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EXCEL - IDEA: XBRL DOCUMENT - PVH CORP. /DE/Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - PVH CORP. /DE/ex32220143q10q.htm
EX-32.1 - EXHIBIT 32.1 - PVH CORP. /DE/ex32120143q10q.htm
EX-31.2 - EXHIBIT 31.2 - PVH CORP. /DE/ex31220143q10q.htm
EX-31.1 - EXHIBIT 31.1 - PVH CORP. /DE/ex31120143q10q.htm


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

FORM 10-Q

(Mark One)
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
November 2, 2014
 

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


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

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

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

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

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

The number of outstanding shares of common stock, par value $1.00 per share, of the registrant as of December 2, 2014
was 82,450,867.




PVH CORP.
INDEX

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

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

PART I -- FINANCIAL INFORMATION

Item 1 - Financial Statements
PART II -- OTHER INFORMATION





PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

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

 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 2,
 
November 3,
 
November 2,
 
November 3,
 
2014
 
2013
 
2014
 
2013
Net sales    
$
2,114.0

 
$
2,145.1

 
$
5,876.0

 
$
5,852.6

Royalty revenue    
89.3

 
85.5

 
224.0

 
215.1

Advertising and other revenue    
29.8

 
28.5

 
72.4

 
66.4

Total revenue    
2,233.1

 
2,259.1

 
6,172.4

 
6,134.1

Cost of goods sold     
1,065.6

 
1,087.3

 
2,917.0

 
2,984.3

Gross profit    
1,167.5

 
1,171.8

 
3,255.4

 
3,149.8

Selling, general and administrative expenses    
892.9

 
927.4

 
2,647.8

 
2,764.0

Debt modification and extinguishment costs

 

 
93.1

 
40.4

Equity in income of unconsolidated affiliates, net
5.3

 
4.9

 
9.2

 
8.0

Income before interest and taxes
279.9

 
249.3

 
523.7

 
353.4

Interest expense    
33.6

 
47.9

 
110.7

 
145.3

Interest income    
1.5

 
1.9

 
4.2

 
6.0

Income before taxes
247.8

 
203.3

 
417.2

 
214.1

Income tax expense
22.1

 
6.7

 
29.8

 
33.1

Net income
225.7

 
196.6

 
387.4

 
181.0

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

 
(0.1
)
 
(0.1
)
 
0.0

Net income attributable to PVH Corp.
$
225.7

 
$
196.7

 
$
387.5

 
$
181.0

Basic net income per common share attributable to PVH Corp.
$
2.74

 
$
2.41

 
$
4.71

 
$
2.24

Diluted net income per common share attributable to PVH Corp.
$
2.71

 
$
2.37

 
$
4.66

 
$
2.19

Dividends declared per common share    
$
0.0375

 
$
0.0375

 
$
0.1500

 
$
0.1500


See accompanying notes.

1



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


 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 2,
 
November 3,
 
November 2,
 
November 3,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
225.7

 
$
196.6

 
$
387.4

 
$
181.0

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $1.2; $0.1; $(2.1) and $(0.2)
(217.6
)
 
84.4

 
(207.4
)
 
(65.9
)
Amortization of prior service credit related to pension and postretirement plans, net of tax (benefit) of $(0.1); $(0.1); $(0.3) and $(0.3)
(0.2
)
 
(0.2
)
 
(0.4
)
 
(0.4
)
Net unrealized and realized gain (loss) on effective hedges, net of tax expense (benefit) of $1.3; $(1.0); $1.3 and $(1.7)
28.5

 
(7.1
)
 
36.5

 
2.4

Comprehensive income
36.4

 
273.7

 
216.1

 
117.1

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

 
(0.3
)
 
0.5

 
(1.9
)
Total comprehensive income attributable to PVH Corp.
$
36.4

 
$
274.0

 
$
215.6

 
$
119.0


See accompanying notes.


2




PVH Corp.
Consolidated Balance Sheets
(In millions, except share and per share data)
 
November 2,
 
February 2,
 
November 3,
 
2014
 
2014
 
2013
 
UNAUDITED
 
AUDITED
 
UNAUDITED
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents    
$
365.1

 
$
593.2

 
$
542.5

Trade receivables, net of allowances for doubtful accounts of $19.8, $26.4 and $21.4
879.7

 
730.3

 
875.3

Other receivables    
31.0

 
30.9

 
40.6

Inventories, net    
1,239.9

 
1,281.0

 
1,164.1

Prepaid expenses    
177.9

 
151.9

 
227.4

Other, including deferred taxes of $86.5, $155.1 and $91.1
173.1

 
211.3

 
164.7

Assets held for sale

 

 
47.5

Total Current Assets
2,866.7

 
2,998.6

 
3,062.1

Property, Plant and Equipment, net
707.6

 
712.1

 
689.3

Goodwill    
3,435.0

 
3,506.8

 
3,496.6

Tradenames    
2,930.9

 
3,010.3

 
2,998.8

Other Intangibles, net
995.5

 
1,041.9

 
1,067.5

Other Assets, including deferred taxes of $32.8, $35.2 and $104.3
330.0

 
305.9

 
339.2

Total Assets
$
11,265.7

 
$
11,575.6

 
$
11,653.5

 
 
 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
Current Liabilities:
 
 
 
 
 
Accounts payable    
$
476.2

 
$
582.9

 
$
436.1

Accrued expenses, including deferred taxes of $0.0, $1.2 and $0.4
745.6

 
844.2

 
748.4

Deferred revenue    
17.7

 
33.5

 
18.3

Short-term borrowings    
39.9

 
6.8

 
12.4

Current portion of long-term debt    
99.3

 
85.0

 
85.0

Total Current Liabilities    
1,378.7

 
1,552.4

 
1,300.2

Long-Term Debt
3,618.7

 
3,878.2

 
4,174.6

Other Liabilities, including deferred taxes of $1,102.5, $1,016.6 and $1,049.1
1,684.5

 
1,804.2

 
1,814.4

Redeemable Non-Controlling Interest

 
5.6

 
5.6

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

 

 

Common stock, par value $1 per share; 240,000,000 shares authorized; 83,044,291; 82,679,574 and 82,095,790 shares issued
83.0

 
82.7

 
82.1

Additional paid in capital - common stock    
2,752.3

 
2,696.6

 
2,646.4

Retained earnings    
1,949.8

 
1,574.8

 
1,612.5

Accumulated other comprehensive (loss) income
(129.6
)
 
42.3

 
77.9

Less: 598,814; 512,702 and 504,845 shares of common stock held in treasury, at cost
(71.7
)
 
(61.2
)
 
(60.2
)
Total Stockholders’ Equity    
4,583.8

 
4,335.2

 
4,358.7

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity
$
11,265.7

 
$
11,575.6

 
$
11,653.5


See accompanying notes.

3




PVH Corp.
Consolidated Statements of Cash Flows
Unaudited
(In millions)
 
Thirty-Nine Weeks Ended
 
November 2,
 
November 3,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
387.4

 
$
181.0

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization    
181.4

 
243.1

Equity in income of unconsolidated affiliates, net
(9.2
)
 
(8.0
)
Deferred taxes    
(2.5
)
 
(83.5
)
Stock-based compensation expense    
37.3

 
47.1

Impairment of long-lived assets
4.8

 
5.8

Debt modification and extinguishment costs
93.1

 
40.4

Net gain on deconsolidation of subsidiaries and joint venture
(8.0
)
 

Write-down of assets held for sale

 
16.0

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net    
(168.8
)
 
(176.0
)
Inventories, net    
4.4

 
73.7

Accounts payable, accrued expenses and deferred revenue    
(177.5
)
 
(303.4
)
Prepaid expenses    
(45.1
)
 
(22.3
)
Employer pension contributions
(2.7
)
 
(60.0
)
Other, net    
29.3

 
81.6

Net cash provided by operating activities
323.9

 
35.5

INVESTING ACTIVITIES(1)
 
 
 
Business acquisitions, net of cash acquired
(14.7
)
 
(1,815.3
)
Cash received for sale of Chaps sportswear assets

 
18.3

Purchase of property, plant and equipment    
(173.5
)
 
(166.2
)
Contingent purchase price payments
(35.5
)
 
(37.5
)
Change in restricted cash
9.7

 

Investments in unconsolidated affiliates
(26.2
)
 
(3.5
)
Net cash used by investing activities    
(240.2
)
 
(2,004.2
)
FINANCING ACTIVITIES(1)
 
 
 
Net proceeds from (payments on) short-term borrowings
31.6

 
(25.3
)
Repayment of 2011 facilities

 
(900.0
)
Redemption of 7 3/8% senior notes, including make whole premium
(667.6
)
 

Repayment of Warnaco’s previously outstanding debt

 
(197.0
)
Proceeds from 2014/2013 facilities, net of related fees
586.7

 
2,993.4

Repayment of 2014/2013 facilities
(244.7
)
 
(202.9
)
Payment of fees associated with issuance of 4 1/2% senior notes

 
(16.3
)
Net proceeds from settlement of awards under stock plans
9.5

 
27.0

Excess tax benefits from awards under stock plans    
9.3

 
22.7

Cash dividends    
(12.5
)
 
(12.3
)
Acquisition of treasury shares    
(10.5
)
 
(60.5
)
Payments of capital lease obligations
(6.6
)
 
(7.0
)
Net cash (used) provided by financing activities
(304.8
)
 
1,621.8

Effect of exchange rate changes on cash and cash equivalents    
(7.0
)
 
(2.8
)
Decrease in cash and cash equivalents
(228.1
)
 
(349.7
)
Cash and cash equivalents at beginning of period    
593.2

 
892.2

Cash and cash equivalents at end of period    
$
365.1

 
$
542.5


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

See accompanying notes.

4



PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. GENERAL

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

The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see Note 5, “Investments in Unconsolidated Affiliates,” for a further discussion. As a result of the acquisition in the first quarter of 2013 of The Warnaco Group, Inc. (“Warnaco”), the Company acquired a majority interest in a joint venture in India that was consolidated and accounted for as a redeemable non-controlling interest during 2013. The redeemable non-controlling interest represented the minority shareholders’ proportionate share (49%) of the equity in that entity. During the first quarter of 2014, in connection with the sale of the minority shareholders’ interests to a third party, the Company and the new shareholder entered into a shareholder agreement with different governing arrangements between the Company and the new shareholder as compared to the arrangements with the prior minority shareholders. Based on the new arrangements, the joint venture was deconsolidated and is now accounted for using the equity method of accounting. Please see Note 6, “Redeemable Non-Controlling Interest,” for a further discussion.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not contain all disclosures required by accounting principles generally accepted in the United States for complete financial statements. Reference should be made to the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended February 2, 2014.

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

The results of operations for the thirteen and thirty-nine weeks ended November 2, 2014 and November 3, 2013 are not necessarily indicative of those for a full fiscal year due, in part, to seasonal factors. The data contained in these financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods.

Certain reclassifications have been made to the consolidated financial statements for the prior year periods to present that information on a basis consistent with the current year. 

2. INVENTORIES

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


5



3. ACQUISITIONS AND DIVESTITURES

Acquisition of Warnaco

The Company acquired on February 13, 2013 all of the outstanding equity interests in Warnaco. The results of Warnaco’s operations since that date are included in the Company’s consolidated financial statements. Warnaco designs, sources, markets and distributes a broad line of intimate apparel, underwear, jeanswear and swim products worldwide. Warnaco’s products are sold under the Calvin Klein, Speedo, Warner’s and Olga brand names and were also previously sold under the Chaps brand name. Ralph Lauren Corporation reacquired the Chaps license on February 14, 2013 as a result of Company’s acquisition of Warnaco.

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

Fair Value of the Acquisition Consideration

The acquisition date fair value of the acquisition consideration paid at closing totaled $3,137.1 million, which consisted of the following:

(In millions, except per share data)
 
 
Cash
 
$
2,180.0

Common stock (7.7 shares, par value $1.00 per share)
 
926.5

Warnaco employee replacement stock awards
 
39.8

Elimination of pre-acquisition liability to Warnaco
 
(9.2
)
Total fair value of the acquisition consideration
 
$
3,137.1


The fair value of the 7.7 million common shares issued was equal to the aggregate value of the shares at the closing market price of the Company’s common stock on February 12, 2013, the day prior to the closing. The value of the replacement stock awards was determined by multiplying the estimated fair value of the Warnaco awards outstanding at the time of the acquisition, reduced by an estimated value of awards to be forfeited, by the proportionate amount of the vesting period that had lapsed as of the acquisition date. Also included in the acquisition consideration was the elimination of a $9.2 million pre-acquisition liability to Warnaco.

The Company funded the cash portion and related costs of the Warnaco acquisition, repaid all outstanding borrowings under its previously outstanding senior secured credit facilities and repaid all of Warnaco’s previously outstanding long-term debt with the net proceeds of (i) the issuance of $700.0 million of 4 1/2% senior notes due 2022; and (ii) the borrowing of $3,075.0 million of term loans under new senior secured credit facilities.

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

The Company incurred certain pre-tax costs in 2012 and 2013 directly associated with the acquisition, including short-lived non cash valuation adjustments and amortization, totaling approximately $170.0 million, of which approximately $125.0 million was recorded during the thirty-nine weeks ended November 3, 2013. Please see Note 16, “Exit Activity Costs,” for a discussion of restructuring costs incurred during the thirty-nine weeks ended November 2, 2014 associated with the integration.

The operations acquired with Warnaco had total revenue of $1,567.6 million and a net loss, after non cash valuation adjustments and amortization and integration costs, of $(21.4) million for the period from the date of acquisition through November 3, 2013. These amounts were included in the Company’s results of operations for the thirty-nine week period then ended.

6



Pro Forma Impact of the Transaction

The following table presents the Company’s pro forma consolidated results of operations for the thirteen and thirty-nine weeks ended November 3, 2013, as if the acquisition and the related financing transactions had occurred at the beginning of the year prior to the acquisition date. The pro forma results were calculated applying the Company’s accounting policies and reflect (i) the impact on revenue, cost of goods sold and selling, general and administrative expenses resulting from the elimination of intercompany transactions; (ii) the impact on depreciation and amortization expense based on fair value adjustments to Warnaco’s property, plant and equipment and intangible assets recorded in connection with the acquisition; (iii) the impact on interest expense resulting from changes to the Company’s capital structure in connection with the acquisition; (iv) the impact on cost of goods sold resulting from acquisition date adjustments to the fair value of inventory; (v) the elimination of transaction costs related to the acquisition that were included in the Company’s results of operations for the thirteen and thirty-nine weeks ended November 3, 2013; and (vi) the tax effects of the above adjustments. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Warnaco. Accordingly, such pro forma amounts are not indicative of the results that actually would have occurred had the acquisition been completed at the beginning of the year prior to the acquisition date, nor are they indicative of the future operating results of the combined company.

 
Pro Forma
 
Pro Forma
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(In millions)
 
11/3/13
 
11/3/13
Total revenue
 
$
2,259.2

 
$
6,197.2

Net income attributable to PVH Corp.
 
300.2

 
450.1



Allocation of the Acquisition Consideration

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

(In millions)
 
 
Cash and cash equivalents
 
$
364.7

Trade receivables
 
286.7

Other receivables
 
46.9

Inventories
 
442.9

Prepaid expenses
 
38.7

Other current assets
 
56.0

Property, plant and equipment
 
123.3

Goodwill
 
1,513.2

Tradenames
 
604.6

Other intangibles
 
1,023.7

Other assets
 
169.3

Total assets acquired
 
4,670.0

Accounts payable
 
180.1

Accrued expenses
 
260.5

Short-term borrowings
 
26.9

Current portion of long-term debt
 
2.0

Long-term debt
 
195.0

Other liabilities
 
862.8

Total liabilities assumed
 
1,527.3

Redeemable non-controlling interest
 
5.6

Total fair value of acquisition consideration
 
$
3,137.1




7



The Company finalized the purchase price allocation during the fourth quarter of 2013 and applied applicable measurement period adjustments retrospectively in accordance with Financial Accounting Standards Board (“FASB”) guidance for business combinations.

During the process of finalizing the purchase price allocation, the Company received additional information about facts and circumstances that existed as of the Warnaco acquisition date. As a result of the receipt of new information, which was included in the final valuation report received from a third-party valuation firm, and considering the results of that report, the Company estimated the fair value of the order backlog acquired as part of the Warnaco acquisition to be $24.1 million lower than the estimated provisional amount. As a result of this adjustment to fair value, the carrying amount of the order backlog (which was being amortized principally over six months) was retrospectively decreased as of February 13, 2013, with a corresponding increase to goodwill and other intangible assets (net of related deferred taxes), and the related order backlog amortization expense for the first and second quarters of 2013 was reduced by $11.6 million and $12.3 million, respectively. The difference between the decrease in backlog amortization expense and the decrease in the fair value of the intangible asset relates to changes in exchange rates subsequent to the acquisition date. The Company recorded these measurement period adjustments in the fourth quarter of 2013 and applied the adjustments retrospectively to the first and second quarters of 2013. The measurement period adjustments were included in the results of the Calvin Klein International segment.

In connection with the acquisition, the Company recorded goodwill of $1,513.2 million, which was assigned to the Company’s Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail segments in the amounts of $456.0 million, $658.6 million, $5.9 million, $296.5 million, $84.3 million and $11.9 million, respectively. In accordance with FASB guidance, the goodwill acquired in the Warnaco acquisition was assigned as of the acquisition date to the Company’s reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before the acquisition and their estimated fair values after the acquisition. None of the goodwill is expected to be deductible for tax purposes.

The Company also recorded other intangible assets of $1,628.3 million, which included reacquired license rights of $593.3 million, order backlog of $73.0 million and customer relationships of $149.8 million, which are all amortizable, as well as tradenames of $604.6 million and perpetual license rights of $207.6 million, which have indefinite lives.

Sale of Chaps Sportswear Assets

As a result of the Company’s acquisition of Warnaco, Ralph Lauren Corporation reacquired on February 14, 2013 the license for Chaps men’s sportswear that Warnaco held from affiliates of Ralph Lauren Corporation. The Chaps sportswear business was previously operated by Warnaco under such license. In connection with this transaction, the Company sold all of the assets of the Chaps sportswear business, which consisted principally of inventory, to Ralph Lauren Corporation for gross proceeds of $18.3 million.

Acquisition of Russia Franchisee

The Company acquired three Tommy Hilfiger stores in Russia during the fourth quarter of 2013 and two additional stores during the first quarter of 2014 from a former Tommy Hilfiger franchisee. The Company paid $6.0 million during the fourth quarter of 2013 for the first three stores and $4.3 million during the first quarter of 2014 for the other two stores. These transactions were accounted for as business combinations.

Acquisition of Ireland Franchisee

The Company acquired six Tommy Hilfiger stores in Ireland from a former Tommy Hilfiger franchisee during the first quarter of 2014. The Company paid $3.1 million as consideration for this transaction. This transaction was accounted for as a business combination.

Acquisition of Calvin Klein Performance Wear Retail Businesses in Hong Kong and China

The Company acquired the Calvin Klein performance wear retail businesses in Hong Kong and China from a former Calvin Klein sublicensee during the third quarter of 2014. The Company paid $7.3 million as consideration for this transaction. This transaction was accounted for as a business combination. The Company and the former shareholders of the acquired entity are in the process of finalizing the value of the net assets acquired; thus the amount paid is subject to adjustment.

8



4. ASSETS HELD FOR SALE

During the third quarter of 2013, the Company entered into an agreement to sell substantially all of the assets of its G.H. Bass & Co. (“Bass”) business. The decision to sell these assets was based on the Company’s strategy to drive growth through its higher-margin Calvin Klein and Tommy Hilfiger businesses. The Company recorded a net pre-tax loss of $19.5 million during the third quarter of 2013 in connection the sale, the details of which are discussed below.

The Company classified the Bass assets as held for sale and recorded a loss of $16.0 million during the third quarter of 2013 to reflect these assets in the Consolidated Balance Sheet as of November 3, 2013 at $47.5 million, representing their fair value, less estimated costs to sell. This loss was principally included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013. On November 4, 2013, the Company completed the sale of these assets for net proceeds of $47.5 million. The sale price, net of costs to sell, was equal to the carrying value of the assets as of November 3, 2013.

The assets classified as held for sale in the Company’s Consolidated Balance Sheet as of November 3, 2013 were included in the Heritage Brands Retail segment and consisted of the following:
(In millions)
 
 
Other receivables
 
$
0.2

Inventories, net
 
49.0

Other current assets
 
0.2

Property, plant and equipment, net
 
14.0

Other noncurrent assets
 
0.1

Allowance for reduction of assets held for sale
 
(16.0
)
Total assets held for sale
 
$
47.5


A small number of the Company’s Bass stores were excluded from the sale and were deemed to be impaired as of November 3, 2013. The Company recorded a loss of $1.2 million during the third quarter of 2013 related to the impaired stores. Please see Note 12, “Fair Value Measurements,” for a further discussion. In addition, during the third quarter of 2013, the Company recorded a gain of $3.3 million as a result of writing off certain liabilities in connection with the transaction. The Company also recognized costs during the third quarter of 2013 related to severance and termination benefits for certain Bass employees, which totaled $1.2 million. The above-mentioned items were included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013 and were included in the Heritage Brands Retail segment.

In connection with the sale, the Company guaranteed lease payments for substantially all Bass retail stores included in the sale pursuant to the terms of noncancelable leases expiring on various dates through 2022. The estimated fair value of these guarantee obligations as of November 3, 2013 was $4.4 million, which was recorded in the Heritage Brands retail segment and was included in selling, general and administrative expenses in the Company’s Consolidated Income Statements for the thirteen and thirty-nine weeks ended November 3, 2013 and accrued expenses and other liabilities in the Company’s Consolidated Balance Sheet as of November 3, 2013. The estimated fair value of these guarantee obligations as of November 2, 2014 is $3.2 million, which is included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheet. Please see Note 20, “Guarantees,” for a further discussion.

5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Karl Lagerfeld
The Company acquired a 10% economic interest in Kingdom Holding 1 B.V., the parent company of the Karl Lagerfeld brand, during the first quarter of 2014 for $18.9 million. One of the Company’s directors owns approximately 35% of Kingdom Holding 1 B.V. The Company has significant influence as defined under FASB guidance with respect to its investment in Kingdom Holding 1 B.V., therefore, this investment is being accounted for under the equity method of accounting.
Calvin Klein Australia
The Company formed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), in 2013 in which the Company owns a 50% economic interest. The joint venture licenses from a Company subsidiary the rights to distribute and sell certain Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the transaction,

9



the Company contributed to the joint venture its subsidiaries that were operating the Calvin Klein Jeans businesses in Australia and New Zealand. In connection with this contribution, which took place on the first day of 2014, the Company deconsolidated these subsidiaries and recognized a net gain of $2.1 million during the first quarter of 2014, which was recorded in selling, general and administrative expenses. The gain was measured as the difference between the fair value of the Company’s 50% interest as determined by a third-party valuation firm and the carrying value of the net assets and cash contributed. The Company made net payments of $7.3 million and $0.7 million to PVH Australia during the thirty-nine weeks ended November 2, 2014 and November 3, 2013, respectively, representing its 50% share of funding. This investment is being accounted for under the equity method of accounting.
 
Calvin Klein India

With the Warnaco acquisition, the Company acquired a 51% economic interest in a Calvin Klein joint venture in India, Premium Garments Wholesale Trading Private Limited (“CK India”). The joint venture licenses from a Company subsidiary the rights to the Calvin Klein trademark in India. Beginning in the first quarter of 2014, this investment is being accounted for under the equity method of accounting. Please see Note 6, “Redeemable Non-Controlling Interest,” for a further discussion.

Tommy Hilfiger Brazil

The Company formed a joint venture, Tommy Hilfiger do Brasil S.A., in Brazil in 2012, in which the Company owns a 40% economic interest. The joint venture licenses from a Company subsidiary the rights to the Tommy Hilfiger trademarks in Brazil. The Company made a payment of $2.8 million to Tommy Hilfiger do Brasil S.A. during the thirty-nine weeks ended November 3, 2013 to contribute its 40% share of funding. This investment is being accounted for under the equity method of accounting.

Tommy Hilfiger China

The Company formed a joint venture, TH Asia Ltd., in China in 2010, in which the Company owns a 45% economic interest. The joint venture assumed direct control of the Tommy Hilfiger wholesale and retail distribution businesses in China from the prior licensee on August 1, 2011. The joint venture licenses from a Company subsidiary the rights to these businesses. This investment is being accounted for under the equity method of accounting.

Tommy Hilfiger India

The Company acquired in 2011 a 50% economic interest in a company that has since been renamed Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a Company subsidiary the rights to the Tommy Hilfiger trademarks in India for all categories (other than fragrance), operates a wholesale apparel, footwear and handbags business in connection with its license, and sublicenses the trademarks for certain other product categories. This investment is being accounted for under the equity method of accounting.

Included in other assets in the Company’s Consolidated Balance Sheets as of November 2, 2014, February 2, 2014 and November 3, 2013 is $113.7 million, $71.3 million and $71.9 million, respectively, related to these investments in unconsolidated affiliates.

6. REDEEMABLE NON-CONTROLLING INTEREST
CK India was consolidated in the Company’s financial statements during 2013. Please see Note 5, “Investments in Unconsolidated Affiliates,” for a further discussion.
The fair value of the non-controlling interest in CK India as of the date it was acquired by the Company was $5.6 million. During 2013, subsequent changes in the fair value of the redeemable non-controlling interest were recognized immediately as they occurred and the carrying amount of the redeemable non-controlling interest was adjusted to equal the fair value at the end of each reporting period, provided that this amount at the end of each reporting period was not lower than the initial fair value. Any fair value adjustment to the carrying amount of the redeemable non-controlling interest was recognized immediately in retained earnings of the Company. After adjusting the carrying amount for net income and other comprehensive income during the thirty-nine weeks ended November 3, 2013, an adjustment to retained earnings of $1.9 million was necessary to increase the fair value of the redeemable non-controlling interest as of November 3, 2013 to the initial fair value of $5.6 million.

During the first quarter of 2014, Arvind Limited, the Company’s joint venture partner in TH India, purchased the Company’s prior joint venture partners’ shares in CK India and, as a result of the entry into a shareholder agreement with different

10



governing arrangements between the Company and the new shareholder as compared to the arrangements with the prior minority shareholders, the Company no longer holds a controlling interest in the joint venture. CK India was deconsolidated, as a result, and the Company began reporting its 51% interest as an equity method investment in the first quarter of 2014. The Company recognized a net gain of $5.9 million in connection with the deconsolidation of CK India during the first quarter of 2014, which was recorded in selling, general and administrative expenses. The gain was measured as the difference between the fair value of the Company’s 51% interest as determined by a third-party valuation firm and the carrying value.

7. GOODWILL

The changes in the carrying amount of goodwill for the thirty-nine weeks ended November 2, 2014, by segment, were as follows:
(In millions)
Calvin Klein North America
 
Calvin Klein International
 
Tommy Hilfiger North America
 
Tommy Hilfiger International
 
Heritage Brands Wholesale
 
Heritage Brands Retail
 
Total
Balance as of February 2, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
$
683.6

 
$
877.8

 
$
204.4

 
$
1,489.9

 
$
239.2

 
$
11.9

 
$
3,506.8

Accumulated impairment losses    

 

 

 

 

 

 

Goodwill, net    
683.6

 
877.8

 
204.4

 
1,489.9

 
239.2

 
11.9

 
3,506.8

Contingent purchase price payments to Mr. Calvin Klein
21.5

 
17.0

 

 

 

 

 
38.5

Goodwill from acquisition of Russia franchisee

 

 

 
3.8

 

 

 
3.8

Goodwill from acquisition of Ireland franchisee

 

 

 
3.7

 

 

 
3.7

Goodwill from acquisition of Calvin Klein performance wear retail businesses in Hong Kong and China

 
7.2

 

 

 

 

 
7.2

Currency translation    
(0.2
)
 
(14.4
)
 

 
(110.4
)
 

 

 
(125.0
)
Balance as of November 2, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
704.9

 
887.6

 
204.4

 
1,387.0

 
239.2

 
11.9

 
3,435.0

Accumulated impairment losses    

 

 

 

 

 

 

Goodwill, net    
$
704.9

 
$
887.6

 
$
204.4

 
$
1,387.0

 
$
239.2

 
$
11.9

 
$
3,435.0


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

8. RETIREMENT AND BENEFIT PLANS

The Company has five noncontributory defined benefit pension plans as of November 2, 2014 covering substantially all employees resident in the United States who meet certain age and service requirements. As part of the Warnaco acquisition, the Company acquired a frozen noncontributory defined benefit pension plan. Such plan was merged with an existing plan of the Company’s during 2013. The plans provide monthly benefits upon retirement based on career compensation and years of credited service. Vesting in plan benefits occurs after five years of service. The Company refers to these five plans as its “Pension Plans.”

The Company also has for certain members of Tommy Hilfiger’s domestic senior management a supplemental executive retirement plan, which is an unfunded non-qualified supplemental defined benefit pension plan. Such plan is frozen and, as a

11




result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation plan, which is an unfunded non-qualified supplemental defined benefit plan. Under the individual participants’ agreements, the participants in this plan will receive a predetermined amount during the 10 years following the attainment of age 65, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least 10 years and has attained age 55. The Company also has for certain employees resident in the United States who meet certain age and service requirements an unfunded non-qualified supplemental defined benefit pension plan, which provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. The Company refers to these three plans as its “SERP Plans.”

The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. During 2002, the postretirement plan was amended to eliminate the Company contribution, which partially subsidized benefits, for active participants who, as of January 1, 2003, had not attained age 55 and 10 years of service. As a result of the Company’s acquisition of Warnaco, the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. This plan was frozen on January 1, 2014. The Company refers to these two plans as its “Postretirement Plans.”

Net benefit cost related to the Company’s Pension Plans was recognized in selling, general and administrative expenses as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(In millions)
11/2/14
 
11/3/13
 
11/2/14
 
11/3/13
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$
4.9

 
$
4.9

 
$
14.7

 
$
14.3

Interest cost    
7.2

 
6.6

 
21.4

 
19.7

Expected return on plan assets    
(10.8
)
 
(10.0
)
 
(32.6
)
 
(29.5
)
Total    
$
1.3

 
$
1.5

 
$
3.5

 
$
4.5


Net benefit cost related to the Company’s SERP Plans was recognized in selling, general and administrative expenses as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(In millions)
11/2/14
 
11/3/13
 
11/2/14
 
11/3/13
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$
1.1

 
$
1.1

 
$
3.3

 
$
3.3

Interest cost    
1.1

 
0.9

 
3.1

 
2.7

Amortization of prior service credit
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Total    
$
2.1

 
$
1.9

 
$
6.3

 
$
5.9


Net benefit cost related to the Company’s Postretirement Plans was recognized in selling, general and administrative expenses as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
(In millions)
11/2/14
 
11/3/13
 
11/2/14
 
11/3/13
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$

 
$
0.1

 
$

 
$
0.1

Interest cost    
0.2

 
0.2

 
0.6

 
0.6

Amortization of prior service credit
(0.2
)
 
(0.2
)
 
(0.6
)
 
(0.6
)
Total    
$
0.0

 
$
0.1

 
$
0.0

 
$
0.1


The Company made contributions of $2.7 million to its Pension Plans in the thirty-nine weeks ended November 2, 2014 and does not expect to make additional contributions to its Pension Plans during the remainder of 2014.


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9. DEBT

Short-Term Borrowings

One of the Company’s Asian subsidiaries has a Yen-denominated overdraft facility with a Japanese bank, which provides for borrowings of up to ¥1,000.0 million (approximately $8.9 million based on exchange rates in effect on November 2, 2014) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the one-month Japanese interbank borrowing rate plus 0.30%. Such facility renews automatically unless the Company gives notice of termination. As of November 2, 2014, the Company had $8.9 million of borrowings outstanding under this facility. The weighted average interest rate on the funds borrowed at November 2, 2014 was 0.45%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November 2, 2014 was equal to the maximum amount of borrowings available under the facility.

One of the Company’s European subsidiaries has short-term revolving notes with a number of banks at various interest rates, as well as a Euro-denominated overdraft facility, which provide for borrowings of up to €60.0 million (approximately $75.1 million based on exchange rates in effect on November 2, 2014). These facilities are used primarily to fund working capital needs. As of November 2, 2014, the Company had $5.7 million of borrowings outstanding under the overdraft facility. The weighted average interest rate on the borrowings outstanding at November 2, 2014 was 1.84%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November 2, 2014 was approximately $31.9 million.

One of the Company’s European subsidiaries has a United States dollar-denominated short-term line of credit facility with a Turkish bank, which provides for borrowings of up to $3.0 million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish Central Bank lending rate plus 0.50%. As of November 2, 2014, the Company had $0.3 million of borrowings outstanding under this facility. The weighted average interest rate on the borrowings outstanding at November 2, 2014 was 11.75%. The maximum amount of borrowings outstanding during the thirty-nine weeks ended November 2, 2014 was approximately $2.7 million.

One of the Company’s Asian subsidiaries has a short-term $10.0 million revolving credit facility to be used primarily to fund working capital needs. Borrowings under this facility bear interest at 1.75% plus the one-month London interbank borrowing rate (“LIBOR”). At the end of each month, amounts outstanding under this facility may be carried forward for additional one-month periods for up to one year. This facility is subject to certain terms and conditions and may be terminated at any time at the discretion of the lender. There were no borrowings outstanding under this facility as of or during the thirty-nine weeks ended November 2, 2014.

One of the Company’s Asian subsidiaries has a Won-denominated short-term revolving credit facility with one lender that provides for borrowings of up to ₩3,000.0 million (approximately $2.8 million based on exchange rates in effect on November 2, 2014) and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the three-month Cost of Funds Index rate plus a specified margin. There were no borrowings outstanding under this facility as of or during the thirty-nine weeks ended November 2, 2014.

One of the Company’s Latin American subsidiaries has Real-denominated short-term revolving credit facilities with a number of banks that provide for total available borrowings of R$69.0 million (approximately $28.1 million based on exchange rates in effect on November 2, 2014) and are utilized primarily to fund working capital needs. Borrowings under these facilities bear interest at various interest rates. There were no borrowings outstanding under these facilities as of or during the thirty-nine weeks ended November 2, 2014.

As of November 2, 2014 the Company had drawn $25.0 million of revolving borrowings under its senior secured credit facilities as discussed in the section entitled “2014 Senior Secured Credit Facilities” below. The weighted average interest rate on the borrowings outstanding at November 2, 2014 was 4.00%. The maximum amount of revolving borrowings outstanding under these facilities during the thirty-nine weeks ended November 2, 2014 was approximately $150.0 million. In addition, the Company has certain other facilities under which there were no borrowings outstanding as of or during the thirty-nine weeks ended November 2, 2014.


13




Long-Term Debt

The carrying amounts of the Company’s long-term debt were as follows:
(In millions)
11/2/14
 
11/3/13
 
 
 
 
Senior secured term loan A facility due 2019
$
1,929.9

 
$
1,651.5

Senior secured term loan B facility due 2020
988.4

 
1,208.4

7 3/8% senior unsecured notes due 2020

 
600.0

4 1/2% senior unsecured notes due 2022
700.0

 
700.0

7 3/4% debentures due 2023
99.7

 
99.7

Total    
3,718.0

 
4,259.6

Less: Current portion of long-term debt    
99.3

 
85.0

Long-term debt    
$
3,618.7

 
$
4,174.6


As of November 2, 2014, the Company’s mandatory long-term debt repayments for the next five years were as follows:

(In millions)
 
Remainder of 2014
$
24.8

2015
99.3

2016
136.6

2017
186.2

2018
198.6

2019
1,291.1


As of November 2, 2014, after taking into account the effect of the Company’s interest rate swap and cap agreements discussed in the section entitled “2014 Senior Secured Credit Facilities” below, which were in effect as of such date, approximately 70% of the Company’s long-term debt was at a fixed or capped rate, with the remainder at variable rates.

2013 Senior Secured Credit Facilities

On February 13, 2013, simultaneously with and related to the closing of the Warnaco acquisition, the Company entered into senior secured credit facilities (the “2013 facilities”), the proceeds of which were used to fund a portion of the acquisition, repay all outstanding borrowings under the Company’s prior facilities, which were amended and restated during 2011 (the “2011 facilities”), and repay all of Warnaco’s previously outstanding long-term debt. The 2013 facilities consisted of a $1,700.0 million United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $7.3 million as of the acquisition date), a $1,375.0 million United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $6.9 million as of the acquisition date) and senior secured revolving credit facilities in an aggregate principal amount of $750.0 million (based on the applicable exchange rates on February 13, 2013), consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs. In connection with entering into the 2013 facilities and repaying all outstanding borrowings under the 2011 facilities and all of Warnaco’s previously outstanding long-term debt, the Company paid debt issuance costs of $67.4 million (of which $34.6 million was expensed as debt modification and extinguishment costs and $32.8 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $5.8 million to write-off previously capitalized debt issuance costs.

The Company made payments of $202.9 million on its term loans under the 2013 facilities during the thirty-nine weeks ended November 3, 2013.

On March 21, 2014, the Company amended and restated the 2013 facilities, as discussed in the section entitled “2014 Senior Secured Credit Facilities” below.


14




2014 Senior Secured Credit Facilities

On March 21, 2014 (the “Restatement Date”), the Company entered into an amendment (the “Amendment”) to the 2013 facilities (as amended by the Amendment, the “2014 facilities”). The Amendment provided for an additional $350.0 million principal amount of loans under the Term Loan A facility and an additional $250.0 million principal amount of loans under the Term Loan B facility and extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2018 to February 13, 2019. The maturity of the Term Loan B facility remains February 13, 2020. On the Restatement Date, the Company borrowed the additional principal amounts described above and used the proceeds to redeem all of its outstanding 7 3/8% senior notes, as discussed in the section entitled “7 3/8% Senior Notes Due 2020” below. In connection with entering into the Amendment, the Company paid debt issuance costs of $13.3 million (of which $8.0 million was expensed as debt modification and extinguishment costs and $5.3 million is being amortized over the term of the related debt agreement) and recorded additional debt modification and extinguishment costs of $3.2 million to write-off previously capitalized debt issuance costs.

The 2014 facilities consist of a $1,986.3 million United States dollar-denominated Term Loan A facility (recorded net of an original issue discount of $7.8 million), a $1,188.6 million United States dollar-denominated Term Loan B facility (recorded net of an original issue discount of $5.7 million) and senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million Euro-denominated revolving credit facility available in Euro, Pounds Sterling, Japanese Yen and Swiss Francs.

The revolving credit facilities also include amounts available for letters of credit. As of November 2, 2014, the Company had drawn $25.0 million of revolving credit borrowings and $40.5 million of letters of credit. A portion of each of the United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more term loan facilities or increase the commitments under the revolving credit facilities by an aggregate amount not to exceed the sum of (1) the sum of (x) $1,350.0 million plus (y) the aggregate amount of all voluntary prepayments of term loans under the facilities and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an additional unlimited amount as long as the ratio of the Company’s senior secured net debt to consolidated adjusted earnings before interest, taxes, depreciation and amortization (in each case calculated as set forth in the documentation relating to the 2014 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase. The lenders under the 2014 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.

During the thirty-nine weeks ended November 2, 2014, the Company made payments of $244.7 million on its term loans under the 2014 facilities, the majority of which was voluntary. As of November 2, 2014, the Company had total term loans outstanding of $2,918.3 million, net of original issue discounts. The terms of each of Term Loan A and Term Loan B contain a mandatory quarterly repayment schedule. Due to previous voluntary payments, the Company is not required to make any additional mandatory payments under Term Loan B prior to maturity.

Obligations of the Company under the 2014 facilities are guaranteed by substantially all of the Company’s existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European Borrower under the 2014 facilities are guaranteed by the Company, substantially all of its existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., a wholly owned subsidiary of the Company. The Company and its domestic subsidiary guarantors have pledged certain of their assets as security for the obligations under the 2014 facilities.

The outstanding borrowings under the 2014 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2014 facilities require the Company to repay certain amounts outstanding thereunder with (a) net cash proceeds of the incurrence of certain indebtedness, (b) net cash proceeds of certain asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds, to the extent such proceeds are not reinvested or committed to be reinvested in the business in accordance with customary reinvestment provisions, and (c) a percentage of excess cash flow, which percentage is based upon the Company’s net leverage ratio during the relevant fiscal period.

The United States dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds rate plus 1/2 of 1.00% and (iii) a one-month adjusted Eurocurrency rate plus 1.00%

15




(provided, that, with respect to the Term Loan B facility, in no event will the base rate be deemed to be less than 1.75%) or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2014 facilities (provided, that, with respect to the Term Loan B facility, in no event will the adjusted Eurocurrency rate be deemed to be less than 0.75%).

Canadian dollar-denominated borrowings under the 2014 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes at its main office in Toronto, Ontario as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian dollar bankers’ acceptances having a term of one month that appears on the display referred to as “CDOR Page” of Reuters Monitor Money Rate Services as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the administrative agent (and if such screen is not available, any successor or similar service as may be selected by the administrative agent), and (y) 0.75%, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2014 facilities.

The borrowings under the 2014 facilities in currencies other than United States dollars or Canadian dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2014 facilities.

The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is 1.75% for adjusted Eurocurrency rate loans and 0.75% for base rate loans, respectively. The current applicable margin with respect to the Term Loan B facility is 2.50% for adjusted Eurocurrency rate loans and 1.50% for base rate loans, respectively. After the date of delivery of the compliance certificate and financial statements with respect to the Company’s fiscal quarter ending November 2, 2014, the applicable margin for borrowings under the Term Loan A facility, the Term Loan B facility and the revolving credit facilities is subject to adjustment based upon the Company’s net leverage ratio.

The 2014 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by the Company and certain of its subsidiaries, and certain pledges of its assets and those of certain of its subsidiaries, as security for the obligations under the 2014 facilities; and a change in control (as defined in the 2014 facilities).

During the second quarter of 2014, the Company entered into an interest rate cap agreement for an 18-month term commencing on August 18, 2014. The agreement was designed with the intended effect of capping the interest rate on an initial notional amount of $514.2 million of the Company’s variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms. Such agreement remains outstanding with a notional amount of $511.9 million as of November 2, 2014. Under the terms of this agreement, the one-month LIBOR that the Company will pay is capped at a rate of 1.50%. Therefore, the maximum amount of interest that the Company will pay on the then-outstanding notional amount will be at the 1.50% capped rate, plus the current applicable margin.

During the second quarter of 2014, the Company entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $682.6 million of the Company’s variable rate debt obligation under the 2014 facilities, or any replacement facility with similar terms, to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and it will pay a weighted average fixed rate of 1.924%, plus the current applicable margin.

During the second quarter of 2013, the Company entered into an interest rate swap agreement for a three-year term commencing on August 19, 2013. The agreement was designed with the intended effect of converting an initial notional amount of $1,228.8 million of the Company’s variable rate debt obligation under its previously outstanding 2013 facilities, or any replacement facility with similar terms, to fixed rate debt. Such agreement remains outstanding with a notional amount of $1,275.6 million as of November 2, 2014, and is now converting a portion of the Company’s variable rate debt obligation under the 2014 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and it will pay a fixed rate of 0.604%, plus the current applicable margin.

The Company entered into an interest rate swap agreement for a three-year term commencing on June 6, 2011. The agreement was designed with the intended effect of converting an initial notional amount of $632.0 million of the Company’s variable rate debt obligation under its previously outstanding 2011 facilities, or any replacement facility with similar terms, to fixed rate debt. Such swap agreement expired June 6, 2014.

16





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

The 2014 facilities also contain covenants that restrict the Company’s ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in its interest or to satisfy its obligations under its other outstanding debt. These covenants restrict the Company’s ability to, among other things:

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

The 2014 facilities require the Company to comply with certain financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the applicable facility. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable which would result in acceleration of the Company’s other debt. If the Company was unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of the Company’s other indebtedness.

4 1/2% Senior Notes Due 2022

On December 20, 2012, the Company issued $700.0 million principal amount of 4 1/2% senior notes due December 15, 2022 in connection with the Warnaco acquisition. The Company paid $16.3 million of fees in the first quarter of 2013 in connection with the issuance of these notes, which will be amortized over the term of the notes.

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

7 3/4% Debentures Due 2023

The Company has outstanding $100.0 million of debentures due November 15, 2023 with a yield to maturity of 7.80%. The debentures accrue interest at the rate of 7 3/4%. Pursuant to the indenture governing the debentures, the Company must maintain a certain level of stockholders’ equity in order to pay cash dividends and make other restricted payments, as defined in the indenture governing the debentures.

7 3/8% Senior Notes Due 2020

On May 6, 2010, the Company issued $600.0 million principal amount of 7 3/8% senior notes due May 15, 2020. On March 24, 2014, in connection with the amendment and restatement of the 2013 facilities as discussed above in the section entitled “2014 Senior Secured Credit Facilities,” the Company redeemed all of its outstanding 7 3/8% senior notes and, pursuant to the indenture under which the notes were issued, paid a “make whole” premium of $67.6 million to the holders of the notes. The Company also recorded costs of $14.3 million to write-off previously capitalized debt issuance costs associated with these notes.  


17



10. INCOME TAXES

The effective income tax rates for the thirteen weeks ended November 2, 2014 and November 3, 2013 were 8.9% and 3.3%, respectively. The effective income tax rates for the thirty-nine weeks ended November 2, 2014 and November 3, 2013 were 7.1% and 15.5%, respectively.
The effective income tax rates for the thirteen and thirty-nine weeks ended November 2, 2014 and November 3, 2013 were lower than the United States statutory rate due to the benefit of lower tax rates in international jurisdictions where the Company files tax returns, the recognition of foreign tax credits generated from Warnaco integration activities and the benefit of discrete items related to uncertain tax positions. The benefit of discrete items for the thirty-nine weeks ended November 2, 2014 included the favorable resolution in the second quarter of 2014 of uncertain tax positions approximating $24.0 million in international jurisdictions, and of an uncertain tax position approximating $6.0 million related to European and United States transfer pricing arrangements. Partially offsetting these benefits were the impacts of state and local taxes.
On May 14, 2014, the Company resolved for $179.0 million an uncertain tax position related to European and United States transfer pricing arrangements for which it had previously recorded a liability of approximately $185.0 million. The liability will be settled over three years. Accordingly, in the second quarter of 2014, the Company recognized a tax benefit of approximately $6.0 million and recorded a reduction of approximately $185.0 million in its liability for uncertain tax positions.

11. DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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


18




The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for the Company’s derivative financial instruments:
(In millions)
Asset Derivatives (Classified in Other Current Assets and Other Assets)
Liability Derivatives (Classified in Accrued Expenses and Other Liabilities)
 
11/2/14
 
11/3/13
 
11/2/14
 
11/3/13
Contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts     (inventory purchases)
$
36.3

 
$
1.2

 
$
0.1

 
$
9.2

Interest rate contracts
2.6

 
2.3

 
9.9

 
8.2

Total contracts designated as cash flow hedges
38.9

 
3.5

 
10.0

 
17.4

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

 

 

 
0.1

Foreign currency forward exchange contracts (principally intercompany transactions)
13.0

 
0.9

 
0.3

 
0.0

Total undesignated contracts
13.0

 
0.9

 
0.3

 
0.1

Total
$
51.9

 
$
4.4

 
$
10.3

 
$
17.5


At November 2, 2014, the notional amount outstanding of foreign currency forward exchange contracts was $911.4 million. Such contracts expire principally between November 2014 and October 2015.

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

 
 
Gain (Loss) Recognized in Other Comprehensive (Loss) Income
 
Gain (Loss) Reclassified from AOCI into Income (Expense)        
(In millions)
 
 
Location
 Amount
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
11/2/14
 
11/3/13
 
 
11/2/14
 
11/3/13
Foreign currency forward exchange contracts     (inventory purchases)
 
$
36.9

 
$
(8.0
)
 
Cost of goods sold
$
2.9

 
$
(1.8
)
Interest rate contracts    
 
(5.7
)
 
(3.9
)
 
Interest expense
(1.5
)
 
(2.0
)
Total    
 
$
31.2

 
$
(11.9
)
 
 
$
1.4

 
$
(3.8
)
 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
11/2/14
 
11/3/13
 
 
11/2/14
 
11/3/13
Foreign currency forward exchange contracts     (inventory purchases)
 
$
38.1

 
$
2.6

 
Cost of goods sold
$
(2.6
)
 
$
1.1

Interest rate contracts
 
(8.0
)
 
(5.0
)
 
Interest expense
(5.1
)
 
(4.2
)
Total
 
$
30.1

 
$
(2.4
)
 
 
$
(7.7
)
 
$
(3.1
)

There was no ineffective portion of hedges designated as cash flow hedging instruments during the thirty-nine weeks ended November 2, 2014 and November 3, 2013.

A net gain in AOCI on foreign currency forward exchange contracts at November 2, 2014 of $35.2 million is estimated to be reclassified in the next 12 months in the Consolidated Income Statements to cost of goods sold as the underlying inventory is purchased and sold. In addition, a net loss in AOCI for interest rate contracts at November 2, 2014 of $4.0 million is estimated to be reclassified to interest expense within the next 12 months.


19




The following table summarizes the effect of the Company’s foreign currency forward exchange undesignated contracts:
(In millions)

 
Gain (Loss) Recognized in Income
Thirteen Weeks Ended
 
Location
 
11/2/14
 
11/3/13
Foreign currency forward exchange contracts (inventory purchases)
 
Selling, general and administrative expenses
 
$

 
$
(0.2
)
Foreign currency forward exchange contracts (principally intercompany transactions)
 
Selling, general and administrative expenses
 
13.2

 
(1.4
)
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
Location
 
11/2/14
 
11/3/13
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
 
Selling, general and administrative expenses
 
$

 
$
0.1

Foreign currency forward exchange contracts (principally intercompany transactions)
 
Selling, general and administrative expenses
 
12.9

 
(1.4
)

The Company had no derivative financial instruments with credit risk related contingent features underlying the related contracts as of November 2, 2014.

12. FAIR VALUE MEASUREMENTS

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

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

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

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


20




In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
(In millions)
11/2/14
 
2/2/14
 
11/3/13
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
49.3

 
N/A
 
$
49.3

 
N/A
 
$
5.8

 
N/A
 
$
5.8

 
N/A
 
$
2.1

 
N/A
 
$
2.1

Interest rate contracts
N/A
 
2.6

 
N/A
 
2.6

 
N/A
 
2.2

 
N/A
 
2.2

 
N/A
 
2.3

 
N/A
 
2.3

Total Assets
N/A
 
$
51.9

 
N/A
 
$
51.9

 
N/A
 
$
8.0

 
N/A
 
$
8.0

 
N/A
 
$
4.4

 
N/A
 
$
4.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
0.4

 
N/A
 
$
0.4

 
N/A
 
$
6.2

 
N/A
 
$
6.2

 
N/A
 
$
9.3

 
N/A
 
$
9.3

Interest rate contracts
N/A
 
9.9

 
N/A
 
9.9

 
N/A
 
6.8

 
N/A
 
6.8

 
N/A
 
8.2

 
N/A
 
8.2

Contingent purchase price payments related to reacquisition of the perpetual rights to the Tommy Hilfiger trademarks in India    
N/A
 
N/A
 
$
5.1

 
5.1

 
N/A
 
N/A
 
$
4.2

 
4.2

 
N/A
 
N/A
 
$
6.5

 
6.5

Total Liabilities
N/A
 
$
10.3

 
$
5.1

 
$
15.4

 
N/A
 
$
13.0

 
$
4.2

 
$
17.2

 
N/A
 
$
17.5

 
$
6.5

 
$
24.0


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

Pursuant to the agreement governing the reacquisition of the rights in India to the Tommy Hilfiger trademarks (which the Company entered into in connection with its acquisition of its 50% economic interest in TH India), the Company is required to make annual contingent purchase price payments into 2016 (or, under certain circumstances, into 2017) based on a percentage of annual sales in excess of an agreed upon threshold of Tommy Hilfiger products in India. Such payments are subject to a $25.0 million aggregate maximum and are due within 60 days following each one-year period. The Company made annual contingent purchase price payments of $0.6 million, $0.4 million and $0.1 million during the third quarter of each of 2014, 2013 and 2012, respectively. The Company is required to remeasure this liability at fair value on a recurring basis and classifies this as a Level 3 measurement. The fair value of such liability was determined using the discounted cash flow method, based on net sales projections for the Tommy Hilfiger apparel and accessories businesses in India, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Excluding the initial recognition of the liability for the contingent purchase price payments and the payments made to reduce the liability, changes in the fair value are included within selling, general and administrative expenses.

The following table presents the change in the Level 3 contingent purchase price payment liability during the thirty-nine weeks ended November 2, 2014 and November 3, 2013:
(In millions)
Thirty-Nine Weeks Ended
 
11/2/14
 
11/3/13
Beginning Balance
$
4.2

 
$
7.0

Payments
(0.6
)
 
(0.4
)
Adjustments included in earnings
1.5

 
(0.1
)
Ending Balance
$
5.1

 
$
6.5



21




Additional information with respect to assumptions used to value the contingent purchase price payment liability as of November 2, 2014 is as follows:
Unobservable Inputs
 
Amount
Approximate compounded annual net sales growth rate
 
38.0
%
Approximate
discount rate
 
15.0
%

A five percentage point increase or decrease in the discount rate would change the liability by approximately $0.5 million.

A five percentage point increase or decrease in the compounded annual net sales growth rate would change the liability by approximately $1.0 million.

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

The following table shows the fair value of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a nonrecurring basis (consisting of property, plant and equipment and other long-lived assets) during the thirty-nine weeks ended November 2, 2014 and November 3, 2013, and the total impairments recorded as a result of the remeasurement process:

(In millions)
Fair Value Measurement Using
 
Fair Value
As Of
Impairment Date
 
Total
 Impairments
 
Level 1
 
Level 2
 
Level 3
 
 
November 2, 2014
N/A
 
N/A
 
$

 
$

 
$
4.8

November 3, 2013
N/A
 
N/A
 
$

 
$

 
$
5.8


Long-lived assets with a carrying amount of $4.8 million were written down to a fair value of zero during the thirty-nine weeks ended November 2, 2014 in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using current sales trends and market participant assumptions. The impairment charge of $4.8 million was included in selling, general and administrative expenses, of which $0.1 million was recorded in the Calvin Klein North America segment, $3.4 million was recorded in the Tommy Hilfiger North America segment and $1.3 million was recorded in the Heritage Brands Retail segment.

Long-lived assets with a carrying amount of $4.6 million were written down to a fair value of zero during the thirty-nine weeks ended November 3, 2013 in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using current sales trends and market participant assumptions. The impairment charge of $4.6 million was included in selling, general and administrative expenses, of which $0.8 million was recorded in the Calvin Klein North America segment, $0.2 million was recorded in the Calvin Klein International segment, $3.1 million was recorded in the Tommy Hilfiger North America segment and $0.5 million was recorded in the Heritage Brands Retail segment.

Long-lived assets with a carrying amount of $1.2 million were written down to a fair value of zero during the thirty-nine weeks ended November 3, 2013 in connection with the sale of substantially all of the assets of the Company’s Bass business. The impairment charge was included in selling, general and administrative expenses in the Heritage Brands Retail segment. Please see Note 4, “Assets Held for Sale,” for a further discussion.


22




The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt as of November 2, 2014, February 2, 2014 and November 3, 2013 were as follows:

(In millions)
11/2/14
 
2/2/14
 
11/3/13
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 

 
 

 
 
 
 
 
 

 
 

Cash and cash equivalents
$
365.1

 
$
365.1

 
$
593.2

 
$
593.2

 
$
542.5

 
$
542.5

Short-term borrowings
39.9

 
39.9

 
6.8

 
6.8

 
12.4

 
12.4

Long-term debt (including portion classified as current)
3,718.0

 
3,729.6

 
3,963.2

 
4,025.3

 
4,259.6

 
4,321.9


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

13. STOCK-BASED COMPENSATION

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

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

Through November 2, 2014, the Company has granted under the 2006 Plan (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable performance share units; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, with the exception of the Warnaco employee replacement awards discussed below, each share underlying a stock option award reduces the number available by one share, each share underlying a restricted stock award reduces the number available by two shares and each share underlying an RSU or performance share unit award reduces the number available by three shares for awards made before April 29, 2009 and by two shares for awards made on or after April 29, 2009. Each share underlying a Warnaco employee replacement stock option, restricted stock, RSU or performance share unit award reduces the number available by one share. The per share exercise price of options granted under the 2006 Plan cannot be less than the closing price of the common stock on the date of grant (the business day prior to the date of grant for awards granted prior to September 21, 2006).

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

Under the terms of the merger agreement in connection with the Warnaco acquisition, each outstanding award of Warnaco stock options, restricted stock and restricted stock units was assumed by the Company in 2013 and converted into an award of the same type, and subject to the same terms and conditions, but payable in shares of Company common stock. The replacement stock options are generally exercisable in three equal annual installments commencing one year after the date of original grant and the replacement RSUs and restricted stock awards generally vest three years after the date of original grant, principally on a cliff basis. The Company accounted for the replacement awards as a modification of the existing awards. As such, a new fair value was assigned to the awards, a portion of which is included as part of the merger consideration. The merger consideration of $39.8 million was determined by multiplying the estimated fair value of the Warnaco awards outstanding at the effective time of the Warnaco acquisition, net of the estimated value of awards to be forfeited, by the proportionate amount of the vesting

23




period that had lapsed as of the acquisition date. The remaining fair value, net of estimated forfeitures, is being expensed over the awards’ remaining vesting periods.

Net income for the thirty-nine weeks ended November 2, 2014 and November 3, 2013 included $37.3 million and $47.1 million, respectively, of pre-tax expense related to stock-based compensation.

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

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

The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during the thirty-nine weeks ended November 2, 2014 and November 3, 2013 (with the exception of the Warnaco employee replacement stock options):
 
Thirty-Nine Weeks Ended
 
11/2/14
 
11/3/13
Weighted average risk-free interest rate
2.15
%
 
1.05
%
Weighted average expected option term (in years)    
6.25

 
6.22

Weighted average Company volatility
44.12
%
 
45.20
%
Expected annual dividends per share    
$
0.15

 
$
0.15

Weighted average grant date fair value per option
$
56.21

 
$
51.51


The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected option term. The expected option term represents the weighted average period of time that options granted are expected to be outstanding, based on vesting schedules and the contractual term of the options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected option term. Expected dividends are based on the Company’s common stock cash dividend rate at the date of grant.

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

The following summarizes the assumptions used to estimate the fair value of the Warnaco employee stock options that were replaced on February 13, 2013:
Weighted average risk-free interest rate

0.24
%
Weighted average expected option term (in years)

1.70

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

Weighted average grant date fair value per option
$
40.60


Service-based stock option activity for the thirty-nine weeks ended November 2, 2014 was as follows:
(In thousands, except per option data)
Options
 
Weighted Average Exercise Price
Per Option
Outstanding at February 2, 2014
1,588

 
$
58.47

  Granted
140

 
124.27

  Exercised
169

 
56.50

  Cancelled
5

 
72.36

Outstanding at November 2, 2014
1,554

 
$
64.56

Exercisable at November 2, 2014
1,090

 
$
49.01


24





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

RSU activity for the thirty-nine weeks ended November 2, 2014 was as follows:
(In thousands, except per RSU data)
RSUs
 
Weighted Average Grant Date Fair Value Per RSU
Non-vested at February 2, 2014
702

 
$
89.06

  Granted
233

 
124.70

  Vested
247

 
71.66

  Cancelled
31

 
108.68

Non-vested at November 2, 2014
657

 
$
107.33


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

Restricted stock activity for the thirty-nine weeks ended November 2, 2014 was as follows:
(In thousands, except per share data)
Restricted Stock
 
Weighted Average Grant Date Fair Value Per Share
Non-vested at February 2, 2014
46

 
$
120.72

  Granted

 

  Vested
22

 
120.72

  Cancelled
2

 
120.72

Non-vested at November 2, 2014
22

 
$
120.72


The Company granted contingently issuable performance share units to certain of the Company’s senior executives during the first quarter of each of 2012, 2013 and 2014 subject to a performance period of two years and a service period of one year beyond the performance period. The Company granted contingently issuable performance share units to certain of the Company’s executives during the second quarter of 2013 subject to a performance period of three years. For the awards granted in the second quarter of 2013, the final number of shares that will be earned, if any, is contingent upon the Company’s achievement of goals for the performance period, of which 50 percent is based upon the Company’s absolute stock price growth during the performance period and 50 percent is based upon the Company’s total shareholder return during the performance period relative to other companies included in the S&P 500 as of the date of grant. For the awards granted in the first quarter of each 2013 and 2014, the final number of shares that will be earned, if any, is contingent upon the Company’s achievement of goals for the performance periods based on earnings per share growth during the applicable performance cycle. For the awards granted in the first quarter of 2012, the two year performance period has ended and the final number of shares earned, as determined based on both earnings per share growth and return on equity during the performance period, will vest following the additional one year service period.

For the contingently issuable performance share units granted during the first quarter of each 2012, 2013 and 2014, the Company records expense ratably over each applicable vesting period based on fair value and the Company’s current expectations of the probable number of shares that will ultimately be issued. The fair value of these contingently issuable performance share units is equal to the closing price of the Company’s common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Company’s common stock during the performance cycle, as these contingently issuable performance share units do not accrue dividends prior to the completion of the performance cycle.


25




For the contingently issuable performance share units granted during the second quarter of 2013, because the awards are subject to market conditions, the Company records expense ratably over the vesting period, net of estimated forfeitures, regardless of whether the market condition is satisfied. The fair value of such awards was established on the grant date using
the Monte Carlo simulation model, which was based on the following assumptions:

Risk-free interest rate
0.34
%
Expected Company volatility
38.67
%
Expected annual dividends per share
$
0.15

Grant date fair value per performance share unit
$
123.27


Performance share activity for the thirty-nine weeks ended November 2, 2014 was as follows:
(In thousands, except per share data)
Performance Shares
 
Weighted Average Grant Date Fair Value Per Share
Non-vested at February 2, 2014
548

 
$
118.60

  Granted
83

 
125.15

  Vested

 

  Cancelled
5

 
123.27

Non-vested at November 2, 2014
626

 
$
119.43


The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions for the thirty-nine weeks ended November 2, 2014 and November 3, 2013 were $15.8 million and $55.7 million, respectively. Of those amounts, $9.3 million and $22.7 million, respectively, were reported as excess tax benefits. Excess tax benefits arise when the actual tax benefit resulting from a stock plan award transaction exceeds the tax benefit associated with the grant date fair value of the related stock award.

14. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the changes in AOCI, net of related taxes, by component for the thirty-nine weeks ended November 2, 2014:


(In millions)
Foreign currency translation adjustments
 
Retirement liability adjustment
 
Net unrealized and realized (loss) gain on effective hedges
 
Total
Balance, February 2, 2014
$
50.1

 
$
1.0

 
$
(8.8
)
 
$
42.3

Other comprehensive (loss) income before reclassifications
(210.0
)
 

 
30.6

 
(179.4
)
Less: Amounts reclassified from AOCI
(2.0
)
 
0.4

 
(5.9
)
 
(7.5
)
Other comprehensive (loss) income
(208.0
)
 
(0.4
)
 
36.5

 
(171.9
)
Balance at November 2, 2014
$
(157.9
)
 
$
0.6

 
$
27.7

 
$
(129.6
)


26




The following table presents reclassifications out of AOCI to earnings for the thirteen and thirty-nine weeks ended November 2, 2014 and November 3, 2013:

(In millions)
Amount Reclassified from AOCI
Affected Line Item in the Consolidated Income Statements
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
11/2/14
 
11/3/13
 
11/2/14
 
11/3/13
 
Realized gain (loss) on effective hedges:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
2.9

 
$
(1.8
)
 
$
(2.6
)
 
$
1.1

Cost of goods sold
Interest rate contracts
(1.5
)
 
(2.0
)
 
(5.1
)
 
(4.2
)
Interest expense
Less: Tax effect
(0.7
)
 
(0.7
)
 
(1.8
)
 
0.0

Income tax expense
Total, net of tax
$
2.1

 
$
(3.1
)
 
$
(5.9
)
 
$
(3.1
)
 
 
 
 
 
 
 
 
 
 
Amortization of retirement liability items:
 
 
 
 
 
 
 
 
Prior service credit
$
0.3

 
$
0.3

 
$
0.7

 
$
0.7

Selling, general and administrative expenses
Less: Tax effect
0.1

 
0.1

 
0.3

 
0.3

Income tax expense
Total, net of tax
$
0.2

 
$
0.2

 
$
0.4

 
$
0.4

 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Deconsolidation of foreign subsidiaries and joint venture
$

 
$

 
$
(2.0
)
 
$

Selling, general and administrative expenses
  Less: Tax effect

 

 

 

Income tax expense
Total, net of tax
$

 
$

 
$
(2.0
)
 
$

 
 
 
 
 
 
 
 
 
 
15. STOCKHOLDERS’ EQUITY

Common Stock Issuance

On February 13, 2013, the Company issued 7.7 million shares of its common stock, par value $1.00 per share, as part of the consideration paid to the former stockholders of Warnaco in connection with the acquisition.

16. EXIT ACTIVITY COSTS

Warnaco Integration Costs

In connection with the Company’s acquisition of Warnaco during the first quarter of 2013 and the related integration, the Company incurred certain costs related to severance and termination benefits, inventory liquidations and lease/contract terminations. Such costs were as follows:
(In millions)
Total Expected to be Incurred
 
Incurred During the Thirteen Weeks Ended 11/2/14
 
Incurred During the Thirty-Nine Weeks Ended 11/2/14
 
Cumulative Incurred To Date
Severance, termination benefits and other costs
$
160.0

 
$
1.8

 
$
12.8

 
$
144.3

Inventory liquidation costs
36.1

 

 
1.0

 
36.1

Lease/contract termination and related costs
80.0

 
7.8

 
20.0

 
62.0

Total
$
276.1

 
$
9.6

 
$
33.8

 
$
242.4