|
29,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before noncontrolling interest |
|
|
104,725 |
|
|
|
|
|
|
|
52,393 |
|
|
|
|
|
|
|
86,909 |
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
|
(6,227 |
) |
|
|
|
|
|
|
(3,792 |
) |
|
|
|
|
|
|
(7,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
98,498 |
|
|
|
|
|
|
|
48,601 |
|
|
|
|
|
|
|
79,107 |
|
|
|
|
|
Less: Net income attributable to the noncontrolling interest |
|
|
(2,500 |
) |
|
|
|
|
|
|
(1,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Warnaco Group, Inc. |
|
$ |
95,998 |
|
|
|
|
|
|
$ |
47,254 |
|
|
|
|
|
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Fiscal 2009 to Fiscal 2008
Net Revenues
Net revenues by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
% of total |
|
|
|
(in thousands of dollars) |
|
|
|
|
|
Sportswear Group |
|
$ |
1,091,165 |
|
|
$ |
1,100,597 |
|
|
$ |
(9,432 |
) |
|
|
-0.9 |
% |
|
|
54.0 |
% |
Intimate Apparel Group |
|
|
677,315 |
|
|
|
702,252 |
|
|
|
(24,937 |
) |
|
|
-3.6 |
% |
|
|
33.5 |
% |
Swimwear Group |
|
|
251,145 |
|
|
|
260,000 |
|
|
|
(8,855 |
) |
|
|
-3.4 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues (a) |
|
$ |
2,019,625 |
|
|
$ |
2,062,849 |
|
|
$ |
(43,224 |
) |
|
|
-2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Calvin Klein products |
|
$ |
1,484,224 |
|
|
$ |
1,499,915 |
|
|
$ |
(15,691 |
) |
|
|
-1.0 |
% |
|
|
73.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in net revenues for the Sportswear, Intimate Apparel and Swimwear Groups
for Fiscal 2009 relative to Fiscal 2008 reflect:
|
|
|
a decrease in domestic net revenues of $25.5 million and a decline in
international net revenues of $17.7 million; the decline in international net
revenues includes an $85.0 million decrease due to the unfavorable effect of
fluctuations
in foreign currency exchange rates in countries where the Company conducts certain of
its operations (primarily the Euro, Korean Won, Canadian Dollar and Mexican Peso); |
|
|
|
the negative effect of the downturn in the worldwide economy, tightening of
credit and erosion in consumer spending primarily from the fourth quarter of 2008,
which contributed to the decline domestically and limited the
international increase in net revenues expressed in local currency in Fiscal
2009, and; |
|
|
|
a benefit of $23.0 million for Fiscal 2008 from an extra week of operations
relative to Fiscal 2009. |
38
Total Company net revenues from comparable store sales increased 3.0% for Fiscal 2009.
The Companys products are widely distributed through virtually all channels of distribution
and geographies. The following tables summarize the Companys net revenues by channel of
distribution, by geography and by wholesale/retail split for Fiscal 2009 and Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
United States wholesale |
|
|
|
|
|
|
|
|
Department stores and independent retailers |
|
|
10 |
% |
|
|
12 |
% |
Specialty stores |
|
|
8 |
% |
|
|
8 |
% |
Chain stores |
|
|
8 |
% |
|
|
8 |
% |
Mass merchandisers |
|
|
1 |
% |
|
|
1 |
% |
Membership clubs |
|
|
7 |
% |
|
|
7 |
% |
Off price and other |
|
|
10 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
Total United States wholesale |
|
|
44 |
% |
|
|
44 |
% |
International wholesale |
|
|
33 |
% |
|
|
35 |
% |
Retail / other |
|
|
23 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
Net revenues consolidated |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
Increase / |
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
In thousands of dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
916,691 |
|
|
$ |
942,205 |
|
|
$ |
(25,514 |
) |
|
|
-2.7 |
% |
Europe |
|
|
551,595 |
|
|
|
576,320 |
|
|
|
(24,725 |
) |
|
|
-4.3 |
% |
Asia |
|
|
322,890 |
|
|
|
319,052 |
|
|
|
3,838 |
|
|
|
1.2 |
% |
Canada |
|
|
109,300 |
|
|
|
115,448 |
|
|
|
(6,148 |
) |
|
|
-5.3 |
% |
Mexico, Central and South America |
|
|
119,149 |
|
|
|
109,824 |
|
|
|
9,325 |
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,019,625 |
|
|
$ |
2,062,849 |
|
|
$ |
(43,224 |
) |
|
|
-2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
Increase / |
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
In thousands of dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
1,564,457 |
|
|
$ |
1,638,560 |
|
|
$ |
(74,103 |
) |
|
|
-4.5 |
% |
Retail |
|
|
455,168 |
|
|
|
424,289 |
|
|
|
30,879 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,019,625 |
|
|
$ |
2,062,849 |
|
|
$ |
(43,224 |
) |
|
|
-2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Sportswear Group
Sportswear Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Jeans |
|
$ |
646,862 |
|
|
$ |
663,732 |
|
|
$ |
(16,870 |
) |
|
|
-2.5 |
% |
Chaps |
|
|
168,083 |
|
|
|
177,288 |
|
|
|
(9,205 |
) |
|
|
-5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
814,945 |
|
|
|
841,020 |
|
|
|
(26,075 |
) |
|
|
-3.1 |
% |
Sportswear retail |
|
|
276,220 |
|
|
|
259,577 |
|
|
|
16,643 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group (a), (b) |
|
$ |
1,091,165 |
|
|
$ |
1,100,597 |
|
|
$ |
(9,432 |
) |
|
|
-0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes net revenues of $93.2 million and $86.5 million related to the Calvin Klein
accessories business in Europe and Asia for Fiscal 2009 and Fiscal 2008, respectively. |
|
(b) |
|
Includes approximately $47.0 million and $49.8 million for Fiscal 2009 and Fiscal 2008,
respectively, related to certain sales of Calvin Klein underwear in regions managed by the
Sportswear Group. |
Sportswear Group net revenues decreased $9.4 million to $1,091.2 million for Fiscal 2009
from $1,100.6 million for Fiscal 2008, comprised of a decrease of $26.0 million in Sportswear
wholesale and an increase of $16.6 million in Sportswear retail. Sportswear Group net revenues
include a $56.0 million decrease due to the negative effect of fluctuations in foreign currency
exchange rates. Sportswear Group net revenues from international operations declined $1.1 million
and from domestic operations declined $8.3 million. Sportswear Group net revenues from comparable
store sales increased 4.0% for Fiscal 2009.
The decrease in Sportswear wholesale primarily reflects:
Calvin Klein Jeans:
|
|
|
a decline in net revenues to department stores and membership clubs in
the U.S., Mexico, Canada and Europe, partially offset by: |
|
|
|
an increase in sales in the U.S. and Europe to the off-price channel; |
|
|
|
an increase in net revenues in Asia due to increased sales in Korea,
primarily due to the sale of off-season merchandise and promotional events and
discounts and an increase in the number of distributors in China. |
Chaps:
|
|
|
a decline in the U.S., Mexico and Canada in the department store and
membership club channels, partially offset by: |
|
|
|
an increase in sales in the U.S. to the off-price and chain store
channels. |
The increase in Sportswear retail primarily reflects:
|
|
|
increases in Europe, primarily related to volume increases in comparable
outlet stores and the effect of new outlet, full price and concession store
openings; |
|
|
|
an increase in Brazil, due to the addition of sixteen new stores,
including the eight stores acquired in the fourth quarter of Fiscal 2009; |
|
|
|
increases in comparable store sales and new store openings in China,
Korea and Australia. |
Intimate Apparel Group
Intimate Apparel Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Underwear |
|
$ |
371,783 |
|
|
$ |
399,853 |
|
|
$ |
(28,070 |
) |
|
|
-7.0 |
% |
Core Intimates |
|
|
143,006 |
|
|
|
156,074 |
|
|
|
(13,068 |
) |
|
|
-8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
514,789 |
|
|
|
555,927 |
|
|
|
(41,138 |
) |
|
|
-7.4 |
% |
Calvin Klein Underwear retail |
|
|
162,526 |
|
|
|
146,325 |
|
|
|
16,201 |
|
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group |
|
$ |
677,315 |
|
|
$ |
702,252 |
|
|
$ |
(24,937 |
) |
|
|
-3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Intimate Apparel Group net revenues decreased $24.9 million to $677.3 million for Fiscal
2009 from $702.2 million for Fiscal 2008, comprised of a decrease of $41.1 million in Intimate
Apparel wholesale and an increase of $16.2 million in Calvin Klein Underwear retail. Intimate
Apparel Group net revenues include a $23.9 million decrease due to the negative effect of
fluctuations in foreign currency exchange rates. Intimate Apparel Group net revenues from
international operations declined $12.1 million and from domestic operations declined $12.8
million. Intimate Apparel Group net revenues from comparable store sales increased 2.0% for Fiscal
2009.
The decrease in Intimate Apparel wholesale primarily reflects:
Calvin Klein Underwear:
|
|
|
decreases in net revenues in all geographies in the department store
channel; |
|
|
|
a reduction in the off-price channel in the U.S, which the Company
attributes to lower excess and obsolete inventory in line with its global
initiative to reduce inventory levels, partially offset by: |
|
|
|
|
an increase in net revenues in the U.S., Canada and Mexico to membership clubs; |
|
|
|
|
an increase in net revenues in Asia related to the expansion of the Companys distribution network in China. |
Core Intimates:
|
|
|
decreases in net revenues in all geographies in the department store channel, partially offset by: |
|
|
|
|
an increase in sales in the U.S. in the off-price channel; |
|
|
|
a decline in net revenues of Warners products, primarily related to the
introduction of fewer new styles in 2009 than in 2008 in the chain store channel,
partially offset by: |
|
|
|
an increase in sales of the Olga line, primarily related to strong sales
of new styles. |
The increase in Calvin Klein retail primarily reflects:
|
|
|
the opening of new retail stores and increased net revenues in existing
stores in Canada, Hong Kong, China, Europe, Mexico, Central and South America,
partially offset by: |
|
|
|
a decrease in the U.S., which reflects a decline in e-commerce sales on
the Companys website and the Soho store. |
Swimwear Group
Swimwear Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
Speedo |
|
$ |
215,135 |
|
|
$ |
218,043 |
|
|
$ |
(2,908 |
) |
|
|
-1.3 |
% |
Calvin Klein Swim |
|
|
19,588 |
|
|
|
23,570 |
|
|
|
(3,982 |
) |
|
|
-16.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
234,723 |
|
|
|
241,613 |
|
|
|
(6,890 |
) |
|
|
-2.9 |
% |
Swimwear retail (a) |
|
|
16,422 |
|
|
|
18,387 |
|
|
|
(1,965 |
) |
|
|
-10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group |
|
$ |
251,145 |
|
|
$ |
260,000 |
|
|
$ |
(8,855 |
) |
|
|
-3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $7.3 million and $6.9 million for Fiscal 2009 and Fiscal 2008, respectively,
related to Calvin Klein retail swimwear. |
Swimwear Group net revenues decreased $8.9 million to $251.1 million for Fiscal 2009 from
$260.0 million for Fiscal 2008, comprised of a decrease of $6.9 million in Swimwear wholesale and a
decrease of $2.0 million in Swimwear retail. Swimwear Group net revenues include a $5.1 million
decrease due to the negative effect of fluctuations in foreign currency exchange rates. Swimwear
Group net revenues from international operations declined $4.5 million and from domestic operations
declined $4.4 million. Swimwear Group net revenues from comparable store sales increased 1.6% for
Fiscal 2009.
41
The decrease in Swimwear wholesale net revenues reflects:
Speedo:
|
|
|
a decline in sales in the U.S., reflecting decreased net revenues to
specialty and sporting goods stores and discounters, partially offset by increased
sales volume to membership clubs and team dealers; |
|
|
|
|
a decrease in net revenues in specialty stores in Mexico. |
Calvin Klein:
|
|
|
a decline in the U.S. and in Europe, due primarily to cancellations of orders related to late deliveries in 2009. |
The decrease in Swimwear retail reflects:
|
|
|
volume decreases and price decreases at the online Speedo store in the
U.S. due to promotional sales, partially offset by: |
|
|
|
an increase in sales volume of Calvin Klein swimwear at outlet stores in
Europe. |
Gross Profit
Gross profit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
Fiscal 2009 |
|
|
Revenues |
|
|
Fiscal 2008 |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Sportswear Group (a) |
|
$ |
460,671 |
|
|
|
42.2 |
% |
|
$ |
478,739 |
|
|
|
43.5 |
% |
Intimate Apparel Group |
|
|
322,670 |
|
|
|
47.6 |
% |
|
|
347,773 |
|
|
|
49.5 |
% |
Swimwear Group (b) |
|
|
81,006 |
|
|
|
32.3 |
% |
|
|
94,261 |
|
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit (c) |
|
$ |
864,347 |
|
|
|
42.8 |
% |
|
$ |
920,773 |
|
|
|
44.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Sportswear Group gross profit includes approximately $28.1 million and $34.9 million
for Fiscal 2009 and Fiscal 2008, respectively, related to certain sales of Calvin Klein
underwear in regions managed by the Sportswear Group. |
|
(b) |
|
Reflects a charge of $3.6 million during Fiscal 2009 related to the write down of
inventory associated with the Companys LZR Racer and other similar racing swimsuits.
The Company recorded the write down as a result of FINAs ruling during Fiscal 2009
which banned the use of these types of suits in competitive swim events. |
|
(c) |
|
Includes $0.3 million, $0.8 million and $0.6 million of restructuring expenses
related to the Sportswear, Intimate Apparel and Swimwear groups, respectively, for
Fiscal 2009 and $0.3 million and $1.5 million related to the Sportswear and Swimwear
groups, respectively, for Fiscal 2008. |
Gross profit was $864.3 million, or 42.8% of net revenues, for Fiscal 2009 compared to
$920.8 million, or 44.6% of net revenues, for Fiscal 2008. The $56.5 million decrease in gross
profit was due to decreases in the Sportswear Group ($18.1 million), the Intimate Apparel Group
($25.1 million) and the Swimwear Group ($13.3 million). The 180 basis point reduction in gross
margin is
primarily reflective of an increase in the ratio of customer allowances and discounts to net
revenues (which the Company believes is due to an increase in promotional activity in response to
recent weakness in the global economy), the write down of inventory in response to FINAs ruling
regarding the LZR Racer and other similar swimsuits, an unfavorable sales mix as the Company
experienced an increase in off-price (and other less profitable channels) net revenues as a
proportion of total net revenues and the negative effects of fluctuations in foreign currency
exchange rates. Gross profit for Fiscal 2009 includes a decrease of $72.4 million due to foreign
currency fluctuations. In addition, gross profit for Fiscal 2008 benefitted by an extra week of
operations when compared to Fiscal 2009.
Sportswear Group gross profit decreased $18.1 million and gross margin decreased 130 basis
points for Fiscal 2009 compared to Fiscal 2008 reflecting a $17.8 million decline in the
international business (primarily related to the negative effect of fluctuations in exchange rates
of foreign currencies, an unfavorable sales mix in the wholesale channels in Europe and Asia, and
the effect of an extra week of operations during Fiscal 2008, partially offset by increased retail
sales worldwide in Fiscal 2009) and a $0.3 million decrease in the domestic business (due primarily
to lower net revenues and an unfavorable sales mix, partially offset by lower product costs).
42
Intimate Apparel Group gross profit decreased $25.1 million and gross margin decreased 190
basis points for Fiscal 2009 compared to Fiscal 2008 reflecting a $23.2 million decline in the
international business (primarily related to the negative effect of fluctuations in exchange rates
of foreign currencies, an unfavorable sales mix, lower net sales and the effect of an extra week of
operations during Fiscal 2008) and a $1.9 million decrease in the domestic business. The decrease
in the domestic business primarily reflects decreased net revenues in the Core Intimate and Calvin
Klein underwear businesses, an unfavorable sales mix in the Core Intimate business and a
restructuring expense increase in those businesses, partially offset by a favorable sales mix and
lower freight costs in the Calvin Klein underwear business.
Swimwear Group gross profit decreased $13.3 million and gross margin decreased 400 basis
points for Fiscal 2009 compared to Fiscal 2008. The decrease in gross profit and gross margin
primarily reflects a $6.2 million decrease in Speedo (primarily related to the inventory write down
associated with the LZR Racer and other similar racing swimsuits and declines in net revenues), a
$5.7 million decline in Calvin Klein swimwear wholesale gross profit (due primarily to decrease net
revenues coupled with an unfavorable sales mix in the U.S., a decrease in net sales in Europe and
the unfavorable effect of foreign currency fluctuation in Europe) and a decrease of $1.4 million in
Swimwear retail (due primarily to a decline in net revenue in the U.S. SpeedoUSA.com internet
site). The decrease in gross margin also reflects the effect of an extra week of operations during
Fiscal 2008.
Selling, General and Administrative Expenses
Selling, general &
administrative (SG&A) expenses decreased $99.3 million to
$638.9 million (31.6% of net revenues) for Fiscal 2009 compared to $738.2 million
(35.8% of net revenues) for Fiscal 2008. The decrease in SG&A expenses primarily reflects
the effects of the Companys cost cutting initiatives (which include, among other things,
reductions in its workforce, reductions in discretionary marketing costs, and reductions in
professional fees and travel costs), reductions related to the effects of, and losses associated
with, fluctuations in foreign currency exchange rates (see below), lower restructuring charges
and the effect of an extra week of operations in Fiscal 2008; partially offset by an increase of $5.9 million in selling expenses associated with the opening of additional retail stores in Fiscal 2009 The U.S. dollar strengthened during Fiscal 2009 relative to the functional currencies where the Company conducts certain of its operations compared to Fiscal 2008 resulting in a $32.7 million decrease in SG&A. The Company also experienced a $27.2 million reduction in foreign currency exchange losses (primarily associated with U.S. dollar denominated trade liabilities in certain of its foreign subsidiaries) which management believes is attributable to the implementation (during the fourth quarter of 2008) of strategies designed to minimize losses associated with certain exposures the Company has to fluctuations in foreign currency exchange rates. The reduction in restructuring charges (from $35.3 million in Fiscal 2008 to $12.1 million in Fiscal 2009) primarily related to a reduction in the Companys workforce in response to the downturn in the economy and consolidation of the Companys European operations, while charges for Fiscal 2008 related primarily to the Collection License Company Charge of $18.5 million, discussed previously, as well as activities to increase productivity and profitability in the Swimwear segment (see Note 4 of Notes to Consolidated Financial Statements).
Amortization of Intangible Assets
Amortization of intangible assets was $11.0 million for Fiscal 2009 compared to $9.4 million
for Fiscal 2008. The increase primarily relates to the correction of certain intangible assets
recorded at the Effective Date, partially offset by the unfavorable effect of foreign currency
fluctuations on the Euro-denominated and Korean Won-denominated carrying amounts of Calvin Klein
licenses acquired in January 2006 and January 2008 and the write-off of the Calvin Klein Golf
license in Fiscal 2009.
Pension Income / Expense
Pension expense was $20.9 million in Fiscal 2009 compared to pension expense of $31.6 million
in Fiscal 2008. The decrease in pension expense is primarily related to a higher asset base in 2009
due to positive returns earned on the Plans assets during Fiscal 2009, partially offset by an
increase in pension liability resulting from application of a discount rate of 6.1% in Fiscal 2009
compared to 8.0% in Fiscal 2008. See Note 7 of Notes to the Consolidated Condensed Financial
Statements.
43
Operating Income
The following table presents operating income by group:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 (a) |
|
|
Fiscal
2008 (a) |
|
|
|
(in thousands of dollars) |
|
Sportswear Group |
|
$ |
124,950 |
|
|
$ |
89,782 |
|
Intimate Apparel Group |
|
|
117,070 |
|
|
|
126,132 |
|
Swimwear Group (b) |
|
|
15,558 |
|
|
|
11,478 |
|
Unallocated corporate expenses (c) |
|
|
(64,043 |
) |
|
|
(85,947 |
) |
|
|
|
|
|
|
|
Operating income |
|
$ |
193,535 |
|
|
$ |
141,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as a percentage of net revenue |
|
|
9.6 |
% |
|
|
6.9 |
% |
|
|
|
(a) |
|
Includes approximately $12.1 million and $35.3 million for Fiscal 2009 and Fiscal 2008,
respectively, related to restructuring expenses. See Note 4 of Notes to Consolidated Financial
Statements. |
|
(b) |
|
Reflects a charge of $3.6 million during Fiscal 2009 related to the write down of
inventory associated with the Companys LZR Racer and other similar racing swimsuits. The
Company recorded the write down as a result of FINAs ruling during Fiscal 2009 which banned
the use of these types of suits in competitive swim events. |
|
(c) |
|
Includes $20.4 million and $31.5 million of pension expense, $1.5 million, and $2.2
million of restructuring expenses and $2.6 million and $6.1 million of foreign currency
losses (gains) for Fiscal 2009 and Fiscal 2008, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Increase / |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
116,913 |
|
|
$ |
92,190 |
|
|
$ |
24,723 |
|
|
|
26.8 |
% |
International |
|
|
140,665 |
|
|
|
135,202 |
|
|
|
5,463 |
|
|
|
4.0 |
% |
Unallocated corporate expenses |
|
|
(64,043 |
) |
|
|
(85,947 |
) |
|
|
21,904 |
|
|
|
-25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
193,535 |
|
|
$ |
141,445 |
|
|
$ |
52,090 |
|
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Channnel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
207,965 |
|
|
$ |
181,519 |
|
|
$ |
26,446 |
|
|
|
14.6 |
% |
Retail |
|
|
49,613 |
|
|
|
45,873 |
|
|
|
3,740 |
|
|
|
8.2 |
% |
Unallocated corporate expenses |
|
|
(64,043 |
) |
|
|
(85,947 |
) |
|
|
21,904 |
|
|
|
-25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
193,535 |
|
|
$ |
141,445 |
|
|
$ |
52,090 |
|
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Calvin Klein products |
|
$ |
208,735 |
|
|
$ |
186,773 |
|
|
$ |
21,962 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income was $193.5 million (9.6% of net revenues) for Fiscal 2009 compared to $141.4
million (6.9% of net revenues) for Fiscal 2008. Included in operating income for Fiscal 2009 are
pension expense of $20.9 million and restructuring charges of $12.1 million. Included in operating
income for Fiscal 2008 are pension expense of $31.6 million and restructuring charges of $35.3
million, of which $18.5 million relates to the Collection License Company Charge and the remainder
relates to contract termination, employee severance and other costs. Operating income for Fiscal
2009 includes a decrease of $40.5 million related to the adverse effects of fluctuations in
exchange rates of foreign currencies. In addition, operating income in Fiscal 2008 was favorably
affected by the additional week of operations.
44
Sportswear Group
Sportswear Group operating income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal |
|
|
Brand Net |
|
|
Fiscal |
|
|
Brand Net |
|
|
|
2009 (c) |
|
|
Revenues |
|
|
2008 (c) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Jeans |
|
$ |
88,893 |
|
|
|
13.7 |
% |
|
$ |
62,020 |
|
|
|
9.3 |
% |
Chaps |
|
|
19,180 |
|
|
|
11.4 |
% |
|
|
17,426 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
108,073 |
|
|
|
13.3 |
% |
|
|
79,446 |
|
|
|
9.4 |
% |
Sportswear retail |
|
|
16,877 |
|
|
|
6.1 |
% |
|
|
10,336 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group (a) (b) |
|
$ |
124,950 |
|
|
|
11.5 |
% |
|
$ |
89,782 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes restructuring charges of $3.2 million for Fiscal 2009, primarily related to the
reduction in workforce and consolidation of the Companys European operations and $27.8
million for Fiscal 2008, primarily related to the Collection License Company Charge of $18.5
million related to the transfer of the Collection License Company to PVH as well as contract
termination and employee termination costs. |
|
(b) |
|
Includes approximately $1.8 million and $1.5 million for Fiscal 2009 and Fiscal 2008,
respectively, related to certain sales of Calvin Klein underwear in regions managed by the
Sportswear Group. |
|
(c) |
|
Includes an allocation of shared services expenses by brand as detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
Calvin Klein Jeans |
|
$ |
12,541 |
|
|
$ |
12,990 |
|
Chaps |
|
|
7,248 |
|
|
|
8,465 |
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
19,789 |
|
|
|
21,455 |
|
Sportswear retail |
|
|
440 |
|
|
|
369 |
|
|
|
|
|
|
|
|
Sportswear Group |
|
$ |
20,229 |
|
|
$ |
21,824 |
|
|
|
|
|
|
|
|
Sportswear Group operating income increased $35.2 million, or 39.2%, primarily reflecting
increases of $26.9 million, $1.8
million and $6.5 million in the Calvin Klein Jeans wholesale, Chaps and Calvin Klein Jeans
retail businesses. The increase in Sportswear operating income primarily reflects an $18.1 million
decrease in gross profit, more than offset by a $53.3 million decrease in SG&A (including
amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased
4.5 percentage points. The decrease in SG&A expenses primarily reflects a $24.5 million decrease
in restructuring charges (see Note 4 of Notes to Consolidated Financial Statements), the effects of
foreign currency fluctuations and savings as a result of cost cutting initiatives, partially offset
by increases in Europe, Asia and Brazil due to store openings and the benefit of an extra week of
operations in 2008.
Intimate Apparel Group
Intimate Apparel Group operating income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal |
|
|
Brand Net |
|
|
Fiscal |
|
|
Brand Net |
|
|
|
2009 (b) |
|
|
Revenues |
|
|
2008 (b) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Underwear |
|
$ |
75,245 |
|
|
|
20.2 |
% |
|
$ |
81,110 |
|
|
|
20.3 |
% |
Core Intimates |
|
|
11,625 |
|
|
|
8.1 |
% |
|
|
14,142 |
|
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
86,870 |
|
|
|
16.9 |
% |
|
|
95,252 |
|
|
|
17.1 |
% |
Calvin Klein Underwear retail |
|
|
30,200 |
|
|
|
18.6 |
% |
|
|
30,880 |
|
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group (a) |
|
$ |
117,070 |
|
|
|
17.3 |
% |
|
$ |
126,132 |
|
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes restructuring charges of $4.3 million for Fiscal 2009, primarily related
to the reduction in workforce and $1.3 million for Fiscal 2008, primarily related to contract
termination and employee termination costs. |
45
|
|
|
(b) |
|
Includes an allocation of shared services expenses by brand as detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
Calvin Klein Underwear |
|
$ |
9,236 |
|
|
$ |
10,628 |
|
Core Intimates |
|
|
5,519 |
|
|
|
7,100 |
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
14,755 |
|
|
|
17,728 |
|
Calvin Klein Underwear retail |
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group |
|
$ |
15,102 |
|
|
$ |
17,728 |
|
|
|
|
|
|
|
|
Intimate Apparel Group operating income for Fiscal 2009 decreased $9.1 million, or 7.2%,
over the prior year reflecting a $5.9 million decrease in Calvin Klein Underwear wholesale, a $0.7
million decrease in Calvin Klein Underwear retail and a $2.5 million decrease in Core Intimates.
The decrease in Intimate Apparel operating income primarily reflects a $25.1 million decrease in
gross profit, partially offset by a $16.0 million decrease in SG&A (including amortization of
intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 1.2 percentage
points. The decrease in SG&A expense primarily reflects the Companys initiative to reduce costs
and the effect of fluctuations in foreign currency exchange rates and the benefit of an extra week
in 2008, partially offset by an increase related to retail store openings in Europe and Asia.
Swimwear Group
Swimwear Group operating income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal |
|
|
Brand Net |
|
|
Fiscal |
|
|
Brand Net |
|
|
|
2009 (d) |
|
|
Revenues |
|
|
2008 (d) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Speedo |
|
$ |
16,950 |
|
|
|
7.9 |
% |
|
$ |
5,625 |
|
|
|
2.6 |
% |
Calvin Klein Swim |
|
|
(3,928 |
) |
|
|
-20.1 |
% |
|
|
1,196 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
13,022 |
|
|
|
5.5 |
% |
|
|
6,821 |
|
|
|
2.8 |
% |
Swimwear retail (a) |
|
|
2,536 |
|
|
|
15.4 |
% |
|
|
4,657 |
|
|
|
25.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group (b) (c) |
|
$ |
15,558 |
|
|
|
6.2 |
% |
|
$ |
11,478 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $1.4 million and $1.2 million for Fiscal 2009 and Fiscal 2008, respectively, related
to Calvin Klein retail swimwear. |
|
(b) |
|
Reflects a charge of $3.6 million during Fiscal 2009 related to the write down of
inventory associated with the Companys LZR Racer and other similar racing swimsuits. The
Company recorded the write down as a result of FINAs ruling during Fiscal 2009 which banned
the use of these types of suits in competitive swim events. |
|
(c) |
|
Includes restructuring charges of $3.0 million for Fiscal 2009, primarily related to the
reduction in workforce and $3.9 million for Fiscal 2008, primarily related to contract
termination and employee termination costs. |
|
(d) |
|
Includes an allocation of shared services expenses by brand in the following table: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
Speedo |
|
$ |
9,682 |
|
|
$ |
14,842 |
|
Calvin Klein Swim |
|
|
230 |
|
|
|
455 |
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
9,912 |
|
|
|
15,297 |
|
Swimwear retail |
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group |
|
$ |
10,512 |
|
|
$ |
15,297 |
|
|
|
|
|
|
|
|
Swimwear Group operating income for Fiscal 2009 increased $4.1 million, or 35.5%,
reflecting an $11.3 million increase in Speedo wholesale, partially offset by a $5.1 million
decrease in Calvin Klein wholesale and a decline of $2.1 million in Swimwear retail. Operating
income for Fiscal 2009 and Fiscal 2008 includes restructuring expenses of $3.0 million and $3.9
million, respectively, primarily related to the reduction in the Companys workforce in response to
the downturn in the economy as well as the rationalization of the Swimwear Group warehouse and
distribution function in California (see Note 4 of Notes to Consolidated Financial Statements). The
increase in Swimwear operating income primarily reflects a $13.3 million decrease in gross profit,
more than offset by a $17.4 million decrease in SG&A (including amortization of intangible assets)
expenses. SG&A expenses as a percentage of net sales decreased 5.7 percentage points. The decrease
in SG&A expense primarily relates to the Companys initiative to reduce costs, marketing expenses
related to the Beijing Olympics in 2008 and the benefit of the extra week of operations in Fiscal
2008.
46
Other (Income) Loss
Loss of $1.9 million for Fiscal 2009 primarily reflects $3.9 million of net losses related to
foreign currency exchange contracts designed as economic hedges (see Note 17 to Notes to
Consolidated Financial Statements), partially offset by net gains of $2.0 million on the current
portion of inter-company loans denominated in currency other than that of the foreign subsidiaries
functional currency. Loss of $1.9 million for Fiscal 2008 primarily reflects net gains of $1.5
million on the current portion of inter-company loans denominated in currency other than that of
the foreign subsidiaries functional currency, a $2.2 million gain related to foreign currency
exchange contracts designed as economic hedges, a write-off of $2.2 million of deferred financing
charges related to the extinguishment of the Amended and Restated Credit Agreement in August 2008
(see below), and a premium paid of $3.2 million (which includes the write-off of approximately $1.1
million of deferred financing costs) related to the repurchase of $44.1 million aggregate principal
amount of Senior Notes (defined below) for a total consideration of $46.2 million. See Capital
Resources and Liquidity Financing Arrangements, below.
Interest Expense
Interest expense decreased $5.6 million to $23.9 million for Fiscal 2009 from $29.5 million
for Fiscal 2008. The decrease primarily relates to a decline in interest associated with the Term B
Note, which was fully repaid in the third quarter of Fiscal 2008, with the Senior Notes in the
U.S., which were partially repaid in the first quarter of Fiscal 2008, to the decrease in the
outstanding balance and interest rates related to the CKJEA short term notes payable and the
amortization of the premium on the interest rate swaps which were terminated in Fiscal 2009. Those
decreases were partially offset by an increase in interest on balances of the New Credit
Agreements, which were entered into in August 2008.
Interest Income
Interest income decreased $1.9 million to $1.2 million for Fiscal 2009 from $3.1 million for
Fiscal 2008. The decrease in interest income was due primarily to lower interest rates despite
higher outstanding cash balances.
Income Taxes
The effective tax rates for Fiscal 2009 and Fiscal 2008 were 38.0% and 53.7% respectively.
The lower effective tax rate for Fiscal 2009 primarily relates to a non-cash tax charge of
approximately $14.6 million recorded during Fiscal 2008 associated with the repatriation of the
Lejaby sale proceeds (see Note 3 to the Consolidated Financial Statements), partially offset by a
tax charge of approximately $3.6 million in the U.S. recorded during Fiscal 2009 and a shift in
earnings from lower to higher taxing jurisdictions included in the effective tax rate for Fiscal
2009. The tax charge of approximately $3.6 million recorded during Fiscal 2009 related to the
correction of an error in the 2006 income tax provision associated with the recapture of
cancellation of indebtedness income which had been deferred in connection with the Companys
bankruptcy proceedings in 2003. See Note 6 of Notes to Consolidated Financial Statements.
Discontinued Operations
Loss from discontinued operations, net of taxes, was $6.2 million and $3.8 million for Fiscal
2009 and Fiscal 2008, respectively. See Note 3 of Notes to Consolidated Financial Statements.
Comparison of Fiscal 2008 to Fiscal 2007
Net Revenues
Net revenues by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
Sportswear Group |
|
$ |
1,100,597 |
|
|
$ |
939,147 |
|
|
$ |
161,450 |
|
|
|
17.2 |
% |
Intimate Apparel Group |
|
|
702,252 |
|
|
|
627,014 |
|
|
|
75,238 |
|
|
|
12.0 |
% |
Swimwear Group |
|
|
260,000 |
|
|
|
253,418 |
|
|
|
6,582 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues (a) |
|
$ |
2,062,849 |
|
|
$ |
1,819,579 |
|
|
$ |
243,270 |
|
|
|
13.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $1.50 billion and $1.24 billion related to the Companys total Calvin Klein
businesses for Fiscal 2008 and Fiscal 2007, respectively (an increase of approximately
21%). |
47
Net revenues increased $243.3 million, or 13.4%, to $2.1 billion for Fiscal 2008 compared
to $1.8 billion for Fiscal 2007. The increase reflects a $161.5 million increase in the Sportswear
Group net revenues and a $75.2 million increase in Intimate Apparel net revenues, which relate
primarily to strength in Calvin Klein jeans and Calvin Klein underwear, respectively, in Europe,
Asia and the U.S. The $6.6 million increase in Swimwear Group net revenues primarily reflects
increases in Calvin Klein swimwear in Europe. The increases in net revenues for the Sportswear,
Intimate Apparel and Swimwear Groups for Fiscal 2008 relative to Fiscal 2007 were negatively
impacted by the downturn in the worldwide economy, tightening of credit and erosion in consumer
spending during the fourth quarter of 2008. During the fourth quarter of 2008 relative to the
fourth quarter of 2007, net revenues declined to $235.8 million from $245.7 million and to $163.3
million from $176.9 million in the Sportswear and Intimate Apparel Groups, respectively, and
increased to $46.2 million from $43.8 million in the Swimwear Group. In translating foreign
currencies into the U.S. dollar, the U.S. dollar weakened during Fiscal 2008 relative to the
functional currencies where the Company conducts certain of its operations (primarily the Euro and
Canadian dollar) and strengthened relative to the Korean won, compared to Fiscal 2007. The annual
trends for those periods reflect a stronger U.S. dollar in the fourth quarter of 2008 relative to
the Euro and Canadian dollar. Consequently, foreign currency translation resulted in a $41.6
million decrease in net revenues for the fourth quarter of 2008 and a $10.6 million increase in net
revenues for Fiscal 2008. In addition, net revenues for Fiscal 2008 benefited by $23.0 million from
an extra week of operations relative to Fiscal 2007.
The Companys products are widely distributed through virtually all channels of distribution.
The following table summarizes the Companys net revenues by channel of distribution for Fiscal
2008 and Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
United States wholesale |
|
|
|
|
|
|
|
|
Department stores and independent retailers |
|
|
12 |
% |
|
|
15 |
% |
Specialty stores |
|
|
8 |
% |
|
|
9 |
% |
Chain stores |
|
|
8 |
% |
|
|
8 |
% |
Mass merchandisers |
|
|
1 |
% |
|
|
2 |
% |
Membership clubs |
|
|
7 |
% |
|
|
7 |
% |
Off price and other |
|
|
8 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
Total United States wholesale |
|
|
44 |
% |
|
|
51 |
% |
International wholesale |
|
|
35 |
% |
|
|
31 |
% |
Retail / other |
|
|
21 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
Net revenues consolidated |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Sportswear Group
Sportswear Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
(Decrease) |
|
|
%
Change |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Jeans |
|
$ |
663,732 |
|
|
$ |
544,505 |
|
|
$ |
119,227 |
|
|
|
21.9 |
% |
Chaps |
|
|
177,288 |
|
|
|
190,741 |
|
|
|
(13,453 |
) |
|
|
-7.1 |
% |
Mass sportswear licensing (a ) |
|
|
|
|
|
|
233 |
|
|
|
(233 |
) |
|
|
-100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
841,020 |
|
|
|
735,479 |
|
|
|
105,541 |
|
|
|
14.3 |
% |
Sportswear retail |
|
|
259,577 |
|
|
|
203,668 |
|
|
|
55,909 |
|
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group (b), (c) |
|
$ |
1,100,597 |
|
|
$ |
939,147 |
|
|
$ |
161,450 |
|
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Relates to design services fees earned in connection with the White Stag womens sportswear
line which business ceased in January 2007. |
|
(b) |
|
Includes net revenues of $86.5 million and $53.6 million related to the Calvin Klein
accessories business in Europe and Asia for Fiscal 2008 and Fiscal 2007, respectively. |
|
(c) |
|
Includes approximately $49.8 million and $42.3 million for Fiscal 2008 and Fiscal 2007,
respectively, related to certain sales of Calvin Klein underwear in regions managed by the
Sportswear Group. |
48
The $119.2 million increase in Calvin Klein jeans wholesale net revenues reflects
increases of $39.8 million in Europe, $58.8 million in the Americas and $20.6 million in Asia. The
increase in Europe primarily reflects volume growth in both the jeans and accessories businesses
and the favorable effects of foreign currency translation. The increase in net revenues in the
Americas reflects increases in Mexico, Central and South America of $31.6 million, increases in the
U.S of $21.2 million and increases in Canada of $6.0 million. The increase in Mexico, Central and
South America primarily reflects the consolidation of the results of the Companys Brazilian
operation following the acquisition, effective January 1, 2008, by the Company, of a controlling
interest in a Brazilian entity which, prior to January 1, 2008, had been accounted for by the
Company under the equity method of accounting. The increase in the U.S. reflects an increase in
sales to department stores (primarily related to increases in the Plus size jeans business which
launched in
the Fall of 2007, the Petite size jeans business which launched in the fourth quarter of 2008
and the womens jeans business, partially offset by a decline in the mens jeans business) and
increases in sales to off-price stores and membership clubs, partially offset by the unfavorable
effects of increases in the level of customer allowances. The increase in Asia primarily relates to
the Companys expansion efforts in this region, particularly in China, including increased volume
by franchisees, both in number of stores purchasing merchandise and volume of same store sales,
partially offset by unfavorable effects of foreign currency fluctuations primarily related to
Korea.
The $13.5 million decrease in Chaps net revenues reflects decreases in the U.S., Canada and
Mexico of $5.7 million, $4.5 million and $3.3 million, respectively. The decrease in Chaps net
revenues in the U.S primarily reflects decreases in sales to customers in the department store and
off-price channels and decreases in sales to the military, partially offset by increases in the
sales to customers in the chain store, membership club and specialty store distribution channels.
Net revenues were also impacted by the favorable effect of a reduction in the level of customer
allowances in the department store and chain store channels. The decline in Chaps net revenues in
Canada was due to a decrease in sales to department stores and in Mexico reflected a decrease in
sales to membership clubs coupled with an increase in customer allowances.
The $55.9 million increase in Sportswear retail net revenues primarily reflects a $33.3
million increase in Asia (primarily related to volume increases and new store openings in China and
Korea, partially offset by the unfavorable effects of foreign currency translation) and a $20.8
million increase in Europe (primarily related to volume increases, the effect of new store openings
and the favorable effect of foreign currency translation).
Intimate Apparel Group
Intimate Apparel Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calvin Klein Underwear |
|
$ |
399,853 |
|
|
$ |
358,359 |
|
|
$ |
41,494 |
|
|
|
11.6 |
% |
Core Intimates |
|
|
156,074 |
|
|
|
154,180 |
|
|
|
1,894 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
555,927 |
|
|
|
512,539 |
|
|
|
43,388 |
|
|
|
8.5 |
% |
Calvin Klein Underwear retail |
|
|
146,325 |
|
|
|
114,475 |
|
|
|
31,850 |
|
|
|
27.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group |
|
$ |
702,252 |
|
|
$ |
627,014 |
|
|
$ |
75,238 |
|
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $41.5 million increase in Calvin Klein Underwear wholesale net revenues reflects
increases in Europe of $16.2 million, increases in Mexico, Central and South America of $7.5
million, increases in Asia of $9.8 million, increases in Canada of $5.1 million and increases in
the U.S. of $2.9 million. The increase in Europe primarily relates to increases in sales of both
mens (including sales related to the Companys Steel line which was launched in the third quarter
of 2007) and womens lines during Fiscal 2008 compared to Fiscal 2007 coupled with the positive
impacts of foreign currency translation. The increase in the U.S of the Companys Calvin Klein
Underwear wholesale business primarily related to increases in sales to department stores and
stores operated by the licensor of the Calvin Klein brand (sales were favorably impacted by the
launch of the Seductive Comfort womens line in the third quarter of 2008 and strong sales of the
mens Steel line), as well as increased sales to membership clubs and specialty stores, partially
offset by decreases in sales to customers in the off-price channel of distribution. The increase in
Asia is primarily related to volume increases in China and Korea, partially offset by unfavorable
effects of foreign currency fluctuations primarily related to Korea.
The $1.9 million increase in Core Intimates net revenues reflects a $0.1 million decrease in
the U.S., coupled with a $1.6 million increase in Canada, a $0.5 million increase in Mexico and a
$0.1 million decrease in Asia. The increase in Canada is due to higher sales in the mass merchant
channel, partially offset by decreased sales to department stores. The decrease in the U.S. is
primarily related to a reduction in private label business with a particular brand and decreases in
the off-price channel, offset by increased sales of the Companys Warners product to JCPenney and
Kohls, increases related to sales of the Olga line, increases in the membership clubs, and
favorable effects of reductions in the level of customer returns and allowances. The Company
launched its
Warners brand in JCPenney in the second quarter of 2007. Increases in Warners and Olga
reflect an increase in replenishment orders coupled with increases related to new product
offerings.
49
The $31.9 million increase in Calvin Klein Underwear retail net revenues primarily reflects a
$20.1 million increase in Europe and a $5.5 million increase in Asia, with the remainder comprised
of increases of $4.1 million in Canada, $1.7 million in Mexico and $0.5 million in the U.S. The
increase in net revenues in Europe from $85.1 million for Fiscal 2007 to $105.2 million for Fiscal
2008 primarily reflects volume increases at concession, outlet and full-price stores and the
positive impact of foreign currency translation. The increase in net revenues in Asia from $19.8
million for Fiscal 2007 to $25.3 million for Fiscal 2008 primarily reflects increases related to
continued growth in China and Hong Kong, including same store sales and increases in number of
stores in Hong Kong.
Swimwear Group
Swimwear Group net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
(in thousands of dollars) |
|
Speedo |
|
$ |
218,043 |
|
|
$ |
219,372 |
|
|
$ |
(1,329 |
) |
|
|
-0.6 |
% |
Calvin Klein Swim |
|
|
23,570 |
|
|
|
18,363 |
|
|
|
5,207 |
|
|
|
28.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
241,613 |
|
|
|
237,735 |
|
|
|
3,878 |
|
|
|
1.6 |
% |
Swimwear retail (a) |
|
|
18,387 |
|
|
|
15,683 |
|
|
|
2,704 |
|
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group |
|
$ |
260,000 |
|
|
$ |
253,418 |
|
|
$ |
6,582 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $6.9 million and $5.0 million for Fiscal 2008 and Fiscal 2007, respectively,
related to Calvin Klein retail swimwear. |
The $1.3 million decrease in net revenues for Speedo wholesale is due primarily to a $1.8
million decrease in the U.S. and a $0.4 million decrease in Canada partially offset by a $0.9
million increase in Mexico, Central and South America. The decrease in the U.S. primarily reflects
a decrease in sales to mass merchandise, department store, chain store and off price channels of
distribution, offset by increases in sales to specialty stores (due to strong and early orders for
merchandise related to the Olympics, including the LZR Racer swimsuit) and membership clubs. The
increase in membership clubs was primarily due to the fact that merchandise that would usually have
been shipped at the end of Fiscal 2007 was shipped during the first half of Fiscal 2008.
The $5.2 million increase in Calvin Klein swimwear wholesale net revenues primarily reflects a
$7.1 million increase in Europe, a $0.5 million increase in Canada and a $0.2 million increase in
Asia, partially offset by decreases in the U.S. and Mexico of $2.5 million and 0.1 million,
respectively. The increase in Europe relates to growth in the Calvin Klein swim business which the
Company believes is the result of design improvements made to the European collection combined with
the positive effect of foreign currency translation. The decrease in the U.S. is due to a decrease
in the department store, specialty store and off-price channels.
The $2.7 million increase in Swimwear retail net revenues primarily reflects a $1.8 million
increase in Europe and a $0.9 million increase in the U.S. The increase in net revenues in Europe
primarily reflects volume increases at concession and outlet stores (related to Calvin Klein
swimwear) and the positive impact of foreign currency translation. The increase in net revenues in
the U.S. primarily reflects volume increases at the online Speedo store.
Gross Profit
Gross profit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
Fiscal 2008 |
|
|
Revenues |
|
|
Fiscal 2007 |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Sportswear Group (a) |
|
$ |
478,739 |
|
|
|
43.5 |
% |
|
$ |
397,075 |
|
|
|
42.3 |
% |
Intimate Apparel Group |
|
|
347,773 |
|
|
|
49.5 |
% |
|
|
286,923 |
|
|
|
45.8 |
% |
Swimwear Group |
|
|
94,261 |
|
|
|
36.3 |
% |
|
|
65,676 |
|
|
|
25.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
920,773 |
|
|
|
44.6 |
% |
|
$ |
749,674 |
|
|
|
41.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Sportswear Group gross profit includes approximately $34.9 million and $30.7 million
for Fiscal 2008 and Fiscal 2007, respectively, related to certain sales of Calvin Klein
underwear in regions managed by the Sportswear Group. |
50
Gross profit was $920.8 million, or 44.6% of net revenues, for Fiscal 2008 compared to
$749.7 million, or 41.2% of net revenues, for Fiscal 2007. The $171.1 million increase in gross
profit was due to increases in the Sportswear Group ($81.7 million), the Intimate Apparel Group
($60.8 million) and the Swimwear Group ($28.6 million). Included in gross profit for Fiscal 2008 is
$1.5 million and $0.3 million of restructuring expenses related to the Swimwear and Sportswear
Groups, respectively, and included in gross profit for Fiscal 2007 is $21.5 million of
restructuring expenses related to the Swimwear Group, included in cost of goods sold for both 2008
and 2007 (see Note 4 of Notes to Consolidated Financial Statements). During the fourth quarter of
2008 relative to 2007, gross profit declined $12.9 million and $0.6 million in the Sportswear and
Intimate Apparel Groups, respectively, and increased $16.1 million in the Swimwear Group. Included
in gross profit for the fourth quarter of 2007 was $11.4 million of restructuring expense related
to the Swimwear Group and for the fourth quarter of 2008 $0.3 million and $0.4 million of
restructuring expense in the Sportswear and Swimwear Groups, respectively.
The increases in gross profit for the Sportswear, Intimate Apparel and Swimwear Groups for
Fiscal 2008 relative to Fiscal 2007 were negatively impacted by the downturn in the worldwide
economy, tightening of credit and erosion in consumer spending during the fourth quarter of 2008.
In translating foreign currencies into the U.S. dollar, the U.S. dollar weakened during Fiscal 2008
relative to the functional currencies where the Company conducts certain of its operations
(primarily the Euro and Canadian dollar) and strengthened relative to the Korean won, compared to
Fiscal 2007. The annual trends for those periods reflect a stronger U.S. dollar in the fourth
quarter of 2008 relative to the Euro and Canadian dollar. Consequently, foreign currency
translation resulted in a $21.6 million decrease in gross margin for the fourth quarter of 2008 and
a $3.4 million increase in gross margin for Fiscal 2008. In addition, gross profit for Fiscal 2008
benefited by an extra week of operations when compared to Fiscal 2007.
Sportswear Group gross profit increased $81.7 million and gross margin increased 120 basis
points for Fiscal 2008 compared to Fiscal 2007. The increase in gross profit primarily reflects a
$51.7 million increase in Calvin Klein Jeans wholesale (due primarily to an increase in net
revenues combined with a more favorable sales mix), a $26.1 million increase in Sportswear retail
(due primarily to an increase in net revenues), and a $3.6 million increase in Chaps (due primarily
to a decrease in customer allowances, production and freight costs, and a decrease in inventory
markdowns).
Intimate Apparel Group gross profit increased $60.8 million and gross margin increased 370
basis points for Fiscal 2008 compared to Fiscal 2007. The increase in Intimate Apparel gross
profit is reflective of the increase in net revenues (discussed above), the favorable impact of
foreign currency translation and consists of a $35.3 million increase in Calvin Klein Underwear
wholesale, a $21.7 million increase in Calvin Klein Underwear retail and a $3.8 million increase in
Core Intimates. The increase in gross margin is primarily due to a more favorable sales mix in the
Companys Calvin Klein Underwear business in Europe, Asia and the U.S., and in Core Intimates in
the U.S., and lower sourcing and production costs.
Swimwear Group gross profit increased $28.6 million and gross margin increased 1,040 basis
points for Fiscal 2008 compared to Fiscal 2007. The increase in gross profit primarily reflects an
increase in net revenues (discussed above) coupled with a decrease in production costs, a decrease
in restructuring expenses, primarily associated with the disposal, in 2007, of manufacturing
facilities in Mexico and office and warehouse relocation costs in the U.S. in 2008 (see Note 5 of
Notes to Consolidated Financial Statements) and lower levels of excess inventory.
Selling, General and Administrative Expenses
Selling, general & administrative (SG&A) expenses increased $136.5 million to $738.2 million
(35.8% of net revenues) for Fiscal 2008 compared to $601.7 million (33.1% of net revenues) for
Fiscal 2007. The increase in SG&A reflects a $22.6 million increase in restructuring expenses
(primarily related to the Collection License Company Charge of $18.5 million, discussed previously,
and legal and other costs, partially offset by a decrease in the Swimwear segment), a $19.6 million
increase in marketing expenses (primarily in the Companys Calvin Klein businesses in Europe, Asia
and the U.S. as well as in the Speedo business in the U.S. related to the Olympics), a $54.4
million increase in selling and distribution expenses (primarily related to the increase in net
revenues associated with the Calvin Klein businesses in Europe and Asia, partially offset by a net
decrease in the Swimwear segment due to warehouse efficiency following restructuring activities),
and a $39.9 million increase in administrative expenses. The increase in administrative expenses
primarily relates to a net increase of $30.2 million associated with the foreign currency exchange
losses related to U.S. dollar denominated liabilities in certain of the Companys foreign
operations, as well as increased expenses related to the expansion of operations in Europe and
Asia. In translating foreign currencies into the U.S. dollar, the U.S. dollar weakened during
Fiscal 2008 relative to the functional currencies where the Company conducts certain of its
operations (primarily the Euro and Canadian dollar) and strengthened relative to the Korean won,
compared to Fiscal 2007. The annual trends for those periods reflect a stronger U.S. dollar in the
fourth quarter of 2008 relative to the Euro and Canadian dollar. Consequently, foreign currency
translation resulted in a $19.7 million decrease in SG&A expenses for the fourth quarter of 2008
and a $2.6 million decrease in SG&A expenses for Fiscal 2008.
51
Amortization of Intangible Assets
Amortization of intangible assets was $9.4 million for Fiscal 2008 compared to $13.2 million
for Fiscal 2007. The decrease relates to the reduction of intangible assets as of January 3, 2009
as a result of the recognition of certain deferred tax assets in existence as of the Effective
Date, partially offset by the amortization of certain Calvin Klein licenses acquired in January
2008.
Pension Income / Expense
Pension expense was $31.6 million in Fiscal 2008 compared to pension income of $8.8 million in
Fiscal 2007. The $40.4 million net increase in pension expense was due primarily to losses in the
fair value of plan assets, partially offset by net actuarial gains associated with plan
liabilities, primarily due to the increase in the discount rate from 6.75% in Fiscal 2007 to 8.0%
in Fiscal 2008. See Note 7 of Notes to Consolidated Financial Statements.
Operating Income
The following table presents operating income by group:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
(a) |
|
|
(a) |
|
|
|
(in thousands of dollars) |
|
Sportswear Group |
|
$ |
89,782 |
|
|
$ |
97,946 |
|
Intimate Apparel Group |
|
|
12l6,132 |
|
|
|
108,343 |
|
Swimwear Group |
|
|
11,478 |
|
|
|
(24,499 |
) |
Unallocated corporate expenses (b) |
|
|
(85,947 |
) |
|
|
(38,100 |
) |
|
|
|
|
|
|
|
Operating income |
|
$ |
141,445 |
|
|
$ |
143,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as a percentage of net revenue |
|
|
6.9 |
% |
|
|
7.9 |
% |
|
|
|
(a) |
|
Includes approximately $27.8 million, $1.3 million, $3.9 million and $2.3 million of
restructuring expenses for Fiscal 2008 in the Sportswear Group, Intimate Apparel Group,
Swimwear Group and Unallocated corporate expenses, respectively, and approximately $0.1
million, $2.1 million, $29.8 million and $0.3 million of restructuring expenses for Fiscal
2007 in the Sportswear Group, Intimate Apparel Group, Swimwear Group and Unallocated corporate
expenses, respectively. |
|
(b) |
|
Includes approximately $31.5 million of pension expense and approximately $9.0 million of
pension income for Fiscal 2008 and Fiscal 2007, respectively. |
Operating income was $141.4 million (6.9% of net revenues) for Fiscal 2008 compared to
$143.7 million (7.9% of net revenues) for Fiscal 2007. Included in operating income for Fiscal
2008 are pension expense of $31.6 million, foreign currency exchange losses associated with U.S.
dollar denominated trade liabilities in certain of the Companys foreign operations of $28.5
million and restructuring charges of $35.3 million, of which $18.5 million relates to the
Collection License Company Charge and the remainder relates to contract termination, employee
severance and other costs. Included in operating income for Fiscal 2007 are pension income of $8.8
million, foreign currency exchange gains associated with U.S. dollar denominated trade liabilities
in certain of the Companys foreign operations of $1.7 million and restructuring charges of $32.3
million.
The increases in operating income for the Sportswear, Intimate Apparel and Swimwear Groups for
Fiscal 2008 relative to Fiscal 2007 were negatively impacted by the downturn in the worldwide
economy, tightening of credit and erosion in consumer spending during the fourth quarter of 2008.
During the fourth quarter of 2008 relative to 2007, operating income declined from $16.2 million to
$3.9 million and from $29.5 million to $27.6 million in the Sportswear and Intimate Apparel Groups,
respectively, and increased from a loss of $16.0 million to a loss of $0.8 million in the Swimwear
Group. In translating foreign currencies into the U.S. dollar, the U.S. dollar weakened during
Fiscal 2008 relative to the functional currencies where the Company conducts certain of its
operations (primarily the Euro and Canadian dollar) and strengthened relative to the Korean won,
compared to Fiscal 2007. The annual trends for those periods reflect a stronger U.S. dollar in the
fourth quarter of 2008 relative to the Euro and Canadian dollar. Consequently, foreign currency
translation resulted in a $1.8 million decrease in operating income for the fourth quarter of 2008
and a $6.0 million increase in operating income for Fiscal 2008. In addition, operating income was
favorably impacted by the additional week of operations.
52
Sportswear Group
Sportswear Group operating income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal 2008 |
|
|
Brand Net |
|
|
Fiscal 2007 |
|
|
Brand Net |
|
|
|
(c) |
|
|
Revenues |
|
|
(c) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Jeans |
|
$ |
62,020 |
|
|
|
9.3 |
% |
|
$ |
70,559 |
|
|
|
13.0 |
% |
Chaps |
|
|
17,426 |
|
|
|
9.8 |
% |
|
|
10,920 |
|
|
|
5.7 |
% |
Mass sportswear licensing |
|
|
|
|
|
|
0.0 |
% |
|
|
(268 |
) |
|
|
-115.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
79,446 |
|
|
|
9.4 |
% |
|
|
81,211 |
|
|
|
11.0 |
% |
Sportswear retail |
|
|
10,336 |
|
|
|
4.0 |
% |
|
|
16,735 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear Group (a) (b) |
|
$ |
89,782 |
|
|
|
8.2 |
% |
|
$ |
97,946 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the Collection License Company Charge of $18.5 million for Fiscal 2008 related
to the transfer of the Collection License Company to PVH. |
|
(b) |
|
Includes approximately $1.5 million and $4.1 million for Fiscal 2008 and 2007,
respectively, related to certain sales of Calvin Klein underwear in regions managed by the
Sportswear Group. |
|
(c) |
|
Includes an allocation of shared services expenses by brand as detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
Calvin Klein Jeans |
|
$ |
12,990 |
|
|
$ |
12,866 |
|
Chaps |
|
|
8,465 |
|
|
|
9,037 |
|
Mass sportswear licensing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear wholesale |
|
|
21,455 |
|
|
|
21,903 |
|
Sportswear retail |
|
|
369 |
|
|
|
425 |
|
|
|
|
|
|
|
|
Sportswear Group |
|
$ |
21,824 |
|
|
$ |
22,328 |
|
|
|
|
|
|
|
|
Sportswear Group operating income decreased $8.2 million, or 8.3%, primarily reflecting
decreases of $8.5 million and $6.4 million in the Calvin Klein Jeans wholesale and Calvin Klein
Jeans retail businesses, respectively, partially offset by a $6.5 million increase in the Chaps
business. The decrease in Sportswear operating income primarily reflects an $81.7 million increase
in gross profit, more than offset by an $89.9 million increase in SG&A (including amortization of
intangible assets) expenses. SG&A expenses as a percentage of net sales increased 3.4% including a
net increase of $17.0 million related to foreign currency exchange losses
associated with U.S. dollar denominated trade liabilities in certain of the Companys foreign
operations and a $27.7 million increase in restructuring charges, primarily related to the
Collection License Company Charge of $18.5 million (see Note 2 of Notes to Consolidated Financial
Statements) and contract termination, employee severance, legal and other costs.
Intimate Apparel Group
Intimate Apparel Group operating income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal 2008 |
|
|
Brand Net |
|
|
Fiscal 2007 |
|
|
Brand Net |
|
|
|
(a) |
|
|
Revenues |
|
|
(a) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Calvin Klein Underwear |
|
$ |
81,110 |
|
|
|
20.3 |
% |
|
$ |
71,124 |
|
|
|
19.8 |
% |
Core Intimates |
|
|
14,142 |
|
|
|
9.1 |
% |
|
|
8,730 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
95,252 |
|
|
|
17.1 |
% |
|
|
79,854 |
|
|
|
15.6 |
% |
Calvin Klein Underwear retail |
|
|
30,880 |
|
|
|
21.1 |
% |
|
|
28,489 |
|
|
|
24.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group |
|
$ |
126,132 |
|
|
|
18.0 |
% |
|
$ |
108,343 |
|
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes an allocation of shared services expenses by brand as detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
Calvin Klein Underwear |
|
$ |
10,628 |
|
|
$ |
10,293 |
|
Core Intimates |
|
|
7,100 |
|
|
|
6,867 |
|
|
|
|
|
|
|
|
Intimate Apparel wholesale |
|
|
17,728 |
|
|
|
17,160 |
|
Calvin Klein Underwear retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intimate Apparel Group |
|
$ |
17,728 |
|
|
$ |
17,160 |
|
|
|
|
|
|
|
|
53
Intimate Apparel Group operating income for Fiscal 2008 increased $17.8 million, or
16.4%, over the prior year reflecting a $10.0 million increase in Calvin Klein Underwear wholesale,
a $2.4 million increase in Calvin Klein Underwear retail and a $5.4 million increase in Core
Intimates. The 70 basis point improvement in operating income as a percentage of net revenues
primarily reflects a 370 basis point increase in gross margin, partially offset by the effects of a
300 basis point increase in SG&A as a percentage of net revenues. The increase in SG&A as a
percentage of net revenues primarily relates to expansion of the Companys Calvin Klein Underwear
retail business in Europe and Asia, an increase in selling and administration expenses (including a
net increase in foreign currency exchange losses associated with U.S. dollar denominated trade
liabilities in certain of the Companys foreign operations of $7.0 million) and the unfavorable
impact of foreign currency translation.
Swimwear Group
Swimwear Group operating income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fiscal 2008 |
|
|
Brand Net |
|
|
Fiscal 2007 |
|
|
Brand Net |
|
|
|
(a) |
|
|
Revenues |
|
|
(a) |
|
|
Revenues |
|
|
|
(in thousands of dollars) |
|
Speedo |
|
$ |
5,625 |
|
|
|
2.6 |
% |
|
$ |
(26,766 |
) |
|
|
-12.2 |
% |
Calvin Klein Swim |
|
|
1,196 |
|
|
|
5.1 |
% |
|
|
(3,079 |
) |
|
|
-16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
6,821 |
|
|
|
2.8 |
% |
|
|
(29,845 |
) |
|
|
-12.6 |
% |
Swimwear retail |
|
|
4,657 |
|
|
|
25.3 |
% |
|
|
5,346 |
|
|
|
34.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group |
|
$ |
11,478 |
|
|
|
4.4 |
% |
|
$ |
(24,499 |
) |
|
|
-9.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes an allocation of shared services expenses by brand as detailed below: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
Speedo |
|
$ |
14,842 |
|
|
$ |
18,725 |
|
Calvin Klein Swim |
|
|
455 |
|
|
|
611 |
|
|
|
|
|
|
|
|
Swimwear wholesale |
|
|
15,297 |
|
|
|
19,336 |
|
Swimwear retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swimwear Group |
|
$ |
15,297 |
|
|
$ |
19,336 |
|
|
|
|
|
|
|
|
Swimwear Group operating income for Fiscal 2008 increased $36.0 million, or 146.8%,
reflecting a $32.4 million increase in Speedo wholesale, a $4.3 million increase in Calvin Klein
wholesale, partially offset by a decline of $0.7 million in Swimwear retail. Operating income for
Fiscal 2008 includes restructuring expenses of $3.9 million primarily related to the relocation of
the Companys offices in California and the rationalization of the Swimwear Group warehouse and
distribution function, and additional costs associated with the disposal, in 2007, of manufacturing
facilities in Mexico. The 1,410 basis point improvement in operating income as a percentage of net
revenues primarily reflects a 1,030 basis point increase in gross margin (including a reduction in
restructuring costs from $29.8 million in Fiscal 2007 to $3.9 million in Fiscal 2008), offset by
the effects of a 380 basis point decrease in SG&A as a percentage of net revenues. The decrease in
SG&A as a percentage of net revenues primarily relates to a decline in distribution, selling and
restructuring costs in the Speedo wholesale and Calvin Klein wholesale businesses, partially offset
by increases in marketing, selling and distribution expenses in the Calvin Klein retail business.
The Company continues to implement initiatives to improve the productivity and profitability of its
Swimwear segment.
Other (Income) Loss
Loss of $1.9 million for Fiscal 2008 primarily reflects net gains of $1.5 million on the
current portion of inter-company loans denominated in currency other than that of the foreign
subsidiaries functional currency, a $2.2 million gain related to foreign currency exchange
contracts designed as economic hedges, a loss of $2.2 million on deferred financing charges, which
had been recorded as Other Assets on the balance sheet, related to the extinguishment of the
Amended and Restated Credit Agreement in August 2008 (see below), and a premium paid of $3.2
million (which includes the write-off of approximately $1.1 million of deferred financing costs)
related to the repurchase of $44.1 million aggregate principal amount of Senior Notes (defined
below) for a total consideration of $46.2 million (see Capital Resources and Liquidity Financing
Arrangements, below). Income of $7.1 million for Fiscal 2007 primarily reflects net gains on the
current portion of inter-company loans denominated in a currency other than that of the foreign
subsidiaries functional currency.
54
Interest Expense
Interest expense decreased $8.2 million to $29.5 million for Fiscal 2008 from $37.7 million
for Fiscal 2007. The decrease primarily relates to a decline in interest associated with the Term B
Note (which was repaid from the proceeds of the borrowing under the New Credit Agreement in August
2008) and the Senior Notes in the U.S., which were partially repaid in Fiscal 2008. See Capital
Resources and Liquidity Financing Arrangements, below.
Interest Income
Interest income decreased $0.7 million to $3.1 million for Fiscal 2008 from $3.8 million for
Fiscal 2007, reflecting changes in interest rates and the amount of outstanding cash balances
during both periods.
Income Taxes
The provision for income taxes was $60.7 million, or an effective tax rate of 53.7% for Fiscal
2008, compared to $29.9 million, or an effective tax rate of 25.6% for Fiscal 2007. The higher
effective tax rate for Fiscal 2008 compared to Fiscal 2007 primarily reflects; (i) a charge of
approximately $14.6 million related to the repatriation, in the form of a dividend, to the U.S., of
the net proceeds received in connection with the Lejaby sale (see Note 4); (ii) certain
nondeductible restructuring expenses associated with the transfer of the Collection License Company
to PVH, which provided no tax benefits to the Company and (iii) a shift in the mix of earnings
between higher and lower taxing jurisdictions. See Note 7 of Notes to Consolidated Financial Statements.
Discontinued Operations
Loss from discontinued operations, net of taxes, was $3.8 million and $7.8 million for Fiscal
2008 and Fiscal 2007, respectively. See Note 3 of Notes to Consolidated Financial Statements.
Capital Resources and Liquidity
Financing Arrangements
Senior Notes
On June 12, 2003, Warnaco, the principal operating subsidiary of Warnaco Group, completed the
sale of $210.0 million aggregate principal amount at par value of Senior Notes, which notes mature
on June 15, 2013 and bear interest at 87/8% per annum payable semi-annually on December 15 and June
15 of each year. No principal payments prior to the maturity date are required. The Senior Notes
are unconditionally guaranteed, jointly and severally, by Warnaco Group and substantially all of
Warnaco.s domestic subsidiaries (all of which are 100% owned, either directly or indirectly, by
Warnaco Group). The Senior Notes are effectively subordinate in right of payment to existing and
future secured debt (including the Companys New Credit Agreements) and to the obligations
(including trade accounts payable) of the subsidiaries that are not guarantors of the Senior Notes.
The guarantees of each guarantor are effectively subordinate to that guarantors existing and
future secured debt (including guarantees of the New Credit Agreements) to the extent of the value
of the assets securing that debt. There are no restrictions that prevent the guarantor subsidiaries
from transferring funds or paying dividends to the Company. The indenture pursuant to which the
Senior Notes were issued contains covenants which, among other things, restrict the Companys
ability to incur additional debt, pay dividends and make restricted payments, create or permit
certain liens, use the proceeds of sales of assets and subsidiaries stock, create or permit
restrictions on the ability of certain of Warnacos subsidiaries to pay dividends or make other
distributions to Warnaco Group or to Warnaco, enter into transactions with affiliates, engage in
certain business activities, engage in sale and leaseback transactions and consolidate or merge or
sell all or substantially all of its assets. Redemption of the Senior Notes prior to their maturity
is subject to premiums as set forth in the indenture. In connection with the offering of the
Senior Notes, the Company entered into a registration rights agreement with the initial purchasers
of the Senior Notes, which, among other things, required Warnaco and the guarantors to complete a
registration and exchange of the Senior Notes. In accordance with the registration rights
agreement, the Company completed the registration and exchange of the Senior Notes in the first
quarter of Fiscal 2004. The Company was in compliance with the financial covenants of the Senior
Notes as of January 2, 2010 and January 3, 2009.
On June 2, 2006, the Company purchased $5.0 million aggregate principal amount of the
outstanding $210.0 million Senior Notes for total consideration of $5.2 million in the open market.
During March, 2008, the Company purchased $44.1 million aggregate principal amount of the
outstanding Senior Notes for a total consideration of $46.2 million in the open market. In
connection with the purchase, the Company recognized a loss, in the other loss (income) line item
in the Companys consolidated statement of operations, of approximately $3.2 million, which
included the write-off of approximately $1.1 million of deferred financing costs. The aggregate
principal amount outstanding under the Senior Notes was $160.9 million as of January 2, 2010 and
January 3, 2009.
55
On January 5, 2010, the Company redeemed from bondholders $50.0 million aggregate principal
amount of the outstanding Senior Notes for a total consideration of $51.5 million. In connection
with the redemption, the Company will recognize a loss, in the other loss (income) line item in the
Companys Consolidated Statement of Operations for the first quarter of fiscal 2010, of
approximately $1.7 million, which includes a $1.5 million premium, the write-off of approximately
$0.8 million of deferred financing costs and $0.6 million of unamortized gain from the previously
terminated 2003 Swap Agreement and 2004 Swap Agreement (both defined below).
Interest Rate Swap Agreements
The Company entered into interest rate swap agreements on September 18, 2003 (the 2003 Swap
Agreement) and
November 5, 2004 (the 2004 Swap Agreement), with respect to the Senior Notes for a total
notional amount of $75 million. In June 2009, the 2004 Swap Agreement was terminated by the issuer
and the Company received a debt premium of $0.74 million. On July 15, 2009, the 2003 Swap Agreement
was terminated by the issuer and the Company received a debt premium of $1.48 million. Both debt
premiums are being amortized as reductions to interest expense through June 15, 2013 (the date on
which the Senior Notes mature). During Fiscal 2009, $0.3 million was amortized. The 2003 Swap
Agreement and the 2004 Swap Agreement provided that the Company would receive interest at 87/8% and
pay variable rates of interest based upon six month LIBOR plus 4.11% and 4.34%, respectively. As a
result of the 2003 Swap Agreement, the 2004 Swap Agreement and the amortization of the debt
premiums, the weighted average effective interest rate of the Senior Notes was 8.53% as of January
2, 2010 and 7.77% as of January 3, 2009.
The fair values of the Companys interest rate swap agreements reflect the termination premium
or termination discount that the Company would have realized if such swaps had been terminated on
the valuation dates. Since the provisions of the Companys 2003 Swap Agreement and 2004 Swap
Agreement matched the provisions of the Companys outstanding Senior Notes (the Hedged Debt),
changes in the fair values of the swaps did not have any effect on the Companys results of
operations but were recorded in the Companys Consolidated Balance Sheets. Unrealized gains on the
interest rate swap agreements were included in other assets with a corresponding increase in the
Hedged Debt. Unrealized losses on the interest rate swap agreements were included as a component
of long-term debt with a corresponding decrease in the Hedged Debt.
As of January 2, 2010, the Company had no outstanding interest rate swap agreements. The table
below summarizes the unrealized gain of the Companys swap agreements at January 3, 2009:
|
|
|
|
|
|
|
January 3, 2009 |
|
|
|
(in thousands of dollars) |
|
Unrealized gain: |
|
|
|
|
2003 Swap Agreement |
|
$ |
1,972 |
|
2004 Swap Agreement |
|
|
932 |
|
|
|
|
|
Net unrealized gain |
|
$ |
2,904 |
|
|
|
|
|
New Credit Agreements
On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a
revolving credit agreement (the New Credit Agreement) and Warnaco of Canada Company (Warnaco
Canada), an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as
guarantor, entered into a second revolving credit agreement (the New Canadian Credit Agreement
and, together with the New Credit Agreement, the New Credit Agreements), in each case with the
financial institutions which, from time to time, will act as lenders and issuers of letters of
credit (the Lenders and Issuers).
The New Credit Agreements replaced the Companys Amended and Restated Credit Agreement (see
below), including the Term B Note. In addition, the New Credit Agreements are used to issue standby
and commercial letters of credit, to finance ongoing working capital and capital expenditure needs
and for other general corporate purposes.
The New Credit Agreement provides for a five-year asset-based revolving credit facility under
which up to $270.0 million initially will be available. In addition, during the term of the New
Credit Agreement, Warnaco may make up to three requests for additional credit commitments in an
aggregate amount not to exceed $200.0 million. The New Canadian Credit Agreement provides for a
five-year asset-based revolving credit facility in an aggregate amount up to U.S. $30.0 million.
The New Credit Agreements mature on August 26, 2013.
56
The New Credit Agreement has interest rate options that are based on (i) a Base Rate (as
defined in the New Credit Agreement) plus 0.75% (4.0% at January 2, 2010) or (ii) a LIBOR Rate plus
1.75% (2.0% at January 2, 2010), in each case, on a per annum basis. The interest rate payable on
outstanding borrowing is subject to adjustments based on changes in the Companys leverage ratio.
The New Canadian Credit Agreement has interest rate options that are based on (i) the prime rate
announced by Bank of America (acting through its Canada branch) plus 0.75% (3.0% at January 2,
2010), or (ii) a BA Rate (as defined in the New Canadian Credit Agreement) plus 1.75% (2.08% at
January 2, 2010), in each case, on a per annum basis and subject to adjustments
based on changes in the Companys leverage ratio. The BA Rate is defined as the annual rate of
interest quoted by Bank of America (acting through its Canada branch) as its rate of interest for
bankers acceptances in Canadian dollars for a face amount similar to the amount of the loan and
for a term similar to the applicable interest period.
The New Credit Agreements contain covenants limiting the Companys ability to (i) incur
additional indebtedness and liens, (ii) make significant corporate changes including mergers and
acquisitions with third parties, (iii) make investments, (iv) make loans, advances and guarantees
to or for the benefit of third parties, (v) enter into hedge agreements, (vi) make restricted
payments (including dividends and stock repurchases), and (vii) enter into transactions with
affiliates. The New Credit Agreements also include certain other restrictive covenants. In
addition, if Available Credit (as defined in the New Credit Agreements) is less than a threshold
amount (as specified in the New Credit Agreements) the Companys Fixed Charge Coverage ratio (as
defined in the New Credit Agreements) must be at least 1.1 to 1.0.
The covenants under the New Credit Agreements contain negotiated exceptions and carve-outs,
including the ability to repay indebtedness, make restricted payments and make investments so long
as after giving pro forma effect to such actions the Company has a minimum level of Available
Credit (as defined in the New Credit Agreements), the Companys Fixed Charge Coverage Ratio (as
defined in the New Credit Agreements) for the last four quarters was at least 1.1 to 1.0 and
certain other requirements are met.
The New Credit Agreements contain events of default, such as payment defaults,
cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a
defined change of control, or the failure to observe the negative covenants and other covenants
related to the operation and conduct of the Companys business. Upon an event of default, the
Lenders and Issuers will not be obligated to make loans or other extensions of credit and may,
among other things, terminate their commitments and declare any then outstanding loans due and
payable immediately. As of January 2, 2010 and January 3, 2009, the Company was in compliance with
all financial covenants contained in the New Credit Agreements.
The obligations of Warnaco under the New Credit Agreement are guaranteed by Warnaco
Group and its indirect domestic subsidiaries (other than Warnaco) (collectively, the U.S.
Guarantors). The obligations of Warnaco Canada under the New Canadian Credit Agreement are
guaranteed by the Warnaco Group, Warnaco and the U.S. Guarantors, as well as by a Canadian
subsidiary of Warnaco Canada. As security for the obligations under the New Credit Agreements and
the guarantees thereof, the Warnaco Group, Warnaco and each of the U.S. Guarantors has granted
pursuant to a Pledge and Security Agreement to the collateral agent, for the benefit of the lenders
and issuing banks, a first priority lien on substantially all of their tangible and intangible
assets, including, without limitation, pledges of their equity ownership in domestic subsidiaries
and up to 66% of their equity ownership in first-tier foreign subsidiaries, as well as liens on
intellectual property rights. As security for the obligations under the New Canadian Credit
Agreement and the guarantee thereof by a Warnaco Canadian subsidiary, Warnaco Canada and its
subsidiary have each granted pursuant to General Security Agreements, a Securities Pledge Agreement
and Deeds of Hypothec to the collateral agent, for the benefit of the lenders and issuing banks
under the New Canadian Credit Agreement, a first priority lien on substantially all of their
tangible and intangible assets, including, without limitation, pledges of their equity ownership in
subsidiaries, as well as liens on intellectual property rights.
On August 26, 2008, the Company used $90.0 million of the proceeds from the New Credit
Agreements and $16.0 million of its existing cash and cash equivalents to repay $106.0 million in
loans outstanding under the Term B Note of the Amended and Restated Credit Agreement in full (see
below). The Amended and Restated Credit Agreement was terminated along with all related guarantees,
mortgages, liens and security interests. As of January 2, 2010, the Company had approximately $0.2
million in loans and approximately $72.5 million in letters of credit outstanding under the New
Credit Agreement, leaving approximately $231.9 million of availability (including $123.8 million of
available cash) under the New Credit Agreement. As of January 2, 2010, there were no
loans and no letters of credit outstanding under the New Canadian Credit Agreement and available
credit was approximately $19.0 million.
Revolving Credit Facility; Amended and Restated New Credit Agreement and Foreign Revolving
Credit Facility
On August 26, 2008, the Company terminated the Amended and Restated Credit Agreement,
including the Term B Note, in connection with the closing of the New Credit Agreements (see above).
In addition, during the third quarter of Fiscal 2008, the Company terminated the Foreign Revolving
Credit Facility under which no amounts were outstanding. All guarantees, mortgages,
liens and security interests related to both of those agreements were terminated at that time.
57
Euro-Denominated CKJEA Notes Payable and Other
In connection with the CKJEA Acquisition, the Company assumed certain short-term notes payable
(the CKJEA Notes) with a number of banks at various interest rates (primarily Euro LIBOR plus
1.0%). The total CKJEA Notes payable was $47.7 million at January 2, 2010 and $62.3 million at
January 3, 2009. The weighted average effective interest rate for the outstanding CKJEA Notes
payable was 2.18% as of January 2, 2010 and 4.50% as of January 3, 2009. All of the CKJEA Notes
payable are short-term and were renewed during Fiscal 2009 for additional terms of no more than 12
months. In addition, one of the Companys Korean subsidiaries had an outstanding note payable of
$3.8 million with an interest rate of 8.84% per annum at January 3, 2009, which had been fully
repaid at January 2, 2010.
Liquidity and Capital Resources
The Companys principal source of cash is from sales of its merchandise to both wholesale and
retail customers. During Fiscal 2009, despite the challenging global economy, there was an increase
in sales of the Companys products as expressed in local currencies compared to Fiscal 2008. Since
more than 50% of those sales arose from the Companys operations outside the U.S., fluctuations in
foreign currencies (principally the Euro, Korean Won, Canadian Dollar and Mexican Peso) relative to
the U.S. Dollar have a significant effect on the Companys cash inflows, expressed in U.S. Dollars.
During Fiscal 2009, the U.S. Dollar was stronger relative to the foreign currencies noted above
than during Fiscal 2008. As a result, the increase in sales as expressed in local currencies was
more than offset by the negative effect of fluctuations in foreign currencies, resulting in a
decrease in net revenues as expressed in U.S. dollars of 2.1% during Fiscal 2009 compared to
Fiscal 2008 (see Results of Operations Net Revenues, above).
The Company believes that, at January 2, 2010, cash on hand, cash available under its New
Credit Agreements (see Capital Resources and Liquidity Financing Arrangements, above) and cash to
be generated from future operating activities will be sufficient to fund its operations, including
contractual obligations (see Contractual Obligations, below) and capital expenditures, for the next
12 months.
As of January 2, 2010, the Company had working capital (current assets less current
liabilities) of $560.2 million. Included in working capital as of January 2, 2010 was (among other
items) cash and cash equivalents of $320.8 million, and short-term debt of $97.9 million, including
the CKJEA Notes and the $50 million current portion of the Senior Notes. The Companys total debt
was $210.7 million, consisting of $162.8 million of the Senior Notes (including unamortized debt
premium of $1.9 million on the termination of the 2003 and 2004 interest rate swaps), $0.2 million
under the New Credit Agreement, $0 under the New Canadian Credit Agreement and $47.7 million of the
CKJEA Notes.
On January 5, 2010, the Company redeemed from bondholders $50.0 million aggregate principal
amount of the outstanding Senior Notes for a total consideration of $51.5 million. In connection
with the redemption, the Company will recognize a loss, in the other loss (income) line item in the
Companys Consolidated Statement of Operations for the first quarter of fiscal 2010, of
approximately $1.7 million, which included $1.5 million of premium expense, the write-off of
approximately $0.8 million of deferred financing costs and $0.6 million of unamortized gain from
the previously terminated 2003 and 2004 interest rate swaps.
As of January 2, 2010, under the New Credit Agreement, the Company had approximately $0.2
million in loans and approximately $72.5 million in letters of credit outstanding, leaving
approximately $231.9 million of availability (including $123.8 million of available cash), and,
under the New Canadian Credit Agreement, no loans and no letters of credit, leaving approximately
$19.0 million of availability. With the exception of the Companys foreign short-term notes
payable, including the CKJEA Notes, the Company is not required to make any principal payments
under its debt facilities prior to June 15, 2013.
The revolving credit facilities under the New Credit Agreements reflect funding commitments by
a syndicate of 14 U.S. and Canadian banks, including Bank of America N.A., JPMorgan Chase, N.A.,
Deutsche Bank, HSBC, Royal Bank of Scotland and The Bank of Nova Scotia. The ability of any one or
more of those banks to meet its commitment to provide the Company with funding up to the maximum of
available credit is dependent on the fair value of the banks assets and its legal lending ratio
relative to those assets
(amount the bank is allowed to lend). The turmoil in the credit markets in late Fiscal 2008
and early Fiscal 2009 may have limited the ability of those banks to make loans. That turmoil began
to ease during Fiscal 2009. However, the Company continues to monitor the creditworthiness of the
syndicated banks.
During the first quarter of Fiscal 2009, the Company borrowed funds under the New Credit
Agreement, net of repayments, of $52.8 million for seasonal cash flow requirements. The Company
repaid those borrowings by the end of the second quarter of Fiscal 2009. Additional funds were
borrowed in the third quarter of 2009 and substantially repaid by the end of Fiscal 2009. As of
January 2, 2010, the Company expects that it will continue to be able to obtain needed funds under
the New Credit Agreements when requested. However, in the event that such funds are not available,
the Company may have to delay certain capital expenditures or plans to expand its business, to
scale back operations and/or raise capital through the sale of its equity or debt securities.
58
The Companys corporate credit ratings and outlooks at January 2, 2010, are summarized below:
|
|
|
|
|
Rating |
|
Corporate |
|
|
Agency |
|
Rating |
|
Outlook |
|
|
|
|
|
Moodys
|
|
Ba2
|
|
positive |
|
|
|
|
|
Standard & Poors
|
|
BB+
|
|
positive |
|
|
|
(a) |
|
ratings on individual debt issuances can be different from the Companys composite credit
ratings depending on the priority position of creditors holding such debt, collateral related
to such debt and other factors. The Companys secured debt is rated BBB by Standard & Poors. |
The Companys credit ratings contribute to its ability to access the credit markets. Factors
that can affect the Companys credit ratings include changes in its operating performance, the
economic environment, conditions in the apparel industry, the Companys financial position, and
changes in the Companys business or financial strategy. The Company is not aware of any
circumstances that would result in a downgrade of its credit ratings. If a downgrade were to occur,
it could adversely impact, among other things, the Companys future borrowing costs and access to
capital markets. Despite the Companys credit ratings, the current state of the economy creates
greater uncertainty than in the past with regard to financing opportunities and the cost of such
financing. Given the Companys capital structure and its projections for future profitability and
cash flow, the Company believes it is well positioned to obtain additional financing, if necessary,
to refinance its debt, or, if opportunities present themselves, to make future acquisitions.
However, there can be no assurance that such financing, if needed, can be obtained on terms
satisfactory to the Company or at such time as a specific need may arise.
During Fiscal 2009, the Company leased over 100,000 square feet of new retail store space
worldwide, which resulted in capital expenditures of approximately $20 million. During fiscal 2010,
the Company has targeted the leasing of 100,000 square feet of new retail store space worldwide,
which the Company expects will result in capital expenditures of approximately $21 million.
During Fiscal 2009, the Company reduced its workforce in order to align its cost structure to
match the downturn in the global economy and turmoil in the financial markets and in connection
with the consolidation of its European operations. The Company made $8.3 million in cash severance
payments to employees during Fiscal 2009. The Company also paid $3.6 million related to
restructuring and other exit activities, including contract termination costs. The Company expects
to incur further restructuring expenses of approximately $1.2 million in connection with the
consolidation of its European operations through 2010. See Note 4 to Consolidated Financial
Statements for additional information on the Companys restructuring activities.
During the fourth quarter of Fiscal 2009, the Company acquired the remaining 49% equity
interest in WBR, its non-controlling interest in Brazil. The Company also acquired the assets and
assumed the leases for eight retail stores in Brazil that sell Calvin Klein products (including
jeans wear and underwear). Prior to those acquisitions, WBR paid a dividend of 7 million Brazilian
Real to the sellers, representing a distribution of their equity in WBR through September 30,
2009. The Company paid 21 million Brazilian Real (approximately $12 million based on the currency
exchange rate on the date of acquisition) to acquire the remaining equity interest and the retail
stores. The Company is required to make three future annual payments totaling up to 43 million
Brazilian
Real (approximately $24 million) through March 31, 2012, which are contingent on the
operating income, as defined, of WBR during that period. Based upon the operating results achieved
by WBR in the fourth quarter of Fiscal 2009, the first payment, amounting to 6 million Brazilian
Real (approximately $3.5 million) will be paid by March 31, 2010.
During Fiscal 2009, some of the Companys foreign subsidiaries with functional currencies
other than the U.S. dollar made purchases of inventory, paid minimum royalty and advertising costs
and /or had intercompany loans and payables denominated in U.S. dollars. The cash flows of those
subsidiaries were, therefore, negatively impacted by the strengthening of the U.S. dollar in
relation to those foreign currencies. In order to minimize foreign exchange risk of those
transactions, the Company uses derivative financial instruments, including foreign exchange forward
contracts and zero cost collars (option contracts) (see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk Foreign Exchange Risk and Note 17 to Notes to Consolidated
Financial Statements).
The Company carries its derivative financial instruments at fair value on the Consolidated
Balance Sheets. The Company utilizes the market approach to measure fair value for financial assets
and liabilities. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. At January 2, 2010, the
Companys hedging programs included $44.2 million of future inventory purchases, $19.2 million of
future minimum royalty and advertising payments and $54.0 million of intercompany loans and amounts
denominated in non-functional currencies, primarily the U.S. dollar.
59
The Company classifies its financial instruments under a fair value hierarchy that is intended
to increase consistency and comparability in fair value measurements and related disclosures. The
fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value
that are either observable or unobservable. Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on market data obtained from
independent sources while unobservable inputs reflect a reporting entitys pricing based upon their
own market assumptions. The fair value hierarchy consists of the following three levels:
|
Level 1 |
|
Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Inputs are quoted prices for similar assets or liabilities in an active market,
quoted prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable and market-corroborated inputs which are
derived principally from or corroborated by observable market data. |
|
|
Level 3 |
|
Inputs are derived from valuation techniques in which one or more significant inputs
or value drivers are unobservable. |
The fair value of foreign exchange contracts was determined as the net unrealized gains or
losses on those contracts, which is the net difference between (i) the U.S. dollars to be received
or paid at the contracts settlement date and (ii) the U.S. dollar value of the foreign currency to
be sold or purchased at the current forward exchange rate. The fair value of these foreign exchange
contracts is based on quoted prices which include the effects of U.S. and foreign interest rate
yield curve and, therefore, meets the definition of level 2 fair value, as defined above.
The fair value of zero-cost collars was determined as the net unrealized gains or losses on
the option contracts comprising each collar, which is the net difference between (i) the U.S.
dollars to be received or paid at the contracts settlement date and (ii) the U.S. dollar value of
the foreign currency to be sold or purchased at the current spot exchange rate. The fair value of
these foreign currency exchange contracts is based on exchange-quoted prices and, therefore, meets
the definition of level 2 fair value, as defined above.
The Pension Protection Act of 2006 (the PPA) revised the basis and methodology for
determining defined benefit plan minimum funding requirements as well as maximum contributions to
and benefits paid from tax-qualified plans. Most of these provisions were first applicable to the
Companys domestic defined benefit pension plan in Fiscal 2008. The PPA may ultimately
require the Company to make additional contributions to its domestic plans. During Fiscal
2009, the Company contributed $10.5 million to the domestic pension plan. Annual contributions for
the following four years are expected to range between $5.7 million and $6.3 million. Actual fiscal
2010 and later year contributions could exceed the Companys current projections, and may be
influenced by future changes in government requirements. Additionally, the Companys projections
concerning timing of the PPA funding requirements are subject to change and may be influenced by
factors such as general market conditions affecting trust asset performance, interest rates, and
the Companys future decisions regarding certain elective provisions of the PPA. See Note 7 to
Notes to Consolidated Financial Statements for additional information on the Companys pension
plan.
Accounts receivable increased $38.8 million to $290.7 million at January 2, 2010 from $251.9
million at January 3, 2009 due primarily to increased sales in the fourth quarter of Fiscal 2009.
The balance of accounts receivable at January 2, 2010 includes an increase of $14.9 million due to
the weaker U.S. dollar relative to foreign currencies in connection with transactions in countries
where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian
dollar and Mexican peso) at that date compared to January 3, 2009.
Inventories decreased $72.9 million to $253.4 million at January 2, 2010 from $326.3 million
at January 3, 2009 reflecting primarily the Companys initiative to reduce inventory in light of
the downturn in the global economy. The balance of inventories at January 2, 2010 includes an
increase of $9.9 million due to the weaker U.S. dollar relative to foreign currencies in connection
with transactions in countries where the Company conducts certain of its operations at that date
compared to January 3, 2009.
Share Repurchase Program
In May 2007, the Companys Board of Directors authorized a share repurchase program (the 2007
Share Repurchase Program) for the repurchase of up to 3,000,000 shares of the Companys common
stock. The Company expects that, in order to comply with the terms of applicable debt instruments,
purchases under this newly authorized program will be made from time to time over a period of up to
four years beginning from the date the program was approved. The 2007 Share Repurchase Program may
be modified or terminated by the Companys Board of Directors at any time. During Fiscal 2007, the
Company repurchased 566,869 shares of its common stock in the open market at a total cost of
approximately $22.0 million (an average cost of $38.89 per share) under its 2007 Share Repurchase
Program. During Fiscal 2008, the Company, repurchased 943,000 shares of its common stock in the
open market at a total cost of approximately $15.9 million (an average cost of $16.82 per share)
under its 2007 Share Repurchase Program. The Company did not repurchase any common stock under the
2007 Share Repurchase Program in Fiscal 2009.
60
Cash Flows
The following table summarizes the cash flows from the Companys operating, investing and
financing activities for Fiscal 2009, Fiscal 2008 and Fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
(in thousands of dollars) |
|
Net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
263,881 |
|
|
$ |
153,408 |
|
|
$ |
124,483 |
|
Discontinued operations |
|
|
1,033 |
|
|
|
(27,521 |
) |
|
|
35,940 |
|
Net cash (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(52,581 |
) |
|
|
(44,263 |
) |
|
|
(20,357 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(443 |
) |
Net cash (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(40,908 |
) |
|
|
(120,692 |
) |
|
|
(121,688 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
1,702 |
|
|
|
(5,223 |
) |
|
|
6,993 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
173,127 |
|
|
$ |
(44,291 |
) |
|
$ |
24,928 |
|
|
|
|
|
|
|
|
|
|
|
For Fiscal 2009, cash provided by operating activities from continuing operations was
$263.9 million compared to $153.4 million in Fiscal 2008 and $124.5 million in Fiscal 2007. The
$110.5 million increase in cash provided from Fiscal 2008 to Fiscal
2009 was due to a $49.9 million increase in net income and to changes to non-cash charges and
working capital. Working capital changes for Fiscal 2009 included cash outflows of $27.9 million
related to accounts receivable (due to increased sales in 2009 and the timing of payments) and $5.1
million related to accounts payable, accrued expenses and other liabilities (due to the timing of
payments for purchases of inventory), partially offset by cash inflows of $67.5 million related to
inventory (due to the Companys initiative to reduce inventory balances in light of the downturn in
the economy), $17.1 million related to accrued income taxes and $9.9 million related to prepaid
expenses and other assets. Working capital changes for Fiscal 2008 included cash outflows of $6.5
million related to accounts receivable, $42.4 million related to inventory, $33.8 million related
to prepaid expenses and other assets, which were partially offset by cash inflows of $67.2 million
related to accounts payable and accrued expenses and $4.9 million related to accrued income taxes
(including an accrual during Fiscal 2008 of approximately $14.6 million associated with the
repatriation, to the U.S., of the proceeds related to the sale of the Lejaby business, net of
adjustments for working capital). The Company experienced an $11.6 million decrease in non-cash
charges in Fiscal 2009 compared to Fiscal 2008 primarily reflecting decreases in foreign exchange
losses, provision for trade and other bad debts, inventory write-downs (primarily related to the
Companys Swimwear group), amortization of deferred charges and loss on repurchase of Senior Notes
and refinancing of the Amended and Restated New Credit Agreement in 2008, partially offset by
increases in loss from discontinued operations in 2009 and provision for deferred income tax.
The $28.9 million increase in cash provided by operating activities from continuing operations
for Fiscal 2008 compared to Fiscal 2007 was due to a $30.5 million decrease in net income offset by
the changes to non-cash charges and working capital. Working capital changes for Fiscal 2008
included cash outflows of $6.5 million related to accounts receivable, $42.4 million related to
inventory, $33.8 million related to prepaid expenses and other assets, which were partially offset
by cash inflows of $67.2 million related to accounts payable and accrued expenses and $4.9 million
related to accrued income taxes (including an accrual during Fiscal 2008 of approximately $14.6
million associated with the repatriation, to the U.S., of the proceeds related to the sale of the
Lejaby business, net of adjustments for working capital). Working capital changes for Fiscal 2007
included outflows of $17.5 million related to inventory, $35.7 million related to accounts payable
and accrued expenses, $11.3 million related to accrued income taxes and $1.0 million in prepaid
expenses and other assets, which were offset by inflows of $3.4 million related to accounts
receivable. The Company experienced an $8.1 million increase in non-cash charges in Fiscal 2008
compared to Fiscal 2007 primarily reflecting increases in foreign exchange losses, benefit for
deferred income tax and loss on repurchase of Senior Notes and refinancing of Amended and Restated
New Credit Agreement in 2008, partially offset by decreases in depreciation and amortization,
inventory write-downs (primarily related to the Companys Swimwear group) and loss from
discontinued operations.
61
For Fiscal 2009, cash used in investing activities from continuing operations was $52.6
million, mainly attributable to purchases of property, plant and equipment of $43.4 million, the
acquisition of retail stores in Chile and Peru of $2.5 million and acquisitions in Brazil of $9.5
million (see Note 2 to Notes to Consolidated Financial Statements). For Fiscal 2008, cash used in
investing activities from continuing operations was $44.3 million, mainly attributable to purchases
of property, plant and equipment of $42.3 million and cash used for business acquisitions, net of
cash acquired of $2.4 million, mainly related to the acquisition of a business which operates 11
retail stores in China and purchase of intangible assets of $26.7 million, mainly related to 2008
CKI Licenses acquired from PVH on January 30, 2008 (see Note 2 of Notes to the Consolidated
Financial Statements). Those amounts were partially offset by a net amount of $26.8 million
received from the sale of the Lejaby business, which closed on March 10, 2008 (see Note 3 of Notes
to the Consolidated Financial Statements). For Fiscal 2007, cash used in investing activities from
continuing operations was $20.4 million, mainly attributable to the purchase of property, plant and
equipment of $40.5 million, offset by the net proceeds from the sale of certain designer brands of
$19.5 million.
Net cash used in financing activities for Fiscal 2009 was $40.9 million, which primarily
reflects a decrease of $24.0 million related to short-term notes payable, a decrease of $11.8
million due to repayment of amounts borrowed under the New Credit Agreements, a decrease of $4.0
million related to the dividend paid in connection with the acquisitions in Brazil in Fiscal 2009,
a decrease of $5.3 million related to the acquisition of the equity interest in the Brazilian
non-controlling interest, which was accounted for as an equity transaction, and a decrease of $1.5
million related to the repurchase of treasury stock (in connection with the surrender of shares
for the payment of the minimum employee withholding tax due upon vesting of certain restricted
stock awarded by the Company to its employees), partially offset by an increase of $4.0 million
from the exercise of employee stock options and an increase of $2.2 million of cash received upon
the cancellation of the 2003 and 2004 interest rate swap agreements (see Note 12 to notes to
Consolidated Financial Statements). Net cash used in financing activities in Fiscal 2008 was $120.7
million, which primarily reflects the repayments of the Term B note of $107.3 million, repurchase
of $46.2 million of Senior Notes, repurchase of treasury
stock of $20.5 million (related to the 2007 Share Repurchase Program and surrender of shares
in connection with the vesting of certain restricted stock awarded by the Company to its employees)
and the payment of deferred financing costs of $3.9 million. Those amounts were partially offset by
$12.0 million received under the New Credit Agreements, $28.5 million received from the exercise of
employee stock options and $16.6 million related to an increase in short-term notes payable. Net
cash used in financing activities in 2007 was $121.7 million, which primarily reflects $61.8
million used for the repayment of the Term B Note and $57.7 million for treasury stock purchases
(primarily related to the Companys stock repurchase programs).
Cash
in operating accounts primarily represents cash held in domestic cash
collateral accounts, lockbox receipts not yet cleared or available to the Company, cash held by foreign subsidiaries
and compensating balances required under various trade, credit and other arrangements.
Contractual Obligations
The following table summarizes the Companys contractual commitments as of January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Credit Agreements (a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Senior Notes (b) |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
110,890 |
|
|
|
|
|
|
|
|
|
|
|
160,890 |
|
CKJEA short term notes payable (c) |
|
|
47,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,684 |
|
Minimum royalties (d) |
|
|
66,331 |
|
|
|
64,840 |
|
|
|
61,943 |
|
|
|
62,116 |
|
|
|
67,308 |
|
|
|
1,456,951 |
|
|
|
1,779,489 |
|
Operating leases (d) |
|
|
72,246 |
|
|
|
62,019 |
|
|
|
55,151 |
|
|
|
45,286 |
|
|
|
35,760 |
|
|
|
112,397 |
|
|
|
382,859 |
|
Interest payments (e) |
|
|
12,191 |
|
|
|
12,191 |
|
|
|
12,191 |
|
|
|
6,109 |
|
|
|
|
|
|
|
|
|
|
|
42,682 |
|
Pension plan funding (f) |
|
|
6,300 |
|
|
|
6,100 |
|
|
|
5,900 |
|
|
|
5,700 |
|
|
|
5,500 |
|
|
|
400 |
|
|
|
29,900 |
|
Post-retirement plan funding (f) |
|
|
390 |
|
|
|
400 |
|
|
|
370 |
|
|
|
360 |
|
|
|
340 |
|
|
|
1,720 |
|
|
|
3,580 |
|
Employment contracts |
|
|
3,494 |
|
|
|
1,453 |
|
|
|
|
|
|
|
264 |
|
|
|
156 |
|
|
|
159 |
|
|
|
5,526 |
|
Purchase obligations (g) |
|
|
32,868 |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,868 |
|
IT license and maintenance contracts |
|
|
2,801 |
|
|
|
2,146 |
|
|
|
1,282 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
6,359 |
|
Liabilities for uncertain tax positions |
|
|
882 |
|
|
|
13,322 |
|
|
|
15,985 |
|
|
|
5,295 |
|
|
|
1,212 |
|
|
|
1,950 |
|
|
|
38,646 |
|
Other long-term obligations (h) |
|
|
6,439 |
|
|
|
1,849 |
|
|
|
1,841 |
|
|
|
1,054 |
|
|
|
481 |
|
|
|
1,070 |
|
|
|
12,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
374,104 |
|
|
$ |
171,320 |
|
|
$ |
154,663 |
|
|
$ |
237,204 |
|
|
$ |
110,757 |
|
|
$ |
1,574,647 |
|
|
$ |
2,622,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The New Credit Agreements mature on August 26, 2013. See Capital Resources and
Liquidity Financing Arrangements and Note 12 of Notes to Consolidated Financial Statements. |
|
(b) |
|
The Senior Notes mature on June 15, 2013. See-Capital Resources and Liquidity -
Financing Arrangements Senior Notes and Note 12 of Notes to Consolidated Financial
Statements. |
|
(c) |
|
All of the CKJEA Notes were renewed for additional one-year terms during Fiscal 2009. |
|
(d) |
|
See Note 15 of Notes to Consolidated Financial Statements. |
|
62
|
|
|
(e) |
|
Reflects expected interest obligations after considering required minimum repayments
of the related debt. Interest on variable rate debt instruments is estimated based upon rates
in effect at January 2, 2010. See Item 7A. Quantitative and Qualitative Disclosures About
Market Risk Interest Rate Risk. |
|
(f) |
|
Reflects expected contributions to the Companys U.S. pension plan in accordance with
the Pension Protection Act of 2006 and to the Companys post-retirement plan. See Capital
Resources and Liquidity Liquidity and Note 7 of Notes to Consolidated Financial Statements. |
|
(g) |
|
Represents contractual commitments for goods or services not received or recorded on
the Companys consolidated balance sheet. Includes, among other items, purchase obligations of
approximately $20.8 million, during 2010 and 2011, pursuant to a production agreement with the
buyer of the Companys manufacturing facilities in Mexico. See Note 4 and Note 15 of Notes
to Consolidated Financial Statements. |
|
(h) |
|
Includes contracts with athletes and models and $3.5 million related to the Brazilian
acquisitions in Fiscal 2009, which will be paid by March 31, 2010 (see Note 2 of Notes to
Consolidated Financial Statements). |
In addition to the above contractual obligations, in the ordinary course of business, the
Company has open purchase orders with
suppliers of approximately $309.5 million as of January 2, 2010.
Seasonality
The Companys Swimwear business is seasonal; approximately 67.8% of the Swimwear Groups net
revenues was generated in the first half of Fiscal 2009. The consolidated operations of the
Company are somewhat seasonal. In Fiscal 2009, approximately 49.2% of the Companys net revenues
was generated in the first half of the fiscal year. The working capital requirements of the
Swimwear Group are highest during the periods when the Companys other businesses have their lowest
working capital requirements. Sales and earnings from the Companys other groups and business units
are generally expected to be somewhat higher in the second half of the fiscal year.
The following sets forth the net revenues, operating income and net cash flow from operating
activities generated for each quarter of Fiscal 2009 and Fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
April 4, |
|
|
July 4, |
|
|
October 3, |
|
|
January 2, |
|
|
April 5, |
|
|
July 5, |
|
|
October 4, |
|
|
January 3, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2010 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
|
(in millions of dollars) |
|
Net revenues |
|
$ |
537.8 |
|
|
$ |
455.4 |
|
|
$ |
520.9 |
|
|
$ |
505.5 |
|
|
$ |
567.2 |
|
|
$ |
502.8 |
|
|
$ |
547.6 |
|
|
|
445.3 |
|
Operating income |
|
|
64.3 |
|
|
|
41.0 |
|
|
|
60.3 |
|
|
$ |
27.9 |
|
|
|
56.1 |
|
|
|
49.2 |
|
|
|
48.0 |
|
|
|
(11.9 |
) |
Cash flow provided by
(used in)
operating
activities |
|
|
(61.2 |
) |
|
|
135.3 |
|
|
|
73.8 |
|
|
|
117.0 |
|
|
|
(43.4 |
) |
|
|
81.9 |
|
|
|
32.4 |
|
|
|
55.0 |
|
Inflation
The Company does not believe that the relatively moderate levels of inflation in the U.S.,
Canada, Western Europe and Asia have had a significant effect on its net revenues or its
profitability in any of the last three fiscal years. The Company believes that, in the past, it has
been able to offset such effects by increasing prices on certain items or instituting improvements
in productivity. Mexico and Brazil, historically, has been subject to high rates of inflation;
however, the effects of inflation on the operation of the Companys Mexican and Brazilian
subsidiaries have been relatively moderate and have not had a material effect on the results of the
Company in any of the last three fiscal years.
Deflation of Apparel Selling Prices
Management believes the apparel industry is undergoing significant changes in its
manufacturing and procurement business cycles through the lifting of import restrictions on certain
products, overall deflation in the selling prices of its products and department store and retailer
demands for increased profitability from the wholesale apparel industry. The Company expects to
meet these challenges by improving its procurement process through aggressive sourcing of product
from multiple vendors and locations, improving its efficiency through upgraded systems and improved
procedures and maintaining a diverse mix of products that are offered at multiple price points
across virtually all channels of distribution.
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
See Note 1 to Notes to Consolidated Financial Statements for a description of accounting
pronouncements that have recently been issued and the Companys assessment of the effect of their
adoption on its financial position, results of operations and cash flows.
63
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K, as well as certain other written, electronic and oral
disclosures made by the Company from time to time, contains forward-looking statements that are
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties and reflect, when made, the
Companys estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions,
opportunities and expectations. Actual results may differ materially from anticipated results,
targets or expectations and investors are cautioned not to place undue reliance on any
forward-looking statements. Statements other than statements of historical fact, including, without
limitation, future financial targets, are forward-looking statements. These forward-looking
statements may be identified by, among other things, the use of forward-looking language, such as
the words believe, anticipate, estimate, expect, intend, may, project, scheduled
to, seek, should, will be, will continue, will likely result, targeted, or the
negative of those terms, or other similar words and phrases or by discussions of intentions or
strategies.
The following factors, among others, including those described in this Annual Report on Form
10-K under the heading Item 1A. Risk Factors (as such disclosure may be modified or supplemented
from time to time), could cause the Companys actual results to differ materially from those
expressed in any forward-looking statements made by it: the Companys ability to execute its
repositioning and sale initiatives (including achieving enhanced productivity and profitability)
previously announced; economic conditions that affect the apparel industry, including the recent
turmoil in the financial and credit markets; the Companys failure to anticipate, identify or
promptly react to changing trends, styles, or brand preferences; further declines in prices in the
apparel industry; declining sales resulting from increased competition in the Companys markets;
increases in the prices of raw materials; events which result in difficulty in procuring or
producing the Companys products on a cost-effective basis; the effect of laws and regulations,
including those relating to labor, workplace and the environment;
possible additional tax liabilities; changing international trade
regulation, including as it relates to the imposition or elimination of quotas on imports of
textiles and apparel; the Companys ability to protect its intellectual property or the costs
incurred by the Company related thereto; the risk of product safety issues, defects, or other
production problems associated with our products; the Companys dependence on a limited number of
customers; the effects of consolidation in the retail sector; the Companys dependence on license
agreements with third parties; the Companys dependence on the reputation of its brand names,
including, in particular, Calvin Klein; the Companys exposure to conditions in overseas markets in
connection with the Companys foreign operations and the sourcing of products from foreign
third-party vendors; the Companys foreign currency exposure; the Companys history of insufficient
disclosure controls and procedures and internal controls and restated financial statements;
unanticipated future internal control deficiencies or weaknesses or ineffective disclosure controls
and procedures; the effects of fluctuations in the value of investments of the Companys pension
plan; the sufficiency of cash to fund operations, including capital expenditures; the Companys
ability to service its indebtedness, the effect of changes in interest rates on the Companys
indebtedness that is subject to floating interest rates and the limitations imposed on the
Companys operating and financial flexibility by the agreements governing the Companys
indebtedness; the Companys dependence on its senior management team and other key personnel; the
Companys reliance on information technology; the limitations on purchases under the Companys
share repurchase program contained in the Companys debt instruments, the number of shares that the
Company purchases under such program and the prices paid for such shares; the Companys inability
to achieve its financial targets and strategic objectives, as a result of one or more of
the factors described above, changes in the assumptions underlying the targets or goals, or
otherwise; the failure of acquired businesses to generate expected levels of revenues; the failure
of the Company to successfully integrate such businesses with its existing businesses (and as a
result, not achieving all or a substantial portion of the anticipated benefits of such
acquisitions); and such acquired businesses being adversely affected, including by one or more of
the factors described above, and thereby failing to achieve anticipated revenues and earnings
growth.
The Company encourages investors to read the section entitled Item 1A. Risk Factors and the
discussion of the Companys critical accounting policies in Discussion of Critical Accounting
Policies included in this Annual Report on Form 10-K, as such discussions may be modified or
supplemented by subsequent reports that the Company files with the SEC. This discussion of
forward-looking statements is not exhaustive but is designed to highlight important factors that
may affect actual results. Forward-looking statements speak only as of the date on which they are
made, and, except for the Companys ongoing obligation under the U.S. federal securities laws, the
Company disclaims any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
64
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
The Company is exposed to market risk primarily related to changes in hypothetical investment
values under certain of the Companys employee benefit plans, interest rates and foreign currency
exchange rates. The Company does not use derivative financial instruments for speculation or for
trading purposes.
Market Risk
The Companys pension plan invests in marketable equity and debt securities, mutual funds,
limited partnerships and cash accounts. These investments are subject to changes in the market
value of individual securities and interest rates as well as changes in the overall economy.
Investments are stated at fair value, except as disclosed below, based upon quoted market prices.
Investments in limited partnerships are valued based on estimated fair value by the management of
the limited partnerships in the absence of readily ascertainable market values. These estimated
fair values are based upon the underlying investments of the limited partnerships. Because of the
inherent uncertainty of valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and the differences could
be material. The limited partnerships utilize a fund of funds approach resulting in diversified
multi-strategy, multi-manager investments. The limited partnerships invest capital in a
diversified group of investment entities, generally hedge funds, private investment companies,
portfolio funds and pooled investment vehicles which engage in a variety of investment strategies,
managed by investment managers. Fair value is determined by the administrators of each underlying
investment, in consultation with the investment managers. Investments in common collective trusts
are valued at the net asset value, as determined by the trust manager, of the shares held by the
pension plan at year end, which is based on the fair value of the underlying assets.
During the fourth quarter of Fiscal 2009, the fair value of the debt and equity securities and
other investments held in the pension plans investment portfolio has begun to increase. Earlier in
the year, the turmoil in the world financial and credit markets had created significant volatility,
resulting in a significant decline in the portfolios fair value. Changes in the fair value of the
pension plans investment portfolio are directly reflected in the Companys Consolidated Statement
of Operations through pension expense and in the Companys Consolidated Balance Sheet as a
component of accrued pension liability. The Company records the effect of any changes in actuarial
assumptions (including changes in the discount rate) and the difference between the assumed rate of
return on plan assets and the actual return on plan assets in the fourth quarter of its fiscal
year. The total value of the pension plans investment portfolio was $118.3 million at January 2,
2010 and $100.6 million at January 3, 2009. A hypothetical 10% increase/decrease in the value of
the Companys pension plan investment portfolio would have resulted in a decrease/increase in
pension expense of $11.8 million and $10.1 million for Fiscal 2009 and Fiscal 2008, respectively.
Based on historical appreciation in the Companys pension plan investment portfolio, the Company,
during the first three quarters of Fiscal 2009, estimated pension expense on an interim basis
assuming a long-term rate of return on pension plan investments of 8%, net of pension plan
expenses. A 1% decrease/increase in the actual return earned on pension plan assets (a decrease in
the return on plan assets from 8% to 7% or an increase in the return on plan assets from 8% to 9%)
would result in an increase/decrease of approximately $1.2 million in pension expense
(decrease/increase in pension income) for Fiscal 2009. During Fiscal 2009, the return on pension
plan assets, net of pension plan expenses, actually increased by approximately 17.6%. However, the
Company reduced the discount rate used to determine benefit obligations from 8.0% in Fiscal 2008 to
6.1% in Fiscal 2009, which increased the benefit obligation. As a result, the Company recognized
approximately $18.3 million of pension expense in the fourth quarter of Fiscal 2009. See Note 7 of
Notes to Consolidated Financial Statements.
Interest Rate Risk
The Company has market risk from exposure to changes in interest rates, at January 2, 2010, on
$0.2 million under the New Credit Agreements and $47.7 million under the CKJEA Notes and, at
January 3, 2009, on its 2003 and 2004 Swap Agreements with notional amounts totaling $75.0 million,
on $62.3 million under the CKJEA Notes and on $11.9 million under the New Credit Agreements. The
Company is not exposed to interest rate risk on its Senior Notes because the interest rate on the
Senior Notes is fixed at 87/8% per annum. With respect to the 2003 and 2004 Swap Agreements (which
were terminated by the issuer in July 2009 and June 2009, respectively), a hypothetical 10%
increase in interest rates would have had an unfavorable impact of $0.5 million for Fiscal 2008 on
the Companys income from continuing operations before provision for income taxes. A hypothetical
10% increase in interest rates for the loans outstanding under the New Credit Agreements would have
had a negligible unfavorable effect in Fiscal 2009 and a negligible unfavorable effect in Fiscal
2008 on the Companys income from continuing operations before provision for income taxes. A
hypothetical 10% increase in interest rates for the CKJEA Notes would have had a $0.1 million
unfavorable effect in Fiscal 2009
and an unfavorable effect of $0.3 million in Fiscal 2008 on the Companys income from
continuing operations before provision for income taxes. See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity
Financing Arrangements and Note 12 of Notes to Consolidated Financial Statements.
65
Foreign Exchange Risk
The Company is exposed to foreign exchange risk related to its U.S. dollar-denominated
purchases of inventory, payment of minimum royalty and advertising costs and intercompany loans and
payables where the functional currencies of the subsidiaries that are party to these transactions
are the Euro, Canadian Dollar, Korean Won, Mexican Peso or British Pound. The foreign currency
derivative instruments that the Company uses to offset its foreign exchange risk are forward
purchase contracts and zero-cost collars. See Note17 of Notes to the Consolidated Financial
Statements for further details on the derivative instruments and hedged transactions. These
exposures have created significant foreign currency fluctuation risk and have had a significant
negative impact on the Companys earnings during Fiscal 2009, compared to Fiscal 2008, due to the
strengthening of the U.S. dollar against those foreign currencies. The Companys European, Asian,
Canadian and Mexican operations accounted for approximately 54.6% of the Companys total net
revenues for Fiscal 2009. These foreign operations of the Company purchase products from suppliers
denominated in U.S. dollars. Total purchases of products made by foreign subsidiaries denominated
in U.S. dollars amounted to approximately $234.3 million for Fiscal 2009. A hypothetical decrease
of 10% in the value of these foreign currencies relative to the U.S. dollar would have increased
cost of goods sold (which would decrease operating income) by $23.4 million for Fiscal 2009.
The fair value of foreign currency exchange forward contracts and zero cost collars was
determined as the net unrealized gains or losses on those contracts, which is the net difference
between (i) the U.S. dollars to be received or paid at the contracts settlement date and (ii) the
U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange
rate.
The following table summarizes the effect on earnings for Fiscal 2009 of a hypothetical 10%
increase in the contractual exchange rate or strike rate of the Companys foreign currency exchange
forward contracts and zero-cost collar option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Effect of Hypothetical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
10% Increase in Contractual |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Contractual |
|
|
Exchange Rate or Strike Rate |
|
|
|
|
|
|
|
Currency (a) |
|
|
Amount |
|
|
Exchange Rate |
|
|
on Earnings |
|
Derivative Instrument |
|
Hedged Transaction |
|
Sell/Buy |
|
|
Hedged |
|
|
or Strike Price |
|
|
Gain (loss) (b) |
|
|
|
|
|
|
|
|
|
|
|
USD thousands |
|
|
|
|
|
|
USD thousands |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Minimum royalty and adverising costs |
|
Euro/USD |
|
|
10,000 |
|
|
|
1.373 |
|
|
|
(1,000 |
) |
Foreign exchange contracts |
|
Minimum royalty and adverising costs |
|
Euro/USD |
|
|
9,213 |
|
|
|
1.408 |
|
|
|
(921 |
) |
Foreign exchange contracts |
|
Purchases of inventory |
|
KRW/USD |
|
|
10,625 |
|
|
|
1,208 |
|
|
|
(1,063 |
) |
Foreign exchange contracts |
|
Purchases of inventory |
|
CAD/USD |
|
|
21,085 |
|
|
|
0.8578 |
|
|
|
(2,109 |
) |
Foreign exchange contracts |
|
Purchases of inventory |
|
MXN/USD |
|
|
1,082 |
|
|
|
0.0601 |
|
|
|
(108 |
) |
Foreign exchange contracts |
|
Intercompany purchases of inventory |
|
Euro/GBP |
|
|
11,395 |
|
|
|
0.8810 |
|
|
|
(1,139 |
) |
Foreign exchange contracts |
|
Intercompany loans |
|
CAD/USD |
|
|
1,500 |
|
|
|
0.9537 |
|
|
|
(250 |
) |
Foreign exchange contracts |
|
Intercompany payables |
|
Euro/USD |
|
|
12,000 |
|
|
|
1.4351 |
|
|
|
1,088 |
|
Zero-cost collars |
|
Intercompany payables |
|
Euro/USD |
|
|
26,000 |
|
|
|
1.4230 |
|
|
|
1,991 |
|
Zero-cost collars |
|
Intercompany payables |
|
KRW/USD |
|
|
14,500 |
|
|
|
1,224 |
|
|
|
(1,654 |
) |
|
|
|
(a) |
|
USD = U.S. dollar, KRW = Korean won, CAD = Canadian dollar, GBP =British pound, MXN = Mexican
peso |
|
(b) |
|
The Company expects that these hypothetical gains and losses would be offset by gains and
losses on the related underlying transactions. |
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
The information required by this Item 8 of Part II is incorporated by reference to the
Consolidated Financial Statements filed with this Annual Report on Form 10-K. See Item 15.
Exhibits, Financial Statement Schedules.
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
|
|
|
Item 9A. |
|
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures.
The Companys management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
the period covered by this report, the Companys disclosure controls and procedures were effective.
66
Managements Annual Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal Control over financial reporting is defined in Rule
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process
designed by or under the supervision of, the Companys principal executive and principal financial
officers and effected by the Companys board of directors, management and other personnel 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 and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company; |
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect
on the financial statements. |
Management assessed the effectiveness of the Companys internal control over financial
reporting as of January 2, 2010. In making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on this assessment, management concluded that, as of January 2, 2010, the Companys
internal control over financial reporting was effective.
Deloitte & Touche LLP, the Companys independent registered public accounting firm, has
audited the Companys internal control over financial reporting as of January 2, 2010, and its
report thereon is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of
2009 that materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
Limitations on the Effectiveness of Controls
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risks that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control systems objectives will be met.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Warnaco Group, Inc.
New York, New York
We have audited the internal control over financial reporting of The Warnaco Group, Inc. (the
Company) as of January 2, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Annual Report on Internal Control Over
Financial Reporting on page 67. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel 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. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended January 2, 2010 of the Company and our report dated March 1, 2009 expressed
an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
New York, NY
March 1, 2010
|
|
|
Item 9B. |
|
Other Information. |
None.
68
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance. |
The information required by this Item 10 of Part III is incorporated by reference from Item 1.
Business - Executive Officers of the Registrant and from the Proxy Statement of The Warnaco Group,
Inc., relating to the 2010 Annual Meeting of Stockholders, to be filed with the SEC within 120 days
of the Fiscal 2009 year end.
|
|
|
Item 11. |
|
Executive Compensation. |
The information required by this Item 11 of Part III is incorporated by reference from the
Proxy Statement of The Warnaco Group, Inc., relating to the 2010 Annual Meeting of Stockholders, to
be filed with the SEC within 120 days of the Fiscal 2009 year end.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. |
The information required by this Item 12 of Part III is incorporated by reference from the
Proxy Statement of The Warnaco Group, Inc., relating to the 2010 Annual Meeting of Stockholders, to
be filed with the SEC within 120 days of the Fiscal 2009 year end.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions and Director Independence. |
The information required by this Item 13 of Part III is incorporated by reference from the
Proxy Statement of The Warnaco Group, Inc., relating to the 2010 Annual Meeting of Stockholders, to
be filed with the SEC within 120 days of the Fiscal 2009 year end.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services. |
The information required by this Item 14 of Part III is incorporated by reference from the
Proxy Statement of The Warnaco Group, Inc., relating to the 2010 Annual Meeting of Stockholders, to
be filed with the SEC within 120 days of the Fiscal 2009 year end.
69
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules. |
|
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PAGE |
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|
|
(a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc. |
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F-1 |
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F-2 |
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F-3 |
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F-4 |
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F-5 F-6 |
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F-7 F-55 |
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2. Financial Statement Schedule |
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|
A-1 |
|
All other schedules for which provision is made in the applicable accounting regulations of
the SEC which are not included with this additional financial data have been omitted because they
are not applicable or the required information is shown in the Consolidated Financial Statements or
Notes thereto.
70
3. List of Exhibits.
The agreements contain representations and warranties by each of the parties to the
applicable agreement. These representations and warranties were made solely for the benefit of the
other parties to the applicable agreement and:
|
|
|
were not intended to be treated as categorical statements of fact, but rather as a
way of allocating the risk to one of the parties if those statements prove to be
inaccurate; |
|
|
|
may have been qualified in such agreements by disclosures that were made to the
other party in connection with the negotiation of the applicable agreement; |
|
|
|
may apply contract standards of materiality that are different from materiality
under the applicable security laws; and |
|
|
|
were made only as of the date of the applicable agreement or such other date or
dates as may be specified in the agreement. |
The Company acknowledges that notwithstanding the inclusion of the foregoing cautionary
statements, it is responsible for considering whether additional specific disclosures of material
information regarding material contractual provisions are required to make the statements in this
Form 10-K not misleading. Additional information about The Warnaco Group, Inc. may be found
elsewhere in this Annual Report on Form 10-K and The Warnaco Group, Inc.s other public filings,
which are available without charge through the SECs website at http://www.sec.gov. See Website
Access to Reports under Item 1 of Part I.
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
2.1 |
|
|
First Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and its
Affiliated Debtors in Possession Under Chapter 11 of the Bankruptcy Code
(incorporated by reference to Exhibit 99.2 to The Warnaco Group, Inc.s Form
10-Q filed on November 18, 2002).* |
|
2.2 |
|
|
Disclosure Statement with respect to the First Amended Joint Plan of
Reorganization of The Warnaco Group, Inc. and its Affiliated Debtors and
Debtors in Possession Under Chapter 11 of the Bankruptcy Code (incorporated
by reference to Exhibit 99.3 to The Warnaco Group, Inc.s Form 10-Q filed
November 18, 2002).* |
|
2.3 |
|
|
Stock Purchase Agreement, dated as of August 3, 2004, by and among Warnaco
Inc., Ocean Pacific Apparel Corp. and Doyle & Boissiere Fund I, LLC, Anders
Brag, Leo Isotolo and Richard A. Baker (incorporated by reference to Exhibit
2.1 to The Warnaco Group, Inc.s Form 10-Q filed November 10, 2004).* ## ** |
|
2.4 |
|
|
Stock Purchase Agreement, dated as of December 20, 2005, by and among Warnaco
Inc., Fingen Apparel N.V., Fingen S.p.A., Euro Cormar S.p.A., and Calvin
Klein, Inc. (incorporated by reference to Exhibit 10.1 to The Warnaco Group,
Inc.s Form 8-K filed December 23, 2005).* ** |
|
2.5 |
|
|
Amendment, dated as of January 30, 2006, to the Stock Purchase Agreement,
dated as of December 20, 2005, by and among Warnaco Inc., Fingen Apparel
N.V., Fingen S.p.A., Euro Cormar S.p.A., and Calvin Klein, Inc. (incorporated
by reference to Exhibit 10.1 to The Warnaco Group, Inc.s Form 8-K filed
February 3, 2006).* |
|
2.6 |
|
|
Asset Purchase Agreement, dated as of October 31, 2006, by and among The
Warnaco Group, Inc., Ocean Pacific Apparel Corp. and Iconix Brand Group, Inc.
(incorporated by reference to Exhibit 2.1 to The Warnaco Group, Inc.s Form
8-K filed November 6, 2006).* ** |
|
2.7 |
|
|
Stock and Asset Purchase Agreement, dated as of February 14, 2008, between
Warnaco Netherlands BV and Palmers Textil AG (incorporated by reference to
Exhibit 2.1 to The Warnaco Group, Inc.s Form 8-K filed February 19, 2008).*
** |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of The Warnaco Group, Inc.
(incorporated by reference to Exhibit 1 to the Form 8-A/A filed by The
Warnaco Group, Inc. on February 4, 2003).* |
|
3.2 |
|
|
Second Amended and Restated Bylaws of The Warnaco Group, Inc. (incorporated
by reference to Exhibit 3.1 to the Form 8-K filed by The Warnaco Group, Inc.
on January 11, 2008).* |
|
4.1 |
|
|
Registration Rights Agreement, dated as of June 12, 2003, among Warnaco Inc.,
the Guarantors (as defined therein) and the Initial Purchasers (as defined
therein) (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 (File No. 333-107788) filed by The Warnaco Group, Inc.
and certain of its subsidiaries on August 8, 2003).* |
|
4.2 |
|
|
Indenture, dated as of June 12, 2003, among Warnaco Inc., the Guarantors (as
defined therein) and the Trustee (as defined therein) (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-4 (File No.
333-107788) filed by The Warnaco Group, Inc. and certain of its subsidiaries
on August 8, 2003).* |
71
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
4.3 |
|
|
Registration Rights Agreement, dated as of February 4, 2003, among The
Warnaco Group, Inc. and certain creditors thereof (as described in the
Registration Rights Agreement) (incorporated by reference to Exhibit 4.5 to
The Warnaco Group, Inc.s Form 8-K filed February 10, 2003).* |
|
10.1 |
|
|
Credit Agreement, dated as of August 26, 2008, among Warnaco Inc., The
Warnaco Group, Inc., the Lenders (as defined therein) and Issuers (as defined
therein) party thereto, Bank of America, N.A., as administrative agent for
the revolving credit facility and as collateral agent for the Lenders and the
Issuers party thereto, Banc of America Securities LLC and Deutsche Bank
Securities Inc., as joint lead arrangers, Banc of America Securities LLC,
Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc., as joint
bookrunners, Deutsche Bank Securities Inc., as sole syndication agent for the
Lenders and the Issuers party thereto, and HSBC Business Credit (USA) Inc.,
JPMorgan Chase Bank, N.A. and RBS Business Capital, a division of RBS Asset
Finance Inc., each as a co-documentation agent for the Lenders and Issuers
(incorporated by reference to Exhibit 10.1 to The Warnaco Group Inc.s Form
8-K filed August 28, 2008).* |
|
10.2 |
|
|
Guaranty, dated as of August 26, 2008, by The Warnaco Group, Inc. and each of
the other entities listed on the signature pages thereof or that becomes a
party thereto, in favor of Bank of America, N.A., as administrative agent for
the revolving credit facility and as collateral agent for the Lenders (as
defined therein) and Issuers (as defined therein) party thereto, and the
Issuers and Lenders party thereto (incorporated by reference to Exhibit 10.2
to The Warnaco Group Inc.s Form 8-K filed August 28, 2008).* |
|
10.3 |
|
|
Pledge and Security Agreement, dated as of August 26, 2008, by The Warnaco
Group, Inc., Warnaco Inc., and each of the other entities listed on the
signature pages thereto or that becomes a party thereto, in favor of Bank of
America, N.A., as collateral agent for the secured parties thereunder
(incorporated by reference to Exhibit 10.3 to The Warnaco Group Inc.s Form
8-K filed August 28, 2008).* |
|
10.4 |
|
|
Canadian Credit Agreement, dated as of August 26, 2008, among Warnaco of
Canada Company, The Warnaco Group, Inc., the Lenders (as defined therein) and
Issuers (as defined therein) party thereto, Bank of America, N.A., as
administrative agent for the revolving credit facility and as collateral
agent for the Lenders and the Issuers party thereto, Banc of America
Securities LLC and Deutsche Bank Securities Inc., as joint lead arrangers and
joint book managers, and Deutsche Bank Securities Inc., as sole syndication
agent for the Lenders and the Issuers party thereto (incorporated by
reference to Exhibit 10.4 to The Warnaco Group Inc.s Form 8-K filed August
28, 2008).* |
|
10.5 |
|
|
U.S. Loan Party Canadian Facility Guaranty, dated as of August 26, 2008, by
The Warnaco Group, Inc., Warnaco Inc., and each of the other entities listed
on the signature pages thereto or that becomes a party thereto, in favor of,
Bank of America, N.A. as administrative agent for the revolving credit
facility and as collateral agent for the Lenders (as defined therein) and
Issuers (as defined therein) party thereto, and the Issuers and Lenders party
thereto (incorporated by reference to Exhibit 10.5 to The Warnaco Group
Inc.s Form 8-K filed August 28, 2008).* |
|
10.6 |
|
|
Guaranty, dated as of August 26, 2008 by 4278941 Canada Inc., in favor of
Bank of America, N.A. as lender (acting through its Canada branch) and as
collateral agent, for itself and on behalf of the secured parties
(incorporated by reference to Exhibit 10.6 to The Warnaco Group Inc.s Form
8-K filed August 28, 2008).* |
|
10.7 |
|
|
General Security Agreement, dated as of August 26, 2008, granted by Warnaco
of Canada Company to Bank of America, N.A. (incorporated by reference to
Exhibit 10.7 to The Warnaco Group Inc.s Form 8-K filed August 28, 2008).* |
|
10.8 |
|
|
General Security Agreement, dated as of August 26, 2008, granted by 4278941
Canada Inc. to Bank of America, N.A. (incorporated by reference to Exhibit
10.8 to The Warnaco Group Inc.s Form 8-K filed August 28, 2008).* |
|
10.9 |
|
|
Securities Pledge Agreement, dated as of August 26, 2008 made by Warnaco of
Canada Company to and in favour of Bank of America, N.A. as collateral agent
(incorporated by reference to Exhibit 10.9 to The Warnaco Group Inc.s Form
8-K filed August 28, 2008).* |
|
10.10 |
|
|
Deed of Hypothec, dated as of August 26, 2008, between Warnaco of Canada
Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.10
to The Warnaco Group Inc.s Form 8-K filed August 28, 2008).* |
|
10.11 |
|
|
Deed of Hypothec, dated as of August 26, 2008, between 4278941 Canada Inc.and
Bank of America, N.A. (incorporated by reference to Exhibit 10.11 to The
Warnaco Group Inc.s Form 8-K filed August 28, 2008).* |
|
10.12 |
|
|
Warnaco Employee Retirement Plan (incorporated by reference to Exhibit 10.11
to The Warnaco Group, Inc.s Registration Statement on Form S-1 (File No.
33-4587)).* |
|
10.13 |
|
|
The Warnaco Group, Inc. 2003 Stock Incentive Plan (incorporated by reference
to Appendix D to The Warnaco Group, Inc.s Proxy Statement filed April 29,
2003).* |
|
10.14 |
|
|
The Warnaco Group, Inc. Incentive Compensation Plan (incorporated by
reference to Appendix E to The Warnaco Group, Inc.s Proxy Statement filed
April 29, 2003).* |
|
10.15 |
|
|
The Warnaco Group, Inc. 2005 Stock Incentive Plan (incorporated by reference
to Annex A to The Warnaco Group, Inc.s 2005 Proxy Statement on Schedule 14A
filed on April 12, 2005).* |
72
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.16 |
|
|
The Warnaco Group, Inc. Amended and Restated 2005 Stock Incentive Plan
(incorporated by reference to Appendix A to The Warnaco Group, Inc.s 2008
Proxy Statement on Schedule 14A filed on April 11, 2008).* |
|
10.17 |
|
|
The Warnaco Group, Inc. 2008 Incentive Compensation Plan (incorporated by
reference to Appendix B to The Warnaco Group, Inc.s 2008 Proxy Statement on
Schedule 14A filed on April 11, 2008).* |
|
10.18 |
|
|
The Warnaco Group, Inc. Amended and Restated Deferred Compensation Plan (incorporated by
reference to Exhibit 10.18 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.19 |
|
|
2007 Non-Employee Directors Deferred Compensation Plan (incorporated by
reference to Exhibit 10.17 to The Warnaco Group, Inc.s Form 10-K filed March
7, 2007).* |
|
10.20 |
|
|
Amended and Restated 2007 Non-Employee Directors Deferred Compensation Plan (incorporated by
reference to Exhibit 10.20 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.21 |
|
|
Form of Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.2 to The Warnaco Group, Inc.s Form 8-K filed May 25, 2005).* |
|
10.22 |
|
|
Form of Non-Qualified Stock Option Agreement (incorporated by reference to
Exhibit 10.3 to The Warnaco Group, Inc.s Form 8-K filed May 25, 2005).* |
|
10.23 |
|
|
Form of Restricted Stock Unit Award Agreement for Joseph R. Gromek
(incorporated by reference to Exhibit 10.4 to The Warnaco Group, Inc.s Form
8-K filed May 25, 2005).* |
|
10.24 |
|
|
Form of The Warnaco Group, Inc. 2005 Stock Incentive Plan Notice of Grant of
Restricted Stock (incorporated by reference to Exhibit 10.8 to The Warnaco
Group, Inc.s Form 8-K filed August 12, 2005).* |
|
10.25 |
|
|
Offer Letter and Employee Waiver, Release and Discharge of Claims pursuant to
the Key Domestic Employee Retention Plan for Stanley P. Silverstein, dated
November 26, 2001 (incorporated by reference to Exhibit 10.41 to The Warnaco
Group, Inc.s Form 10-K filed July 31, 2002).* |
|
10.26 |
|
|
Amended and Restated Employment Agreement, dated as of December 19, 2007,
between The Warnaco Group, Inc. and Joseph R. Gromek (incorporated by
reference to Exhibit 10.1 to The Warnaco Group, Inc.s Form 8-K filed
December 20, 2007).* |
|
10.27 |
|
|
Amended and Restated Letter Agreement, dated as of December 31, 2008, by and
between The Warnaco Group, Inc. and Lawrence R. Rutkowski (incorporated by
reference to Exhibit 10.27 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.28 |
|
|
Amended and Restated Letter Agreement, dated as of December 31, 2008, by and
between The Warnaco Group, Inc. and Frank Tworecke (incorporated by
reference to Exhibit 10.28 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.29 |
|
|
Amended and Restated Letter Agreement, dated as of December 31, 2008, by and
between The Warnaco Group, Inc. and Helen McCluskey (incorporated by
reference to Exhibit 10.29 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.30 |
|
|
Amended and Restated Employment Agreement, dated as of December 31, 2008, by
and between The Warnaco Group, Inc. and Stanley P. Silverstein (incorporated by
reference to Exhibit 10.30 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.31 |
|
|
Employment Agreement, dated as of August 11, 2008, by and between The Warnaco
Group, Inc. and Jay L. Dubiner (incorporated by
reference to Exhibit 10.31 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.32 |
|
|
Amended and Restated Letter Agreement, dated as of December 31, 2008, by and
between The Warnaco Group, Inc. and Dwight Meyer (incorporated by
reference to Exhibit 10.32 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.33 |
|
|
Amended and Restated Employment Agreement, dated as of December 31, 2008 by
and between The Warnaco Group, Inc. and Elizabeth Wood (incorporated by
reference to Exhibit 10.33 to The Warnaco Group, Inc.s Form 10-K filed March 2, 2009).* |
|
10.34 |
|
|
Amended and Restated License Agreement, dated as of January 1, 1996, between
Polo Ralph Lauren, L.P. and Warnaco Inc. (incorporated by reference to
Exhibit 10.4 to The Warnaco Group, Inc.s Form 10-Q filed November 14,
1997).* |
|
10.35 |
|
|
Amended and Restated Design Services Agreement, dated as of January 1, 1996,
between Polo Ralph Lauren Enterprises, L.P. and Warnaco Inc. (incorporated by
reference to Exhibit 10.5 to The Warnaco Group, Inc.s Form 10-Q filed
November 14, 1997).* |
|
10.36 |
|
|
License Agreement and Design Services Agreement Amendment and Extension,
dated as of September 19, 2003, by and among PRL USA, Inc., as successor to
Polo Ralph Lauren L.P., The Polo/Lauren Company, L.P., Polo Ralph Lauren
Corporation, as successor to Polo Ralph Lauren L.P., and Warnaco Inc. and
Warnaco of Canada Company (incorporated by reference to Exhibit 10.2 to The
Warnaco Group, Inc.s Form 10-Q filed November 18, 2003).* # |
|
10.37 |
|
|
License Agreement, dated as of August 4, 1994, between Calvin Klein, Inc. and
Calvin Klein Jeanswear Company (incorporated by reference to Exhibit 10.20 to
Designer Holdings, Ltd.s Registration Statement on Form S-1 (File No.
333-02236)).* |
|
10.38 |
|
|
Amendment to the Calvin Klein License Agreement, dated as of December 7, 1994
(incorporated by reference to Exhibit 10.21 to Designer Holdings, Ltd.s
Registration Statement on Form S-1 (File No. 333-02236)).* |
|
10.39 |
|
|
Amendment to the Calvin Klein License Agreement, dated as of January 10, 1995
(incorporated by reference to Exhibit 10.22 to Designer Holdings, Ltd.s
Registration Statement on Form S-1 (File No. 333-02236)).* |
|
10.40 |
|
|
Amendment to the Calvin Klein License Agreement, dated as of February 28,
1995 (incorporated by reference to Exhibit 10.23 to Designer Holdings, Ltd.s
Registration Statement on Form S-1 (File No. 333-02236)).* |
|
10.41 |
|
|
Amendment to the Calvin Klein License Agreement, dated as of April 22, 1996
(incorporated by reference to Exhibit 10.38 to Designer Holdings, Ltd.s
Registration Statement on Form S-1 (File No. 333-02236)).* |
73
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.42 |
|
|
Amendment and Agreement, dated June 5, 2003, by and among Calvin Klein, Inc.,
Phillips-Van Heusen Corporation, Warnaco Inc., Calvin Klein Jeanswear
Company, and CKJ Holdings Inc. (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to the Registration Statement on Form S-4/A (File No.
333-107788) filed by The Warnaco Group, Inc. and certain of its subsidiaries
on December 18, 2003).*## |
|
10.43 |
|
|
Consent and Amendment No. 1 to the Facility Agreement, dated as of February
5, 2002 (incorporated by reference to Exhibit 10.49 to The Warnaco Group,
Inc.s Form 10-K filed July 31, 2002).* |
|
10.44 |
|
|
Speedo Settlement Agreement, dated November 25, 2002, by and between Speedo
International Limited and Authentic Fitness Corporation, Authentic Fitness
Products, Inc., The Warnaco Group, Inc. and Warnaco Inc. (incorporated by
reference to Exhibit 10.28 to The Warnaco Group, Inc.s Form 10-K filed April
4, 2003).* |
|
10.45 |
|
|
Amendment to the Speedo Licenses, dated as of November 25, 2002, by and among
Speedo International Limited, Authentic Fitness Corporation and Authentic
Fitness Products, Inc. (incorporated by reference to Exhibit 10.29 to The
Warnaco Group, Inc.s Form 10-K filed April 4, 2003).* ## |
|
10.46 |
|
|
Settlement Agreement, dated January 22, 2001, by and between Calvin Klein
Trademark Trust, Calvin Klein, Inc. and Calvin Klein and Linda Wachner, The
Warnaco Group, Inc., Warnaco Inc., Designer Holdings, Ltd, CKJ Holdings,
Inc., Jeanswear Holdings Inc., Calvin Klein Jeanswear Company and Outlet
Holdings, Inc. (incorporated by reference to Exhibit 10.57 to The Warnaco
Group, Inc.s Form 10-K filed July 31, 2002).* ## |
|
10.47 |
|
|
Settlement Agreement, dated November 15, 2002, by and among Linda J. Wachner,
the Debtors, the Bank of Nova Scotia and Citibank, N.A. in their capacity as
Debt Coordinators for the Debtors Prepetition Secured Lenders and the
Official Committee of Unsecured Creditors of the Debtors (incorporated by
reference to Exhibit 10.38 to The Warnaco Group, Inc.s Form 10-K filed April
4, 2003).* |
|
10.48 |
|
|
Acquisition Agreement, dated as of March 14, 1994, by and among Calvin Klein,
Inc., The Warnaco Group, Inc. and Warnaco Inc. (incorporated by reference to
Exhibit 10.6 to The Warnaco Group, Inc.s Form 10-Q filed on May 24, 1994).* |
|
10.49 |
|
|
License Agreement, dated as of June 21, 2004, by and between The Warnaco
Group, Inc. and Michael Kors (USA), Inc. (incorporated by reference to
Exhibit 10.3 to The Warnaco Group, Inc.s Form 10-Q filed August 6, 2004).*
## |
|
10.50 |
|
|
License Agreement, dated as of July 26, 2004, by and between Calvin Klein,
Inc. and Warnaco Swimwear Inc. (incorporated by reference to Exhibit 10.1 to
The Warnaco Group, Inc.s Form 10-Q filed November 10, 2004).* ## |
|
10.51 |
|
|
License Agreement, dated as of December 1, 2004, by and between The Warnaco
Group, Inc. and SAP America, Inc. (incorporated by reference to Exhibit 10.46
to The Warnaco Group, Inc.s Form 10-K filed March 17, 2005) * # |
|
10.52 |
|
|
Amended and Restated License Agreement, dated as of January 1, 1997, by and
between Calvin Klein, Inc. and Calvin Klein Jeanswear Asia Ltd. (incorporated
by reference to Exhibit 10.62 to The Warnaco Group, Inc.s Form 10-K filed
March 3, 2006).* ## |
|
10.53 |
|
|
Amendment and Agreement, dated as of January 31, 2006, by and among Calvin
Klein, Inc., WF Overseas Fashion C.V. and the CKJ Entities (as defined
therein), with respect to the Amended and Restated License Agreement, dated
as of January 1, 1997, by and between Calvin Klein, Inc. and Calvin Klein
Jeanswear Asia Ltd. (incorporated by reference to Exhibit 10.63 to The
Warnaco Group, Inc.s Form 10-K filed March 3, 2006).*# |
|
10.54 |
|
|
Amended and Restated Letter Agreement, dated as of March 6, 2002, by and
among Calvin Klein, Inc., CK Jeanswear N.V., CK Jeanswear Asia Limited and CK
Jeanswear Europe S.p.A. (incorporated by reference to Exhibit 10.64 to The
Warnaco Group, Inc.s Form 10-K filed March 3, 2006).* ## |
|
10.55 |
|
|
Letter Agreement, dated as of January 31, 2006, by and among Calvin Klein,
Inc., WF Overseas Fashion C.V., CK Jeanswear N.V., CK Jeanswear Asia Limited
and CK Jeanswear Europe S.p.A., with respect to the Amended and Restated
Letter Agreement, dated as of March 6, 2002, by and among Calvin Klein, Inc.,
CK Jeanswear N.V., CK Jeanswear Asia Limited and CK Jeanswear Europe S.p.A.
(incorporated by reference to Exhibit 10.65 to The Warnaco Group, Inc.s Form
10-K filed March 3, 2006).* # |
|
10.56 |
|
|
Amended and Restated License Agreement. dated January 1, 1997, by and between
Calvin Klein, Inc. and CK Jeanswear Europe, S.p.A. (incorporated by reference
to Exhibit 10.66 to The Warnaco Group, Inc.s Form 10-K filed March 3,
2006).* ## |
|
10.57 |
|
|
Letter Agreement, dated as of January 31, 2006, by and among Calvin Klein,
Inc., WF Overseas Fashion C.V. and CK Jeanswear Europe, S.p.A., with respect
to the Amended and Restated License Agreement. dated January 1, 1997, by and
between Calvin Klein, Inc. and CK Jeanswear Europe, S.p.A. (incorporated by
reference to Exhibit 10.67 to The Warnaco Group, Inc.s Form 10-K filed March
3, 2006).* # |
|
10.58 |
|
|
License Agreement, dated as of January 31, 2006, by and among Calvin Klein,
Inc., CK Jeanswear Europe S.p.A and WF Overseas Fashion C.V. (re: Bridge
Apparel) (incorporated by reference to Exhibit 10.68 to The Warnaco Group,
Inc.s Form 10-K filed March 3, 2006).* ## |
74
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.59 |
|
|
License Agreement, dated as of January 31, 2006, by and among Calvin, Klein,
Inc., CK Jeanswear Europe S.p.A and WF Overseas Fashion C.V. (re: Bridge
Accessories) (incorporated by reference to Exhibit 10.69 to The Warnaco
Group, Inc.s Form 10-K filed March 3, 2006).* ## |
|
10.60 |
|
|
License Agreement, dated as of January 31, 2006, by and among Calvin, Klein,
Inc., CK Jeanswear Europe S.p.A, CK Jeanswear Asia Limited and WF Overseas
Fashion C.V. (re: Jean Accessories) (incorporated by reference to Exhibit
10.70 to The Warnaco Group, Inc.s Form 10-K filed March 3, 2006).* ## |
|
10.61 |
|
|
Letter Agreement, dated January 31, 2006, by and among Calvin Klein, Inc., CK
Jeanswear N.V., CK Jeanswear Europe S.p.A., CK Jeanswear Asia Limited and WF
Overseas Fashion C.V. (re: Bridge Store) (incorporated by reference to
Exhibit 10.71 to The Warnaco Group, Inc.s Form 10-K filed March 3, 2006).*
## |
|
10.62 |
|
|
License Agreement, dated as of January 31, 2008, between Calvin Klein, Inc.,
WF Overseas Fashion C.V. and CK Jeanswear Europe S.r.l. (re: Bridge
Accessories) (incorporated by reference to Exhibit 10.68 to The Warnaco
Group, Inc.s Form 10-K filed February 27, 2008). * ## |
|
10.63 |
|
|
License Agreement Central and South America, dated as of January 31, 2008,
between Calvin Klein, Inc. and WF Overseas Fashion C.V. (re: Bridge
Accessories) (incorporated by reference to Exhibit 10.69 to The Warnaco
Group, Inc.s Form 10-K filed February 27, 2008). * ## |
|
10.64 |
|
|
License Agreement, dated as of January 31, 2008, between Calvin Klein, Inc.,
WF Overseas Fashion C.V., CK Jeanswear Asia Limited and CK Jeanswear Europe
S.r.l. (re: Jean Accessories) (incorporated by reference to Exhibit 10.70 to
The Warnaco Group, Inc.s Form 10-K filed February 27, 2008). * ## |
|
10.65 |
|
|
License Agreement Central and South America, dated as of January 31, 2008,
between Calvin Klein, Inc. and WF Overseas Fashion C.V. (re: Jean
Accessories) (incorporated by reference to Exhibit 10.71 to The Warnaco
Group, Inc.s Form 10-K filed February 27, 2008). * ## |
|
10.66 |
|
|
E-Commerce Agreement, dated as of January 31, 2008, Calvin Klein, Inc., WF
Overseas Fashion C.V., CK Jeanswear N.V., CK Jeanswear Asia Limited, CK
Jeanswear Europe S.r.l., Calvin Klein Jeanswear Company and CKJ Holdings,
Inc. (incorporated by reference to Exhibit 10.72 to The Warnaco Group, Inc.s
Form 10-K filed February 27, 2008). * ## |
|
12.1 |
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
21.1 |
|
|
Subsidiaries of The Warnaco Group, Inc. |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
31.1 |
|
|
Certification of Chief Executive Officer of The Warnaco Group, Inc. pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
31.2 |
|
|
Certification of Chief Financial Officer of The Warnaco Group, Inc. pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
32.1 |
|
|
Certifications of Chief Executive Officer and Chief Financial Officer of The
Warnaco Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) |
|
|
|
* |
|
Previously filed. |
|
** |
|
The schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation
S-K. The Company will furnish copies of any of the schedules to the Securities and Exchange
Commission upon request. |
|
|
|
Filed herewith. |
|
# |
|
Certain portions of this exhibit omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment. |
|
## |
|
Certain portions of this exhibit omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment, which request was
granted. |
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 1st day of March, 2010.
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THE WARNACO GROUP, INC.
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By: |
/s/ JOSEPH R. GROMEK
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Name: |
Joseph R. Gromek |
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Title: |
President and Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated:
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SIGNATURE |
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TITLE |
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DATE |
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Director, President and Chief Executive Officer
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March 1, 2010 |
(Joseph R. Gromek)
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(Principal Executive Officer) |
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/s/ LAWRENCE R. RUTKOWSKI
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Executive Vice President and Chief Financial Officer
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March 1, 2010 |
(Lawrence R. Rutkowski)
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(Principal Financial and Accounting Officer) |
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Non-Executive Chairman of the
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March 1, 2010 |
(Charles R. Perrin)
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Board of Directors |
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Director
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March 1, 2010 |
(David A. Bell) |
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Director
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March 1, 2010 |
(Robert A. Bowman) |
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Director
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March 1, 2010 |
(Richard Karl Goeltz) |
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Director
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March 1, 2010 |
(Sheila A. Hopkins) |
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Director
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March 1, 2010 |
(Nancy A. Reardon) |
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Director
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March 1, 2010 |
(Donald Seeley) |
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Director
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March 1, 2010 |
(Cheryl Nido Turpin) |
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76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Warnaco Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of The Warnaco, Group Inc.
(the Company) as of January 2, 2010 and January 3, 2009, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the three years
in the period ended January 2, 2010. Our audits also included the financial statement schedule
listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on
the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of The Warnaco Group, Inc. as of January 2, 2010 and
January 3, 2009, and the results of their operations and their cash flows for each of the three
years in the period ended January 2, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of January 2,
2010, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010
expressed an unqualified opinion on the Companys internal control over financial reporting.
DELOITTE & TOUCHE LLP
New York, NY
March 1, 2010
F-1
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, excluding per share data)
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
320,754 |
|
|
$ |
147,627 |
|
Accounts receivable, less reserves of $89,982 and $87,375
as of January 2, 2010 and January 3, 2009, respectively |
|
|
290,737 |
|
|
|
251,886 |
|
Inventories |
|
|
253,362 |
|
|
|
326,297 |
|
Assets of discontinued operations |
|
|
2,172 |
|
|
|
6,279 |
|
Prepaid expenses and other current assets |
|
|
84,227 |
|
|
|
91,727 |
|
Deferred income taxes |
|
|
51,605 |
|
|
|
65,050 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,002,857 |
|
|
|
888,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
120,491 |
|
|
|
109,563 |
|
Other assets: |
|
|
|
|
|
|
|
|
Licenses, trademarks and other intangible assets, net |
|
|
376,831 |
|
|
|
282,656 |
|
Deferred financing costs, net |
|
|
6,063 |
|
|
|
7,758 |
|
Deferred income taxes |
|
|
12,957 |
|
|
|
76,196 |
|
Other assets |
|
|
29,874 |
|
|
|
30,918 |
|
Goodwill |
|
|
110,721 |
|
|
|
100,136 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,659,794 |
|
|
$ |
1,496,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
97,873 |
|
|
$ |
79,888 |
|
Accounts payable |
|
|
127,636 |
|
|
|
146,030 |
|
Accrued liabilities |
|
|
184,438 |
|
|
|
168,892 |
|
Liabilities of discontinued operations |
|
|
8,018 |
|
|
|
12,055 |
|
Accrued income taxes payable |
|
|
24,577 |
|
|
|
6,041 |
|
Deferred income taxes |
|
|
146 |
|
|
|
1,406 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
442,688 |
|
|
|
414,312 |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
112,835 |
|
|
|
163,794 |
|
Deferred income taxes |
|
|
65,219 |
|
|
|
51,192 |
|
Other long-term liabilities |
|
|
122,942 |
|
|
|
78,054 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock (See Note 13) |
|
|
|
|
|
|
|
|
Common stock: $0.01 par value, 112,500,000 shares authorized,
50,617,795 and 50,122,614 issued as of January 2, 2010
and January 3, 2009, respectively |
|
|
506 |
|
|
|
501 |
|
Additional paid-in capital |
|
|
633,378 |
|
|
|
631,891 |
|
Accumulated other comprehensive income |
|
|
46,473 |
|
|
|
12,841 |
|
Retained earnings |
|
|
362,813 |
|
|
|
268,016 |
|
Treasury stock, at cost 4,939,729 and 4,865,401 shares as of January 2, 2010 and
January 3, 2009, respectively |
|
|
(127,060 |
) |
|
|
(125,562 |
) |
|
|
|
|
|
|
|
Total Warnaco Group Inc. stockholders equity |
|
|
916,110 |
|
|
|
787,687 |
|
Noncontrolling interest |
|
|
|
|
|
|
1,054 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
916,110 |
|
|
|
788,741 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,659,794 |
|
|
$ |
1,496,093 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-2
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,019,625 |
|
|
$ |
2,062,849 |
|
|
$ |
1,819,579 |
|
Cost of goods sold |
|
|
1,155,278 |
|
|
|
1,142,076 |
|
|
|
1,069,904 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
864,347 |
|
|
|
920,773 |
|
|
|
749,675 |
|
Selling, general and administrative expenses |
|
|
638,907 |
|
|
|
738,238 |
|
|
|
601,656 |
|
Amortization of intangible assets |
|
|
11,032 |
|
|
|
9,446 |
|
|
|
13,167 |
|
Pension expense (income) |
|
|
20,873 |
|
|
|
31,644 |
|
|
|
(8,838 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
193,535 |
|
|
|
141,445 |
|
|
|
143,690 |
|
Other loss (income) |
|
|
1,889 |
|
|
|
1,926 |
|
|
|
(7,063 |
) |
Interest expense |
|
|
23,897 |
|
|
|
29,519 |
|
|
|
37,718 |
|
Interest income |
|
|
(1,248 |
) |
|
|
(3,120 |
) |
|
|
(3,766 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision
for income taxes and noncontrolling interest |
|
|
168,997 |
|
|
|
113,120 |
|
|
|
116,801 |
|
Provision for income taxes |
|
|
64,272 |
|
|
|
60,727 |
|
|
|
29,892 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before noncontrolling interest |
|
|
104,725 |
|
|
|
52,393 |
|
|
|
86,909 |
|
Loss from discontinued operations, net of taxes |
|
|
(6,227 |
) |
|
|
(3,792 |
) |
|
|
(7,802 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
98,498 |
|
|
|
48,601 |
|
|
|
79,107 |
|
Less: Net income
attributable to the
noncontrolling
interest |
|
|
(2,500 |
) |
|
|
(1,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Warnaco Group, Inc. |
|
$ |
95,998 |
|
|
$ |
47,254 |
|
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Warnaco Group, Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
102,225 |
|
|
$ |
51,046 |
|
|
$ |
86,909 |
|
Discontinued operations, net of tax |
|
|
(6,227 |
) |
|
|
(3,792 |
) |
|
|
(7,802 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
95,998 |
|
|
$ |
47,254 |
|
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2.22 |
|
|
$ |
1.11 |
|
|
$ |
1.90 |
|
Loss from discontinued operations |
|
|
(0.13 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.09 |
|
|
$ |
1.03 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2.19 |
|
|
$ |
1.08 |
|
|
$ |
1.84 |
|
Loss from discontinued operations |
|
|
(0.14 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.05 |
|
|
$ |
1.00 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in
computing income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,433,874 |
|
|
|
45,351,336 |
|
|
|
44,908,028 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
46,196,397 |
|
|
|
46,595,038 |
|
|
|
46,506,319 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warnaco Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Retained |
|
|
Treasury |
|
|
Noncontrolling |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
Income |
|
|
Earnings |
|
|
Stock |
|
|
Interest |
|
|
Income |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006 |
|
$ |
470 |
|
|
$ |
555,734 |
|
|
$ |
31,453 |
|
|
$ |
142,596 |
|
|
$ |
(47,339 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
682,914 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,107 |
|
|
|
|
|
|
|
|
|
|
|
79,107 |
|
|
|
79,107 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
36,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,533 |
|
|
|
36,533 |
|
Change in post retirement plans |
|
|
|
|
|
|
|
|
|
|
1,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752 |
|
|
|
1,752 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155 |
) |
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,130 |
|
|
|
38,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
117,237 |
|
|
|
117,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially adopt FASB ASC 740-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(941 |
) |
Stock issued in connection with
stock compensation plans |
|
|
12 |
|
|
|
16,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,799 |
|
Compensation expense in connection with
employee stock compensation plans |
|
|
|
|
|
|
14,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,578 |
|
Purchase of treasury stock related to
stock compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,488 |
) |
|
|
|
|
|
|
|
|
|
|
(2,488 |
) |
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,203 |
) |
|
|
|
|
|
|
|
|
|
|
(55,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007 |
|
|
482 |
|
|
|
587,099 |
|
|
|
69,583 |
|
|
|
220,762 |
|
|
|
(105,030 |
) |
|
|
|
|
|
|
|
|
|
|
772,896 |
|
Comprehensive (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,254 |
|
|
|
|
|
|
|
1,347 |
|
|
|
48,601 |
|
|
|
48,601 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
(57,412 |
) |
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
(57,652 |
) |
|
|
(57,652 |
) |
Change in post retirement plans |
|
|
|
|
|
|
|
|
|
|
764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764 |
|
|
|
764 |
|
(Loss) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
(328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(328 |
) |
|
|
(328 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
(56,982 |
) |
|
|
(56,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107 |
|
|
$ |
(8,381 |
) |
|
|
(8,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of consolidation of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
|
|
|
|
(53 |
) |
Stock issued in connection with
stock compensation plans |
|
|
19 |
|
|
|
28,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,496 |
|
Compensation expense in connection with
employee stock compensation plans |
|
|
|
|
|
|
15,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,496 |
|
Other |
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
819 |
|
Purchase of treasury stock related to
stock compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,667 |
) |
|
|
|
|
|
|
|
|
|
|
(4,667 |
) |
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,865 |
) |
|
|
|
|
|
|
|
|
|
|
(15,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2009 |
|
|
501 |
|
|
|
631,891 |
|
|
|
12,841 |
|
|
|
268,016 |
|
|
|
(125,562 |
) |
|
|
1,054 |
|
|
|
|
|
|
|
788,741 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,998 |
|
|
|
|
|
|
|
2,500 |
|
|
|
98,498 |
|
|
|
98,498 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
35,360 |
|
|
|
|
|
|
|
|
|
|
|
213 |
|
|
|
35,573 |
|
|
|
35,573 |
|
Change in post retirement plans |
|
|
|
|
|
|
|
|
|
|
(1,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,029 |
) |
|
|
(1,029 |
) |
(Loss) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
(699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(699 |
) |
|
|
(699 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229 |
|
|
|
33,861 |
|
|
|
33,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,729 |
|
|
$ |
132,359 |
|
|
|
132,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of adjustment to initially adopt FASB ASC 740-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,201 |
) |
Purchase of 49% of non-controlling interest |
|
|
|
|
|
|
(17,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235 |
|
|
|
|
|
|
|
(17,410 |
) |
Dividend paid to non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,018 |
) |
|
|
|
|
|
|
(4,018 |
) |
Stock issued in connection with
stock compensation plans |
|
|
5 |
|
|
|
4,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,684 |
|
Compensation expense in connection with
employee stock compensation plans |
|
|
|
|
|
|
14,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,453 |
|
Purchase of treasury stock related to
stock compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010 |
|
$ |
506 |
|
|
$ |
633,378 |
|
|
$ |
46,473 |
|
|
$ |
362,813 |
|
|
$ |
(127,060 |
) |
|
$ |
|
|
|
|
|
|
|
$ |
916,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,498 |
|
|
$ |
48,601 |
|
|
$ |
79,107 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
6,227 |
|
|
|
3,792 |
|
|
|
7,802 |
|
Depreciation and amortization |
|
|
46,843 |
|
|
|
46,154 |
|
|
|
65,332 |
|
Stock compensation |
|
|
14,453 |
|
|
|
15,189 |
|
|
|
14,286 |
|
Amortization of deferred financing costs |
|
|
1,683 |
|
|
|
2,636 |
|
|
|
2,793 |
|
Provision for trade and other bad debts |
|
|
4,775 |
|
|
|
6,028 |
|
|
|
4,555 |
|
Inventory writedown |
|
|
18,623 |
|
|
|
23,870 |
|
|
|
33,315 |
|
Loss on repurchase of Senior Notes/refinancing of debt facilities |
|
|
|
|
|
|
5,329 |
|
|
|
|
|
Provision (benefit) for deferred income tax |
|
|
17,477 |
|
|
|
12,093 |
|
|
|
(11,202 |
) |
Foreign exchange loss (gain) |
|
|
(5,477 |
) |
|
|
1,024 |
|
|
|
(9,456 |
) |
Other |
|
|
(675 |
) |
|
|
(552 |
) |
|
|
6 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(27,947 |
) |
|
|
(6,545 |
) |
|
|
3,413 |
|
Inventories |
|
|
67,470 |
|
|
|
(42,400 |
) |
|
|
(17,494 |
) |
Prepaid expenses and other assets |
|
|
9,906 |
|
|
|
(33,837 |
) |
|
|
(993 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(5,090 |
) |
|
|
67,151 |
|
|
|
(35,704 |
) |
Accrued income taxes |
|
|
17,115 |
|
|
|
4,875 |
|
|
|
(11,277 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
263,881 |
|
|
|
153,408 |
|
|
|
124,483 |
|
Net cash provided by (used in) operating activities from
discontinued operations |
|
|
1,033 |
|
|
|
(27,521 |
) |
|
|
35,940 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
264,914 |
|
|
|
125,887 |
|
|
|
160,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of assets and collection of notes receivable |
|
|
373 |
|
|
|
354 |
|
|
|
2,709 |
|
Purchase of property, plant and equipment |
|
|
(43,443 |
) |
|
|
(42,314 |
) |
|
|
(40,516 |
) |
Business acquisitions, net of cash acquired |
|
|
(9,511 |
) |
|
|
(2,356 |
) |
|
|
(2,069 |
) |
Proceeds from the sale of businesses, net |
|
|
|
|
|
|
26,780 |
|
|
|
19,519 |
|
Purchase of intangible asset |
|
|
|
|
|
|
(26,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities from continuing operations |
|
|
(52,581 |
) |
|
|
(44,263 |
) |
|
|
(20,357 |
) |
Net cash (used in) investing activities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(52,581 |
) |
|
|
(44,263 |
) |
|
|
(20,800 |
) |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs |
|
$ |
(515 |
) |
|
$ |
(3,934 |
) |
|
$ |
(480 |
) |
Repayments of Senior Note due 2013 |
|
|
|
|
|
|
(46,185 |
) |
|
|
|
|
Repayments of Term B Note |
|
|
|
|
|
|
(107,300 |
) |
|
|
(61,800 |
) |
Proceeds from the exercise of employee stock options |
|
|
4,034 |
|
|
|
28,496 |
|
|
|
16,149 |
|
Purchase of treasury stock |
|
|
(1,498 |
) |
|
|
(20,532 |
) |
|
|
(57,691 |
) |
Premium on cancellation of interest rate swaps |
|
|
2,218 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term notes payable |
|
|
(23,985 |
) |
|
|
16,593 |
|
|
|
(17,493 |
) |
Borrowings (repayments) under revolving credit facility |
|
|
(11,805 |
) |
|
|
12,000 |
|
|
|
|
|
Payment of dividend to non-controlling interest |
|
|
(4,018 |
) |
|
|
|
|
|
|
|
|
Cost to purchase non-controlling interest in an equity
transaction |
|
|
(5,339 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
170 |
|
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities from continuing operations |
|
|
(40,908 |
) |
|
|
(120,692 |
) |
|
|
(121,688 |
) |
Net cash (used in) financing activities from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities |
|
|
(40,908 |
) |
|
|
(120,692 |
) |
|
|
(121,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash and cash equivalents |
|
|
1,702 |
|
|
|
(5,223 |
) |
|
|
6,993 |
|
Increase (decrease) in cash and cash equivalents |
|
|
173,127 |
|
|
|
(44,291 |
) |
|
|
24,928 |
|
Cash and cash equivalents at beginning of period |
|
|
147,627 |
|
|
|
191,918 |
|
|
|
166,990 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
320,754 |
|
|
$ |
147,627 |
|
|
$ |
191,918 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 1Nature of Operations and Summary of Significant Accounting Policies
Organization: The Warnaco Group, Inc. (Warnaco Group and, collectively with its
subsidiaries, the Company) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986,
acquired substantially all of the outstanding shares of Warnaco Inc. (Warnaco). Warnaco is the
principal operating subsidiary of Warnaco Group.
Nature of Operations: The Company designs, sources, markets and licenses a broad line of (i)
sportswear for men, women and juniors (including jeanswear, knit and woven shirts, tops and
outerwear); (ii) intimate apparel (including bras, panties, sleepwear, loungewear, shapewear and
daywear for women and underwear and sleepwear for men); and (iii) swimwear for men, women, juniors
and children (including swim accessories and fitness and active apparel). The Companys products
are sold under a number of highly recognized owned and licensed brand names. The Company offers a
diversified portfolio of brands across multiple distribution channels to a wide range of customers.
The Company distributes its products to customers, both domestically and internationally, through a
variety of channels, including department and specialty stores, independent retailers, chain
stores, membership clubs, mass merchandisers and the internet. As of January 2, 2010, the Company
operated: (i) 1,097 Calvin Klein retail stores worldwide (consisting of 131 full price
free-standing stores, 109 outlet free-standing stores, 857 shop-in-shop/concession stores) and (ii)
three on-line stores: SpeedoUSA.com, Calvinkleinjeans.com, and CKU.com. As of January 2, 2010,
there were also 624 Calvin Klein retail stores operated by third parties under retail licenses or
franchise and distributor agreements.
Warnaco Group, Warnaco and certain of Warnacos subsidiaries were reorganized under Chapter 11
of the U.S. Bankruptcy Code, 11 U.S.C. Sections 101-1330, as amended, effective February 4, 2003
(the Effective Date).
Basis of Consolidation and Presentation: The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States
of America (U.S.). The consolidated financial statements include the accounts of Warnaco Group
and its subsidiaries. Noncontrolling interest represents minority shareholders proportionate share
of the equity in the Companys consolidated subsidiary WBR Industria e Comercio de Vestuario S.A
(WBR). During the fourth quarter of Fiscal 2009, the Company purchased the remaining 49% of the
equity of WBR, increasing its ownership of the equity of WBR to 100% (see Note 2 to Notes to
Consolidated Financial Statements).
The Company operates on a fiscal year basis ending on the Saturday closest to December 31. The
period January 4, 2009 to January 2, 2010 (Fiscal 2009) contained fifty-two weeks of operations.
The period December 30, 2007 to January 3, 2009 (Fiscal 2008) contained fifty-three weeks of
operations and the period December 31, 2006 to December 29, 2007 (Fiscal 2007) contained
fifty-two weeks of operations.
Reclassifications: Prior period items on the Companys Consolidated Statements of Operations
and Consolidated Statements of Cash Flows have been reclassified to give effect to the Companys
discontinued operations. (See Note 3 of Notes to Consolidated Financial Statements). In addition,
certain prior period items, related to the presentation and disclosure of noncontrolling interests,
on the Companys Consolidated Statements of Operations and Consolidated Balance Sheets have been
reclassified. Basic and diluted earnings per share data have also been recalculated to give effect
to participating securities, which are required to be included in the computation of both basic and
diluted earnings per share (see Note 14 of Notes to Consolidated Financial Statements).
All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates: The Company uses estimates and assumptions in the preparation of its
financial statements which affect (i) the reported amounts of assets and liabilities at the date of
the consolidated financial statements and (ii) the reported amounts of revenues and expenses.
Actual results could materially differ from these estimates. The estimates the Company makes are
based upon historical factors, current circumstances and the experience and judgment of the
Companys management. The Company evaluates its assumptions and estimates on an ongoing basis. The
Company believes that the use of estimates affects the application of all of the Companys
significant accounting policies and procedures.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents, receivables and derivative
financial instruments. The Company invests its excess cash in demand
deposits and investments in short-term marketable securities that are classified as cash
equivalents. The Company has established guidelines that relate to credit quality, diversification
and maturity and that limit exposure to any one issue of securities. The Company holds no
collateral for these financial instruments. The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no collateral from its customers. During
Fiscal 2007, 2008 and 2009, no one customer represented more than 10% of net revenues.
F-7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Revenue Recognition: The Company recognizes revenue when goods are shipped to customers and
title and risk of loss have passed, net of estimated customer returns, allowances and other
discounts. The Company recognizes revenue from its retail stores when goods are sold to consumers,
net of allowances for future returns. The determination of allowances and returns involves the use
of significant judgment and estimates by the Company. The Company bases its estimates of allowance
rates on past experience by product line and account, the financial stability of its customers, the
expected rate of retail sales and general economic and retail forecasts. The Company reviews and
adjusts its accrual rates each month based on its current experience. During the Companys monthly
review, the Company also considers its accounts receivable collection rate and the nature and
amount of customer deductions and requests for promotion assistance. The Company believes it is
likely that its accrual rates will vary over time and could change materially if the Companys mix
of customers, channels of distribution or products change. Current rates of accrual for sales
allowances, returns and discounts vary by customer. Revenues from the licensing or sub-licensing of
certain trademarks are recognized when the underlying royalties are earned.
Cost of Goods Sold: Cost of goods sold consists of the cost of products purchased and certain
period costs related to the product procurement process. Product costs include: (i) cost of
finished goods; (ii) duty, quota and related tariffs; (iii) in-bound freight and traffic costs,
including inter-plant freight; (iv) procurement and material handling costs; (v) inspection,
quality control and cost accounting and (vi) in-stocking costs in the Companys warehouse
(in-stocking costs may include but are not limited to costs to receive, unpack and stock product
available for sale in its distribution centers). Period costs included in cost of goods sold
include: (a) royalty; (b) design and merchandising; (c) prototype costs; (d) loss on seconds; (e)
provisions for inventory losses (including provisions for shrinkage and losses on the disposition
of excess and obsolete inventory); and (f) direct freight charges incurred to ship finished goods
to customers. Costs incurred to store, pick, pack and ship inventory to customers (excluding direct
freight charges) are included in shipping and handling costs and are classified in selling, general
and administrative (SG&A) expenses. The Companys gross profit and gross margin may not be
directly comparable to those of its competitors, as income statement classifications of certain
expenses may vary by company.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks, demand deposits
and investments in short-term marketable securities with maturities of 90 days or less.
Accounts Receivable: The Company maintains reserves for estimated amounts that the Company
does not expect to collect from its trade customers. Accounts receivable reserves include amounts
the Company expects its customers to deduct for returns, allowances, trade discounts, markdowns,
amounts for accounts that go out of business or seek the protection of the Bankruptcy Code and
amounts in dispute with customers. The Companys estimate of the allowance amounts that are
necessary includes amounts for specific deductions the Company has authorized and an amount for
other estimated losses. Adjustments to estimate accruals for specific account allowances and
negotiated settlements of customer deductions are recorded as deductions to revenue in the period
the related revenue is recognized. The provision for accounts receivable allowances is affected by
general economic conditions, the financial condition of the Companys customers, the inventory
position of the Companys customers and many other factors. The determination of accounts
receivable reserves is subject to significant levels of judgment and estimation by the Companys
management. If circumstances change or economic conditions deteriorate, the Company may need to
increase the reserve significantly. As of January 2, 2010 and January 3, 2009, the Company recorded
$89,982 and $87,375, respectively, of accounts receivable reserves.
Inventories: The Company records purchases of inventory when it assumes title and the risk of
loss. The Company values its inventories at the lower of cost, determined on a first-in, first-out
basis, or market. The Company evaluates its inventories to determine excess units or slow-moving
styles based upon quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors that are obsolete,
the Company estimates the net amount that it expects to realize from the sale of such items. The
Companys objective is to recognize projected inventory losses at the time the loss is evident
rather than when the goods are ultimately sold. The Companys calculation of the reduction in
carrying value necessary
for the disposition of excess inventory is highly dependent on its projections of future sales
of those products and the prices it is able to obtain for such products. The Company reviews its
inventory position monthly and adjusts its carrying value for excess or obsolete goods based on
revised projections and current market conditions for the disposition of excess and obsolete
inventory.
Long-Lived Assets: Long-lived and intangible assets (including property, plant and equipment)
acquired as part of business combinations accounted for using the acquisition method of accounting
and long-lived and intangible assets existing at the Effective Date are recorded at fair value
based upon the appraised value of such assets, net of accumulated depreciation and amortization.
The Company determines the fair value of acquired assets based upon the planned future use of each
asset or group of assets, quoted market prices where a market exists for such assets, the expected
future revenue and profitability of the business unit utilizing such assets and the expected future
life of such assets. In its determination of fair value, the Company also considers whether an
asset will be sold either individually or with other assets and the proceeds the Company expects to
receive from any such sale. Preliminary estimates of the fair value of acquired assets are based
upon managements estimates and preliminary appraisal reports. Adjustments to the preliminary
estimates of fair value, which are made within one year of an acquisition date, are recorded as
adjustments to goodwill. Subsequent adjustments are recorded in earnings in the period of the
adjustment.
F-8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Long-lived assets acquired in the ordinary course of the Companys operations are recorded at
historical costs, net of accumulated depreciation. Assumptions relating to the expected future use
of individual assets could affect the fair value of such
assets and the depreciation expense recorded related to such assets in the future.
The Company reviews its long-lived assets for possible impairment when events or circumstances
indicate that the carrying value of the assets may not be recoverable. Such events may include (a)
a significant adverse change in legal factors or the business climate; (b) an adverse action or
assessment by a regulator; (c) unanticipated competition; (d) a loss of key personnel; (e) a
more-likely-than-not expectation that a reporting unit, or a significant part of a reporting unit,
will be sold or disposed of; (f) the determination of a lack of recoverability of a significant
asset group within a reporting unit; (g) reporting a goodwill impairment loss by a subsidiary
that is a component of a reporting unit; and (h) a significant decrease in the Companys stock
price.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of
future cash flows expected to result from the use of the asset and its eventual disposition. To the
extent that estimated future undiscounted net cash flows attributable to the asset are less than
the carrying amount, an impairment loss is recognized equal to the difference between the carrying
value of such asset and its fair value, which is determined based on discounted cash flows. Assets
to be disposed of and for which there is a committed plan of disposal are reported at the lower of
carrying value or fair value less costs to sell.
The Company conducted an annual evaluation of the long-lived assets of its retail stores for
impairment during the fourth quarter of Fiscal 2009. None of those assets were impaired except for
$160 of assets in two stores in Mexico, which will be closed early in 2010. The Company recognized
a loss for the full amount of that impairment in the fourth quarter of Fiscal 2009.
Since the determination of future cash flows is an estimate of future performance, there may
be future impairments to the carrying value of long-lived and intangible assets and impairment
charges in future periods in the event that future cash flows do not meet expectations. In
addition, depreciation and amortization expense is affected by the Companys determination of the
estimated useful lives of the related assets. The estimated useful lives of fixed assets and
finite-lived intangible assets are based on their classification and expected usage, as determined
by the Company.
Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over
the fair value of net assets acquired in business combinations after the Effective Date accounted
for under the acquisition method of accounting. Goodwill is not amortized and is subject to an
annual impairment test which the Company performs in the fourth quarter of each fiscal year.
Goodwill impairment is determined using a two-step process. Goodwill is allocated to various
reporting units, which are either the operating segment or one reporting level below the operating
segment. As of January 2, 2010, the Companys reporting units for purposes of determining potential
impairment of goodwill are: Core Intimate Apparel (consisting of the Warners® /Olga® /Body Nancy
Ganz®/Bodyslimmers ® business units), Calvin Klein Underwear, Calvin Klein Jeans, Chaps® and
Swimwear. The first step of the goodwill impairment test is to compare the fair value of each
reporting unit to its carrying amount to determine if there is potential impairment. If the fair
value of the reporting unit is less than its carrying value, the second step of the goodwill
impairment test is
performed to measure the amount of impairment loss. The second step of the goodwill
impairment test compares the implied fair value of the reporting units goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. That is, the fair value of the reporting unit is
allocated to all of the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and the fair value was
the purchase price paid to acquire the reporting unit.
Determining the fair value of a reporting unit under the first step of the goodwill impairment
test and determining the fair value of individual assets and liabilities of a reporting unit
(including unrecognized intangible assets) under the second step of the goodwill impairment test is
judgmental in nature and often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the fair value of other intangible
assets. These estimates and assumptions could have a significant impact on whether or not an
impairment charge is recognized and the magnitude of any such charge. Estimates of fair value are
primarily determined using discounted cash flows, market multiples or appraised values, as
appropriate.
F-9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Intangible assets primarily consist of licenses and trademarks. Licenses and trademarks in
existence as of the Effective Date are recorded at their fair values net of accumulated
amortization since the Effective Date and net of any adjustments after the Effective Date for
reductions in valuation allowances related to deferred tax assets arising before the Effective
Date. Licenses and trademarks acquired in business combinations after the Effective Date under the
acquisition method of accounting are recorded at their fair values net of accumulated amortization
since the acquisition date. Licenses and trademarks acquired in the normal course of the Companys
operations are recorded at cost, net of accumulated amortization. Costs incurred to renew or extend
the term of a recognized intangible asset are capitalized and amortized, where appropriate, through
the extension or renewal period of the asset.
The majority of the Companys license and trademark agreements cover extended periods of time,
some in excess of forty years. The estimates and assumptions used in the determination of the
value of indefinite-lived intangible assets will not have an effect on the Companys future
earnings unless a future evaluation of trademark or license value indicates that such asset is
impaired. Intangible assets with indefinite lives are not amortized and are subject to an annual
impairment test which the Company performs in the fourth quarter of each fiscal year. The Company
also reviews its indefinite-lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an indefinite-lived intangible asset exceeds its
fair value, as for goodwill. If the carrying value of an indefinite-lived intangible asset exceeds
its fair value (determined based on discounted cash flows), an impairment loss is recognized.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over the
estimated useful lives of the assets. The Company reviews its finite-lived intangible assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of
finite-lived intangible asset may not be recoverable, as for goodwill. Recoverability of a
finite-lived intangible asset is measured by a comparison of its carrying amount to the
undiscounted future cash flows expected to be generated by the asset. If the asset is considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is determined based on discounted
cash flows. See Note 10 of Notes to Consolidated Financial Statements. The Company did not
identify any reporting units that failed or are at risk of failing the first step of the goodwill
impairment test (comparing fair value to carrying amount) or impairment of any intangible assets of
continuing operations for any period presented.
Property, Plant and Equipment: Property, plant and equipment as of January 2, 2010 and January
3, 2009 is stated at estimated fair value, net of accumulated depreciation, for the assets in
existence at February 4, 2003 and at historical costs, net of accumulated depreciation, for
additions after February 4, 2003. The estimated useful lives of property, plant and equipment are
summarized below:
|
|
|
Buildings
|
|
40 years |
Building Improvements (including leasehold improvements)
|
|
4-15 years |
Machinery and equipment
|
|
2-10 years |
Furniture and fixtures (including store fixtures)
|
|
1-10 years |
Computer hardware
|
|
3-5 years |
Computer software
|
|
3-7 years |
Depreciation and amortization expense is based on the estimated useful lives of depreciable
assets and is provided using the straight line method. Leasehold improvements are amortized over
the lesser of the useful lives of the assets or the lease term; or the lease term plus renewal
options if renewal of the lease is reasonably assured.
Computer Software Costs: Internal and external costs incurred in developing or obtaining
computer software for internal use are capitalized in property, plant and equipment and are
amortized on a straight-line basis, over the estimated useful life of the software (3 to 7 years).
Interest costs related to developing or obtaining computer software that could have been avoided if
expenditures for the asset had not been made, if any, are capitalized to the cost of the asset.
General and administrative costs related to developing or obtaining such software are expensed as
incurred.
Income Taxes: Deferred income taxes are determined using the asset and liability method.
Deferred tax assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates
and laws to taxable years in which such differences are expected to reverse. Realization of the
Companys deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the
timing and amount of which are uncertain. Management assesses the Companys income tax positions
and records tax benefits for all years subject to examination based upon an evaluation of the
facts, circumstances, and information available at the reporting dates. In addition, valuation
allowances are established when management determines that it is more-likely-than-not that some
portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed
periodically and adjusted as events occur, or circumstances change, that warrant adjustments to
those balances.
F-10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Company accounts for uncertainty in income taxes in accordance with Financial Accounting
Standards Board Accounting Standards Codification (FASB ASC) Topic 740-10. If the Company
considers that a tax position is more-likely-than-not of being sustained upon audit, based solely
on the technical merits of the position, it recognizes the tax benefit. The Company measures the
tax benefit by determining the largest amount that is greater than 50% likely of being realized
upon settlement, presuming that the tax position is examined by the appropriate taxing authority
that has full knowledge of all relevant information. These assessments can be complex and require
significant judgment. To the extent that the Companys estimates change or the final tax outcome of
these matters is different than the amounts recorded, such differences will impact the income tax
provision in the period in which such determinations are made. If the initial assessment fails to
result in the recognition of a tax benefit, the Company regularly monitors its position and
subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law
that sufficiently raise the likelihood of prevailing on the technical merits of the position to
more-likely-than-not, (ii) the statute of limitations expires, or (iii) there is a completion of an
audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax
positions are classified as current only when the Company expects to pay cash within the next
twelve months. Interest and penalties, if any, are recorded within the provision for income taxes
in the Companys Consolidated Statements of Operations and are classified on the Consolidated
Balance Sheets with the related liability for unrecognized tax benefits.
Pension Plans: The Company has a defined benefit pension plan covering certain full-time
non-union domestic employees and certain domestic employees covered by a collective bargaining
agreement that had completed service prior to January 1, 2003 (the Pension Plan). The
measurement date used to determine benefit information is the Companys fiscal year end.
The assumptions used, in particular the discount rate, can have a significant effect on the
amount of pension liability recorded by the Company. The discount rate is used to estimate the
present value of projected benefit obligations at each valuation date. The Company evaluates the
discount rate annually and adjusts the rate based upon current market conditions. For the Pension
Plan, the discount rate is estimated using a portfolio of high quality corporate bond yields (rated
Aa or higher by Moodys or Standard & Poors Investors Services) which matches the projected
benefit payments and duration of obligations for participants in the Pension Plan. The discount
rate that is developed considers the unique characteristics of the Pension Plan and the long-term
nature of the projected benefit obligation. The Company believes that a discount rate of 6.10% for
Fiscal 2009 reasonably reflects current market conditions and the characteristics of the Pension
Plan.
The investments of each plan are stated at fair value based upon quoted market prices, if
available. The Pension Plan invests in certain funds or asset pools that are managed by investment
managers for which no quoted market price is available. These investments are valued at estimated
fair value as reported by each funds administrators to the Pension Plan trustee. The individual
investment managers estimates of fair value are based upon the value of the underlying investments
in the fund or asset pool. These amounts may differ significantly from the value that would have
been reported had a quoted market price been available for each underlying investment or the
individual asset pool in total.
Effective January 1, 2003, the Pension Plan was amended and, as a result, no future benefits
accrue to participants in the Pension Plan. As a result of the amendment, the Company has not
recorded pension expense related to current service for all periods presented and will not record
pension expense for current service for any future period.
The Company uses a method that accelerates recognition of gains or losses which are a result
of (i) changes in projected benefit obligations related to changes in assumptions and (ii) returns
on plan assets that are above or below the projected asset return rate (currently 8% for the
Pension Plan) (Accelerated Method) to account for its defined benefit pension plans. The Company
has recorded pension obligations equal to the difference between the plans projected benefit
obligations and the fair value of plan assets in each fiscal year since the adoption of the
Accelerated Method. The Company believes the Accelerated Method is preferable because the pension
liability using the Accelerated Method approximates fair value.
The Company recognizes one-quarter of its estimated annual pension expense (income) in each of
its first three fiscal quarters. Estimated pension expense (income) consists of the interest cost
on projected benefit obligations for the Pension Plan, offset by the expected return on pension
plan assets. The Company records the effect of any changes in actuarial assumptions (including
changes in the discount rate) and the difference between the assumed rate of return on plan assets
and the actual return on plan assets in the fourth quarter of its fiscal year. The Companys use
of the Accelerated Method results in increased volatility in reported pension expense and therefore
the Company reports pension income/expense on a separate line in its Consolidated Statements of
Operations. The Company recognizes the funded status of its pension and other post-retirement
benefit plans in the Consolidated Balance Sheets.
F-11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Company makes annual contributions to all of its defined benefit pension plans that are at
least equal to the minimum required contributions and any other premiums due under the Employee
Retirement Income Security Act of 1974, as amended, the Pension Protection Act of 2006 and the U.S.
Internal Revenue Code of 1986, as amended. The Companys cash contribution to the Pension Plan for
Fiscal 2009 was $10,526 and is expected to be approximately $6,300 in fiscal 2010. See Note 7 of
Notes to Consolidated Financial Statements.
Stock-Based Compensation: In accounting for equity-based compensation awards, the Company uses
the Black-Scholes-Merton model to calculate the fair value of stock option awards. The
Black-Scholes-Merton model uses assumptions which involve estimating future uncertain events. The
Company is required to make significant judgments regarding these assumptions, the most significant
of which are the stock price volatility, the expected life of the option award and the risk-free
rate of return.
|
|
|
In determining the stock price volatility assumption used, the Company considers
the historical volatility of the stock prices of selected companies in the apparel
industry, the nature of those companies, the Companys own historical stock price
volatility since its emergence from bankruptcy and other factors. Historical
volatilities are based upon daily quoted market prices of the Companys common stock
on the New York Stock Exchange and, prior to May 15, 2008, on the NASDAQ Stock
Market LLC, over a period equal to the expected term of the related equity
instruments. The Company relies only on historical volatility since it provides the
most reliable indication of future volatility. Future volatility is expected to be
consistent with historical; historical volatility is calculated using a simple
average calculation method; historical data is available for the length of the
options expected term and a sufficient number of price observations are used
consistently. Since the Companys stock options are not traded on a public market,
the Company does not use implied volatility. A higher volatility input to the
Black-Scholes-Merton model increases the resulting compensation expense. |
|
|
|
During Fiscal 2009, the Company had accumulated sufficient historical data
regarding stock option exercises and
forfeitures to be able to rely on that data for the calculation of expected option
life. Accordingly, for options granted during Fiscal 2009, the Company revised its
method of calculating expected option life from the simplified method as described in
the SECs Staff Accounting Bulletin No. 110 (SAB 110) (which yielded an expected
term of six years) to the use of historical data (which yielded an expected life of
3.72 years). Historical data will be used for stock options granted in all future
periods. The Company based its Fiscal 2008 and Fiscal 2007 estimates of the expected
life of a stock option of six years upon the average of the sum of the vesting period
of 36-42 months and the option term of ten years for issued and outstanding options in
accordance with the simplified method as detailed in SAB 110. A shorter expected term
would result in a lower compensation expense. |
|
|
|
The Companys risk-free rate of return assumption for options granted in Fiscal
2009, Fiscal 2008 and Fiscal 2007 was equal to the quoted yield for U.S. treasury
bonds as of the date of grant. |
Compensation expense related to stock option grants is determined based on the fair value of
the stock option on the grant date and is recognized over the vesting period of the grants on a
straight-line basis. Compensation expense related to restricted stock grants is determined based on
the fair value of the underlying stock on the grant date and recognized over the vesting period of
the grants on a straight-line basis. The Company applies a forfeiture rate to the number of
unvested awards in each reporting period in order to estimate the number of awards that are
expected to vest. Estimated forfeiture rates are based upon historical data on vesting behavior of
employees. The Company adjusts the total amount of compensation cost recognized for each award, in
the period in which each award vests, to reflect the actual forfeitures related to that award.
Changes in the Companys estimated forfeiture rate will result in changes in the rate at which
compensation cost for an award is recognized over its vesting period.
The fair values of these stock options were estimated at the date of grant using a
Black-Scholes-Merton option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average risk free rate of return |
|
|
1.84 |
% |
|
|
3.19 |
% |
|
|
4.43 |
% |
Dividend yield (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility of the market price
of the Companys common stock |
|
|
59.3 |
% |
|
|
36.1 |
% |
|
|
31.3 |
% |
Expected option life |
|
3.72 years |
|
|
6 years |
|
|
6 years |
|
|
|
|
(a) |
|
The terms of the Companys New Credit Agreements, Amended and Restated Credit Agreement and
the indenture governing its 87/8% Senior Notes due 2013 (each as defined below) limit the
Companys ability to make certain payments, including dividends, and require the Company to
meet certain financial covenants. The Company has not paid dividends on its common stock in
any of the last five fiscal years. See Note 12. |
F-12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
A summary of stock-based compensation expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income
taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
5,721 |
|
|
$ |
5,585 |
|
|
$ |
6,854 |
|
Restricted stock grants |
|
|
8,732 |
|
|
|
9,911 |
|
|
|
7,724 |
|
|
|
|
|
|
|
|
|
|
|
Total (a) |
|
|
14,453 |
|
|
|
15,496 |
|
|
|
14,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
2,048 |
|
|
|
1,949 |
|
|
|
2,428 |
|
Restricted stock grants |
|
|
3,126 |
|
|
|
1,556 |
|
|
|
2,737 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,174 |
|
|
|
3,505 |
|
|
|
5,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense after income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
3,673 |
|
|
|
3,636 |
|
|
|
4,426 |
|
Restricted stock grants |
|
|
5,606 |
|
|
|
8,355 |
|
|
|
4,987 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,279 |
|
|
$ |
11,991 |
|
|
$ |
9,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock-based compensation has been reflected in the Companys Consolidated Statement of
Operations as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in income from continuing operations
before
provision for income taxes |
|
$ |
14,453 |
|
|
$ |
15,189 |
|
|
$ |
14,286 |
|
Included in loss from discontinued operations,
net of income taxes |
|
|
|
|
|
|
307 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,453 |
|
|
$ |
15,496 |
|
|
$ |
14,578 |
|
|
|
|
|
|
|
|
|
|
|
As of January 2, 2010, there was $15,099 of total unrecognized compensation cost related
to unvested stock-based compensation awards granted under the Companys stock incentive plans.
That cost is expected to be recognized over a weighted average period of approximately 21.8 months.
The tax benefit realized from exercise of stock options was not material for any period presented.
Shares issued under stock based compensation plans are issued from previously unissued but
authorized Common Stock.
Advertising Costs: Advertising costs are included in SG&A expenses and are expensed when the
advertising or promotion is published or presented to consumers. Cooperative advertising expenses
are charged to operations as incurred and are also included in SG&A expenses. The amounts charged
to operations for advertising, marketing and promotion expenses (including cooperative advertising,
marketing and promotion expenses) for Fiscal 2009, Fiscal 2008 and Fiscal 2007 were $100,188,
$118,814 and $99,054, respectively. Cooperative advertising expenses for Fiscal 2009, Fiscal 2008
and Fiscal 2007 were $21,583, $24,646 and $24,780, respectively.
Shipping and Handling Costs: Costs to store, pick and pack merchandise and costs related to
warehousing and distribution activities (with the exception of freight charges incurred to ship
finished goods to customers) are expensed as incurred and are classified in SG&A expenses. Direct
freight charges incurred to ship merchandise to customers are expensed as incurred and are
classified in cost of goods sold. The amounts charged to SG&A for shipping and handling costs for
Fiscal 2009, Fiscal 2008, and Fiscal 2007 were $52,260, $56,393 and $57,172, respectively.
Leases: The Company recognizes rent expense for operating leases on a straight-line basis
(including the effect of reduced or free rent and rent escalations) over the initial lease term.
The difference between the cash paid to the landlord and the amount recognized as rent expense on a
straight-line basis is included in deferred rent and classified within other long-term liabilities.
Cash reimbursements received from landlords for leasehold improvements and other cash payments
received from landlords as lease incentives are recorded as deferred rent and classified as other
long-term liabilities. Deferred rent related to landlord incentives is amortized using the
straight-line method over the initial lease term as an offset to rent expense.
F-13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Deferred Financing Costs: Deferred financing costs represent legal, other professional and
bank underwriting fees incurred in connection with the issuance of debt. Such fees are amortized
over the life of the related debt using the interest method. Amortization of deferred financing
costs is included in interest expense, net.
Derivative Financial Instruments: The Company is exposed to foreign exchange risk related to
U.S. dollar-denominated purchases of inventory, payment of minimum royalty and advertising costs
and intercompany loans and payables by subsidiaries whose functional currencies are the Euro,
Canadian Dollar, Korean Won, Mexican Peso or British Pound. The Company or its foreign subsidiaries
enter into foreign exchange forward contracts and zero-cost collar option contracts, to offset its
foreign exchange risk. The Company does not use derivative financial instruments for speculative or
trading purposes.
The Company accounts for its derivative instruments as either assets or liabilities and
carries them at fair value. The Company designates foreign exchange forward contracts, that are
entered into by the Companys subsidiaries, related to the purchase of inventory or the payment of
minimum royalties and advertising costs as cash flow hedges, with gains and losses accumulated on
the Balance Sheet in Other Comprehensive Income and recognized in Cost of Goods Sold (COGS) in
the Statement of Operations during the periods in which the underlying transactions occur. Foreign
exchange forward contracts, entered into by foreign subsidiaries that do not qualify for hedge
accounting, and those entered into by Warnaco on behalf of a subsidiary, related to inventory
purchases, payment of minimum royalties and advertising costs and zero-cost collars or forward
contracts related to intercompany loans or payables are considered to be economic hedges for
accounting purposes. Gain or loss on the underlying foreign-denominated balance or future
obligation would be offset by the loss or gain on the forward contract. Accordingly, changes in the
fair value of these economic hedges are recognized in earnings during the period of change.
Gains and losses on economic hedges that are forward contracts are recorded in
Other loss (income) in the Consolidated Statements of Operations. Gains and losses on zero cost collars
that are used to hedge changes in intercompany loans and payables are
included in other income/loss or selling, general and administrative expense, respectively, on
the Consolidated Statements of Operations.
The Company designates foreign currency forward contracts related to purchase of inventory or
payment of minimum royalty and advertising costs as cash flow hedges if the following requirements
are met: (i) at the inception of the hedge there is formal documentation of the hedging
relationship, the entitys risk management objective and strategy for undertaking the hedge, the
specific identification of the hedging instrument, the hedged transaction and how the hedging
instruments effectiveness in hedging exposure to the hedged transactions variability in cash flows
attributable to the hedged risk will be assessed; (ii) the hedge transaction is expected to be
highly effective in achieving offsetting cash flows attributable to the hedged risk and (iii) the
occurrence of the forecasted transaction is probable.
The Company formally assesses, both at the cash flow hedges inception and on an ongoing
basis, whether the derivatives used in hedging transactions have been highly effective in
offsetting changes in the cash flows of hedged items and whether those derivatives may be expected
to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based
on forward rates using the Dollar-Offset Analysis, which compares (a) the cumulative
changes since inception of the amount of dollars maturing under that dollar forward purchase
contract to (b) the cumulative changes since inception of the contract in the amount required for
hedged transaction. Changes in the time value (difference between spot and forward rates) are not
excluded from the assessment of effectiveness.
Changes in the fair values of foreign exchange contracts that are designated as cash flow
hedges, to the extent that they are effective, are deferred and recorded as a component of other
comprehensive income until the underlying transaction being hedged is settled, at which time the
deferred gains or losses are recorded in cost of goods sold in the Statements of Operations. The
ineffective portion of a cash flow hedge, if any, is recognized in other income/ expense in the
current period. Commissions and fees related to foreign currency exchange contracts, if any, are
expensed as incurred. Cash flows from the Companys derivative instruments are classified in the
Consolidated Statements of Cash Flows in the same category as the items being hedged.
The Company discontinues hedge accounting prospectively when it is determined that (i) a
derivative is not, or has ceased to be, highly effective as a hedge, (ii) when a derivative expires
or is terminated or (iii) whenever it is probable that the original forecasted transactions will
not occur by the end of the originally specified time period or within an additional two-month
period of time thereafter. When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected period, the gain or
loss on the derivative remains in accumulated other comprehensive income and is reclassified to net
income when the forecasted transaction affects net income. However, if it is probable that a
forecasted transaction will not occur by the end of the originally specified time period or within
a two-month period of time thereafter, the gains and losses that were accumulated in other
comprehensive income will be recognized immediately in net income.
F-14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Company also utilizes interest rate swaps to convert a portion of the interest obligation
related to its long-term debt from a fixed rate to floating rates. See Note 12 of Notes to
Consolidated Financial Statements. A number of international financial institutions are
counterparties to the Companys outstanding interest rate swap agreements, zero cost collars and
foreign exchange contracts. The Company monitors its positions with, and the credit quality of,
these counterparty financial institutions and does not anticipate nonperformance by these
counterparties. Management believes that the Company would not suffer a material loss in the event
of nonperformance by these counterparties.
Translation of Foreign Currencies: Cumulative translation adjustments arise primarily from
consolidating the net assets and liabilities of the Companys foreign operations at current rates
of exchange. Assets and liabilities of the Companys foreign operations are recorded at current
rates of exchange at the balance sheet date and translation adjustments are applied directly to
stockholders equity and are included as part of accumulated other comprehensive income. Gains and
losses related to the translation of current amounts due from foreign subsidiaries are included in
Other loss (income) or selling, general and administrative expense, as appropriate, and are
recognized in the period incurred. Translation gains and losses related to long-term and
permanently invested inter-company balances are recorded in accumulated other comprehensive income.
Income and expense items for the Companys foreign operations are translated using monthly average
exchange rates.
Subsequent Events: The Company has evaluated events and transactions occurring after January
2, 2010 for potential
recognition or disclosure in the Consolidated Financial Statements. See Note 12 of Notes to
Consolidated Financial Statements regarding redemption of Senior Notes.
Recent Accounting Pronouncements:
In December 2007, the Financial Accounting Standards Board (FASB) issued updated accounting
guidance related to the accounting for recurring financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements. In January 2009, that accounting
guidance was extended to include non-recurring financial assets and liabilities and for all other
non-financial assets and liabilities that are recognized or disclosed at fair value in the
financial statements. This guidance defines fair value, establishes a market-based framework or
hierarchy for measuring fair value, and expands disclosures about fair value measurements. This
guidance is applicable whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value, but does not expand or require any new fair value
measures. Beginning in Fiscal 2009, the full adoption of this guidance includes application to
financial assets and liabilities, primarily the Companys derivative contracts, as well as
non-financial assets and liabilities, such as assets and liabilities acquired in a business
combination or impairment testing of long-lived assets. The Company had provided the expanded
disclosures required by this guidance in its financial statements. Adoption of this guidance did
not have a material effect on the Companys financial condition or results of operations.
In December 2007, the FASB issued updated accounting guidance on business combinations. The
updated accounting guidance retains the underlying concepts of the previous guidance in that all
business combinations are required to be accounted for at fair value under the acquisition method
of accounting but the updated accounting guidance changed the method of applying the acquisition
method in a number of significant aspects. For example, (a) consideration paid in the form of
equity securities will be measured on the closing date of the acquisition rather than on the
announcement date, which introduces volatility in estimating the final acquisition price, (b)
contingent consideration will be recorded at fair value on the acquisition date regardless of the
likelihood of payment rather than when the contingency is resolved, which increases the initial
purchase price and may give rise to more goodwill and (c) transaction costs will be expensed as
incurred rather than added to the purchase price and allocated to net assets acquired, which
decreases the initial purchase price and the amount of goodwill and reduces the acquirers earnings
before and after the close of the transaction. The updated accounting guidance was effective for
the Company from January 4, 2009 on a prospective basis for all business combinations for which the
acquisition date was on or after that date, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies such that adjustments made to valuation
allowances on deferred taxes and to acquired tax contingencies, such as uncertain tax positions
associated with acquisitions that closed prior to January 4, 2009 will be recognized in earnings
rather than as an adjustment to goodwill. Whenever the Company enters into a business combination
or adjusts its valuation allowances subsequent to January 4, 2009, the Company will evaluate this
guidance, which may have a material impact on its financial position, results of operations and
cash flows.
F-15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
In December 2007, the FASB issued updated accounting guidance related to noncontrolling
interests in consolidated financial statements which establishes new standards that govern the
accounting for and reporting of (1) noncontrolling interest in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. Significant changes to accounting for
noncontrolling interests include (a) the inclusion of noncontrolling interests in the equity
section of the controlling entitys Consolidated Balance Sheet rather than in the mezzanine section
and (b) changes in the controlling entitys interest in the noncontrolling interest, without a
change in control, are recognized in the controlling entitys equity rather than being accounted
for by the acquisition method, which would have given rise to goodwill. This guidance was effective
for the Company from January 4, 2009 on a prospective basis for all fiscal years, and interim
periods within those fiscal years, except for the presentation and disclosure requirements, which
are applied retrospectively. The Company changed the presentation of noncontrolling interest
(formerly called minority interests) in its Consolidated Balance Sheets and Consolidated Statements
of Operations for all periods presented. Although the adoption of the provisions contained in the
updated accounting guidance affects certain performance and equity ratios, its adoption did not
have a material effect on the Companys ability to comply with the financial covenants contained in
its debt covenant agreements.
In March 2008, the FASB issued updated accounting guidance related to disclosures about
derivative instruments and hedging activities. The updated accounting guidance requires additional
disclosures regarding a companys derivative instruments and hedging activities by requiring
disclosure of the fair values of derivative instruments and their gains and losses in a tabular
format. It also requires disclosure of derivative features that are credit risk-related as well as
cross-referencing within the notes to the financial
statements to enable financial statement users to locate important information about
derivative instruments, financial performance, and cash flows and was effective for the Companys
fiscal year and interim periods within such year, beginning January 4, 2009. The Company has
presented the expanded disclosures in Note 17 of Notes to the Consolidated Financial Statements and
Item 7A. Qualitative and Quantitative Disclosures About Market Risk Foreign Exchange Risk.
In June 2008, the FASB issued updated accounting guidance related to the determination of
whether instruments granted in share-based payment transactions are participating securities. The
updated accounting guidance clarifies that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and are required to be included in the computation of both basic and
diluted earnings per share pursuant to the two-class method. The updated accounting guidance was
effective for the Companys financial statements issued for fiscal years beginning January 4, 2009,
and interim periods within those years. All prior-period earnings per share data presented are
required to be adjusted retrospectively (including interim financial statements, summaries of
earnings, and selected financial data) to conform with its provisions. The adoption of this
guidance by the Company did not have a material effect on the calculation of either basic or
diluted earnings per share for any period presented, although shares of restricted stock, which are
deemed to be participating securities, were included in those calculations for all periods
presented.
In December 2008, the FASB issued updated accounting guidance related to employers
disclosures about postretirement benefit plan assets which is intended to enhance the transparency
surrounding the types of assets and associated risks in an employers defined benefit pension or
other postretirement plan. The updated accounting guidance requires additional disclosures about:
(1) how investment allocation decisions are made by management, (2) major categories of plan
assets, and (3) significant concentrations of risk. Additionally, this guidance requires an
employer to disclose information about the valuation of plan assets similar to that required under
the FASB guidance related to fair value measurements. Those disclosures include: (1) the level
within the fair value hierarchy in which fair value measurements of plan assets fall, (2)
information about the inputs and valuation techniques used to measure the fair value of plan
assets, and (3) a reconciliation of the beginning and ending balances of plan assets valued using
significant unobservable inputs (Level 3 under the guidance related to fair value measurements).
The new disclosures are required to be included in financial statements for fiscal years ending
after December 15, 2009. The Company has provided the enhanced disclosures required by this updated
accounting guidance in Note 7 of Notes to Consolidated Financial Statements in this Annual Report
on Form 10-K.
In April 2009, the FASB issued updated accounting guidance related to interim disclosures
about fair value of financial instruments to require disclosures about fair value and the related
carrying amount of financial instruments in interim financial statements as well as in annual
financial statements. The updated accounting guidance also requires disclosure about the methods
and significant assumptions used to estimate the fair value of financial instruments and was
effective for interim and annual periods ending after June 15, 2009. Disclosures are required only
on a prospective basis. The Company has presented the required disclosures in Notes 16 and 17 of
Notes to Consolidated Financial Statements.
In June 2009, the FASB issued an Accounting Standards Codification (ASC or Codification), which
identifies the sources of accounting principles and the framework for selecting the principles used
in the preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United States. This
guidance establishes the Codification as the source of authoritative GAAP recognized by the
FASB to be applied by those entities. Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The SEC Sections
in the Codification are not the authoritative sources of such content and do not contain the entire
population of SEC rules, regulations, interpretive releases, and staff guidance. All guidance
contained in the Codification carries an equal level of authority. Following the issuance of this
guidance, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates to the
Codification. This guidance is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. There were no changes to the accounting principles used to
prepare the Companys financial statements as a result of the adoption of the ASC.
F-16
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
In September 2009, the FASB issued Accounting Standards Update No. 2009-12, Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2009-12). ASU
2009-12 amends ASC 820-10, Fair Value Measurements and Disclosures Overall to provide additional
guidance on how companies should measure the fair value of certain alternative investments, such as
hedge funds, private equity funds, and venture capital funds. ASU 2009-12 allows companies to
determine the fair value of such investments using Net Asset Value (NAV) as a practical
expedient, unless it is probable the
investment will be sold at something other than NAV. ASU 2009-12 also requires new disclosures
for each major category of alternative investments. The disclosure provisions of ASU 2009-12 are
not applicable to employers disclosures about pension and other postemployment benefit plan
assets. The Company adopted ASU 2009-12 as of its annual reporting period ended on January 2, 2010.
Accordingly, the Company used the NAV of the alternative investments, including limited
partnerships and common/collective trusts, held in its pension plan as a measure of the fair values
of those investments when providing disclosures in this Annual Report on Form 10-K and will do so
for all future annual and quarterly financial reporting.
No other new accounting pronouncement issued or effective during Fiscal 2009 had or is
expected to have a material impact on the Consolidated Financial Statements.
Note 2Acquisitions
Acquisition of Remaining Non-controlling Interest and Retail Stores in Brazil
During the fourth quarter of 2009, the Company finalized agreements, effective October 1,
2009, to acquire the remaining 49% of the equity (the Equity Purchase) in its Brazilian
subsidiary WBR Industria e Comercio de Vestuario S.A. (WBR) from the minority shareholders (the
Sellers). As a result, the Companys interest in the outstanding equity of WBR increased to 100%.
Concurrent with the Equity Purchase, the Company finalized agreements, effective October 1, 2009,
to acquire the business of eight retail stores in Brazil that sell Calvin Klein products (including
jeans wear and underwear) (the Asset Purchase) from the Sellers. The consummation of the Equity
Purchase and the Asset Purchase continues the Companys strategy of expansion of its operations in
South America.
Prior to the consummation of the Equity Purchase, WBR paid a dividend in the amount of 7,000
Brazilian Real ($4,000), which amount represented a distribution to the Sellers of their portion of
WBRs accumulated earnings through September 30, 2009. The Company made an initial cash payment of
21,000 Brazilian Real ($12,000 based on the exchange rate on the acquisition date) in connection
with both the Equity Purchase and the Asset Purchase. In addition to the initial cash payment, the
Company is required to make three additional payments, each of which is contingent upon the
achievement of a threshold of profitability of WBR (including the eight retail stores), within a
defined range, for the fourth quarter of Fiscal 2009 and each of fiscal years 2010 and 2011,
respectively. The contingent consideration is payable on March 31, 2010, 2011 and 2012. The
potential future payments that the Company could be required to make under the contingent
consideration arrangement is between 0 and 43,000 Brazilian Real (approximately $0 and $24,000). On
the date of acquisition, the Company recorded a liability of 35,000 Brazilian Real ($20,000), which
amount represents the present value of the estimated future contingent payments it will be required
to pay. The Company will recognize the difference between the present value of the future
contingent payments and the nominal value of future contingent payments as interest expense in its
Consolidated Statements of Operations during the period over which the contingent payments are
made. The Company will record any changes in its initial estimate of the contingent consideration
as an adjustment to earnings in its Consolidated Statement of Operations (part of selling, general
and administrative expenses (SG&A)) in the period of the change in estimate. Based upon the
operating results achieved by WBR during the fourth quarter of Fiscal 2009, a payment of 6,000
Brazilian Real ($3,500) will be paid by March 31, 2010.
The Equity Purchase was accounted for as an equity transaction since the Company maintained
control of WBR both before and after the transaction. The Company has determined, based on its
preliminary estimates of the relative fair values of the acquired retail stores business and the
49% interest of WBR (without the acquired retail stores), that the portion of the total
consideration due the Sellers that related to the Equity Purchase was 44,100 Brazilian Real
($25,000), resulting in the reduction of Additional Paid in Capital by that amount. In addition,
in connection with the Equity Purchase, the Company recorded a deferred tax asset of 14,200
Brazilian Real (approximately $8,000), which was offset by an increase in Additional Paid in
Capital.
F-17
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Asset Purchase was accounted for as a business combination, which was not deemed to be
material for accounting purposes from a financial disclosure perspective. The Company determined
that the portion of the total consideration due the Sellers that related to the Asset Purchase was
12,400 Brazilian Real ($7,000). See Note 10 of Notes to Consolidated Financial Statements for
details of intangible assets and goodwill resulting from these acquisitions.
The Company is in the process of finalizing the allocation of the purchase price attributable
to Equity Purchase and the Asset Purchase and is also in the process of finalizing the
determination of the fair values of the assets acquired and liabilities assumed in the Asset
Purchase.
The following table describes the effect of changes in the Companys ownership interest in WBR
on the Companys equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Warnaco Group, Inc. |
|
$ |
95,998 |
|
|
$ |
47,254 |
|
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Warnaco Group Inc.s paid in
capital for purchase of 49% equity interest
in WBR (a) |
|
|
(17,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers to noncontrolling interest |
|
|
(17,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to Warnaco
Group, Inc. and transfer to noncontrolling
interest |
|
$ |
78,353 |
|
|
$ |
47,254 |
|
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
includes $451 of transaction costs related to the acquisition of WBR. |
Businesses in Chile and Peru: On June 10, 2009, the Company acquired from Fashion Company
S.A. (formerly Clemente Eblen S.A.) and Battery S.A. (collectively, Eblen), for cash
consideration of $2,475, businesses relating to distribution and sale at wholesale and retail of
jeanswear and underwear products bearing the Calvin Klein trademarks in Chile and Peru, including
the transfer and assignment to the Company by Eblen of the right to operate and conduct business at
three retail locations in Chile and one retail location in Peru. The Company acquired these
businesses in order to increase its presence in South America.
2008 CK Licenses: In connection with the consummation of the January 31, 2006 acquisition of
100% of the shares of the companies (the CKJEA Business) that operate the wholesale and retail
businesses of Calvin Klein jeanswear and accessories in Europe and Asia and the CK /Calvin Klein
bridge line of sportswear and accessories in Europe, the Company became obligated to acquire from
the seller of the CKJEA Business, for no additional consideration and subject to certain conditions
which were ministerial in nature, 100% of the shares of the company (the Collection License
Company) that operates the license (the Collection License) for the Calvin Klein mens and
womens Collection apparel and accessories worldwide. The Company acquired the Collection License
Company on January 28, 2008. The Collection License was scheduled to expire in December
2013. However, pursuant to an agreement (the Transfer Agreement) entered into on January 30,
2008, the Company transferred the Collection License Company to Phillips-Van Heusen Corporation
(PVH), the parent company of Calvin Klein, Inc. (CKI). In connection therewith, the Company
paid approximately $43,000 (including final working capital adjustments) to, or on behalf of, PVH
and entered into certain new, and amended certain existing, Calvin Klein licenses (collectively,
the 2008 CK Licenses).
The rights acquired by the Company pursuant to the 2008 CK Licenses include: (i) rights to
operate Calvin Klein Jeanswear Accessories Stores in Europe, Eastern Europe, Middle East, Africa
and Asia, as defined; (ii) rights to operate Calvin Klein Jeanswear Accessories Stores in Central
and South America (excluding Canada and Mexico, which is otherwise included in the underlying grant
of rights to the company to operate Calvin Klein Jeanswear retail stores in Central and South
America); (iii) rights to operate CK/Calvin Klein Bridge Accessories Stores in Europe, Eastern
Europe, Middle East and Africa, as defined; (iv) rights to operate CK/Calvin Klein Bridge
Accessories Stores in Central and South America (excluding Canada and Mexico, which is otherwise
included in the underlying grant of rights to the Company to operate Calvin Klein Bridge
Accessories Stores in Central and South America); and (v) e-commerce rights in the Americas, Europe
and Asia for Calvin Klein Jeans and for Calvin Klein jeans accessories. Each of the 2008 CK
Licenses are long-term arrangements. In addition, pursuant to the Transfer Agreement, the Company
had entered into negotiations with respect to a grant of rights to sublicense and distribute Calvin
Klein Golf apparel and golf related accessories. During Fiscal 2008, the Company recorded $24,700
of intangible assets related to the 2008 CK Licenses and Calvin Klein Golf license and recorded a
restructuring charge (included in selling, general and administrative expenses) of $18,535 (the
Collection License
Company Charge) related to the transfer of the Collection License Company to PVH. During the
third quarter of Fiscal 2009, the Company decided to discontinue its Calvin Klein Golf business
(see Note 3 of Notes to Consolidated Financial Statements).
F-18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Retail Stores: During Fiscal 2007, the Company acquired a retail store (which acquisition
included the assumption of the lease for the store location) in New York City as well as a business
which operates eight retail stores in Shanghai, China for a total consideration of approximately
$1,540. During Fiscal 2008, the Company acquired a business which operates 11 retail stores in
China (which acquisition included the assumption of the leases related to the stores) for a total
consideration of approximately $2,524.
Note 3Dispositions and Discontinued Operations
Calvin Klein Golf and Calvin Klein Collection businesses: During the third quarter of Fiscal
2009, the Company discontinued its Calvin Klein Golf (Golf) business and classified as available
for sale, its Calvin Klein Collection (Collection) business, both of which operated in Korea. As
a result, those business units have been classified as discontinued operations for all periods
presented. During the third quarter of Fiscal 2009, the Company wrote off the carrying value of the
Golf license of $792. In addition, the Company reclassified, as discontinued operations, net
revenues of $155 and expenses of $353 for Fiscal 2009 in connection with the shut down of the Golf
business. The Companys Collection business had operated as a distributor of Calvin Klein
Collection merchandise at retail locations in Korea both before and subsequent to the transfer of
the Collection License Company to PVH. During the third quarter of Fiscal 2009, the Company
reclassified, as discontinued operations, net revenues of $2,305 and expenses of $3,062 for Fiscal
2009 in connection with the shut down of the Collection business.
Designer Swimwear brands (except for Calvin Klein): During Fiscal 2007, the Company disposed
of its OP womens and junior swimwear, Catalina, Anne Cole and Cole of California businesses. As a
result, the OP womens and juniors, Catalina, Anne Cole and Cole of California business units
have been classified as discontinued operations as of January 2, 2010 and January 3, 2009. The
Company had operated the OP womens and junior swimwear business under a license it was granted in
connection with the Companys sale of its OP business including the associated trademarks and
goodwill in 2006. The Company sold its Catalina, Anne Cole and Cole of California businesses to In
Mocean Group, LLC (InMocean) for a total consideration of approximately $25,300, of which $20,600 was received in cash on December 28, 2007. The
remaining portion relates to raw material and work-in-process acquired at December 28, 2007. Cash
related to raw material and work in process at the sale date is collected by drawing on letters of
credit as the related finished goods are shipped. The Company recorded a loss of $2,338 related to
the sale of the Catalina, Anne Cole and Cole of California businesses. During Fiscal 2008, the
Company recorded charges of approximately $6,864, primarily related to working capital adjustments
associated with the disposition of these brands. In addition, through June 30, 2008, the Company
was obligated to provide certain transition services to InMocean for which the Company has been
reimbursed. In addition, during Fiscal 2008, the Company ceased operations of its Nautica, Michael
Kors and private label swimwear businesses. As a result, these business units have been classified
as discontinued operations for financial reporting purposes. During Fiscal 2009 and Fiscal 2008,
the Company recognized gains of $304 and losses of $2,035, respectively, (as part of Loss from
discontinued operations, net of taxes) related to the discontinuation of the Nautica, Michael Kors
and private label swimwear businesses.
Lejaby Sale: On February 14, 2008, the Company entered into a stock and asset purchase
agreement with Palmers Textil AG (Palmers) whereby, effective March 10, 2008, Palmers acquired
the Lejaby business for a base purchase price of 32,500 (approximately $47,400) payable in cash
and 12,500 (approximately $18,200) evidenced by an interest free promissory note (payable on
December 31, 2013), subject to certain adjustments, including adjustments for working capital. Pursuant to the transition services agreement (TSA) with Palmers,
the Company operated the Canadian portion of the Lejaby business through December 31, 2008, the
term of the TSA. As a result, the Lejaby business (including the Companys Canadian Lejaby
division) has been classified as a discontinued operation for financial reporting purposes. During
March 2008, the Company recorded a gain (as part of Loss from discontinued operations, net of
taxes) of $3,392 related to the sale of Lejaby. In addition, during Fiscal 2008, the Company
repatriated, in the form of a dividend to the U.S., the net proceeds received in connection with
the Lejaby sale. The repatriation of the proceeds from the Lejaby sale, net of adjustments for
working capital, resulted in an income tax charge of approximately $14,587 which was recorded as
part of Provision for income taxes in the Companys Consolidated Statements of Operations.
F-19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Summarized operating results for the discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
3,083 |
|
|
$ |
44,780 |
|
|
$ |
210,956 |
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income
taxes |
|
|
(6,079 |
)(a) |
|
|
(8,636 |
) |
|
|
(13,901 |
) |
Provision (benefit) for income taxes |
|
|
148 |
|
|
|
(4,844 |
) |
|
|
(6,099 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(6,227 |
) |
|
$ |
(3,792 |
) |
|
$ |
(7,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
includes a charge of $3,423 related to the correction of an error in amounts
recorded in prior periods. See Note 6 of Notes to Consolidated Financial Statements. |
The assets and liabilities of the discontinued operations at January 2, 2010 and January
3, 2009 are presented in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 (a) |
|
|
January 3, 2009 (a) |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
366 |
|
|
$ |
5,396 |
|
Inventories, net |
|
|
1,684 |
|
|
|
23 |
|
Prepaid expenses and other current
assets |
|
|
122 |
|
|
|
778 |
|
Deferred tax assets |
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
2,172 |
|
|
$ |
6,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
104 |
|
|
$ |
356 |
|
Accrued liabilities |
|
|
7,902 |
|
|
|
9,735 |
|
Deferred tax liabilities |
|
|
|
|
|
|
104 |
|
Other |
|
|
12 |
|
|
|
1,860 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
8,018 |
|
|
$ |
12,055 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes assets and liabilities related to the businesses that were discontinued in
2009, 2008 and 2007. |
Note 4Restructuring Expense
During Fiscal 2009, the Company incurred restructuring charges of $12,126, primarily related
to (i) the continuation of the workforce reduction, which commenced during the fourth quarter of
Fiscal 2008, in order to align the Companys cost structure to match current economic conditions
($7,110); (ii) the rationalization and consolidation of the Companys European operations, which
had begun in Fiscal 2007 ($1,230); and (iii) other exit activities, including contract termination
costs, legal and other costs ($3,786).
During Fiscal 2008, the Company incurred restructuring charges of $35,260, primarily related
to (i) the Collection License Company Charge ($18,535); (ii) activities associated with
managements initiatives to increase productivity and profitability in the Swimwear Group ($3,944);
(iii) the rationalization and consolidation of the Companys European operations ($1,621); (iv) a
workforce reduction initiative implemented in the fourth quarter of 2008 ($1,360) and (v) other
costs, including contract termination costs, impairment of fixed assets and legal/other costs
associated with various other exit activities ($9,800).
During Fiscal 2007, the Company recorded restructuring charges of $32,360 primarily related to
(i) managements initiatives to increase productivity and profitability in the Swimwear Group
($29,800); (ii) the rationalization and consolidation of the Companys European operations ($632)
and (iii) legal/other costs associated with various other exit activities ($1,928).
Each of the restructuring activities is described below:
The rationalization and consolidation of the Companys European operations: During Fiscal
2007, the Company initiated actions to consolidate its European operations. Actions taken to date
include the consolidation of certain sales functions across Europe as well as the consolidation of
certain administrative and support functions across Europe into one shared service center located
in the
Netherlands. During Fiscal 2009 and Fiscal 2008, the Company incurred charges of approximately
$1,230 and $1,621, respectively, primarily associated with employee termination costs (related to
14 employees and 9 employees, respectively) and consulting and professional fees related to this
initiative. During Fiscal 2007, the Company incurred charges of $632 related to employee
termination expenses. The Company expects to incur additional costs of $1,200 through 2010 related
to this initiative.
F-20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Workforce reduction: Following the economic downturn in the fourth quarter of 2008, as a
result of the turmoil in world financial markets and the expected decline in the demand for the
Companys products, the Company reduced its workforce in the United States during the fourth
quarter of 2008 by 44 employees at a cost of approximately $1,400 in order to align its cost
structure to match current economic conditions. A further reduction in force was implemented during
the Fiscal 2009 (232 employees in both the Companys domestic and foreign operations) at a cost of
approximately $7,110.
The Collection License Company Charge: See Note 2 of Notes to Consolidated Financial Statements.
Activities associated with managements initiatives to increase productivity and profitability
in the Swimwear Group: During Fiscal 2007, the Company initiated actions to increase productivity
and profitability in its Swimwear Group. Actions taken to date include the closure of the Companys
swim goggle manufacturing facility in Canada, the sale of the Companys Mexican manufacturing
facilities, the rationalization and consolidation of the Companys warehouse and administrative
facilities in California and other activities related to the exit of the designer swimwear business
(excluding Calvin Klein swimwear). During Fiscal 2008, the Company recorded $3,944 related to the
rationalization and consolidation of its warehouse and administrative facilities in California
($3,055) as well as facility shutdown costs ($889) associated with the Fiscal 2007 disposition of
its manufacturing plants in Mexico. Costs associated with the rationalization and consolidation of
its warehouse and administrative facilities in California include lease termination and related
costs of $1,707, employee termination expenses of $836 (related to 14 employees) and legal and
other costs of $512.
The Company recorded approximately $29,800 in Fiscal 2007 related to these initiatives. As
relates to the sale of the Mexican manufacturing facilities, on October 1, 2007, the Company
entered into an agreement with a local business partner (the Local Buyer) whereby the Company
transferred the facilities to the Local Buyer. As part of the transfer, the Local Buyer agreed to
assume certain liabilities associated with the facilities and the facilities employees. The
Company recorded losses of approximately $24,000 associated with the transfer, of which
approximately $11,600 related to write-down of certain fixed assets and approximately $12,400
related primarily to liabilities which were assumed by the Local Buyer and which were reimbursed by
the Company. In addition, the Company entered into a production agreement with the Local Buyer for
certain stretch swimwear and other products (at market prices) through June 30, 2011. As of January
2, 2010, total commitments under the production agreement are expected to be approximately $20,800
through June 30, 2011 as follows:
|
|
|
|
|
January 1, 2010 through December 31, 2010 |
|
$ |
13,800 |
|
January 1, 2011 through June 30, 2011 |
|
$ |
7,000 |
|
Other restructuring charges recorded during Fiscal 2007 associated with managements
initiatives to increase productivity and profitability in the Swimwear Group included (a)
approximately $4,200 related to the rationalization of the swimwear workforce in Canada (92
employees), California and Mexico (439 employees); and (b) inventory writedowns of approximately
$1,300 primarily related to the closure of the swim goggle manufacturing facility located in Canada
and legal and other expenses of approximately $300.
Other: During Fiscal 2008, the Company recorded approximately $9,800 related to contract
termination costs, impairment of fixed assets and legal/other costs associated with various other
exit activities. During Fiscal 2007, the Company also decided to close four retail stores (three
located in the United Kingdom and one located in Dallas, Texas) and recorded charges of $1,546.
F-21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Restructuring charges have been recorded in the Consolidated Statements of Operations for
Fiscal 2009, Fiscal 2008 and Fiscal 2007, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
1,764 |
|
|
$ |
1,878 |
|
|
$ |
21,589 |
|
Selling, general and
administrative expenses |
|
|
10,362 |
|
|
|
33,382 |
|
|
|
10,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,126 |
|
|
$ |
35,260 |
|
|
$ |
32,360 |
|
|
|
|
|
|
|
|
|
|
|
Cash portion of restructuring items |
|
$ |
11,921 |
|
|
$ |
33,471 |
|
|
$ |
17,479 |
|
Non-cash portion of restructuring
items |
|
$ |
205 |
|
|
$ |
1,789 |
|
|
$ |
14,881 |
|
Changes in liabilities related to restructuring are summarized below:
|
|
|
|
|
Balance at December 29, 2007 |
|
$ |
4,718 |
|
Charges for Fiscal 2008 |
|
|
33,471 |
|
Cash reductions for Fiscal 2008 |
|
|
(32,777 |
) |
Non-cash changes and foreign currency effects |
|
|
513 |
|
|
|
|
|
Balance at January 3, 2009 |
|
|
5,925 |
|
Charges for Fiscal 2009 |
|
|
11,921 |
|
Cash reductions for Fiscal 2009 |
|
|
(14,402 |
) |
Non-cash changes and foreign currency effects |
|
|
128 |
|
|
|
|
|
Balance at January 2, 2010 (a) |
|
$ |
3,572 |
|
|
|
|
|
|
|
|
(a) |
|
Includes approximately $1,824 recorded in accrued liabilities (part of current
liabilities) which amounts are expected to be settled over the next 12 months and includes
approximately $1,748 recorded in other long term liabilities which amounts are expected to be
settled over the next four years. |
Note 5Business Segments and Geographic Information
Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii)
Intimate Apparel Group; and (iii) Swimwear Group.
The Sportswear Group designs, sources and markets moderate to premium priced mens and womens
sportswear under the Calvin Klein and Chaps® brands. As of January 2, 2010, the Sportswear Group
operated 501 Calvin Klein retail stores worldwide (consisting of 61 full price free-standing
stores, 41 outlet free-standing stores, 398 shop-in-shop/concession stores and one on-line internet
store). As of January 2, 2010, there were also 377 retail stores operated by third parties under
retail licenses or franchise and distributor agreements. The majority of these Calvin Klein retail
stores were acquired as part of the CKJEA Acquisition.
The Intimate Apparel Group designs, sources and markets moderate to premium priced intimate
apparel and other products for women and better to premium priced mens underwear and loungewear
under the Calvin Klein, Warners®,Olga® and Body Nancy Ganz/Bodyslimmers® brand names. As of
January 2, 2010, the Intimate Apparel Group operated: (i) 598 Calvin Klein retail stores worldwide
(consisting of 70 full price free-standing stores, 68 outlet free-standing stores, one on-line
store and 459 shop-in-shop/concession stores). As of January 2, 2010, there were also 247 Calvin
Klein retail stores operated by third parties under retail licenses or franchise and distributor
agreements.
The Swimwear Group designs, licenses, sources, manufactures and markets mass market to premium
priced swimwear, fitness apparel, swim accessories and related products under the Speedo®,
Lifeguard® and Calvin Klein brand names. The Swimwear Group operates one on-line store.
F-22
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Information by business group, excluding discontinued operations, is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear |
|
|
Intimate |
|
|
Swimwear |
|
|
|
|
|
|
Corporate / Other |
|
|
|
|
|
|
Group |
|
|
Apparel Group |
|
|
Group |
|
|
Group Total |
|
|
Items |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
1,091,165 |
|
|
$ |
677,315 |
|
|
$ |
251,145 |
|
|
$ |
2,019,625 |
|
|
$ |
|
|
|
$ |
2,019,625 |
|
Operating income (loss) (b) |
|
|
124,950 |
|
|
|
117,070 |
|
|
|
15,558 |
|
|
|
257,578 |
|
|
|
(64,043 |
) |
|
|
193,535 |
|
Depreciation and amortization |
|
|
28,973 |
|
|
|
12,600 |
|
|
|
2,200 |
|
|
|
43,773 |
|
|
|
3,070 |
|
|
|
46,843 |
|
Restructuring expense |
|
|
3,242 |
|
|
|
4,314 |
|
|
|
3,019 |
|
|
|
10,575 |
|
|
|
1,551 |
|
|
|
12,126 |
|
Capital expenditures |
|
|
15,912 |
|
|
|
22,112 |
|
|
|
616 |
|
|
|
38,640 |
|
|
|
4,116 |
|
|
|
42,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
1,100,597 |
|
|
$ |
702,252 |
|
|
$ |
260,000 |
|
|
$ |
2,062,849 |
|
|
$ |
|
|
|
$ |
2,062,849 |
|
Operating income (loss) |
|
|
89,782 |
|
|
|
126,132 |
|
|
|
11,478 |
|
|
|
227,392 |
|
|
|
(85,947 |
) |
|
|
141,445 |
|
Depreciation and
amortization (a) |
|
|
30,142 |
|
|
|
11,696 |
|
|
|
2,441 |
|
|
|
44,279 |
|
|
|
1,875 |
|
|
|
46,154 |
|
Restructuring expense |
|
|
27,820 |
|
|
|
1,267 |
|
|
|
3,944 |
|
|
|
33,031 |
|
|
|
2,229 |
|
|
|
35,260 |
|
Capital expenditures |
|
|
13,296 |
|
|
|
20,192 |
|
|
|
959 |
|
|
|
34,447 |
|
|
|
6,584 |
|
|
|
41,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
939,147 |
|
|
$ |
627,014 |
|
|
$ |
253,418 |
|
|
$ |
1,819,579 |
|
|
$ |
|
|
|
$ |
1,819,579 |
|
Operating income (loss) |
|
|
97,946 |
|
|
|
108,343 |
|
|
|
(24,499 |
) |
|
|
181,790 |
|
|
|
(38,100 |
) |
|
|
143,690 |
|
Depreciation and amortization |
|
|
29,309 |
|
|
|
13,130 |
|
|
|
19,459 |
|
|
|
61,898 |
|
|
|
3,434 |
|
|
|
65,332 |
|
Restructuring expense |
|
|
118 |
|
|
|
2,142 |
|
|
|
29,821 |
|
|
|
32,081 |
|
|
|
279 |
|
|
|
32,360 |
|
Capital expenditures |
|
|
17,275 |
|
|
|
16,119 |
|
|
|
2,051 |
|
|
|
35,445 |
|
|
|
6,310 |
|
|
|
41,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
$ |
875,304 |
|
|
$ |
390,610 |
|
|
$ |
144,198 |
|
|
$ |
1,410,112 |
|
|
$ |
249,682 |
|
|
$ |
1,659,794 |
|
January 3, 2009 |
|
|
801,038 |
|
|
|
304,724 |
|
|
|
147,685 |
|
|
|
1,253,447 |
|
|
|
242,646 |
|
|
|
1,496,093 |
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
$ |
30,909 |
|
|
$ |
45,882 |
|
|
$ |
3,555 |
|
|
$ |
80,346 |
|
|
$ |
40,145 |
|
|
$ |
120,491 |
|
January 3, 2009 |
|
|
26,525 |
|
|
|
33,921 |
|
|
|
4,091 |
|
|
|
64,537 |
|
|
|
45,026 |
|
|
|
109,563 |
|
|
|
|
(a) |
|
In connection with its estimate of depreciation expense, the Company recorded an
additional depreciation charge of $1,084 during Fiscal 2008, which amount related to the
correction of amounts recorded in prior periods. The amount was not material to any prior
period. |
|
(b) |
|
Reflects a charge of $3,552 recorded during Fiscal 2009 related to the write down
of inventory associated with the Companys LZR Racer and other similar racing swimsuits.
The Company recorded the write down as a result of the Federation Internationale de
Natations ruling during Fiscal 2009 which banned the use of these types of suits in
competitive swim events. |
All inter-company revenues and expenses are eliminated in consolidation. Management does
not include inter-company sales when evaluating segment performance. Each segments performance is
evaluated based upon operating income after restructuring charges and shared services expenses but
before unallocated corporate expenses.
The table below summarizes corporate/other expenses for each period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses |
|
$ |
36,371 |
|
|
$ |
44,295 |
|
|
$ |
43,348 |
|
Foreign exchange losses |
|
|
2,627 |
|
|
|
6,108 |
|
|
|
64 |
|
Pension expense (income) |
|
|
20,424 |
|
|
|
31,440 |
|
|
|
(9,025 |
) |
Restructuring expense |
|
|
1,551 |
|
|
|
2,229 |
|
|
|
279 |
|
Depreciation and amortization
of corporate assets |
|
|
3,070 |
|
|
|
1,875 |
|
|
|
3,434 |
|
|
|
|
|
|
|
|
|
|
|
Corporate/other expenses |
|
$ |
64,043 |
|
|
$ |
85,947 |
|
|
$ |
38,100 |
|
|
|
|
|
|
|
|
|
|
|
F-23
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
A reconciliation of operating income from operating groups to income from continuing
operations before provision for income taxes and non-controlling interest for Fiscal 2009, Fiscal
2008, and Fiscal 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income by operating group |
|
$ |
257,578 |
|
|
$ |
227,392 |
|
|
$ |
181,790 |
|
Corporate/other items |
|
|
(64,043 |
) |
|
|
(85,947 |
) |
|
|
(38,100 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
193,535 |
|
|
|
141,445 |
|
|
|
143,690 |
|
Other (income) loss |
|
|
1,889 |
|
|
|
1,926 |
|
|
|
(7,063 |
) |
Interest expense |
|
|
23,897 |
|
|
|
29,519 |
|
|
|
37,718 |
|
Interest income |
|
|
(1,248 |
) |
|
|
(3,120 |
) |
|
|
(3,766 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before
provision for income taxes and non-controlling interest |
|
$ |
168,997 |
|
|
$ |
113,120 |
|
|
$ |
116,801 |
|
|
|
|
|
|
|
|
|
|
|
Geographic Information: Included in the consolidated financial statements are the
following amounts relating to geographic locations where the Company has business operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
% |
|
|
Fiscal 2008 |
|
|
% |
|
|
Fiscal 2007 |
|
|
% |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
916,691 |
|
|
|
45.4 |
% |
|
$ |
942,205 |
|
|
|
45.7 |
% |
|
$ |
927,152 |
|
|
|
50.9 |
% |
Europe |
|
|
551,595 |
|
|
|
27.3 |
% |
|
|
576,320 |
|
|
|
27.9 |
% |
|
|
470,560 |
|
|
|
25.9 |
% |
Asia |
|
|
322,890 |
|
|
|
16.0 |
% |
|
|
319,052 |
|
|
|
15.5 |
% |
|
|
249,680 |
|
|
|
13.7 |
% |
Canada |
|
|
109,300 |
|
|
|
5.4 |
% |
|
|
115,448 |
|
|
|
5.6 |
% |
|
|
102,972 |
|
|
|
5.7 |
% |
Mexico, Central and
South America |
|
|
119,149 |
|
|
|
5.9 |
% |
|
|
109,824 |
|
|
|
5.3 |
% |
|
|
69,215 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,019,625 |
|
|
|
100.0 |
% |
|
$ |
2,062,849 |
|
|
|
100.0 |
% |
|
$ |
1,819,579 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
49,874 |
|
|
|
41.4 |
% |
|
$ |
57,265 |
|
|
|
52.3 |
% |
All other |
|
|
70,617 |
|
|
|
58.6 |
% |
|
|
52,298 |
|
|
|
47.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
120,491 |
|
|
|
100.0 |
% |
|
$ |
109,563 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about Major Customers: For Fiscal 2009, Fiscal 2008 and Fiscal 2007, no
customer accounted for more than 10% of the Companys net revenue.
Note 6Income Taxes
The following presents the domestic and foreign components of income from continuing
operations before provision for income taxes and non-controlling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
Income from continuing operations before
provision (benefit) for income
taxes and non-controlling interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
53,405 |
|
|
$ |
6,675 |
|
|
$ |
(11,218 |
) |
Foreign |
|
|
115,592 |
|
|
|
106,445 |
|
|
|
128,019 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168,997 |
|
|
$ |
113,120 |
|
|
$ |
116,801 |
|
|
|
|
|
|
|
|
|
|
|
F-24
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The following presents the components of the Companys total income tax provision from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,784 |
|
|
$ |
120 |
|
|
$ |
428 |
|
State and local |
|
|
13,348 |
|
|
|
3,163 |
|
|
|
5,141 |
|
Foreign |
|
|
30,663 |
|
|
|
45,351 |
|
|
|
35,461 |
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision |
|
$ |
46,795 |
|
|
$ |
48,634 |
|
|
$ |
41,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
21,241 |
|
|
$ |
26,614 |
(b) |
|
$ |
4,535 |
|
State and local |
|
|
(7,585 |
) |
|
|
(5,335 |
) |
|
|
592 |
|
Foreign |
|
|
(671 |
) |
|
|
(11,207 |
) |
|
|
(9,064 |
) |
Increase (decrease)
in valuation
allowance |
|
|
4,492 |
|
|
|
2,021 |
|
|
|
(7,201 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax provision (benefit) |
|
|
17,477 |
|
|
|
12,093 |
|
|
|
(11,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes (a) |
|
$ |
64,272 |
|
|
$ |
60,727 |
|
|
$ |
29,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes a charge of approximately $3,600 in Fiscal 2009 in order to correct an error
in prior period income tax provisions related to the recapture of cancellation of
indebtedness income, which had been deferred in connection with the Companys bankruptcy
proceedings in 2003. |
|
(b) |
|
Includes, among other items, approximately $14,600 related to the repatriation to
the U.S. of net proceeds received in connection with the sale of the Lejaby business. |
The following presents the reconciliation of the provision for income taxes to United
States federal income taxes computed at the statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision
for income taxes and non-controlling interest |
|
$ |
168,997 |
|
|
$ |
113,120 |
|
|
$ |
116,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense computed at U.S. statutory rate |
|
$ |
59,149 |
|
|
$ |
39,592 |
|
|
$ |
40,880 |
|
State income taxes, net of federal benefit |
|
|
3,647 |
|
|
|
(1,438 |
) |
|
|
3,728 |
|
Foreign taxes less than the U.S. statutory rate |
|
|
(10,465 |
) |
|
|
(3,112 |
) |
|
|
(18,472 |
) |
Foreign income taxed in the U.S. |
|
|
2,428 |
|
|
|
19,370 |
(a) |
|
|
5,607 |
|
Non-deductible expenses related to foreign operations |
|
|
|
|
|
|
|
|
|
|
3,500 |
|
Cancellation of indebtedness recapture |
|
|
3,606 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance |
|
|
4,492 |
|
|
|
2,021 |
|
|
|
(7,201 |
) |
Other, net |
|
|
1,415 |
|
|
|
4,294 |
|
|
|
1,850 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
64,272 |
|
|
$ |
60,727 |
|
|
$ |
29,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes, among other items, approximately $14,600 related to the repatriation to the
U.S. of net proceeds received in connection with the sale of the Lejaby business. |
F-25
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The components of deferred tax assets and liabilities as of January 2, 2010 and January
3, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventory |
|
$ |
5,014 |
|
|
$ |
6,441 |
|
Pension and post-retirement benefits |
|
|
15,343 |
|
|
|
12,337 |
|
Advertising credits |
|
|
13,373 |
|
|
|
13,368 |
|
Reserves and accruals |
|
|
41,110 |
|
|
|
44,256 |
|
Net operating losses |
|
|
15,426 |
|
|
|
64,893 |
|
Other |
|
|
24,371 |
|
|
|
24,321 |
|
|
|
|
|
|
|
|
|
|
|
114,637 |
|
|
|
165,616 |
|
Valuation allowance |
|
|
(17,455 |
) |
|
|
(15,030 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
97,182 |
|
|
|
150,586 |
|
Gross deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
97,984 |
|
|
|
61,938 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
97,984 |
|
|
|
61,938 |
|
|
|
|
|
|
|
|
Deferred tax asset (liability) net |
|
$ |
(802 |
) |
|
$ |
88,648 |
|
|
|
|
|
|
|
|
Realization of Deferred Tax Assets
Realization of the Companys deferred tax assets is dependent upon future earnings in specific
tax jurisdictions, the timing and amount of which are uncertain. Accordingly, the Company
evaluates all available positive and negative evidence and records a valuation allowance for those
deferred tax assets for which management does not anticipate future realization. The Company
considers income earned and losses incurred in each jurisdiction for the three most recent fiscal
years and also considers its forecast of future taxable income in assessing the need for a
valuation allowance. The underlying assumptions used in forecasting future taxable income requires
significant judgment and take into account the Companys recent performance. A valuation allowance
is established to reduce the deferred tax assets to the amount that is more likely than not to be
realized. As of January 2, 2010, the Company determined that it is more likely than not that it
will realize a benefit from its domestic federal and certain state deferred tax assets based on the
criteria described above.
Domestically, the valuation allowance was approximately $8,200 and $8,000 as of January 2,
2010 and January 3, 2009, respectively, relating to certain of the Companys state tax loss
carryforwards, state tax credits, and deductible temporary differences. The increase in the
valuation allowance relates primarily to additional tax loss carryforwards generated during the
2009 fiscal period and deductible temporary differences. Internationally, the valuation allowance
was approximately $9,300 and $7,000 as of January 2, 2010 and January 3, 2009, respectively. The
increase in the valuation allowance relates primarily to additional tax loss carryforwards
generated during the 2009 fiscal period and deductible temporary differences.
Effective January 4, 2009, GAAP requires that adjustments to tax contingencies and
valuation allowances provided on deferred taxes related to business combinations which were
completed prior to that date will generally impact income tax expense.
Attribute Reduction and Limitations
In connection with the Companys emergence from bankruptcy on February 4, 2003, certain of its
domestic subsidiaries realized cancellation of debt (COD) income during the period from January
5, 2003 to February 4, 2003. Under U.S. tax law, a company that realized COD income while in
bankruptcy is entitled to exclude such income from its U.S. Federal taxable income. A company that
excludes COD income is then required to reduce certain tax attributes in an amount equal to the
excluded COD income. The tax attributes impacted by these rules included net operating loss
carry-forwards, tax credit carry-forwards and tax bases in certain
assets.
There are two alternative interpretations on how the attribute reduction rule should be
applied to reduce tax attributes of a U.S. affiliated group of companies. Under one approach, the
attribute reduction would be applied on a consolidated return basis and eliminate all of the
Companys U.S. consolidated net operating loss (NOL) carryovers generated prior to Fiscal 2004
and reduce certain of its other U.S. tax attributes. Alternatively, the attribute reduction would
be applied on a separate company basis and reduce the attributes of each respective entity based on
the COD income excluded in that entity. The Company has applied the attribute reduction rules on a
separate company basis which resulted in the retention of U.S. net operating loss carryforwards of
approximately $231,000 upon the Companys emergence from bankruptcy on the Effective Date. There
can be no assurance that the Companys position with respect to the separate company attribute
reduction approach discussed above will be sustained upon audit by the Internal Revenue Service.
F-26
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
During Fiscal 2009, in addition to the tax charge of approximately $3,600 discussed above, the
Company also corrected certain of its assets recorded upon its emergence from bankruptcy on
February 4, 2003 in accordance with fresh start accounting which resulted in the following
adjustments to the Companys Consolidated Balance Sheet as of January 2, 2010 and Consolidated Statement of Operations for Fiscal 2009:
An increase in Total assets of $17,033, comprised of the following:
|
|
|
an increase of $84,354 in the carrying amount of Licenses, trademarks and other intangible assets, net |
|
|
|
|
a reduction in non-current deferred income tax assets of $67,321 |
An increase in total liabilities of $25,980, comprised of the following:
|
|
|
an increase in the liability for non-current Deferred income taxes and other
non-current tax liabilities of $15,273 |
|
|
|
|
an increase in Accrued income taxes payable of $10,707 |
A reduction in Retained earnings of $1,200 related to the correction of the adjustment to
initially adopt FASB ASC 740-10 (Uncertainty in Income Taxes, FIN 48)
A reduction in Net income of $4,147, comprised of:
|
|
|
an increase of $724 in Amortization of intangible assets (net of tax benefits of approximately $371) |
|
|
|
|
a $3,423 charge to Loss from discontinued operations, net of taxes |
The Company determined that the errors were not material to any previously issued financial
statements.
The use of the NOL carryforwards is also subject to an annual limitation under Section 382 of
the Internal Revenue Code. Under this provision the Company can use its NOL carryforwards to reduce
U.S. taxable income, if any, by approximately $23,400 per year. Any portion of the annual
limitation not utilized in any given year may be carried forward and increase the annual limitation
in the subsequent year. Additionally, certain losses and expenses generated during the five-year
period after the Effective Date may be subject to the Section 382 limitation.
At January 2, 2010, the Company had U.S. NOL carryforwards of approximately $136,000
(including approximately $101,000 that is subject to Section 382, as described above) expiring in
periods beginning in 2020 through 2027. The benefit of approximately $55,500 related to share
based compensation in excess of that recognized for financial reporting purposes will be recorded
as a direct addition to paid-in-capital when the utilization results in a reduction of current
taxes payable. NOL carryforwards are also subject to the Section 382 limitation in many state
jurisdictions. The Company had state NOL carryforwards of approximately $150,000 expiring in
periods beginning in 2009 through 2028. The Company had foreign NOL carryforwards of approximately
$39,000 of which $3,600 expire between the years 2010 and 2018 and $35,400 have an indefinite life.
At January 2, 2010, the Company had alternative minimum tax credit carryforwards of $1,700
which have an indefinite carryforward period. The Company had foreign tax credit carryforwards of
$210, of which $5 expires in 2012 and $205 expires in 2013. The Company also had state tax credit
carryforwards of $2,700 of which $750 expire beginning in 2010 through 2013, $1,600 expires
beginning in 2010 through 2027, and $350 have an indefinite life.
Permanent Reinvestment of Foreign Earnings
As of January 2, 2010, the total amount of undistributed earnings of foreign subsidiaries was
approximately $304,000. The Companys intention is to permanently reinvest these earnings and
thereby indefinitely postpone their remittance. Accordingly, no domestic deferred income tax
provision has been made for foreign withholding taxes or U.S. income taxes which may become payable
if undistributed earnings were paid as dividends to the Company. Determination of the amount of
unrecognized U.S. income tax liability with respect to such earnings is not practical.
Accounting for Uncertainty in Income Taxes
At January 2, 2010 the Company had gross tax-effected unrecognized tax benefits of $88,171,
all of which if recognized, would impact the effective tax rate.
F-27
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Tax Years Subject to Examination The Company and its subsidiaries conduct business globally,
and as a result file income tax returns in the United States, including various U.S. state and
local jurisdictions, as well as in foreign jurisdictions. The Companys income tax returns are
routinely examined by the U.S. and international tax authorities including key jurisdictions such
as Canada, China, the Netherlands, Italy, Hong Kong and Korea. The tax years under examination vary
by jurisdiction. The Company regularly assesses the potential outcomes of both ongoing and future
examinations for the current or prior years to ensure the Companys provision for income taxes is
sufficient. The Company recognizes liabilities based on estimates of whether additional taxes will
be due and believes its reserves are adequate in relation to the potential assessments.
Classification of Interest and Penalties The Company recognizes penalties and interest
related to uncertain tax positions in income tax expense. As of January 2, 2010 and January 3,
2009, total accrued interest and penalties were approximately $7,000 and $4,500 respectively.
During the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007, the Company
recognized interest and penalties for uncertain tax positions of approximately $2,500, $3,000 and
$1,000, respectively.
Tabular Reconciliation of Unrecognized Tax Benefit The following is a tabular reconciliation
of the total amount of unrecognized tax benefits at the beginning and end of Fiscal 2009, Fiscal
2008 and Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
$ |
85,968 |
|
|
$ |
81,705 |
|
|
$ |
72,564 |
|
Increases: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Positions Taken Current Year |
|
|
8,210 |
|
|
|
9,037 |
|
|
|
5,301 |
|
Tax Positions Taken Prior Year |
|
|
6,495 |
|
|
|
10,575 |
|
|
|
6,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decreases: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Positions Taken Prior Year |
|
|
(10,578 |
) |
|
|
(13,211 |
) |
|
|
(1,632 |
) |
Settlement with Tax Authorities |
|
|
(1,909 |
) |
|
|
(2,138 |
) |
|
|
(1,302 |
) |
Lapse of Statute of Limitations |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of fiscal year |
|
$ |
88,171 |
|
|
$ |
85,968 |
|
|
$ |
81,705 |
|
|
|
|
|
|
|
|
|
|
|
Anticipated Changes within Twelve Months It is difficult to predict the final timing
and resolution of any particular uncertain tax position. Based upon the Companys assessment of
many factors, including past experience and complex judgments about future events, the Company does
not currently anticipate significant changes in its uncertain tax positions over the next twelve
months.
Note 7Employee Retirement Plans
The Company has a defined benefit pension plan covering certain full-time non-union domestic
employees and certain domestic employees covered by a collective bargaining agreement who had
completed service prior to January 1, 2003 (the Pension Plan). The Company also sponsors defined
benefit plans for certain of its United Kingdom and other European employees (the Foreign Plans).
The Foreign Plans were not considered to be material for any period presented. These pension plans
are noncontributory and benefits are based upon years of service. The Company also has defined
benefit health care and life insurance plans that provide post-retirement benefits to retired
domestic employees (the Postretirement Plans). The Postretirement Plans are, in most cases,
contributory with retiree contributions adjusted annually.
The Company is required to recognize in its Consolidated Balance Sheets the funded status of a
benefit plan. For each of the pension plans, this is measured as the difference between plan
assets at fair value and the projected benefit obligation. For the Postretirement Plans (primarily
retiree health care plans), this is equal to the accumulated benefit obligation since these plans
are unfunded.
Effective January 1, 2003, the Pension Plan was amended such that participants in the Pension
Plan will not earn any additional pension benefits after December 31, 2002. The accumulated
benefit obligation for the Pension Plan was equal to the projected benefit obligation at December
31, 2002 due to the curtailment of plan benefits at that date.
F-28
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Company recognizes as a component of other comprehensive income, net of tax, the gains or
losses and prior service costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost. The Company uses a method of accounting for its defined
benefit plans that accelerates the recognition of gains or losses. Gains or losses represent
changes in the amount of either the projected benefit obligations or plan assets resulting from
changes in assumptions, actuarial gains/losses and actual investment returns.
The following tables include the Pension Plan for Fiscal 2009 and Fiscal 2008. The Foreign
Plans were not considered to be material for any period presented.
A reconciliation of the balance of Pension Plan benefit obligations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
|
|
January 2, |
|
|
January 3, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Change in projected benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
period |
|
$ |
127,617 |
|
|
$ |
141,870 |
|
|
$ |
3,118 |
|
|
$ |
4,769 |
|
Service cost |
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
71 |
|
Interest cost |
|
|
9,988 |
|
|
|
9,498 |
|
|
|
290 |
|
|
|
267 |
|
Actuarial loss (gain) (a) |
|
|
28,733 |
|
|
|
(13,227 |
) |
|
|
1,441 |
|
|
|
(1,635 |
) |
Benefits paid |
|
|
(11,005 |
) |
|
|
(10,524 |
) |
|
|
(353 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period |
|
$ |
155,333 |
|
|
$ |
127,617 |
|
|
$ |
4,574 |
|
|
$ |
3,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Pension Plans actuarial loss in Fiscal 2009 is due primarily to the loss related to
the change in the discount rate ($26,800) and other actuarial losses ($1,900) during Fiscal
2009. The Pension Plans actuarial gain in Fiscal 2008 is due primarily to the gain related
to the change in the discount rate ($16,200), partially offset by other actuarial losses
($3,000) during Fiscal 2008. The Postretirement Plans actuarial gain in Fiscal 2009 is
primarily related to the change in the discount rate ($800) and other actuarial gains ($641).
The Postretirement Plans actuarial gain in Fiscal 2008 is primarily related to the change in
the discount rate ($400) and other actuarial gains ($1,235). |
A reconciliation of the change in the fair value of Pension Plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
|
|
January 2, |
|
|
January 3, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Fair value of plan assets at beginning of period |
|
$ |
100,587 |
|
|
$ |
138,147 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
18,226 |
|
|
|
(35,169 |
) |
|
|
|
|
|
|
|
|
Employers contributions |
|
|
10,526 |
|
|
|
8,133 |
|
|
|
353 |
|
|
|
354 |
|
Benefits paid |
|
|
(11,005 |
) |
|
|
(10,524 |
) |
|
|
(353 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period |
|
$ |
118,334 |
|
|
$ |
100,587 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status |
|
$ |
(36,999 |
) |
|
$ |
(27,030 |
) |
|
$ |
(4,574 |
) |
|
$ |
(3,118 |
) |
Unrecognized net actuarial (gain) |
|
|
|
|
|
|
|
|
|
|
(263 |
) |
|
|
(1,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized / Retirement obligations
(a) |
|
$ |
(36,999 |
) |
|
$ |
(27,030 |
) |
|
$ |
(4,837 |
) |
|
$ |
(4,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The net amount recognized for the Pension Plan as of January 2, 2010 is included in
the Companys Consolidated Balance Sheets in accrued pension obligations, within Other
long-term liabilities. |
F-29
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The components of net periodic (benefit) cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
|
Postretirement Plans |
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
78 |
|
|
$ |
71 |
|
|
$ |
166 |
|
Interest cost |
|
|
9,987 |
|
|
|
9,498 |
|
|
|
8,997 |
|
|
|
290 |
|
|
|
267 |
|
|
|
409 |
|
Expected return on plan assets |
|
|
(7,867 |
) |
|
|
(10,942 |
) |
|
|
(10,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on plan assets in
excess of expected return |
|
|
(9,164 |
) |
|
|
46,111 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss (a) |
|
|
28,733 |
|
|
|
(13,227 |
) |
|
|
(8,345 |
) |
|
|
(166 |
) |
|
|
(166 |
) |
|
|
|
|
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
28 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (benefit) cost (b) |
|
$ |
21,689 |
|
|
$ |
31,440 |
|
|
$ |
(9,025 |
) |
|
$ |
204 |
|
|
$ |
200 |
|
|
$ |
687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Pension Plans actuarial loss in Fiscal 2009 is due primarily to the loss related to
the change in the discount rate ($26,800) and other actuarial losses ($1,900) during Fiscal
2009. The Pension Plans actuarial gain in Fiscal 2008 is due primarily to the gain
related to the change in the discount rate ($16,200), partially offset by other actuarial
losses ($3,000) during Fiscal 2008. The Pension Plans net actuarial gain in Fiscal 2007
is primarily related to the change in the discount rate ($11,800), partially offset by
other actuarial losses ($3,500, including a $500 loss on plan assets). |
|
(b) |
|
The Pension Plans net benefit (income) cost does not include (income) costs related to
certain foreign defined benefit plans of ($816), $204 and $187 in Fiscal 2009, Fiscal 2008
and Fiscal 2007, respectively. |
The following table summarizes the amounts recorded in accumulated other comprehensive
income that are expected to be recognized as a component of net benefit (income) cost in fiscal
2010:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Postretirement |
|
|
|
Plans |
|
|
Plans |
|
Initial net asset (obligation) |
|
$ |
|
|
|
$ |
|
|
Prior service (credit) cost |
|
|
|
|
|
|
(166 |
) |
Net loss |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
Total estimated amortization from
Accumulated
Other Comprehensive Income for fiscal
2010 |
|
$ |
|
|
|
$ |
(103 |
) |
|
|
|
|
|
|
|
The Companys investment strategy for the Pension Plans assets is to invest in a
diversified portfolio of assets managed by various fund and money managers. No individual manager
accounts for more than 16.1% of overall Pension Plan assets at January 2, 2010. The target
allocations for Pension Plan assets are 50% equity securities, 30% fixed income securities and 20%
to all other types of investments. Equity securities primarily include investments in large-cap and
mid-cap companies primarily located in the United States. Fixed income securities include corporate
bonds of companies from diversified industries, mortgage backed securities, U.S. government bonds
and U.S. Treasuries. Other types of investments include investments in limited partnerships that
follow several different strategies. The Companys goal is to provide for steady growth in the
Pension Plans assets, exceeding the Companys expected return on plan assets of 8%. Individual
fund managers are evaluated against a relevant market index and against other managers with similar
investment goals. Underperforming investments are reallocated to other investments and fund
managers. The portfolio is balanced annually to maintain the Companys targeted allocation
percentages by type of investment. The targeted allocation percentages are guidelines; actual
investments may differ from the targeted allocations.
F-30
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Investments in equity and fixed income securities are stated at fair value based upon quoted
market prices, if available. The Pension Plan also invests in limited partnerships, the amounts
for which have no quoted market price and represent estimated fair value. The Pension Plans
investments in limited partnerships (approximately $12,925 at January 2, 2010 and $14,334 at
January 3, 2009) are valued based on estimated fair value by the management of the limited
partnerships as reported to the Trustee in the absence of readily ascertainable market values.
These estimated fair values are based upon the underlying investments of the limited partnerships.
Because of the inherent uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the securities existed, and the
differences could be material. The limited partnerships utilize a fund of funds approach
resulting in diversified multi-strategy, multi-manager investments. The limited partnerships
invest capital in a diversified group of investment entities, generally hedge funds, private
investment companies, portfolio funds and pooled investment vehicles which engage in a variety of
investment strategies, managed by investment managers. Fair value is determined by the
administrators of each underlying investment, in consultation with the investment managers. The
Pension Plan records its proportionate share of the partnerships fair value as recorded in the
partnerships financial statements. The limited partnerships allocate gains, losses and expenses
to the partners based on the ownership percentage as described in the partnership agreements.
Certain limited partnerships place limitation on withdrawals, for example by allowing only
semi-annual redemptions, as described in
the partnership agreements. Investments in common collective trusts are valued at the net
asset value, as determined by the trust manager, of the shares held by the Pension Plan at year
end, which is based on the fair value of the underlying assets.
The fair values of the Companys Pension Plan assets at January 2, 2010, by asset category,
are as follows (see Note 16 to Notes to Consolidated Financial Statements for a description of the
various levels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Asset Category |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(in thousands) |
|
Cash and cash equivalents |
|
$ |
11,083 |
|
|
$ |
11,083 |
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital equipment |
|
|
12,957 |
|
|
|
12,957 |
|
|
|
|
|
|
|
|
|
Consumer goods |
|
|
9,645 |
|
|
|
9,645 |
|
|
|
|
|
|
|
|
|
Energy |
|
|
8,962 |
|
|
|
8,962 |
|
|
|
|
|
|
|
|
|
Finance |
|
|
6,695 |
|
|
|
6,695 |
|
|
|
|
|
|
|
|
|
Gold Mines |
|
|
1,223 |
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
Materials |
|
|
2,171 |
|
|
|
2,171 |
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
7,157 |
|
|
|
7,157 |
|
|
|
|
|
|
|
|
|
Services |
|
|
9,056 |
|
|
|
9,056 |
|
|
|
|
|
|
|
|
|
Miscellaneous |
|
|
7,866 |
|
|
|
7,866 |
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government bonds |
|
|
12,697 |
|
|
|
12,697 |
|
|
|
|
|
|
|
|
|
Corporate bonds (a) |
|
|
12,103 |
|
|
|
|
|
|
$ |
12,103 |
|
|
|
|
|
Mortgage-backed securities |
|
|
5,930 |
|
|
|
|
|
|
|
5,930 |
|
|
|
|
|
Other types of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships (b) |
|
|
12,925 |
|
|
|
|
|
|
|
|
|
|
$ |
12,925 |
|
Other |
|
|
591 |
|
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121,061 |
|
|
$ |
89,512 |
|
|
$ |
18,624 |
|
|
$ |
12,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
this category represents investment grade bonds of U.S. issuers from diverse
industries. |
|
(b) |
|
this category represents limited partnerships that invest capital in a
diversified group of investment entities, generally hedge funds, private investment
companies, portfolio funds and pooled investment vehicles which engage in a variety of
investment strategies, managed by investment managers. |
The difference between the fair values of Plan assets of $121,061 and Plan net assets of
$118,334 is due to receivables and payables within the Plans investment funds.
F-31
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
A reconciliation of the balance of fair value measurements for Pension Plan assets using
significant unobservable inputs (Level 3) from January 3, 2009 to January 2, 2010, is as follows:
|
|
|
|
|
|
|
Limited |
|
|
|
Partnerships |
|
|
|
(in thousands) |
|
|
|
|
|
|
Beginning balance January 3, 2009 |
|
$ |
14,334 |
|
Actual return on Plan assets: |
|
|
|
|
Relating to assets still held at the reporting date |
|
|
1,579 |
|
Purchases, sales and settlements |
|
|
(2,988 |
) |
|
|
|
|
Ending balance January 2, 2010 |
|
$ |
12,925 |
|
|
|
|
|
The Company made contributions totaling $10,526, during Fiscal 2009 and $8,133 during Fiscal
2008. The Company expects to contribute approximately $6,300 to the Pension Plan in fiscal 2010.
The amount of cash contributions the Company is required to make to the Pension Plan could
increase or decrease depending on the performance of the Pension Plans assets and other factors
which are not in the control of the Company. The Companys expected cash contributions to the
Postretirement Plans are equal to the expected benefit payments as shown in the table below due to
the nature of the Postretirement Plans.
Future benefit payments are expected to be:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Postretirement |
|
|
|
Plans |
|
|
Plans |
|
2010 |
|
$ |
10,900 |
|
|
$ |
390 |
|
2011 |
|
|
10,900 |
|
|
|
400 |
|
2012 |
|
|
11,000 |
|
|
|
370 |
|
2013 |
|
|
11,000 |
|
|
|
360 |
|
2014 |
|
|
11,200 |
|
|
|
340 |
|
2015-2019 |
|
|
56,300 |
|
|
|
1,720 |
|
The weighted-average assumptions used in the actuarial calculations for the Pension Plans and
Postretirement Plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
Discount rate used for determining
projected benefit obligation |
|
|
6.10 |
% |
|
|
8.00 |
% |
|
|
6.75 |
% |
Discount rate used for determining
net benefit (income) cost |
|
|
8.00 |
% |
|
|
6.75 |
% |
|
|
6.00 |
% |
Long-term rate of return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
Average rate of compensation increase
for determining projected benefit
obligation |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Average rate of compensation increase
for determining net benefit (income) cost |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
The Companys discount rate used for determining projected benefit obligation for both
the Pension Plan and Postretirement Plans was 6.10% for Fiscal 2009, 8.0% for Fiscal 2008 and
6.75% for Fiscal 2007. The Company evaluates the discount rate each year at the valuation date and
adjusts the discount rate as necessary. The discount rate is selected by matching projected
benefit payments to a synthetic portfolio of high quality (rated Aa or higher by Moodys or
Standard & Poors Investor Services) corporate bond yields and the duration of obligations for
participants in the Pension Plan. The projected benefit payments are matched to spot interest
rates over the expected payment period and a single discount rate is developed. The Company
believes that a 2009 discount rate of 6.10% for the Pension Plan properly reflects the
characteristics of the Companys plan, the long-term nature of its pension benefit obligations and
current market conditions. Other companies pension plans may have different characteristics than
the Companys plans and as a result, their discount rates may be higher or lower than the rate used
by the Company. Changes in the discount rate used to determine pension benefit obligations are
reflected in pension expense in the fourth quarter of the Companys fiscal year in accordance with
the Companys use of the Accelerated Method of recognizing actuarial gains and losses. The use of
the Accelerated Method results in increased volatility in the Companys reported pension expense
compared to other companies. The Companys expected rate of return on plan assets in the table
above only applies to Pension Plan assets and reflects the Companys expectation of the long-term
rate of return on the Pension Plans assets. The Company evaluates its discount rate and long-term
rate of return assumptions annually.
F-32
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The Companys estimated long-term rate of return on Pension Plan assets (used to determine
estimated pension expense for interim periods) is based upon the actual net returns realized by the
Pension Plans assets for the last three years (approximately 8.0% net of Pension Plan expenses)
and the return expected to be earned in the future based upon the historical rates of return earned
by the S&P 500 Index (65%) and the Lehman Aggregate Medium Duration Corporate Bond Index (35%),
weighted to reflect the targeted mix of Pension Plan assets. The rate of compensation increase is
not applicable for the Pension Plan because Pension Plan participants benefits have been frozen.
The Companys defined benefit plans measurement date is its fiscal year-end.
The fair value of the Pension Plans assets, as noted above, was approximately $118,334 at
January 2, 2010, compared to approximately $100,587 at January 3, 2009. The fair value of the
Pension Plans assets reflects a $10,200 increase from their assumed value of approximately
$108,100, net of benefits paid, at January 2, 2010, based on an assumed rate of return of 8% per
annum. In addition, the Company decreased the discount rate used to determine the benefit
obligation from 8.0% in Fiscal 2008 to 6.1% in Fiscal 2009, which increased the benefit obligation.
The Company recorded pension expense in the fourth quarter of Fiscal 2009 of approximately $18,276
based upon the increase in the benefit obligation, which more than offset the increase in the fair
value of the Pension Plan assets. The Companys pension income/expense is also affected by Pension
Plan amendments, Pension Plan benefit experience compared to assumed experience and other factors.
For measurement purposes, the weighted average annual assumed rate of increase in the per
capita cost of covered benefits (health care trend rate) related to Postretirement Plans is as
follows:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed next year: |
|
|
|
|
|
|
|
|
Pre-65 |
|
|
7.8 |
% |
|
|
8.0 |
% |
Post-65 |
|
|
7.8 |
% |
|
|
7.0 |
% |
Rate at which the trend rate is assumed to
decline
(the ultimate trend rate) |
|
|
4.5 |
% |
|
|
4.5 |
% |
Year trend rate reaches the ultimate rate |
|
|
2027 |
|
|
|
2027 |
|
A one-percentage point change in assumed health care cost trend rates would have the
following effects:
|
|
|
|
|
|
|
|
|
|
|
One |
|
|
One |
|
|
|
Percentage |
|
|
Percentage |
|
|
|
Point |
|
|
Point |
|
|
|
Increase |
|
|
Decrease |
|
Effect on total of service and interest cost
components |
|
$ |
39 |
|
|
$ |
(33 |
) |
Effect on health care component of the accumulated
post-retirement benefit obligation |
|
$ |
502 |
|
|
$ |
(416 |
) |
The Company also sponsors a defined contribution plan for substantially all of its domestic
employees. Employees can contribute to the plan, on a pre-tax basis, a percentage of their
qualifying compensation up to the legal limits allowed. The Company makes matching contributions to
the defined contribution plan. The maximum Company contribution on behalf of any individual
employee was $12.25 (including $4.9 of maximum profit sharing contribution), $11.5 (including $4.6
of maximum profit sharing contribution) and $11.25 (including $4.5 of maximum profit sharing
contribution) for 2009, 2008 and 2007, respectively. Employees fully vest in the Company
contribution once they have attained four years. Company contributions to the defined contribution
plan, in the aggregate, were $4,121 (including $1,875 of profit sharing contribution for Fiscal
2008 made in Fiscal 2009), $4,106 (including $1,822 of profit sharing contribution for Fiscal 2007
made in Fiscal 2008), $4,069 (including $1,943 of profit sharing contribution for Fiscal 2006 made
in Fiscal 2007) for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
F-33
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
On April 25, 2005, the Company adopted a deferred compensation plan (the Deferred
Compensation Plan) for the benefit of certain employees. The Deferred Compensation Plan allows
participating employees to make pre-tax deferrals of up to 50% of their annual base salary and up
to 100% of their incentive pay. A bookkeeping account is established for each participant, and
each account is increased or decreased by the deemed positive or negative return based on
hypothetical investment alternatives approved by the Company and selected by the participating
employee. In the case of a change of control, the Company expects to establish a rabbi trust in
connection with the Deferred Compensation Plan and will make contributions to the rabbi trust equal
to the Deferred Compensation Plans aggregate benefit obligations. As of January 2, 2010 and
January 3, 2009, the Company had a liability with respect to the Deferred Compensation Plan of
$2,838 and $1,563, respectively, for employee contributions and investment activity to date, which
is recorded in other long-term liabilities.
On January 31, 2007, the Company adopted a non-employee directors deferred compensation plan
(the Directors Deferred Compensation Plan) for the benefit of non-employee directors. The
Directors Deferred Compensation Plan allows participating directors to make pre-tax deferrals of
their annual retainer and committee meeting fees, whether payable in the form of cash or
unrestricted shares of the Companys common stock. A bookkeeping account is established for each
participant and each account is increased or decreased by the deemed positive or negative return
based on hypothetical investment alternatives approved by the Company and selected by the
participating non-employee director. As of January 2, 2010 and January 3, 2009, the Company had a
liability with respect to the Directors Deferred Compensation Plan of $703 and $400, respectively,
for director contributions and investment activity to date, which is recorded in other long-term
liabilities.
Note 8Inventories
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
251,540 |
|
|
$ |
322,095 |
|
Raw materials |
|
|
1,822 |
|
|
|
4,202 |
|
|
|
|
|
|
|
|
|
|
$ |
253,362 |
|
|
$ |
326,297 |
|
|
|
|
|
|
|
|
See Note 17 of Notes to Consolidated Financial Statements for information related to
derivative financial instruments used by the Company to mitigate foreign currency risk related to
purchases of inventory.
Note 9Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
440 |
|
|
$ |
493 |
|
Building, building improvements and leasehold
improvements |
|
|
89,899 |
|
|
|
55,992 |
|
Furniture and fixtures |
|
|
70,147 |
|
|
|
61,369 |
|
Machinery and equipment |
|
|
14,332 |
|
|
|
26,680 |
|
Computer hardware and software |
|
|
113,305 |
|
|
|
101,193 |
|
Construction in progress |
|
|
6,339 |
|
|
|
7,027 |
|
|
|
|
|
|
|
|
|
|
$ |
294,462 |
|
|
$ |
252,754 |
|
Less: Accumulated depreciation and
amortization |
|
|
(173,971 |
) |
|
|
(143,191 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
120,491 |
|
|
$ |
109,563 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant and equipment was
$35,811, $36,708 and $52,165 for Fiscal 2009, Fiscal 2008, and Fiscal 2007, respectively.
F-34
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 10Intangible Assets and Goodwill
The following tables set forth intangible assets at January 2, 2010 and January 3, 2009 and
the activity in the intangible asset accounts during Fiscal 2009 and Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses for a term
(Company as licensee) |
|
$ |
330,389 |
|
|
$ |
46,268 |
|
|
$ |
284,121 |
|
|
$ |
281,800 |
|
|
$ |
36,894 |
|
|
$ |
244,906 |
|
Other |
|
|
20,427 |
|
|
|
8,387 |
|
|
|
12,040 |
|
|
|
16,204 |
|
|
|
6,729 |
|
|
|
9,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,816 |
|
|
|
54,655 |
|
|
|
296,161 |
|
|
|
298,004 |
|
|
|
43,623 |
|
|
|
254,381 |
|
Indefinite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
56,719 |
|
|
|
|
|
|
|
56,719 |
|
|
|
19,366 |
|
|
|
|
|
|
|
19,366 |
|
Licenses in perpetuity |
|
|
23,951 |
|
|
|
|
|
|
|
23,951 |
|
|
|
8,909 |
|
|
|
|
|
|
|
8,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,670 |
|
|
|
|
|
|
|
80,670 |
|
|
|
28,275 |
|
|
|
|
|
|
|
28,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets |
|
$ |
431,486 |
|
|
$ |
54,655 |
|
|
$ |
376,831 |
|
|
$ |
326,279 |
|
|
$ |
43,623 |
|
|
$ |
282,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses |
|
|
Finite-lived |
|
|
|
|
|
|
|
|
|
|
|
|
|
in |
|
|
Intangible |
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
Perpetuity |
|
|
Assets |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007 |
|
$ |
19,366 |
|
|
$ |
8,909 |
|
|
$ |
242,109 |
|
|
$ |
12,443 |
|
|
$ |
282,827 |
|
Amortization expense |
|
|
|
|
|
|
|
|
|
|
(7,369 |
) |
|
|
(2,260 |
) |
|
|
(9,629 |
) |
Acquisition of CK licenses (a) |
|
|
|
|
|
|
|
|
|
|
24,700 |
|
|
|
|
|
|
|
24,700 |
|
Renewal of Chaps license (b) |
|
|
|
|
|
|
|
|
|
|
2,027 |
|
|
|
|
|
|
|
2,027 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
(16,561 |
) |
|
|
(708 |
) |
|
|
(17,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2009 |
|
|
19,366 |
|
|
|
8,909 |
|
|
|
244,906 |
|
|
|
9,475 |
|
|
|
282,656 |
|
Amortization expense |
|
|
|
|
|
|
|
|
|
|
(9,374 |
) |
|
|
(1,658 |
) |
|
|
(11,032 |
) |
Recapture of tax basis (c) |
|
|
37,353 |
|
|
|
15,042 |
|
|
|
33,054 |
|
|
|
|
|
|
|
85,449 |
|
Write off of Calvin Klein
Golf license (d) |
|
|
|
|
|
|
|
|
|
|
(792 |
) |
|
|
|
|
|
|
(792 |
) |
Acquisitions (e) |
|
|
|
|
|
|
|
|
|
|
846 |
|
|
|
3,592 |
|
|
|
4,438 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
15,481 |
|
|
|
631 |
|
|
|
16,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010 |
|
$ |
56,719 |
|
|
$ |
23,951 |
|
|
$ |
284,121 |
|
|
$ |
12,040 |
|
|
$ |
376,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In connection with the purchase of the 2008 CK Licenses, the Company recorded intangible
assets of $24,700 during Fiscal 2008 related to licenses for a term. See Note 2 of Notes to
Consolidated Financial Statements. The Company expects to amortize the 2008 CK Licenses over a
weighted average period of approximately 37 years. |
|
(b) |
|
During Fiscal 2008, the Company paid $2,027 to renew its Chaps license through December 31,
2013. The Company expects to amortize the rights associated with the Chaps renewal payment
over a period of approximately five years. |
|
(c) |
|
Relates to the correction of errors in prior period deferred tax balances associated with the
recapture of cancellation of indebtedness income which had been deferred in connection with
the Companys bankruptcy proceedings in 2003. See Note 6 to Notes to Consolidated Financial
Statements. |
|
(d) |
|
Represents amount reclassified to assets of discontinued operations and subsequently written
off to Income (loss) from discontinued operations, net of taxes. See Note 3 to Notes to
Consolidated Financial Statements. |
|
(e) |
|
Relates to the acquisition of eight retail stores in Brazil during the fourth quarter of
Fiscal 2009, including an indefinite lived intangible asset of $3,592 and
an intangible asset arising from favorability of acquired leases of $846, with a weighted
average amortization period of 2.8 years. See Note 2 to Notes to Consolidated Financial Statements. |
The following table summarizes the Companys estimated amortization expense for
intangible assets for the next five years:
|
|
|
|
|
2010 |
|
$ |
10,245 |
|
2011 |
|
|
9,608 |
|
2012 |
|
|
9,421 |
|
2013 |
|
|
9,323 |
|
2014 |
|
|
8,172 |
|
F-35
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The following table summarizes the changes in the carrying amount of goodwill for Fiscal 2009
and Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sportswear |
|
|
Intimate |
|
|
Swimwear |
|
|
|
|
|
|
Group |
|
|
Apparel Group |
|
|
Group |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at December 29, 2007 |
|
|
105,906 |
|
|
|
400 |
|
|
|
642 |
|
|
|
106,948 |
|
Adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
(6,620 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(6,644 |
) |
Other (a) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at January 3, 2009 |
|
$ |
99,118 |
|
|
$ |
376 |
|
|
$ |
642 |
|
|
$ |
100,136 |
|
Adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
4,889 |
|
|
|
66 |
|
|
|
|
|
|
|
4,955 |
|
Other (b) |
|
|
4,626 |
|
|
|
1,004 |
|
|
|
|
|
|
|
5,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at January 2, 2010 |
|
$ |
108,633 |
|
|
$ |
1,446 |
|
|
$ |
642 |
|
|
$ |
110,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily related to the reduction of certain reserves in the Companys CKJEA businesses that
were in existence on the date of acquisition of the CKJEA business. |
|
(b) |
|
Relates to (i) the acquisition of businesses in Chile, and Peru ($698 in Intimate Apparel)
and Brazil ($1,083 in Sportswear and $306 in Intimate Apparel), allocated based upon the
relative operating income generated from sales of Calvin Klein Jeans and Calvin Klein
Underwear by the eight acquired retail stores during the fourth quarter of Fiscal 2009 and
(ii) an adjustment of $3,543 related to the recapture of certain reserves in the Companys
CKJEA businesses that were in existence on the date of acquisition of the CKJEA business. None
of the goodwill is deductible for income tax purposes. (see Notes 2 and 6 of Notes to
Consolidated Financial Statements). |
During the fourth quarter of Fiscal 2009, the Company conducted its annual test to
determine if there was an impairment in the carrying value of its goodwill or intangible assets,
consisting primarily of licenses and trademarks for its Calvin Klein products. See Note 1 of Notes
to Consolidated Financial Statements Significant Accounting Policies- Goodwill and Other
Intangible Assets. The Company did not identify any reporting units that failed or are at risk of
failing the first step of the goodwill impairment test (comparing fair value to carrying amount) or
impairment of any intangible assets of continuing operations for any period presented.
Note 11Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income as of January 2, 2010 and January 3,
2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
Foreign currency translation adjustments (a) |
|
$ |
48,558 |
|
|
$ |
13,198 |
|
Actuarial (losses), net related to post
retirement medical plans, net of $607 tax |
|
|
(1,058 |
) |
|
|
(29 |
) |
(Loss) on cash flow hedges, net of $387 tax |
|
|
(1,027 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
46,473 |
|
|
$ |
12,841 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The foreign currency translation adjustments reflect the change in the U.S. dollar
relative to functional currencies where the Company conducts certain of its operations.
The increase of $35,360 in the gain related to foreign currency translation adjustments for
Fiscal 2009 compared to Fiscal 2008 reflects the weakening of the U.S. dollar relative to
foreign currencies, coupled with the fact that approximately 60% of the Companys assets
are based outside of the U.S. |
F-36
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 12Debt
Debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CKJEA notes payable and other |
|
$ |
47,684 |
|
|
$ |
67,893 |
|
Revolving credit facilities |
|
|
189 |
|
|
|
11,995 |
|
Current portion of 8 7/8% Senior Notes |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,873 |
|
|
|
79,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 7/8% Senior Notes due 2013 |
|
|
110,890 |
|
|
|
160,890 |
|
Debt premium on 2003 and 2004 swaps |
|
|
1,945 |
|
|
|
|
|
Unrealized gain on swap agreements |
|
|
|
|
|
|
2,904 |
|
|
|
|
|
|
|
|
|
|
|
112,835 |
|
|
|
163,794 |
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
210,708 |
|
|
$ |
243,682 |
|
|
|
|
|
|
|
|
Financing Agreements
Senior Notes
On June 12, 2003, Warnaco completed the sale of $210,000 aggregate principal amount at par
value of Senior Notes, which notes mature on June 15, 2013 and bear interest at 87/8% per annum
payable semi-annually on December 15 and June 15 of each year. No principal payments prior to the
maturity date are required. On June 2, 2006, the Company purchased $5,000 aggregate principal
amount of the outstanding $210,000 Senior Notes for total consideration of $5,200 in the open
market. During March 2008, the Company purchased $44,110 aggregate principal amount of the
outstanding 87/8% Senior Notes due 2013 for a total consideration of $46,185 in the open market. In
connection with the purchase, the Company recognized a loss of approximately $3,160, which included
the write-off of approximately $1,085 of deferred financing costs. The loss on the repurchase is
included in the other loss (income) line item in the Companys Consolidated Statement of
Operations. As of January 2, 2010, total maturity of long-term debt was $110,890 due on June 15,
2013.
On January 5, 2010, the Company redeemed from bondholders $50,000 aggregate principal amount
of the outstanding Senior Notes for a total consideration of $51,479. In connection with the
redemption, the Company will recognize a loss, in the other loss (income) line item in the
Companys Consolidated Statement of Operations for the first fiscal quarter of 2010, of
approximately $1,692 which includes $1,479 of premium expense, the write-off of approximately $817
of deferred financing costs and $604 of unamortized gain from the previously terminated 2003 Swap
Agreement and 2004 Swap Agreement (both defined below).
The Senior Notes are unconditionally guaranteed, jointly and severally, by Warnaco Group and
substantially all of Warnacos domestic subsidiaries (all of which are 100% owned, either directly
or indirectly, by Warnaco). The Senior Notes are effectively subordinate in right of payment to
existing and future secured debt (including the New Credit Agreements) and to the obligations
(including trade accounts payable) of the subsidiaries that are not guarantors of the Senior Notes.
The guarantees of each guarantor are effectively subordinate to that guarantors existing and
future secured debt (including guarantees of the New Credit Agreements) to the extent of the value
of the assets securing that debt. There are no restrictions that prevent the guarantor subsidiaries
from transferring funds or paying dividends to the Company. The indenture pursuant to which the
Senior Notes were issued contains covenants which, among other things, restrict the Companys
ability to incur additional debt, pay dividends and make restricted payments, create or permit
certain liens, use the proceeds of sales of assets and subsidiaries stock, create or permit
restrictions on the ability of certain of Warnacos subsidiaries to pay dividends or make other
distributions to Warnaco or to Warnaco Group, enter into transactions with affiliates, engage in
certain business activities, engage in sale and leaseback transactions and consolidate or merge or
sell all or substantially all of its assets. Redemption of the Senior Notes prior to their maturity
is subject to premiums as set forth in the indenture. In connection with the offering of the Senior
Notes, the Company entered into a registration rights agreement with the initial purchasers of the
Senior Notes, which, among other things, required Warnaco and the guarantors to complete a
registration and exchange of the Senior Notes. In accordance with the registration rights
agreement, the Company completed the registration and exchange of the Senior Notes in the first
quarter of Fiscal 2004.
F-37
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Interest Rate Swap Agreements
The Company entered into interest rate swap agreements on September 18, 2003 (the 2003 Swap
Agreement) and November 5, 2004 (the 2004 Swap Agreement) with respect to the Senior Notes for a
total notional amount of $75 million. In June 2009, the 2004 Swap Agreement was called by the
issuer and the Company received a debt premium of $740. On July 15, 2009, the 2003 Swap Agreement
was called by the issuer and the Company received a debt premium of $1,479. Both debt premiums are
being amortized as reductions to interest expense through June 15, 2013 (the date on which the
Senior Notes mature). During Fiscal 2009, $273 was amortized. The 2003 Swap Agreement and the 2004
Swap Agreement provided that the Company would receive interest at
87/8% and pay variable rates of
interest based upon six month LIBOR plus 4.11% and 4.34%, respectively. As a result of the 2003
Swap Agreement, the 2004 Swap Agreement and the amortization of the debt premiums, the weighted
average effective interest rate of the Senior Notes was 8.53% as of January 2, 2010 and 7.77% as of
January 3, 2009.
The fair values of the Companys interest rate swap agreements reflect the termination premium
or termination discount that the Company would have realized if such swaps had been terminated on
the valuation dates. Since the provisions of the Companys 2003 Swap Agreement and 2004 Swap
Agreement matched the provisions of the Companys outstanding Senior Notes (the Hedged Debt),
changes in the fair values of the swaps did not have any effect on the Companys results of
operations but were recorded in the Companys Consolidated Balance Sheets. Unrealized gains on the
interest rate swap agreements were included in other assets with a corresponding increase in the
Hedged Debt. Unrealized losses on the interest rate swap agreements were included as a component
of long-term debt with a corresponding decrease in the Hedged Debt.
As of January 2, 2010, the Company had no outstanding interest rate swap agreements. The table
below summarizes the
unrealized gain of the Companys swap agreements at January 3, 2009:
|
|
|
|
|
|
|
January 3, 2009 |
|
Unrealized gain: |
|
|
|
|
2003 Swap Agreement |
|
$ |
1,972 |
|
2004 Swap Agreement |
|
|
932 |
|
|
|
|
|
Net unrealized gain |
|
$ |
2,904 |
|
|
|
|
|
New Credit Agreements
On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a
revolving credit agreement (the New Credit Agreement) and Warnaco of Canada Company (Warnaco
Canada), an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as
guarantor, entered into a second revolving credit agreement (the New Canadian Credit Agreement
and, together with the New Credit Agreement, the New Credit Agreements), in each case with the
financial institutions which, from time to time, will act as lenders and issuers of letters of
credit (the Lenders and Issuers).
The New Credit Agreements replaced the Companys Amended and Restated Credit Agreement (see
below), including the Term B Note. Borrowings under the New Credit Agreements were used to repay
the outstanding balance under the Term B Note. In addition, the New Credit Agreements are used to
issue standby and commercial letters of credit, to finance ongoing working capital and capital
expenditure needs and for other general corporate purposes.
The New Credit Agreement provides for a five-year asset-based revolving credit facility under
which up to $270,000 initially will be available. In addition, during the term of the New Credit
Agreement, Warnaco may make up to three requests for additional credit commitments in an aggregate
amount not to exceed $200,000. The New Canadian Credit Agreement provides for a five-year
asset-based revolving credit facility in an aggregate amount up to U.S. $30,000. The New Credit
Agreements mature on August 26, 2013.
The New Credit Agreement has interest rate options that are based on (i) a Base Rate (as
defined in the New Credit Agreement) plus 0.75% (4.0% at January 2, 2010) or (ii) a LIBOR Rate plus
1.75% (2.0% at January 2, 2010) , in each case, on a per annum basis. The interest rate payable on
outstanding borrowings is subject to adjustments based on changes in the Companys financial
leverage ratio. The New Canadian Credit Agreement has interest rate options that are based on
(i) the prime rate announced by Bank of America (acting through its Canadian branch) plus 0.75%
(3.0% at January 2, 2010), or (ii) a BA Rate (as defined in the New Canadian Credit Agreement) plus
1.75% (2.08% at January 2, 2010), in each case, on a per annum basis and subject to adjustments
based on changes in the Companys financial leverage ratio. The BA Rate is defined as the annual
rate of interest quoted by Bank of America (acting through its Canadian branch) as its rate of
interest for bankers acceptances in Canadian dollars for a face amount similar to the amount of
the loan and for a term similar to the applicable interest period.
F-38
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The New Credit Agreements contain covenants limiting the Companys ability to (i) incur
additional indebtedness and liens, (ii) make significant corporate changes including mergers and
acquisitions with third parties, (iii) make investments, (iv) make loans, advances and guarantees
to or for the benefit of third parties, (v) enter into hedge agreements, (vi) make restricted
payments (including dividends and stock repurchases), and (vii) enter into transactions with
affiliates. The New Credit Agreements also include certain other restrictive covenants. In
addition, if Available Credit (as defined in the New Credit Agreements) is less than a threshold
amount (as specified in the New Credit Agreements) the Companys Fixed Charge Coverage ratio (as
defined in the New Credit Agreements) must be at least 1.1 to 1.0.
The covenants under the New Credit Agreements contain negotiated exceptions and carve-outs,
including the ability to repay indebtedness, make restricted payments and make investments so long
as after giving pro forma effect to such actions the Company has a minimum level of Available
Credit (as defined in the New Credit Agreements), the Companys Fixed Charge Coverage Ratio (as
defined in the New Credit Agreements) for the last four quarters was at least 1.1 to 1.0 and
certain other requirements are met.
The New Credit Agreements contain events of default, such as payment defaults,
cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a
defined change of control, or the failure to observe the negative covenants and other covenants
related to the operation and conduct of the Companys business. Upon an event of default, the
Lenders
and Issuers will not be obligated to make loans or other extensions of credit and may, among other
things, terminate their commitments and declare any then outstanding loans due and payable
immediately.
The obligations of Warnaco under the New Credit Agreement are guaranteed by Warnaco
Group and its indirect domestic subsidiaries (other than Warnaco) (collectively, the U.S.
Guarantors). The obligations of Warnaco Canada under the New Canadian Credit Agreement are
guaranteed by the Warnaco Group, Warnaco and the U.S. Guarantors, as well as by a Canadian
subsidiary of Warnaco Canada. As security for the obligations under the New Credit Agreements and
the guarantees thereof, the Warnaco Group, Warnaco and each of the U.S. Guarantors has granted
pursuant to a Pledge and Security Agreement to the collateral agent, for the benefit of the lenders
and issuing banks, a first priority lien on substantially all of their tangible and intangible
assets, including, without limitation, pledges of their equity ownership in domestic subsidiaries
and up to 66% of their equity ownership in first-tier foreign subsidiaries, as well as liens on
intellectual property rights. As security for the obligations under the New Canadian Credit
Agreement and the guarantee thereof by a Warnaco Canadian subsidiary, Warnaco Canada and its
subsidiary have each granted pursuant to General Security Agreements, a Securities Pledge Agreement
and Deeds of Hypothec to the collateral agent, for the benefit of the lenders and issuing banks
under the New Canadian Credit Agreement, a first priority lien on substantially all of their
tangible and intangible assets, including, without limitation, pledges of their equity ownership in
subsidiaries, as well as liens on intellectual property rights.
On August 26, 2008, the Company used $90,000 of the proceeds from the New Credit Agreements
and $16,000 of its existing cash and cash equivalents to repay $106,000 in loans outstanding under
the Term B Note of the Amended and Restated Credit Agreement in full (see below). The Amended and
Restated Credit Agreement was terminated along with all related guarantees, mortgages, liens and
security interests. As of January 2, 2010, the Company had approximately $189 in loans and
approximately $72,478 in letters of credit outstanding under the New Credit Agreement, leaving
approximately $231,859 of availability (including $123,788 of available cash) under the New Credit
Agreement. As of January 2, 2010, there were no loans and no letters of credit
outstanding under the New Canadian Credit Agreement and available credit was approximately $19,020.
In connection with the termination of the Amended and Restated Credit Agreement during Fiscal
2008, the Company wrote-off approximately $2,100 of deferred financing costs, which had been
recorded as Other Assets on the Consolidated Balance Sheet. The write-off of deferred financing
costs is included in interest expense in the Consolidated Statement of Operations. In addition,
approximately $200 of deferred financing costs related to the Amended and Restated Credit Agreement
was not written-off and will be amortized over the term of the New Credit Agreements. The Company
recorded approximately $4,200 of deferred financing costs in connection with the New Credit
Agreements, which will be amortized using the straight-line method through August 25, 2013.
F-39
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Revolving Credit Facility; Amended and Restated Credit Agreement and Foreign Revolving Credit
Facility
On August 26, 2008, the Company terminated the Amended and Restated Credit Agreement,
including the Term B Note, which had been entered into in January 2006, in connection with the
closing of the New Credit Agreements (see above). In addition, during the third quarter of Fiscal
2008, the Company terminated the Foreign Revolving Credit Facility under which no amounts were
outstanding. All guarantees, mortgages, liens and security interests related to both of those
agreements were terminated at that time.
Euro-Denominated CKJEA Notes Payable and Other
In connection with the CKJEA Acquisition, the Company assumed certain short-term notes payable
(the CKJEA Notes) with a number of banks at various interest rates (primarily Euro LIBOR plus
1.0%). The total CKJEA Notes payable was $47,684 at January 2, 2010 and $62,316 at January 3, 2009.
The weighted average effective interest rate for the outstanding CKJEA Notes payable was 2.18% as
of January 2, 2010 and 4.50% as of January 3, 2009. All of the CKJEA Notes payable are short-term
and were renewed during Fiscal 2009 for additional terms of no more than 12 months. In addition,
one of the Companys Korean subsidiaries had an outstanding note payable of $3,785 with an interest
rate of 8.84% per annum at January 3, 2009, which had been fully repaid at January 2, 2010.
Debt Covenants
The Company was in compliance with the covenants of its New Credit Agreements and Senior Notes
as of January 2, 2010 and January 3, 2009.
Interest
As noted above, on January 5, 2010, the Company redeemed $50.0 million of aggregate principal
amount, at par, of the Senior Notes. Subsequent to that redemption, the Company anticipates that
interest payments, based on the fixed rate of 87/8% for the Senior Notes, will be as follows: $9,841
in 2010; $9,841 in 2011; $9,841 in 2012 and $4,542 in 2013.
Note 13Stockholders Equity
Preferred Stock
The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value
$0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value
$0.01 per share. There were no shares of preferred stock issued and outstanding at January 2, 2010
or January 3, 2009.
Share Repurchase Program
In May 2007, the Companys Board of Directors authorized a share repurchase program (the
2007 Share Repurchase Program) for the repurchase of up to 3,000,000 shares of the Companys
common stock. The Company expects that, in order to comply with the terms of applicable debt
instruments, purchases under this authorized program will be made over a period of up to four years
from the date the program was approved. The share repurchase program may be modified or terminated
by the Companys Board of Directors at any time. As of January 2, 2010, the Company had
cumulatively purchased 1,509,869 shares of common stock in the open market at a total cost of
approximately $37,912 (an average cost of $25.11 per share) under the 2007 Share Repurchase
Program. During Fiscal 2009, the Company did not purchase any shares. During Fiscal 2008, the
Company purchased 943,000 shares of common stock in the open market at a total cost of
approximately $15,865 (an average cost of $16.82 per share). During Fiscal 2007, the Company
purchased 566,869 shares of common stock in the open market at a total cost of approximately
$22,047 (an average cost of $38.89 per share).
Repurchased shares are held in treasury pending use for general corporate purposes.
F-40
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
2005 Stock Incentive Plan
The Warnaco Group, Inc. 2005 Stock Incentive Plan (the 2005 Stock Incentive Plan), as amended, permits
the granting of incentive stock options, non-qualified stock options, restricted stock, stock
awards and other stock-based awards (including but not limited to restricted stock units), some of
which may require the satisfaction of performance-based criteria in order to become vested or
payable to participants. During Fiscal 2009, the 2005 Stock Incentive Plan was
amended to increase the aggregate number of shares that may be issued to 7,150,000
shares of common stock; provided, however, that the aggregate number of shares that
may be subject to restricted stock awards shall not exceed 2,725,000. Those numbers of
shares are subject to adjustment for dividends, distributions, recapitalizations, stock
splits, reverse stock splits, reorganizations, mergers, consolidations, split-ups, spin-offs,
combinations, repurchases or exchanges of shares or other securities of the Company, issuances
of warrants or other rights to purchase shares of common stock or other securities of
the Company and other similar events.
The Compensation
Committee of the Companys Board of Directors is responsible for administering the 2005 Stock
Incentive Plan. The Company has reserved 7,150,000 shares of its common stock for stock based
compensation awards granted pursuant to the 2005 Stock Incentive Plan. Substantially all awards
granted under the 2005 Stock Incentive Plan have a contractual life of 10 years. Stock options,
that are granted beginning in 2005, vest annually with respect to 1/3 of the award on each
anniversary of the grant date provided that the grantee is employed by the Company on such date.
Restricted stock awards, that were granted between 2005 and 2008, vest annually with respect to
1/3 of the award on each anniversary of the grant date, and restricted stock awards, that
are granted from 2009, vest on the third anniversary of the grant date, provided that the grantee
is employed by the Company on such date. At January 2, 2010, under the 2005 Stock Incentive Plan,
there were approximately 3,111,000 shares available for future grants, of which approximately
1,546,900 shares were available for future grants of restricted stock awards.
2003 Stock Incentive Plan
The Compensation Committee of the Companys Board of Directors is responsible for
administration of The Warnaco Group, Inc. 2003 Stock Incentive Plan (the 2003 Stock Incentive
Plan) and determines, subject to its provisions, the number of shares to be issued, the terms of
awards, the sale or exercise price, the number of shares awarded and the rate at which awards vest
or become exercisable. The Company has reserved 5,000,000 shares of common stock for stock-based
compensation awards granted pursuant to the 2003 Stock Incentive Plan. Substantially all
stock-based compensation awards granted after January 3, 2004 have a contractual life of 10 years
and vest annually with respect to 1/3 of the award on each anniversary of the grant date beginning
in 2005 provided that the grantee is employed by the Company on such date. Substantially all
stock-based compensation awards granted prior to January 3, 2004 have a contractual life of 10
years and vest, with respect to 1/4 of the award, six months after the grant date and, with respect
to an additional 1/4 of such award, each anniversary after the first vesting date for a period of
three years provided that the grantee is employed by the Company on such date. At January 2, 2010,
under the 2003 Stock Incentive Plan, there were approximately 79,000 shares available for future
grants of either stock options or restricted stock awards.
A summary of stock option award activity under the Companys stock incentive plans as of
January 2, 2010 and changes during Fiscal 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
Outstanding as of January 3, 2009 |
|
|
2,148,812 |
|
|
$ |
25.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
635,650 |
|
|
|
27.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(265,867 |
) |
|
|
15.17 |
|
|
|
|
|
|
|
|
|
Forfeited / Expired |
|
|
(56,249 |
) |
|
|
38.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 2, 2010 |
|
|
2,462,346 |
|
|
$ |
26.79 |
|
|
|
6.8 |
|
|
$ |
41,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
January 2, 2010 |
|
|
1,487,767 |
|
|
$ |
22.27 |
|
|
|
5.4 |
|
|
$ |
30,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
A summary of the activity for unvested restricted share/unit awards as of January 2, 2010
and changes during Fiscal 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted |
|
|
Average Grant |
|
|
|
Shares/Units |
|
|
Date Fair Value |
|
Unvested as of
January 3, 2009 |
|
|
664,956 |
|
|
$ |
34.30 |
|
Granted |
|
|
356,269 |
|
|
|
26.27 |
|
Vested |
|
|
(221,272 |
) |
|
|
26.04 |
|
Forfeited |
|
|
(48,845 |
) |
|
|
36.56 |
|
|
|
|
|
|
|
|
|
Unvested as of
January 2, 2010 |
|
|
751,108 |
|
|
$ |
32.78 |
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted and the intrinsic value of
options exercised and restricted shares/units vested during Fiscal 2009, Fiscal 2008 and Fiscal
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of options
granted |
|
$ |
12.37 |
|
|
$ |
20.21 |
|
|
$ |
10.78 |
|
Intrinsic value of options exercised |
|
|
26.77 |
|
|
|
28.35 |
|
|
|
14.23 |
|
Total fair value of restricted shares/units vested |
|
|
20.24 |
|
|
|
37.15 |
|
|
|
28.13 |
|
The following represents the reconciliation of the number of shares of common stock and
treasury stock issued and outstanding as of January 2, 2010 and January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
Common Stock: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
50,122,614 |
|
|
|
48,202,442 |
|
Shares issued upon exercise of stock options |
|
|
265,867 |
|
|
|
1,582,071 |
|
Shares issued upon vesting of restricted
stock grants |
|
|
221,272 |
|
|
|
347,013 |
|
Shares issued to directors / other |
|
|
8,042 |
|
|
|
(8,912 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
|
50,617,795 |
|
|
|
50,122,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
4,865,401 |
|
|
|
3,796,302 |
|
Purchases of Common Stock (a) |
|
|
74,328 |
|
|
|
1,069,099 |
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
4,939,729 |
|
|
|
4,865,401 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents zero and 943,000 shares for Fiscal 2009 and Fiscal 2008, respectively,
purchased under the Companys share repurchase programs and 74,328 and 126,099 shares
for Fiscal 2009 and Fiscal 2008, respectively, surrendered by employees in satisfaction
of certain payroll tax obligations associated with the vesting of restricted stock. |
For additional disclosures related to stock-based compensation, see Note 1 of the Notes to
Consolidated Financial Statements Stock-Based Compensation.
F-42
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 14Income per Common Share
The following table presents the calculation of both basic and diluted income per common share
attributable to Warnaco Group, Inc. common shareholders, giving effect to participating securities
(see Note1 of Notes to Consolidated Financial Statements). The Company has determined that based on
a review of its share-based awards, only its restricted stock awards are deemed participating
securities, which participate equally with common shareholders. The weighted average restricted
stock outstanding was 567,917 shares, 592,559 shares and 732,578 shares for Fiscal 2009, Fiscal
2008 and Fiscal 2007, respectively. Undistributed income allocated to participating securities is
based on the proportion of restricted stock outstanding to the sum of weighted average number of
common shares outstanding attributable to Warnaco Group, Inc. common shareholders and restricted
stock outstanding for each period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders and participating securities |
|
$ |
102,225 |
|
|
$ |
51,046 |
|
|
$ |
86,909 |
|
Less: allocation to participating securities |
|
|
(1,262 |
) |
|
|
(658 |
) |
|
|
(1,395 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders |
|
$ |
100,963 |
|
|
$ |
50,388 |
|
|
$ |
85,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax, attributable to Warnaco Group, Inc. common shareholders and
participating securities |
|
$ |
(6,227 |
) |
|
$ |
(3,792 |
) |
|
$ |
(7,802 |
) |
Less: allocation to participating securities |
|
|
77 |
|
|
|
49 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations attributable to Warnaco Group, Inc. common shareholders |
|
$ |
(6,150 |
) |
|
$ |
(3,743 |
) |
|
$ |
(7,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Warnaco Group, Inc. common shareholders and participating securities |
|
$ |
95,998 |
|
|
$ |
47,254 |
|
|
$ |
79,107 |
|
Less: allocation to participating securities |
|
|
(1,185 |
) |
|
|
(609 |
) |
|
|
(1,270 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Warnaco Group, Inc. common shareholders |
|
$ |
94,813 |
|
|
$ |
46,645 |
|
|
$ |
77,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share attributable to Warnaco Group, Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in computing income per common share |
|
|
45,433,874 |
|
|
|
45,351,336 |
|
|
|
44,908,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations |
|
$ |
2.22 |
|
|
$ |
1.11 |
|
|
$ |
1.90 |
|
Income per common share from discontinued operations |
|
|
(0.13 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
2.09 |
|
|
$ |
1.03 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to Warnaco Group, Inc. common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in computing basic income per common share |
|
|
45,433,874 |
|
|
|
45,351,336 |
|
|
|
44,908,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units |
|
|
762,523 |
|
|
|
1,243,702 |
|
|
|
1,598,291 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and share equivalents used in computing income per common share |
|
|
46,196,397 |
|
|
|
46,595,038 |
|
|
|
46,506,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations |
|
$ |
2.19 |
|
|
$ |
1.08 |
|
|
$ |
1.84 |
|
Income per common share from discontinued operations |
|
|
(0.14 |
) |
|
|
(0.08 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
2.05 |
|
|
$ |
1.00 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of anti-dilutive out-of-the-money stock options outstanding (a) |
|
|
436,034 |
|
|
|
441,700 |
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Options to purchase shares of common stock at an exercise price greater than the
average market price for each period presented are anti-dilutive and therefore not included in the
computation of diluted income per common share from continuing operations. |
F-43
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 15Lease and Other Commitments
The Company is a party to various lease agreements for equipment, real estate, furniture,
fixtures and other assets, which expire on various dates through 2028. Under these agreements, the
Company is required to pay various amounts including property taxes, insurance, maintenance fees,
and other costs. The following is a schedule of future minimum rental payments required under
non-cancelable operating leases with terms in excess of one year, as of January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
Rental payments |
|
Year |
|
Real Estate |
|
|
Equipment |
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
65,341 |
|
|
$ |
6,905 |
|
2011 |
|
|
56,778 |
|
|
|
5,241 |
|
2012 |
|
|
51,954 |
|
|
|
3,197 |
|
2013 |
|
|
43,400 |
|
|
|
1,886 |
|
2014 |
|
|
35,519 |
|
|
|
241 |
|
2015 and thereafter |
|
|
112,397 |
|
|
|
|
|
Rent expense included in the Consolidated Statements of Operations for Fiscal 2009,
Fiscal 2008, and Fiscal 2007 was $73,173, $61,314 and $53,779, respectively.
Although the specific terms of each of the Companys license agreements vary, generally such
agreements provide for minimum royalty payments and/or royalty payments based upon a percentage of
net sales. Such license agreements also generally grant the licensor the right to approve any
designs marketed by the licensee. The Company has license agreements with the following minimum
guaranteed royalty payments as of January 2, 2010:
|
|
|
|
|
|
|
Minimum |
|
Year |
|
Royalty (a) |
|
|
|
|
|
|
|
|
2010 |
|
$ |
66,331 |
|
2011 |
|
|
64,840 |
|
2012 |
|
|
61,943 |
|
2013 |
|
|
62,116 |
|
2014 |
|
|
67,308 |
|
2015 and thereafter |
|
|
1,456,951 |
|
|
|
|
(a) |
|
Includes all minimum royalty obligations. Some of the Companys license agreements have no
expiration date or extend to 2044 or 2046. License agreements with no expiration date are
assumed to end in 2044 for purposes of this table. Variable based minimum royalty obligations
are based upon payments for the most recent fiscal year. Certain of the Companys license
agreements also require the Company to pay a specified percentage of net revenue (ranging from
1-4%) to the licensor for advertising and promotion of the licensed products (which amount is
not included in minimum royalty obligations for purposes of this item). |
The Company has entered into employment agreements with certain members of management.
Minimum obligations pursuant to such agreements total $3,494, $1,453, $0, $264, $156, and $159 in
fiscal 2010, 2011, 2012, 2013, 2014 and thereafter,
respectively. These minimum obligations include deferred compensation and supplemental
compensation under these agreements. The Company also had accrued severance costs of $638 for
fiscal 2010. See Note 4 of Notes to Consolidated Financial Statements.
As of January 2, 2010, the Company had purchase obligations of $41,715, $15,192, $7,328,
$6,176, and $6,046 for fiscal 2010, 2011, 2012, 2013 and 2014 respectively. Amounts due include,
among other items, purchase obligations of approximately 20,800 pursuant to a production agreement
with the buyer of the Companys manufacturing facilities in Mexico. See Note 4 of Notes to
Consolidated Financial Statements. In addition, amounts relate to payments for software
maintenance fees, software licensing and maintenance fees and advertising.
As of January 2, 2010, the Company has entered into foreign currency exchange forward
contracts and zero-cost collar option contracts to mitigate its foreign exchange risk. See Notes 1
and 17 of Notes to Consolidated Financial Statements for further information on these contracts.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Contractual Obligations, above, for a summary of the Companys contractual
obligations.
F-44
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 16Fair Value Measurement
The Company utilizes the market approach to measure fair value for financial assets and
liabilities, which primarily relate to derivative contracts. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable
assets or liabilities. The Company classifies its financial instruments in a fair value hierarchy
that is intended to increase consistency and comparability in fair value measurements and related
disclosures. The fair value hierarchy consists of the following three levels:
|
Level 1 |
|
Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Inputs are quoted prices for similar assets or liabilities in an active market,
quoted prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable and market-corroborated inputs which are
derived principally from or corroborated by observable market data. |
|
|
Level 3 |
|
Inputs are derived from valuation techniques in which one or more significant inputs
or value drivers are unobservable. |
Valuation Techniques
The fair value of foreign currency exchange contracts and zero cost collars was determined as
the net unrealized gains or losses on those contracts, which is the net difference between (i) the
U.S. dollars to be received or paid at the contracts settlement date and (ii) the U.S. dollar
value of the foreign currency to be sold or purchased at the current forward exchange rate. The
fair value of these foreign exchange contracts is based on quoted prices that include the effects
of U.S. and foreign interest rate yield curves and, therefore, meets the definition of level 2 fair
value, as defined above.
The fair value of interest rate swaps was estimated based on the amount that the Company would
receive or pay to terminate the swaps on the valuation date. Those amounts are based on receipt of
interest at a fixed interest rate of 87/8% and a payment of a variable rate based on a fixed
interest rate above the six month LIBOR rate. As such, the fair value of the interest rate swaps
is classified as level 2, as defined above.
The following table represents the Companys assets and liabilities measured at fair value on
a recurring basis as of January 2, 2010 and January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,904 |
|
|
$ |
|
|
Foreign currency
exchange contracts |
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
2,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange contracts |
|
$ |
|
|
|
$ |
(3,400 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,484 |
|
|
$ |
|
|
Note 17Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments.
Accounts Receivable: The carrying amount of the Companys accounts receivable approximates
fair value.
Accounts Payable: The carrying amount of the Companys accounts payable is approximately equal
to their fair value because accounts payable are short-term in nature and the carrying value is
equal to the settlement value.
Short-term Revolving Credit Facilities: The carrying amount of the short-term New Credit
Agreements, CKJEA Notes and other short term debt is approximately equal to their fair value
because of their short-term nature and because amounts outstanding bear interest at variable rates
which fluctuate with market rates.
F-45
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Senior Notes: The Senior Notes mature on June 15, 2013 and bear interest at 87/8% payable
semi-annually beginning December 15, 2003. The fair value of the Senior Notes is based upon quoted
market prices for the Senior Notes.
Interest Rate Swaps: The fair value of the outstanding interest rate swaps at January 3, 2009
was based upon the cost to terminate the contracts. At January 2, 2010, the Company had no
outstanding interest rate swaps.
Foreign Currency Exchange Forward Contracts: The fair value of the outstanding foreign
currency exchange forward contracts is based upon the cost to terminate the contracts.
The carrying amounts and fair value of the Companys financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Balance Sheet Location |
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
Accounts receivable, net of reserves |
|
$ |
290,737 |
|
|
$ |
290,737 |
|
|
$ |
251,886 |
|
|
$ |
251,886 |
|
Open foreign currency exchange contracts |
|
Prepaid expenses and other current assets |
|
|
79 |
|
|
|
79 |
|
|
|
5,249 |
|
|
|
5,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
Accounts payable |
|
|
127,636 |
|
|
|
127,636 |
|
|
|
146,030 |
|
|
|
146,030 |
|
Short-term revolving credit facilities |
|
Short-term debt |
|
|
47,873 |
|
|
|
47,873 |
|
|
|
79,888 |
|
|
|
79,888 |
|
Senior Notes, current portion |
|
Short-term debt |
|
|
50,000 |
|
|
|
51,479 |
|
|
|
|
|
|
|
|
|
Senior Notes |
|
Long-term debt |
|
|
110,890 |
|
|
|
114,170 |
|
|
|
160,890 |
|
|
|
152,846 |
|
Interest rate swaps net loss |
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
2,904 |
|
|
|
2,904 |
|
Open foreign currency exchange
contracts |
|
Accrued liabilities |
|
|
(3,400 |
) |
|
|
(3,400 |
) |
|
|
(5,484 |
) |
|
|
(5,484 |
) |
Derivative Financial Instruments
The Company is exposed to foreign exchange risk related to U.S. dollar-denominated purchases
of inventory, payment of minimum royalty and advertising costs and intercompany loans and payables
by subsidiaries whose functional currencies are the Euro, Canadian Dollar, Korean Won, Mexican Peso
or British Pound. The Company or its foreign subsidiaries enter into foreign exchange forward
contracts, including zero-cost collar option contracts, to offset certain of its foreign exchange
risk. The Company does not use derivative financial instruments for speculative or trading
purposes.
A number of international financial institutions are counterparties to the Companys
outstanding zero cost collars and foreign exchange contracts. The Company monitors its positions
with, and the credit quality of, these counterparty financial institutions and does not anticipate
nonperformance by these counterparties. Management believes that the Company would not suffer a
material loss
in the event of nonperformance by these counterparties.
During Fiscal 2009, one of the Companys European subsidiaries and one of the Companys
Canadian subsidiaries entered into foreign exchange forward contracts which were designed to
satisfy certain U.S. dollar denominated purchases of inventory. During Fiscal 2009, the Companys
Korean and European subsidiaries also continued their hedging programs from Fiscal 2008 with
foreign exchange forward contracts which were designed to satisfy the first 50% of U.S. dollar
denominated purchases of inventory over an 18-month period, or payment of 100% of the minimum
royalty and advertising expenses, respectively. All of the foregoing forward contracts were
designated as cash flow hedges, with gains and losses accumulated on the Balance Sheet in Other
Comprehensive Income and recognized in Cost of Goods Sold in the Statement of Operations during the
periods in which the underlying transactions occur.
F-46
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
During Fiscal 2009, Warnaco entered into foreign currency forward contracts on behalf of one
of its Mexican subsidiaries. In addition, during Fiscal 2009, the hedging programs also continued
from Fiscal 2008 in which Warnaco has entered into foreign currency exchange contracts, including
zero-cost collars, on behalf of certain of its European, Korean and Canadian subsidiaries. These
forward contracts were designed to fix the number of Euros, Korean won, Canadian dollars or Mexican
pesos required to satisfy (i) the first 50% of U.S. dollar denominated purchases of inventory over
an 18-month period; (ii) 50% of intercompany purchases from a British subsidiary or (iii) U.S.
dollar denominated intercompany loans and payables. All of these foregoing foreign exchange
contracts were accounted for as economic hedges, with gains and losses recognized directly in Other
loss (income) or Selling, general and administrative expense in the Statement of Operations in the
period in which they are incurred. In addition, one European subsidiary continued its hedging
program of forward contracts related to purchases of inventory, which did not qualify as a cash
flow hedge, and was accounted for as an economic hedge.
The following table summarizes the Companys derivative instruments as of January 2, 2010 and
January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
Derivatives designated as |
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
Fair Value |
|
hedging instruments under
FASB ASC 815-20 |
|
Type (a) |
|
|
Balance Sheet
Location |
|
|
January 2,
2010 |
|
|
January 3, 2009 |
|
|
Balance Sheet
Location |
|
|
January 2,
2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
CF |
|
Prepaid expenses and other current assets |
|
$ |
|
|
|
$ |
|
|
|
Accrued liabilities |
|
$ |
(1,119 |
) |
|
$ |
(328 |
) |
Interest rate swaps |
|
FV |
|
Other assets |
|
|
|
|
|
|
2,904 |
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as
hedging instruments under
FASB ASC 815-20 |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,904 |
|
|
|
|
|
|
$ |
(1,119 |
) |
|
$ |
(328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments under
FASB ASC 815-20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
79 |
|
|
$ |
2,345 |
|
|
Accrued liabilities |
|
$ |
(2,281 |
) |
|
$ |
(5,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as
hedging instruments under
FASB ASC 815-20 |
|
|
|
|
|
|
|
|
|
$ |
79 |
|
|
$ |
2,345 |
|
|
|
|
|
|
$ |
(2,281 |
) |
|
$ |
(5,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
|
|
|
|
$ |
79 |
|
|
$ |
5,249 |
|
|
|
|
|
|
$ |
(3,400 |
) |
|
$ |
(5,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
CF = cash flow hedge; FV = fair value hedge |
F-47
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
The following table summarizes the effect of the Companys derivative instruments on the
Statement of Operations for Fiscal 2009 and Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Location of |
|
Amount of |
|
|
|
|
Amount of |
|
|
|
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
Gain (Loss) |
|
|
|
|
Gain (Loss) |
|
|
|
|
|
Recognized |
|
|
Reclassified |
|
Reclassified |
|
|
Location of |
|
Recognized |
|
|
|
|
|
in OCI on |
|
|
from |
|
from |
|
|
Gain (Loss) |
|
in Income on |
|
|
|
|
|
Derivatives |
|
|
Accumulated |
|
Accumulated |
|
|
Recognized |
|
Derivative |
|
|
|
|
|
(Effective |
|
|
OCI into |
|
OCI into Income |
|
|
in Income |
|
(Ineffective |
|
Derivatives in FASB |
|
|
|
Portion) |
|
|
Income |
|
(Effective Portion) |
|
|
on Derivative |
|
Portion) |
|
ASC 815-20 Cash Flow |
|
Nature of Hedged |
|
Fiscal |
|
|
Fiscal |
|
|
(Effective |
|
Fiscal |
|
|
Fiscal |
|
|
(Ineffective |
|
Fiscal |
|
|
Fiscal |
|
Hedging Relationships |
|
Transaction |
|
2009 |
|
|
2008 |
|
|
Portion) |
|
2009 |
|
|
2008 |
|
|
Portion) (c) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Minimum royalty and advertising costs (a) |
|
$ |
(450 |
) |
|
$ |
330 |
|
|
cost of goods sold |
|
$ |
(314 |
) |
|
$ |
394 |
|
|
other loss/income |
|
$ |
(1 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Purchases of inventory (b) |
|
|
(1,868 |
) |
|
|
(264 |
) |
|
cost of goods sold |
|
|
(918 |
) |
|
|
|
|
|
other loss/income |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(2,318 |
) |
|
$ |
66 |
|
|
|
|
$ |
(1,232 |
) |
|
$ |
394 |
|
|
|
|
$ |
(24 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
At January 2, 2010, the amount hedged was 9,213; contracts expire September 2010. At
January 3, 2009, the amount hedged was $8,866; contracts expire September 2009. |
|
(b) |
|
At January 2, 2010, the amount hedged was $26,760; contracts expire April 2011. At January 3,
2009, the amount hedged was $5,340; contracts expire October 2009. |
|
(c) |
|
No amounts were excluded from effectiveness testing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
|
Recognized |
|
Derivatives not |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
in Income |
|
designated as hedging |
|
|
|
|
|
|
|
|
|
Amount Hedged |
|
|
Maturity Date |
|
|
Recognized |
|
|
on Derivative |
|
instruments under |
|
Nature of Hedged |
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
in Income |
|
|
Fiscal |
|
|
Fiscal |
|
FASB ASC 815-20 |
|
Transaction |
|
|
Instrument |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
on Derivative |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (d) |
|
Purchases of inventory |
|
Forward contracts |
|
$ |
6,032 |
|
|
$ |
34,373 |
|
|
August 2010 |
|
November 2009 -
December 2009 |
|
other loss/income |
|
$ |
(2,865 |
) |
|
$ |
1,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (e) |
|
Intercompany purchases of inventory |
|
Forward contracts |
|
|
11,395 |
|
|
|
3,487 |
|
|
December 2010 |
|
August 2009 |
|
other loss/income |
|
|
(387 |
) |
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (f) |
|
Minimum royalty and advertising costs |
|
Forward contracts |
|
|
10,000 |
|
|
|
10,000 |
|
|
October 2010 |
|
October 2009 |
|
other loss/income |
|
|
(505 |
) |
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Intercompany payables |
|
Forward contracts |
|
|
12,000 |
|
|
|
8,400 |
|
|
January 2010 |
|
April 2010 |
|
other loss/income |
|
|
8 |
|
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Intercompany loans |
|
Zero-cost collars |
|
|
1,500 |
|
|
|
12,700 |
|
|
June 2010 |
|
November 2009 |
|
other loss/income |
|
|
258 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Intercompany payables |
|
Zero-cost collars |
|
|
26,000 |
|
|
|
25,000 |
|
|
|
January 2010 -
June 2010 |
|
|
May 2009 |
|
other loss/income |
|
|
1,420 |
|
|
|
(1,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Intercompany payables |
|
Zero-cost collars |
|
|
14,500 |
|
|
|
25,000 |
|
|
|
January 2010 - May 2010 |
|
|
September 2009 |
|
selling, general and administrative |
|
|
2,688 |
|
|
|
(3,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
617 |
|
|
$ |
(2,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Forward contracts used to offset 50% of U.S. dollar-denominated purchases of inventory by the
Companys foreign subsidiaries whose functional currencies were the Euro, Canadian dollar and
Mexican peso, entered into by Warnaco Inc. on behalf of foreign subsidiaries and the British
pound, entered into by a European subsidiary. |
|
(e) |
|
Forward contracts used to offset 50% of Euro-denominated intercompany purchases by a
subsidiary whose functional currency is the British pound. |
|
(f) |
|
Forward contracts used to offset payment of minimum royalty and advertising costs related to
sales of inventory by the Companys foreign subsidiary whose functional currency was the Euro,
entered into by Warnaco Inc. on behalf of a foreign subsidiary. |
F-48
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
A reconciliation of the balance of Accumulated Other Comprehensive Income during Fiscal
2009 and Fiscal 2008 related to cash flow hedges of foreign exchange forward contracts is as
follows:
|
|
|
|
|
Balance December 29, 2007 |
|
$ |
|
|
Derivative gains recognized |
|
|
66 |
|
Amount amortized to earnings |
|
|
(394 |
) |
|
|
|
|
Balance January 3, 2009 |
|
$ |
(328 |
) |
Derivative gains recognized |
|
|
(2,342 |
) |
Amount amortized to earnings |
|
|
1,256 |
|
|
|
|
|
Balance before tax effect |
|
|
(1,414 |
) |
Tax effect |
|
|
387 |
|
|
|
|
|
Balance January 2, 2010, net of tax |
|
$ |
(1,027 |
) |
|
|
|
|
During the twelve months following January 2, 2010, the net amount of losses that was
reported in OCI at that date that are estimated to be amortized into earnings is $1,296. During
Fiscal 2009, no amount of gains or losses was reclassified into earnings as a result of the
discontinuance of cash flow hedges because it was probable that the original forecasted
transactions will not occur by the end of the originally specified time period or within an
additional two-month period of time thereafter.
Note 18Cash Flow Information
The following table sets forth supplemental cash flow information for Fiscal 2009, Fiscal
2008, and Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
Fiscal 2008 |
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
22,792 |
|
|
$ |
28,114 |
|
|
$ |
33,810 |
|
Interest income |
|
|
(1,964 |
) |
|
|
(2,535 |
) |
|
|
(2,910 |
) |
Income taxes, net of refunds received |
|
|
29,680 |
|
|
|
43,331 |
|
|
|
49,641 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable for purchase of fixed assets |
|
|
3,020 |
|
|
|
3,707 |
|
|
|
4,990 |
|
Note 19Legal Matters
SEC Inquiry: On August 8, 2006, the Company announced that it would restate its previously
reported financial statements for fourth quarter 2005, Fiscal 2005 and first quarter 2006. The
restatements were required as a result of certain irregularities discovered by the Company during
the Companys 2006 second quarter closing review and certain other errors. The irregularities
primarily related to the accounting for certain returns and customer allowances at the Companys
Chaps menswear division. These matters were reported to the Companys Audit Committee, which
engaged outside counsel, who in turn retained independent forensic accountants, to investigate and
report to the Audit Committee. Based on information obtained in that investigation, and also to
correct for an error which resulted from the implementation of the Companys new systems
infrastructure at its Swimwear Group during the first quarter 2006, and certain immaterial errors,
the Audit Committee accepted managements recommendation that the Company restate its financial
statements.
In connection with the restatements, the Company contacted the SEC staff to inform them of the
restatements and the Companys related investigation. Thereafter, the SEC staff initiated an
informal inquiry, and on February 22, 2008 informed the Company that in September 2007 the SEC had
issued a formal order of investigation, with respect to these matters. The Company is cooperating
fully with the SEC.
OP Litigation: On August 19, 2004, the Company acquired 100% of the outstanding common stock
of Ocean Pacific Apparel Corp. (OP). The terms of the acquisition agreement required the Company
to make certain contingent payments to the sellers (the Sellers) under certain circumstances. On
November 6, 2006, the Company sold the OP business. The Sellers of OP have filed an action against
the Company alleging that certain contingent purchase price payments are due to them as a result of
the Companys sale of the OP business in November 2006. The Company believes that the Sellers
lawsuit is without merit and intends to defend itself vigorously. The Company believes that it is
adequately reserved for any potential settlements.
F-49
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Lejaby Claims: On March 10, 2008, the Company sold its Lejaby business to Palmers. The
purchase price paid by Palmers for the Lejaby business was subject to certain post-closing
adjustments, including adjustments for working capital. The Company and Palmers have been unable
to agree on the amount of these adjustments to the purchase price. The Company expects that the
matter will be settled by an independent arbitrator. Palmers also has filed an action against the
Company alleging that, as a result of the
Company making certain misrepresentations, the sale agreement is null and void. The Company
believes that the Palmers lawsuit is without merit and intends to defend itself vigorously. The
Company believes that it is adequately reserved for these claims.
Tyr Litigation: On May 12, 2008, Tyr Sport, Inc. (Tyr Sport) filed an action against
the Company and certain third-party co-defendants alleging restraint of trade and false advertising
in connection with the Speedo LZR Racer swimsuit. Certain of Tyr Sports false advertising claims were
dismissed pursuant to a motion to dismiss filed by the Company and its co-defendants. Further, on
December 31, 2009, the Company and its co-defendants filed a motion for summary judgment
relating to all of Tyr Sports remaining claims. The Company believes that Tyr Sports lawsuit is
without merit and continues to defend itself vigorously. The Company believes that it is
adequately reserved in this matter.
Other: In addition, from time to time, the Company is involved in arbitrations or legal
proceedings that arise in the ordinary course of its business. The Company cannot predict the
timing or outcome of these claims and proceedings. Currently, the Company is not involved in any
such arbitration and/or legal proceeding that it expects to have a material effect on its financial
condition, results of operations or business.
Note 20Supplemental Consolidating Condensed Financial Information
The following tables set forth supplemental consolidating condensed financial information as
of January 2, 2010, and January 3, 2009 and for Fiscal 2009, Fiscal 2008, and Fiscal 2007 for: (i)
The Warnaco Group, Inc.; (ii) Warnaco Inc.; (iii) the subsidiaries that guarantee the Senior Notes
(the Guarantor Subsidiaries); (iv) the subsidiaries other than the Guarantor Subsidiaries (the
Non-Guarantor Subsidiaries); and (v) The Warnaco Group, Inc. on a consolidated basis. The Senior
Notes are guaranteed by substantially all of Warnaco Inc.s domestic subsidiaries. See Note 12 of
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
|
|
The Warnaco |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
123,243 |
|
|
$ |
(2 |
) |
|
$ |
197,513 |
|
|
$ |
|
|
|
$ |
320,754 |
|
Accounts receivable, net |
|
|
|
|
|
|
24,283 |
|
|
|
69,377 |
|
|
|
197,077 |
|
|
|
|
|
|
|
290,737 |
|
Inventories |
|
|
|
|
|
|
54,097 |
|
|
|
60,646 |
|
|
|
138,619 |
|
|
|
|
|
|
|
253,362 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
49,857 |
|
|
|
15,881 |
|
|
|
70,094 |
|
|
|
|
|
|
|
135,832 |
|
Assets of discontinued operations |
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
2,046 |
|
|
|
|
|
|
|
2,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
251,480 |
|
|
|
146,028 |
|
|
|
605,349 |
|
|
|
|
|
|
|
1,002,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
44,783 |
|
|
|
5,093 |
|
|
|
70,615 |
|
|
|
|
|
|
|
120,491 |
|
Investment in subsidiaries |
|
|
1,165,775 |
|
|
|
551,617 |
|
|
|
|
|
|
|
|
|
|
|
(1,717,392 |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
47,709 |
|
|
|
92,269 |
|
|
|
396,468 |
|
|
|
|
|
|
|
536,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,165,775 |
|
|
$ |
895,589 |
|
|
$ |
243,390 |
|
|
$ |
1,072,432 |
|
|
$ |
(1,717,392 |
) |
|
$ |
1,659,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
|
|
|
$ |
4 |
|
|
$ |
7,490 |
|
|
$ |
524 |
|
|
$ |
|
|
|
$ |
8,018 |
|
Accounts payable, accrued liabilities,
short-term debt and accrued taxes |
|
|
|
|
|
|
145,968 |
|
|
|
35,116 |
|
|
|
253,586 |
|
|
|
|
|
|
|
434,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
145,972 |
|
|
|
42,606 |
|
|
|
254,110 |
|
|
|
|
|
|
|
442,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany accounts |
|
|
249,665 |
|
|
|
98,512 |
|
|
|
(492,069 |
) |
|
|
143,892 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
112,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,835 |
|
Other long-term liabilities |
|
|
|
|
|
|
75,593 |
|
|
|
2,309 |
|
|
|
110,259 |
|
|
|
|
|
|
|
188,161 |
|
Stockholders equity |
|
|
916,110 |
|
|
|
462,677 |
|
|
|
690,544 |
|
|
|
564,171 |
|
|
|
(1,717,392 |
) |
|
|
916,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,165,775 |
|
|
$ |
895,589 |
|
|
$ |
243,390 |
|
|
$ |
1,072,432 |
|
|
$ |
(1,717,392 |
) |
|
$ |
1,659,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2009 |
|
|
|
The Warnaco |
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
30,771 |
|
|
$ |
(2 |
) |
|
$ |
116,858 |
|
|
$ |
|
|
|
$ |
147,627 |
|
Accounts receivable, net |
|
|
|
|
|
|
22,755 |
|
|
|
57,709 |
|
|
|
171,422 |
|
|
|
|
|
|
|
251,886 |
|
Inventories |
|
|
|
|
|
|
67,251 |
|
|
|
83,205 |
|
|
|
175,841 |
|
|
|
|
|
|
|
326,297 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
59,586 |
|
|
|
23,786 |
|
|
|
73,405 |
|
|
|
|
|
|
|
156,777 |
|
Assets of discontinued operations |
|
|
|
|
|
|
|
|
|
|
5,381 |
|
|
|
898 |
|
|
|
|
|
|
|
6,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
180,363 |
|
|
|
170,079 |
|
|
|
538,424 |
|
|
|
|
|
|
|
888,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
51,220 |
|
|
|
6,045 |
|
|
|
52,298 |
|
|
|
|
|
|
|
109,563 |
|
Investment in subsidiaries |
|
|
1,036,139 |
|
|
|
551,617 |
|
|
|
|
|
|
|
|
|
|
|
(1,587,756 |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
80,644 |
|
|
|
51,408 |
|
|
|
365,612 |
|
|
|
|
|
|
|
497,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,036,139 |
|
|
$ |
863,844 |
|
|
$ |
227,532 |
|
|
$ |
956,334 |
|
|
$ |
(1,587,756 |
) |
|
$ |
1,496,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,445 |
|
|
$ |
4,610 |
|
|
$ |
|
|
|
$ |
12,055 |
|
Accounts payable, accrued liabilities,
short-term debt and accrued taxes |
|
|
|
|
|
|
84,286 |
|
|
|
47,619 |
|
|
|
270,352 |
|
|
|
|
|
|
|
402,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
84,286 |
|
|
|
55,064 |
|
|
|
274,962 |
|
|
|
|
|
|
|
414,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany accounts |
|
|
247,398 |
|
|
|
97,543 |
|
|
|
(480,490 |
) |
|
|
135,549 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
163,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,794 |
|
Other long-term liabilities |
|
|
|
|
|
|
45,814 |
|
|
|
2,648 |
|
|
|
80,784 |
|
|
|
|
|
|
|
129,246 |
|
Stockholders equity |
|
|
788,741 |
|
|
|
472,407 |
|
|
|
650,310 |
|
|
|
465,039 |
|
|
|
(1,587,756 |
) |
|
|
788,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,036,139 |
|
|
$ |
863,844 |
|
|
$ |
227,532 |
|
|
$ |
956,334 |
|
|
$ |
(1,587,756 |
) |
|
$ |
1,496,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
Net revenues |
|
$ |
|
|
|
$ |
445,830 |
|
|
$ |
470,864 |
|
|
$ |
1,102,931 |
|
|
$ |
|
|
|
$ |
2,019,625 |
|
Cost of goods sold |
|
|
|
|
|
|
296,495 |
|
|
|
315,876 |
|
|
|
542,907 |
|
|
|
|
|
|
|
1,155,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
149,335 |
|
|
|
154,988 |
|
|
|
560,024 |
|
|
|
|
|
|
|
864,347 |
|
SG&A expenses (including amortization of intangible assets) |
|
|
|
|
|
|
129,397 |
|
|
|
98,439 |
|
|
|
422,103 |
|
|
|
|
|
|
|
649,939 |
|
Pension income |
|
|
|
|
|
|
20,424 |
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
20,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(486 |
) |
|
|
56,549 |
|
|
|
137,472 |
|
|
|
|
|
|
|
193,535 |
|
Equity in income of subsidiaries |
|
|
(95,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,998 |
|
|
|
|
|
Intercompany |
|
|
|
|
|
|
(9,508 |
) |
|
|
(10,287 |
) |
|
|
19,795 |
|
|
|
|
|
|
|
|
|
Other (income) loss |
|
|
|
|
|
|
5,565 |
|
|
|
|
|
|
|
(3,676 |
) |
|
|
|
|
|
|
1,889 |
|
Interest (income) expense, net |
|
|
|
|
|
|
17,016 |
|
|
|
(122 |
) |
|
|
5,755 |
|
|
|
|
|
|
|
22,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest |
|
|
95,998 |
|
|
|
(13,559 |
) |
|
|
66,958 |
|
|
|
115,598 |
|
|
|
(95,998 |
) |
|
|
168,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
(5,157 |
) |
|
|
25,465 |
|
|
|
43,964 |
|
|
|
|
|
|
|
64,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before noncontrolling interest |
|
|
95,998 |
|
|
|
(8,402 |
) |
|
|
41,493 |
|
|
|
71,634 |
|
|
|
(95,998 |
) |
|
|
104,725 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
|
|
|
|
(299 |
) |
|
|
(1,259 |
) |
|
|
(4,669 |
) |
|
|
|
|
|
|
(6,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
95,998 |
|
|
|
(8,701 |
) |
|
|
40,234 |
|
|
|
66,965 |
|
|
|
(95,998 |
) |
|
|
98,498 |
|
Less: Net income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Warnaco Group, Inc. |
|
$ |
95,998 |
|
|
$ |
(8,701 |
) |
|
$ |
40,234 |
|
|
$ |
64,465 |
|
|
$ |
(95,998 |
) |
|
$ |
95,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
Net revenues |
|
$ |
|
|
|
$ |
462,852 |
|
|
$ |
461,415 |
|
|
$ |
1,138,582 |
|
|
$ |
|
|
|
$ |
2,062,849 |
|
Cost of goods sold |
|
|
|
|
|
|
292,486 |
|
|
|
316,566 |
|
|
|
533,024 |
|
|
|
|
|
|
|
1,142,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
170,366 |
|
|
|
144,849 |
|
|
|
605,558 |
|
|
|
|
|
|
|
920,773 |
|
SG&A expenses (including amortization of intangible assets) |
|
|
|
|
|
|
153,147 |
|
|
|
117,786 |
|
|
|
476,751 |
|
|
|
|
|
|
|
747,684 |
|
Pension income |
|
|
|
|
|
|
31,510 |
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
31,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(14,291 |
) |
|
|
27,063 |
|
|
|
128,673 |
|
|
|
|
|
|
|
141,445 |
|
Equity in income of subsidiaries |
|
|
(47,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,254 |
|
|
|
|
|
Intercompany |
|
|
|
|
|
|
(14,661 |
) |
|
|
(7,463 |
) |
|
|
22,124 |
|
|
|
|
|
|
|
|
|
Other (income) loss |
|
|
|
|
|
|
(7,344 |
) |
|
|
(274 |
) |
|
|
9,544 |
|
|
|
|
|
|
|
1,926 |
|
Interest (income) expense, net |
|
|
|
|
|
|
23,692 |
|
|
|
(2 |
) |
|
|
2,709 |
|
|
|
|
|
|
|
26,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest |
|
|
47,254 |
|
|
|
(15,978 |
) |
|
|
34,802 |
|
|
|
94,296 |
|
|
|
(47,254 |
) |
|
|
113,120 |
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
(8,627 |
) |
|
|
18,791 |
|
|
|
50,563 |
|
|
|
|
|
|
|
60,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before noncontrolling interest |
|
|
47,254 |
|
|
|
(7,351 |
) |
|
|
16,011 |
|
|
|
43,733 |
|
|
|
(47,254 |
) |
|
|
52,393 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
|
|
|
|
(274 |
) |
|
|
(8,933 |
) |
|
|
5,415 |
|
|
|
|
|
|
|
(3,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
47,254 |
|
|
|
(7,625 |
) |
|
|
7,078 |
|
|
|
49,148 |
|
|
|
(47,254 |
) |
|
|
48,601 |
|
Less: Net income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,347 |
) |
|
|
|
|
|
|
(1,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Warnaco Group, Inc. |
|
$ |
47,254 |
|
|
$ |
(7,625 |
) |
|
$ |
7,078 |
|
|
$ |
47,801 |
|
|
$ |
(47,254 |
) |
|
$ |
47,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
Net revenues |
|
$ |
|
|
|
$ |
456,039 |
|
|
$ |
459,776 |
|
|
$ |
903,764 |
|
|
$ |
|
|
|
$ |
1,819,579 |
|
Cost of goods sold |
|
|
|
|
|
|
322,889 |
|
|
|
323,302 |
|
|
|
423,713 |
|
|
|
|
|
|
|
1,069,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
133,150 |
|
|
|
136,474 |
|
|
|
480,051 |
|
|
|
|
|
|
|
749,675 |
|
SG&A expenses (including amortization of intangible assets) |
|
|
|
|
|
|
119,569 |
|
|
|
157,709 |
|
|
|
337,545 |
|
|
|
|
|
|
|
614,823 |
|
Pension income |
|
|
|
|
|
|
(9,024 |
) |
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
(8,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
22,605 |
|
|
|
(21,235 |
) |
|
|
142,320 |
|
|
|
|
|
|
|
143,690 |
|
Equity in income of subsidiaries |
|
|
(79,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,107 |
|
|
|
|
|
Intercompany |
|
|
|
|
|
|
(11,777 |
) |
|
|
(5,827 |
) |
|
|
17,604 |
|
|
|
|
|
|
|
|
|
Other (income) loss |
|
|
|
|
|
|
(95 |
) |
|
|
(6 |
) |
|
|
(6,962 |
) |
|
|
|
|
|
|
(7,063 |
) |
Interest (income) expense, net |
|
|
|
|
|
|
29,933 |
|
|
|
(8 |
) |
|
|
4,027 |
|
|
|
|
|
|
|
33,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest |
|
|
79,107 |
|
|
|
4,544 |
|
|
|
(15,394 |
) |
|
|
127,651 |
|
|
|
(79,107 |
) |
|
|
116,801 |
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
1,044 |
|
|
|
(2,672 |
) |
|
|
31,520 |
|
|
|
|
|
|
|
29,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before noncontrolling interest |
|
|
79,107 |
|
|
|
3,500 |
|
|
|
(12,722 |
) |
|
|
96,131 |
|
|
|
(79,107 |
) |
|
|
86,909 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
|
|
|
|
(157 |
) |
|
|
(14,828 |
) |
|
|
7,183 |
|
|
|
|
|
|
|
(7,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
79,107 |
|
|
|
3,343 |
|
|
|
(27,550 |
) |
|
|
103,314 |
|
|
|
(79,107 |
) |
|
|
79,107 |
|
Less: Net income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Warnaco Group, Inc. |
|
$ |
79,107 |
|
|
$ |
3,343 |
|
|
$ |
(27,550 |
) |
|
$ |
103,314 |
|
|
$ |
(79,107 |
) |
|
$ |
79,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
Net cash provided by (used in) operating activities
from continuing operations |
|
$ |
(2,536 |
) |
|
$ |
94,553 |
|
|
$ |
(2,901 |
) |
|
$ |
174,765 |
|
|
$ |
|
|
|
$ |
263,881 |
|
Net cash used in operating activities
from discontinued operations |
|
|
|
|
|
|
2,343 |
|
|
|
4,080 |
|
|
|
(5,390 |
) |
|
|
|
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(2,536 |
) |
|
|
96,896 |
|
|
|
1,179 |
|
|
|
169,375 |
|
|
|
|
|
|
|
264,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of assets and collection of notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373 |
|
|
|
|
|
|
|
373 |
|
Purchase of property, plant and equipment |
|
|
|
|
|
|
(6,167 |
) |
|
|
(1,179 |
) |
|
|
(36,097 |
) |
|
|
|
|
|
|
(43,443 |
) |
Business acquisitions, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,511 |
) |
|
|
|
|
|
|
(9,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(6,167 |
) |
|
|
(1,179 |
) |
|
|
(45,235 |
) |
|
|
|
|
|
|
(52,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs |
|
|
|
|
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(515 |
) |
Proceeds from the exercise of employee stock options |
|
|
4,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,034 |
|
Purchase of treasury stock |
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,498 |
) |
Premium on cencellation of interest rate swaps |
|
|
|
|
|
|
2,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,218 |
|
Increase (decrease) in short-term notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,985 |
) |
|
|
|
|
|
|
(23,985 |
) |
Borrowings (repayments) under revolving credit facility |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
(11,845 |
) |
|
|
|
|
|
|
(11,805 |
) |
Payment of dividend in connection with Brazil acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,018 |
) |
|
|
|
|
|
|
(4,018 |
) |
Cost to purchase non-controlling interest in an equity transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,339 |
) |
|
|
|
|
|
|
(5,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,536 |
|
|
|
1,743 |
|
|
|
|
|
|
|
(45,187 |
) |
|
|
|
|
|
|
(40,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,702 |
|
|
|
|
|
|
|
1,702 |
|
Increase in cash and cash equivalents |
|
|
|
|
|
|
92,472 |
|
|
|
|
|
|
|
80,655 |
|
|
|
|
|
|
|
173,127 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
30,771 |
|
|
|
(2 |
) |
|
|
116,858 |
|
|
|
|
|
|
|
147,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
123,243 |
|
|
$ |
(2 |
) |
|
$ |
197,513 |
|
|
$ |
|
|
|
$ |
320,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
Net cash provided by (used in) operating activities
from continuing operations |
|
$ |
(8,134 |
) |
|
$ |
125,406 |
|
|
$ |
18,875 |
|
|
$ |
17,261 |
|
|
$ |
|
|
|
$ |
153,408 |
|
Net cash used in operating activities
from discontinued operations |
|
|
|
|
|
|
(1,553 |
) |
|
|
(14,769 |
) |
|
|
(11,199 |
) |
|
|
|
|
|
|
(27,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(8,134 |
) |
|
|
123,853 |
|
|
|
4,106 |
|
|
|
6,062 |
|
|
|
|
|
|
|
125,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of assets and collection of
notes receivable |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
348 |
|
|
|
|
|
|
|
354 |
|
Purchase of property, plant and equipment |
|
|
|
|
|
|
(9,971 |
) |
|
|
(1,875 |
) |
|
|
(30,468 |
) |
|
|
|
|
|
|
(42,314 |
) |
Proceeds from the sale of businesses, net |
|
|
|
|
|
|
|
|
|
|
(2,430 |
) |
|
|
29,210 |
|
|
|
|
|
|
|
26,780 |
|
Business acquisitions, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,356 |
) |
|
|
|
|
|
|
(2,356 |
) |
Purchase of intangible assets |
|
|
|
|
|
|
(2,027 |
) |
|
|
|
|
|
|
(24,700 |
) |
|
|
|
|
|
|
(26,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(11,992 |
) |
|
|
(4,305 |
) |
|
|
(27,966 |
) |
|
|
|
|
|
|
(44,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Term B Note |
|
|
|
|
|
|
(107,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,300 |
) |
Borrowings under revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
|
|
|
|
12,000 |
|
Repurchase of Senior Notes due 2013 |
|
|
|
|
|
|
(46,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,185 |
) |
Increase in short-term notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,593 |
|
|
|
|
|
|
|
16,593 |
|
Proceeds from the exercise of employee stock options |
|
|
28,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,496 |
|
Purchase of treasury stock |
|
|
(20,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,532 |
) |
Payment of deferred financing costs |
|
|
|
|
|
|
(3,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,934 |
) |
Other |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
8,134 |
|
|
|
(157,419 |
) |
|
|
|
|
|
|
28,593 |
|
|
|
|
|
|
|
(120,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and
cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,223 |
) |
|
|
|
|
|
|
(5,223 |
) |
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
(45,558 |
) |
|
|
(199 |
) |
|
|
1,466 |
|
|
|
|
|
|
|
(44,291 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
76,174 |
|
|
|
197 |
|
|
|
115,547 |
|
|
|
|
|
|
|
191,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
30,616 |
|
|
$ |
(2 |
) |
|
$ |
117,013 |
|
|
$ |
|
|
|
$ |
147,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
The Warnaco |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Elimination |
|
|
|
|
|
|
Group, Inc. |
|
|
Warnaco Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Entries |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
from continuing operations |
|
$ |
41,542 |
|
|
$ |
55,439 |
|
|
$ |
(25,965 |
) |
|
$ |
53,467 |
|
|
$ |
|
|
|
$ |
124,483 |
|
Net cash provided by (used) in operating activities
from discontinued operations |
|
|
|
|
|
|
3,834 |
|
|
|
29,948 |
|
|
|
2,158 |
|
|
|
|
|
|
|
35,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
41,542 |
|
|
|
59,273 |
|
|
|
3,983 |
|
|
|
55,625 |
|
|
|
|
|
|
|
160,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of assets and collection of notes receivable |
|
|
|
|
|
|
2,318 |
|
|
|
|
|
|
|
391 |
|
|
|
|
|
|
|
2,709 |
|
Purchase of property, plant and equipment |
|
|
|
|
|
|
(11,319 |
) |
|
|
(2,862 |
) |
|
|
(26,335 |
) |
|
|
|
|
|
|
(40,516 |
) |
Business acquisitions, net of cash acquired |
|
|
|
|
|
|
(677 |
) |
|
|
|
|
|
|
(1,392 |
) |
|
|
|
|
|
|
(2,069 |
) |
Proceeds from the sale of businesses, net |
|
|
|
|
|
|
20,547 |
|
|
|
(1,028 |
) |
|
|
|
|
|
|
|
|
|
|
19,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities from continuing
operations |
|
|
|
|
|
|
10,869 |
|
|
|
(3,890 |
) |
|
|
(27,336 |
) |
|
|
|
|
|
|
(20,357 |
) |
Net cash used in investing activities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
|
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
10,869 |
|
|
|
(3,890 |
) |
|
|
(27,779 |
) |
|
|
|
|
|
|
(20,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued with business acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt assumed on business acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs |
|
|
|
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480 |
) |
Payment of Senior Notes due 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of Term B Note |
|
|
|
|
|
|
(61,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,800 |
) |
Proceeds from the exercise of employee stock options |
|
|
16,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,149 |
|
Purchase of treasury stock |
|
|
(57,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,691 |
) |
Increase in short term CKJEA notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,493 |
) |
|
|
|
|
|
|
(17,493 |
) |
Proceeds from the sale and leaseback of store fixtures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
(430 |
) |
|
|
|
|
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(41,542 |
) |
|
|
(62,223 |
) |
|
|
|
|
|
|
(17,923 |
) |
|
|
|
|
|
|
(121,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,993 |
|
|
|
|
|
|
|
6,993 |
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
7,919 |
|
|
|
93 |
|
|
|
16,916 |
|
|
|
|
|
|
|
24,928 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
68,255 |
|
|
|
104 |
|
|
|
98,631 |
|
|
|
|
|
|
|
166,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
76,174 |
|
|
$ |
197 |
|
|
$ |
115,547 |
|
|
$ |
|
|
|
$ |
191,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
Note 21Quarterly Results of Operations (Unaudited)
The following tables contain selected financial data for each quarter of Fiscal 2009 and
Fiscal 2008. Certain amounts have been adjusted from those originally reported in Form 10Q for the
respective periods in Fiscal 2009 and Fiscal 2008 to give effect to the Companys discontinued
operations. The Company believes that the following information reflects all normal recurring
adjustments necessary for a fair presentation of the information for each quarter of Fiscal 2009
and Fiscal 2008. The operating results for any period are not necessarily indicative of results for
any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter (a) |
|
|
Quarter |
|
|
Quarter (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
537,843 |
|
|
$ |
455,432 |
|
|
$ |
520,905 |
|
|
$ |
505,445 |
|
Gross profit |
|
|
225,284 |
|
|
|
188,999 |
|
|
|
228,822 |
|
|
|
221,242 |
|
Income from continuing operations before non-controlling interest |
|
|
38,849 |
|
|
|
19,555 |
|
|
|
32,548 |
|
|
|
13,773 |
|
Loss from discontinued operations, net of taxes |
|
|
(1,020 |
) |
|
|
(878 |
) |
|
|
(1,562 |
) |
|
|
(2,767 |
) |
Net income |
|
|
37,571 |
|
|
|
17,760 |
|
|
|
29,656 |
|
|
|
11,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.84 |
|
|
$ |
0.41 |
|
|
$ |
0.68 |
|
|
$ |
0.29 |
|
Loss from discontinued operations |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.04 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.82 |
|
|
$ |
0.39 |
|
|
$ |
0.64 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.84 |
|
|
$ |
0.40 |
|
|
$ |
0.66 |
|
|
$ |
0.29 |
|
Loss from discontinued operations |
|
|
(0.03 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.81 |
|
|
$ |
0.38 |
|
|
$ |
0.63 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the second quarter of Fiscal 2009, the Company recorded a tax charge in
continuing operations of approximately $2,500, and a charge of approximately $400 in
discontinued operations, to correct prior periods associated with income taxes. During the
fourth quarter of Fiscal 2009, the Company recorded a tax charge in continuing operations of
approximately $1,100, and a charge of approximately $3,000 in discontinued operations, to
correct prior periods associated with income taxes. See Note 6 of Notes to Consolidated
Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter (a) |
|
|
Quarter (a) |
|
|
Quarter (a) |
|
|
Quarter (a) |
|
|
Net revenues |
|
$ |
567,155 |
|
|
$ |
502,790 |
|
|
$ |
547,626 |
|
|
$ |
445,278 |
|
Gross profit |
|
|
253,785 |
|
|
|
224,514 |
|
|
|
254,638 |
|
|
|
187,836 |
|
Income (loss) from continuing operations before non-controlling interest |
|
|
7,314 |
|
|
|
26,670 |
|
|
|
29,408 |
|
|
|
(12,346 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
10,395 |
|
|
|
(7,306 |
) |
|
|
(2,897 |
) |
|
|
(3,984 |
) |
Net income (loss) |
|
|
17,709 |
|
|
|
19,364 |
|
|
|
26,511 |
|
|
|
(16,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.16 |
|
|
$ |
0.58 |
|
|
$ |
0.63 |
|
|
$ |
(0.26 |
) |
Income (loss) from discontinued operations |
|
|
0.23 |
|
|
|
(0.16 |
) |
|
|
(0.06 |
) |
|
|
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.39 |
|
|
$ |
0.42 |
|
|
$ |
0.57 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.16 |
|
|
$ |
0.56 |
|
|
$ |
0.62 |
|
|
$ |
(0.26 |
) |
Income (loss) from discontinued operations |
|
|
0.22 |
|
|
|
(0.15 |
) |
|
|
(0.06 |
) |
|
|
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.38 |
|
|
$ |
0.41 |
|
|
$ |
0.56 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first and second quarters of Fiscal 2008, the Company recorded expenses to
correct prior periods of approximately $3,800 and $1,000, respectively, primarily associated
with income taxes. During the third and fourth quarters of Fiscal 2008, the Company recorded
income to correct prior periods of approximately $900 and $2,600, respectively, primarily
associated with income taxes. |
F-55
SCHEDULE II
THE WARNACO GROUP, INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Cost and |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Expenses |
|
|
Other Additions / |
|
|
|
|
|
|
End of |
|
Description |
|
Period |
|
|
(1) |
|
|
Reclassification |
|
|
Deductions |
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
87,064 |
|
|
$ |
181,551 |
|
|
$ |
(1,458 |
)(4) |
|
$ |
(180,454 |
)(2) |
|
$ |
86,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax valuation allowance |
|
$ |
150,762 |
|
|
$ |
1,146 |
|
|
$ |
(131,711 |
)(3) |
|
$ |
(8,347 |
) |
|
$ |
11,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
86,703 |
|
|
$ |
215,135 |
|
|
$ |
(1,963 |
)(4) |
|
$ |
(212,500 |
)(2) |
|
$ |
87,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax valuation allowance |
|
$ |
11,850 |
|
|
$ |
2,021 |
|
|
$ |
1,159 |
(3) |
|
$ |
|
|
|
$ |
15,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable allowances |
|
$ |
87,375 |
|
|
$ |
242,755 |
|
|
$ |
|
(4) |
|
$ |
(240,148 |
)(2) |
|
$ |
89,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax valuation allowance |
|
$ |
15,030 |
|
|
$ |
3,552 |
|
|
$ |
(1,127 |
)(3) |
|
$ |
|
|
|
$ |
17,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
With respect to receivable allowances, includes bad debts, cash discounts, customer
allowances and sales returns. |
|
(2) |
|
Credits issued and amounts written-off, net of recoveries. |
|
(3) |
|
Relates primarily to adjustments to the Companys valuation allowance resulting from changes
in its deferred taxes due to: (a) basis differences resulting from the filing of the Companys U.S. corporate income tax
return, (b) finalized assessments of the Companys foreign tax returns by local taxing
authorities, (c) the realization of certain deferred tax assets that existed as of the date of
the Companys emergence from bankruptcy and (d) currency translation adjustments. |
|
(4) |
|
Amounts include reserve balances for discontinued operations. |
A-1