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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 29, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21764

 

 

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida   59-1162998

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

3000 N.W. 107 Avenue

Miami, Florida

  33172
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (305) 592-2830

 

 

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  ☒    No  ☐

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  ☒    No  ☐

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 definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.  ☐

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

The number of shares outstanding of the registrant’s common stock is 15,712,678 (as of August 23, 2017).

 

 

 


Table of Contents

PERRY ELLIS INTERNATIONAL, INC.

INDEX

 

     PAGE  
PART I: FINANCIAL INFORMATION   
Item 1:   

Condensed Consolidated Balance Sheets (Unaudited) as of July  29, 2017 and January 28, 2017

     1  

Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended July 29, 2017 and July 30, 2016

     2  

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended July 29, 2017 and July 30, 2016

     3  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 29, 2017 and July 30, 2016

     4  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  
Item 2:   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24  
Item 3:   

Quantitative and Qualitative Disclosures About Market Risk

     33  
Item 4:   

Controls and Procedures

     34  
PART II: OTHER INFORMATION   
Item 2:   

Unregistered Sales of Equity Securities and Use of Proceeds

     35  
Item 6:   

Exhibits

     36  


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share data)

 

     July 29,
2017
    January 28,
2017
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 23,812     $ 30,695  

Investments, at fair value

     28,870       10,921  

Accounts receivable, net

     131,455       140,240  

Inventories

     131,197       151,251  

Prepaid income taxes

     —         1,647  

Prepaid expenses and other current assets

     6,819       6,462  
  

 

 

   

 

 

 

Total current assets

     322,153       341,216  
  

 

 

   

 

 

 

Property and equipment, net

     59,272       61,835  

Other intangible assets, net

     186,633       187,051  

Deferred income tax

     462       334  

Other assets

     2,226       2,269  
  

 

 

   

 

 

 

TOTAL

   $ 570,746     $ 592,705  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 69,358     $ 92,843  

Accrued expenses and other liabilities

     25,906       20,861  

Accrued interest payable

     1,407       1,450  

Accrued income taxes payable

     1,334       —    

Unearned revenues

     3,579       2,710  
  

 

 

   

 

 

 

Total current liabilities

     101,584       117,864  
  

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,744       49,673  

Senior credit facility

     —         22,504  

Real estate mortgages

     33,153       33,591  

Other long-term liabilities

     19,358       18,271  

Deferred income taxes

     36,572       37,115  
  

 

 

   

 

 

 

Total long-term liabilities

     138,827       161,154  
  

 

 

   

 

 

 

Total liabilities

     240,411       279,018  
  

 

 

   

 

 

 

Commitment and contingencies

    

Equity:

    

Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

     —         —    

Common stock $.01 par value; 100,000,000 shares authorized; 15,762,678 shares issued and outstanding as of July 29, 2017 and 15,530,273 shares issued and outstanding as of January 28, 2017

     158       155  

Additional paid-in-capital

     149,992       147,300  

Retained earnings

     190,077       176,327  

Accumulated other comprehensive loss

     (8,955     (10,095
  

 

 

   

 

 

 

Total

     331,272       313,687  
  

 

 

   

 

 

 

Treasury stock at cost; 50,000 as of July 29, 2017 and no shares as of January 28, 2017

     (937     —    
  

 

 

   

 

 

 

Total equity

     330,335       313,687  
  

 

 

   

 

 

 

TOTAL

   $ 570,746     $ 592,705  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

1


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     July 29,
2017
     July 30,
2016
    July 29,
2017
     July 30,
2016
 

Revenues:

          

Net sales

   $ 198,394      $ 193,341     $ 432,217      $ 444,216  

Royalty income

     8,215        8,312       16,482        18,731  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     206,609        201,653       448,699        462,947  

Cost of sales

     130,129        127,822       281,131        294,032  
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     76,480        73,831       167,568        168,915  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses:

          

Selling, general and administrative expenses

     68,412        72,654       139,611        142,588  

Depreciation and amortization

     3,496        3,716       6,964        7,183  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     71,908        76,370       146,575        149,771  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income (loss)

     4,572        (2,539     20,993        19,144  

Interest expense

     1,869        1,889       3,825        3,914  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) before income taxes

     2,703        (4,428     17,168        15,230  

Income tax provision (benefit)

     1,724        (863     3,418        4,545  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ 979      $ (3,565   $ 13,750      $ 10,685  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per share:

          

Basic

   $ 0.06      $ (0.24   $ 0.91      $ 0.72  
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.06      $ (0.24   $ 0.90      $ 0.71  
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of shares outstanding

          

Basic

     15,075        14,953       15,042        14,882  

Diluted

     15,289        14,953       15,296        15,139  

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(amounts in thousands)

 

     Three Months Ended     Six Months Ended  
     July 29,
2017
    July 30,
2016
    July 29,
2017
    July 30,
2016
 

Net income (loss)

   $ 979     $ (3,565   $ 13,750     $ 10,685  

Other Comprehensive income:

        

Foreign currency translation adjustments, net

     1,273       (3,093     1,552       (1,430

Unrealized gain on pension liability, net of tax

     —         155       —         310  

Unrealized loss on forward contract

     (50     —         (412     —    

Unrealized (loss) gain on investments

     (6     10       —         17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,217       (2,928     1,140       (1,103
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,196     $ (6,493   $ 14,890     $ 9,582  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Six Months Ended  
     July 29,
2017
    July 30,
2016
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 13,750     $ 10,685  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     7,130       7,382  

Provision for bad debts

     1,686       478  

Amortization of debt issue cost

     202       205  

Amortization of premiums and discounts

     53       28  

Amortization of unrealized (gain) loss on pension liability

     —         310  

Deferred income taxes

     (671     1,042  

Share-based compensation

     3,425       3,786  

Changes in operating assets and liabilities, net of acquisitions

    

Accounts receivable, net

     8,527       10,087  

Inventories

     21,342       47,604  

Prepaid income taxes

     1,611       1,874  

Prepaid expenses and other current assets

     (300     110  

Other assets

     (85     37  

Accounts payable and accrued expenses

     (19,746     (51,626

Accrued interest payable

     (43     (34

Income taxes payable

     1,418       344  

Unearned revenues and other liabilities

     2,021       3,469  

Deferred pension obligation

     —         99  
  

 

 

   

 

 

 

Net cash provided by operating activities

     40,320       35,880  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (3,901     (6,609

Purchases of investments

     (28,124     (9,039

Proceeds from investment maturities

     10,136       5,205  
  

 

 

   

 

 

 

Net cash used in investing activities

     (21,889     (10,443
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings from senior credit facility

     141,588       179,380  

Payments on senior credit facility

     (164,092     (207,273

Payments on real estate mortgages

     (435     (423

Purchase of treasury shares

     (937     —    

Payments for employee taxes on shares withheld

     (753     (946

Payments on capital leases

     (140     (129

Proceeds from exercise of stock options

     23       5  
  

 

 

   

 

 

 

Net cash used in financing activities

     (24,746     (29,386
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (568     (71
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (6,883     (4,020

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     30,695       31,902  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 23,812     $ 27,882  
  

 

 

   

 

 

 

Continued

 

4


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Six Months Ended  
     July 29,
2017
     July 30,
2016
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

   $ 3,613      $ 3,715  
  

 

 

    

 

 

 

Income taxes

   $ 771      $ 700  
  

 

 

    

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

     

Accrued purchases of property and equipment

   $ 138      $ 407  
  

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

The information presented reflects all adjustments, which are in the opinion of management of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which requires inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption, during the first quarter of fiscal 2018, of ASU No. 2015-11 did not have a material impact on the Company’s results of operations or the Company’s financial position.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is currently evaluating the effect that the adoption will have on its consolidated financial statements and related disclosures.

 

6


Table of Contents

In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which is part of the FASB’s Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the provisions of ASU 2016-09 in the first quarter of fiscal 2018 using a modified retrospective approach. For the three months ended April 29, 2017, the Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete item. Given the Company’s valuation allowance position, there was no net tax expense or benefit recognized as a result of the adoption of ASU 2016-09. Furthermore, there was no change to retained earnings with respect to excess tax benefits due to the Company’s valuation allowance position. The effect on the condensed consolidating statement of cash flows for the six months ended July 30, 2016, as a result of this adoption, is an increase of approximately $0.9 million in cash provided by operating activities, with a corresponding increase of approximately $0.9 million in cash used in financing activities from the previously reported amounts.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, “Revenue from Contracts with Customers”, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments clarify when promised goods or services are separately identifiable (i.e., distinct within the context of a contract), an important step in determining whether goods and services should be accounted for as separate performance obligations. In addition, the amendments allow entities to disregard goods or services that are immaterial in the context of a contract and provide an accounting policy election for accounting for certain shipping and handling activities. The amendments also clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property (IP), which will determine whether the entity recognizes revenue over time or at a point in time. The amendments revise the guidance to address how entities should apply the exception for sales- and usage-based royalties to licenses of IP, recognize revenue for licenses that are not separate performance obligations and evaluate different types of license restrictions (e.g., time-based, geography-based). The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain aspects of the new revenue standard, ASU 2014-09, “Revenue from Contracts with Customers”. The amendments are intended to provide clarifying guidance in a few narrow areas such as collectability, contract modifications, completed contracts at transition, and non-cash considerations. The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which provides guidance for the accounting for credit losses on instruments within its scope. The amendments guide on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.

 

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Table of Contents

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company has chosen to early adopt the provisions of ASU 2016-16 in the first quarter of fiscal 2018. The adoption of ASU 2016-16 resulted in a decrease to prepaid income taxes of $1.7 million and a decrease to deferred tax liabilities of $1.7 million.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic718): Scope of Modification Accounting,” which amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions, of share-based payment awards, after adoption. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” which is intended to reduce the complexity of accounting for certain financial instruments with down round features and address the difficulty of accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Trade accounts

   $ 144,757      $ 151,370  

Royalties

     5,293        6,659  

Other receivables

     1,153        712  
  

 

 

    

 

 

 

Total

     151,203        158,741  

Less: allowances

     (19,748      (18,501
  

 

 

    

 

 

 

Total

   $ 131,455      $ 140,240  
  

 

 

    

 

 

 

4. INVENTORIES

Inventories are stated at the lower of cost (weighted moving average cost) or market. Cost principally consists of the purchase price, customs, duties, freight, and commissions to buying agents.

 

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Inventories consisted of the following as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Finished goods

   $ 131,197      $ 151,251  

5. INVESTMENTS

The Company’s investments at July 29, 2017 and January 28, 2017 include marketable securities and certificates of deposit with maturity dates less than one year. Marketable securities consist of corporate and government bonds. Investments are stated at fair value. The estimated fair value of the marketable securities is based on quoted prices in an active market.

Investments consisted of the following as of July 29, 2017:

 

     Cost      Gross
Unrealized Gains
     Gross
Unrealized Losses
     Estimated
Fair Value
 
     (in thousands)  

Marketable securities

   $ 22,752      $ —        $ (11    $ 22,741  

Certificates of deposit

     6,130        —          (1      6,129  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 28,882      $ —        $ (12    $ 28,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments consisted of the following as of January 28, 2017:

 

     Cost      Gross
Unrealized Gains
     Gross
Unrealized Losses
     Estimated
Fair Value
 
     (in thousands)  

Marketable securities

   $ 3,258      $ —        $ (8    $ 3,250  

Certificates of deposit

     7,675        —          (4      7,671  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 10,933      $ —        $ (12    $ 10,921  
  

 

 

    

 

 

    

 

 

    

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 94,973      $ 91,639  

Buildings and building improvements

     21,295        21,359  

Vehicles

     537        523  

Leasehold improvements

     48,215        48,799  

Land

     9,430        9,430  
  

 

 

    

 

 

 

Total

     174,450        171,750  

Less: accumulated depreciation and amortization

     (115,178      (109,915
  

 

 

    

 

 

 

Total

   $ 59,272      $ 61,835  
  

 

 

    

 

 

 

The above table of property and equipment includes assets held under capital leases as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 810      $ 810  

Less: accumulated depreciation and amortization

     (587      (452
  

 

 

    

 

 

 

Total

   $ 223      $ 358  
  

 

 

    

 

 

 

 

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For the three months ended July 29, 2017 and July 30, 2016, depreciation and amortization expense relating to property and equipment amounted to $3.4 million and $3.6 million, respectively. For the six months ended July 29, 2017 and July 30, 2016, depreciation and amortization expense relating to property and equipment amounted to $6.7 million and $6.9 million, respectively. These amounts include amortization expense for leased property under capital leases.

7. OTHER INTANGIBLE ASSETS

Trademarks

Trademarks included in other intangible assets, net, are considered indefinite-lived assets and totaled $184.1 million at July 29, 2017 and January 28, 2017.

Other

Other intangible assets represent customer lists as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Customer lists

   $ 8,450      $ 8,450  

Less: accumulated amortization

     (5,962      (5,545
  

 

 

    

 

 

 

Total

   $ 2,488      $ 2,905  
  

 

 

    

 

 

 

For the three months ended July 29, 2017 and July 30, 2016, amortization expense relating to customer lists amounted to approximately $0.2 million for each of the periods. For the six months ended July 29, 2017 and July 30, 2016, amortization expense relating to customer lists amounted to $0.4 million for each of the periods. Other intangible assets are amortized over their estimated useful lives of 10 years. Assuming no impairment, the table sets forth the estimated amortization expense for future periods based on recorded amounts as of January 28, 2017:

 

     (in thousands)  

2018

   $ 835  

2019

   $ 793  

2020

   $ 734  

2021

   $ 543  

 

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8. LETTER OF CREDIT FACILITIES

Borrowings and availability under letter of credit facilities consisted of the following as of:

 

     July 29,
2017
     January 28,
2017
 
     (in thousands)  

Total letter of credit facilities

   $ 30,000      $ 30,000  

Outstanding letters of credit

     (10,727      (10,788
  

 

 

    

 

 

 

Total credit available

   $ 19,273      $ 19,212  
  

 

 

    

 

 

 

9. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $3.8 million and $3.7 million for the three months ended July 29, 2017 and July 30, 2016, respectively, and $7.8 million and $8.0 million for the six months ended July 29, 2017 and July 30, 2016, respectively, and are included in selling, general and administrative expenses.

10. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares of outstanding common stock. The calculation of diluted net income (loss) per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock. The potentially dilutive common stock included in the Company’s computation of diluted net income per share includes the effects of stock options, stock appreciation rights (“SARS”), and unvested restricted shares as determined using the treasury stock method.

The following table sets forth the computation of basic and diluted income (loss) per share:

 

     Three Months Ended      Six Months Ended  
     July 29,
2017
     July 30,
2016
     July 29,
2017
     July 30,
2016
 
     (in thousands, except per share data)  

Numerator:

           

Net income (loss)

   $ 979      $ (3,565    $ 13,750      $ 10,685  

Denominator:

           

Basic-weighted average shares

     15,075        14,953        15,042        14,882  

Dilutive effect: equity awards

     214        —          254        257  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted-weighted average shares

     15,289        14,953        15,296        15,139  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic income (loss) per share

   $ 0.06      $ (0.24    $ 0.91      $ 0.72  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income (loss) per share

   $ 0.06      $ (0.24    $ 0.90      $ 0.71  
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive effect:(1)

     404        1,103        398        604  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents weighted average of stock options to purchase shares of common stock, SARS and restricted stock that were not included in computing diluted income per share because their effects were antidilutive for the respective periods.

 

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11. EQUITY

The following table reflects the changes in equity:

 

     Changes in Equity  
     (in thousands)  

Equity at January 28, 2017

   $ 313,687  

Comprehensive income

     14,890  

Share transactions under employee equity compensation plans

     2,695  

Purchase of treasury stock

     (937
  

 

 

 

Equity at July 29, 2017

   $ 330,335  
  

 

 

 

Equity at January 30, 2016

   $ 291,481  

Comprehensive income

     9,582  

Share transactions under employee equity compensation plans

     2,845  
  

 

 

 

Equity at July 30, 2016

   $ 303,908  
  

 

 

 

The Board of Directors has authorized the Company to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017. Although The Board of Directors allocated a maximum of $70 million to carry out the program, the Company is not obligated to purchase any specific number of outstanding shares and reevaluates the program on an ongoing basis.

During the second quarter of fiscal 2018, the Company repurchased 50,000 shares of common stock at a cost of $0.9 million. There were no treasury shares outstanding as of January 28, 2017. Total purchases under the plan to date amount to approximately $61.7 million.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss by component, net of tax:

 

     Unrealized
(Loss) Gain on
Pension Liability
     Foreign
Currency Translation
Adjustments, Net
    Unrealized
(Loss) Gain on
Investments
    Unrealized
(Loss) Gain on
Forward Contract
    Total  
     (in thousands)  

Balance, January 28, 2017

   $ —        $ (9,902   $ (12   $ (181   $ (10,095

Other comprehensive income (loss) before reclassifications

     —          1,552       —         (404     1,148  

Amounts reclassified from accumulated other comprehensive loss

     —          —         —         (8     (8
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 29, 2017

   $ —        $ (8,350   $ (12   $ (593   $ (8,955
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Unrealized
(Loss) Gain on
Pension Liability
     Foreign
Currency Translation
Adjustments, Net
     Unrealized
(Loss) Gain on
Investments
     Total  
     (in thousands)  

Balance, January 30, 2016

   $ (7,368    $ (7,131    $ (9    $ (14,508

Other comprehensive (loss) income before reclassifications

     —          (1,430      17        (1,413

Amounts reclassified from accumulated other comprehensive loss

     310        —          —          310  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, July 30, 2016

   $ (7,058    $ (8,561    $ 8      $ (15,611
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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A summary of the impact on the condensed consolidated statements of operations line items is as follows:

 

          Three Months Ended  
    

Statement of Operations Location

   July 29,
2017
     July 30,
2016
 
Amortization of defined benefit pension items actuarial gains    Selling, general and administrative expenses    $ —        $ 155  
Forward contract loss reclassified from accumulated other comprehensive loss to income    Cost of goods sold      33        —    
     

 

 

    

 

 

 
Total, net of tax    $ 33      $ 155  
     

 

 

    

 

 

 

 

          Six Months Ended  
    

Statement of Operations Location

   July 29,
2017
    July 30,
2016
 
Amortization of defined benefit pension items actuarial gains    Selling, general and administrative expenses    $ —       $ 310  
Forward contract gain reclassified from accumulated other comprehensive loss to income    Cost of goods sold      (8     —    
     

 

 

   

 

 

 
Total, net of tax    $ (8   $ 310  
     

 

 

   

 

 

 

13. DERIVATIVE FINANCIAL INSTRUMENT – Cash Flow Hedges

The Company has a risk management policy to manage foreign currency risk relating to inventory purchases by its subsidiaries that are denominated in foreign currencies. As such, the Company may employ hedging and derivative strategies to limit the effects of changes in foreign currency on its operating income and cash flows. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. The Company achieves this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. The Company does not use derivative instruments for trading or speculative purposes.

For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents at inception the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company will formally assess at least quarterly whether the financial instruments used in hedging are “highly effective” at offsetting changes in cash flows of the related underlying exposures. For purposes of assessing hedge effectiveness, the Company uses the forward method, and assesses effectiveness based on the changes in both spot and forward points of the hedging instrument. If and when a derivative is no longer expected to be “highly effective,” hedge accounting is discontinued and hedge ineffectiveness, if any, is included in current period earnings. As of July 29, 2017, there was no hedge ineffectiveness.

The Company’s United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, the Company entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These are formally designated and “highly effective” as cash flow hedges. The Company will hedge approximately 45% of its U.S. dollar denominated purchases. All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. The Company records the foreign currency forward exchange contracts at fair value in its Consolidated Balance Sheets. The cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. The Company considers the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. The Company classifies derivative instrument cash flows from hedges of foreign currency risk on the settlement of inventory as operating activities.

 

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The Company’s Hedging Instruments were classified within Level 2 of the fair value hierarchy. The following table summarizes the effects, fair value and balance sheet classification of the Company’s Hedging Instruments.

 

Derivatives Designated As Hedging Instruments

  

Balance sheet location

   July 29,
2017
     January 28,
2017
 
          (in thousands)  
Foreign currency forward exchange contract (inventory purchases)    Accounts Payable    $ 593      $ 181  
     

 

 

    

 

 

 
Total    $ 593      $ 181  
     

 

 

    

 

 

 

The following table summarizes the effect and classification of the Company’s Hedging Instruments.

 

          Three Months Ended      Six Months Ended  

Derivatives Designated As Hedging Instruments

  

Statement of

Operations Location

   July 29,
2017
     July 30,
2016
     July 29,
2017
    July 30,
2016
 
          (in thousands)      (in thousands)  
Foreign currency forward exchange contract (inventory purchases):              
Loss (gain) reclassified from accumulated other comprehensive loss to income    Cost of goods sold    $ 33      $ —        $ (8   $ —    
     

 

 

    

 

 

    

 

 

   

 

 

 
      $ 33         $ (8  
     

 

 

    

 

 

    

 

 

   

 

 

 

The notional amounts outstanding of foreign exchange forward contracts were $15.1 million and $15.0 million at July 29, 2017 and January 28, 2017, respectively. Such contracts expire through July 2018.

Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.6 million and $0.2 million at July 29, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

 

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14. INCOME TAXES

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s U.S. federal income tax returns for fiscal 2011 through fiscal 2018 are open tax years. The Company’s state tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to open tax years from fiscal 2006 through fiscal 2017, depending on each state’s particular statute of limitation. As of July 29, 2017, the examination by the Internal Revenue Service for the Company’s 2011, 2012, and 2013 U.S. federal tax years is still ongoing. During fiscal 2017, the Company received a Notice of Proposed Adjustment from the Internal Revenue Service, which proposed adjustments to taxable income for fiscal 2011, 2012 and 2013 of $6.1 million, $5.3 million and $6.8 million, respectively. During the three months ended July 29, 2017, the Company engaged in further conversations with the Internal Revenue Service concerning the proposed adjustments. Based upon those conversations, the Company has established a reserve of $1 million for the amount it would be willing to pay to settle the issue. While the Company still believes its position would be sustained upon appeal or, if necessary, through litigation, it has made this determination based upon the desire to reach an ultimate resolution and limit the costs associated with continuing the examination. Furthermore, various other state and local income tax returns are also under examination by taxing authorities.

The Company has a $1.2 million liability recorded for unrecognized tax benefits as of January 28, 2017, which includes interest and penalties of $0.3 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three and six months ended July 29, 2017, the total amount of unrecognized tax benefits increased by approximately $5.0 million and $5.0 million, respectively. The change to the total amount of the unrecognized tax benefit for the three and six months ended July 29, 2017 included an increase in interest and penalties of approximately $171,000 and $187,000, respectively. The amount of the unrecognized tax benefits, if recognized, that would affect the Company’s effective tax rate as of January 28, 2017 and July 29, 2017 is $1.2 million and $2.3 million, respectively.

The Company currently anticipates a resolution within the next twelve months for the unrecognized tax benefits relating to the Internal Revenue Service Proposed Adjustment, but does not currently anticipate a resolution for any of the remaining unrecognized tax benefits as of July 29, 2017. The statute of limitations related to the Company’s fiscal 2011, 2012, 2013, and 2014 U.S. federal tax years has been extended as part of the examination and is expected to lapse within the next twelve months.

At the end of fiscal 2017, the Company maintained a $38.6 million valuation allowance against its remaining domestic deferred tax asset; including, but not limited to, the federal net operating loss carryforward and the U.S. state net operating loss carryforwards, whose utilization is not restricted by factors beyond the Company’s control. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pretax losses is considered strong negative evidence in that evaluation. Although the Company recognized pretax earnings through the six months ended July 29, 2017, by itself that does not represent sufficient positive evidence that a deferred tax asset will be realized to warrant removing the valuation allowances established against the U.S. deferred tax assets. Additionally, the Company’s cumulative domestic pretax results for the past 36 months still remain in a loss position. The Company would be able to remove the valuation allowances in future periods when positive evidence outweighs the negative evidence from the relevant look-back period. Deferred tax assets without valuation allowances remain in certain foreign tax jurisdictions, where supported by the evidence.

15. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED SHARES

In 2005, the Company adopted the 2005 Long-Term Incentive Compensation Plan (the “2005 Plan”). The 2005 Plan allowed the Company to grant options and other awards to purchase or receive up to an aggregate of 2,250,000 shares of the Company’s common stock, reduced by any awards outstanding under the 2002 Plan. On March 13, 2008, the Board of Directors unanimously adopted an amendment and restatement of the 2005 Plan that increased the number of shares available for grants to an aggregate of 4,750,000 shares of common stock. On March 17, 2011, the Board of Directors unanimously adopted the second amendment and restatement of the 2005 Plan, which increased the number of shares available for grants by an additional 500,000 shares to an aggregate of 5,250,000 shares of common stock. On May 20, 2015, the Board of Directors unanimously adopted, subject to shareholder approval at the annual meeting, the Perry Ellis International, Inc. 2015 Long Term Incentive Compensation Plan, which is an amendment and restatement of the 2005 Plan (the “2015 Plan, and collectively with the 2002 Plan and the prior 2005 Plan, as amended, the “Stock Plans”). The amendment was approved by the shareholders at the Company’s 2015 annual meeting.

 

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The 2015 Plan extends the term of the 2005 Plan until July 17, 2025 as well as increases the number of shares of common stock reserved for issuance by an additional 1,000,000 shares to an aggregate of 6,250,000 shares.

On March 16, 2017, the Board of Directors unanimously adopted an amendment and restatement of the 2015 Plan (as amended and restated, the “Amended Plan”). The Amended Plan increases the number of shares available for grants by an additional 1,400,000 shares to an aggregate of 7,650,000 shares of common stock and makes other clarifications and technical revisions designed primarily to improve administration and ensure compliance with recent changes in the law including Internal Revenue Code Section 409A. Other than the amendments noted above, the Amended Plan generally contains the same features, terms and conditions as the 2015 Plan. The amendment was approved by the shareholders at the Company’s 2017 annual meeting.

During the first and second quarters of fiscal 2018, the Company granted an aggregate of 72,307 and 10,681 shares of restricted stock to certain key employees, which vest primarily over a three-year period, at an estimated value of $1.5 million and $0.2 million, respectively. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

Also, during the second quarter of fiscal 2018, the Company awarded to five directors an aggregate of 28,995 shares of restricted stock. The restricted stock vests primarily over a one-year period, at an estimated value of $0.6 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the first quarter of fiscal 2018, the Company granted performance based restricted stock to certain key employees. Such stock generally vests 100% in April 2020, provided that each employee is still an employee of the Company on such date, and the Company has met certain performance criteria. A total of 154,401 shares of performance-based restricted stock were issued at an estimated value of $3.3 million.

During the first quarter of fiscal 2018, the Company granted an aggregate of 10,953 shares of restricted stock units to a key employee, that vest primarily over a three-year period, at an estimated value of $0.2 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the first and second quarters of fiscal 2018, a total of 77,655 and 31,448 shares of restricted stock vested, of which 25,241 and 11,259 shares were withheld to cover the employees’ statutory income tax requirements, respectively. The estimated value of the withheld shares was $0.5 million and $0.2 million, respectively.

16. SEGMENT INFORMATION

The Company has four reportable segments: Men’s Sportswear and Swim, Women’s Sportswear, Direct-to-Consumer and Licensing. The Men’s Sportswear and Swim and Women’s Sportswear segments derive revenues from the design, import and distribution of apparel to department stores and other retail outlets, principally throughout the United States. The Direct-to-Consumer segment derives its revenues from the sale of the Company’s branded and licensed products through the Company’s retail stores and e-commerce platforms. The Licensing segment derives its revenues from royalties associated from the use of the Company’s brand names, principally Perry Ellis, Original Penguin, Laundry, Gotcha, Pro Player, Farah, Ben Hogan, and John Henry.

 

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The Company allocates certain corporate selling, general and administrative expenses based primarily on the revenues generated by the segments.

 

     Three Months Ended      Six Months Ended  
     July 29,
2017
     July 30,
2016
     July 29,
2017
     July 30,
2016
 
     (in thousands)  

Revenues:

           

Men’s Sportswear and Swim

   $ 155,466      $ 145,148      $ 341,332      $ 343,073  

Women’s Sportswear

     19,718        24,136        49,457        56,625  

Direct-to-Consumer

     23,210        24,057        41,428        44,518  

Licensing

     8,215        8,312        16,482        18,731  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 206,609      $ 201,653      $ 448,699      $ 462,947  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Men’s Sportswear and Swim

   $ 1,786      $ 2,006      $ 3,637      $ 3,903  

Women’s Sportswear

     866        764        1,661        1,378  

Direct-to-Consumer

     784        889        1,550        1,785  

Licensing

     60        57        116        117  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

   $ 3,496      $ 3,716      $ 6,964      $ 7,183  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) :

           

Men’s Sportswear and Swim

   $ 3,869      $ (2,425    $ 19,384      $ 14,517  

Women’s Sportswear

     (3,409      (3,106      (4,378      (3,457

Direct-to-Consumer

     (1,960      (2,933      (6,061      (6,305

Licensing

     6,072        5,925        12,048        14,389  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income (loss)

   $ 4,572      $ (2,539    $ 20,993      $ 19,144  

Total interest expense

     1,869        1,889        3,825        3,914  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income (loss) before income taxes

   $ 2,703      $ (4,428    $ 17,168      $ 15,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

17. BENEFIT PLAN

The Company sponsored two qualified pension plans as a result of the Perry Ellis Menswear acquisition that occurred in June 2003. The plans were frozen and merged as of December 31, 2003.

During fiscal 2015, the Board of Directors resolved to terminate the pension plan. As of January 28, 2017, the Company satisfied the regulatory requirements prescribed by the Internal Revenue Service and the Pension Benefit Guaranty Corporation, and the distribution of plan assets was completed.

The following table provides the components of net benefit cost for the plan during the three and six months of fiscal 2018 and 2017:

 

     Three Months Ended      Six Months Ended  
     July 29,
2017
     July 30,
2016
     July 29,
2017
     July 30,
2016
 
     (in thousands)  

Service cost

   $ —        $ 63      $ —        $ 126  

Interest cost

     —          124        —          248  

Expected return on plan assets

     —          (87      —          (174

Amortization of net gain

     —          155        —          310  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ —        $ 255      $ —        $ 510  
  

 

 

    

 

 

    

 

 

    

 

 

 

18. FAIR VALUE MEASUREMENTS

Accounts receivable, accounts payable, accrued interest payable and accrued expenses. The carrying amounts reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments.

Investments. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the available-for-sale investments are measured at fair value on a recurring basis in the consolidated balance sheets.

 

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Real estate mortgages. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the real estate mortgages were approximately $34.0 million and $34.5 million at July 29, 2017 and January 28, 2017, respectively. The carrying values of the real estate mortgages at July 29, 2017 and January 28, 2017, approximate their fair values since the interest rates approximate market.

Senior credit facility. The carrying amount of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate.

Senior subordinated notes payable. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the 77/8% senior subordinated notes payable were approximately $49.7 million at July 29, 2017 and January 28, 2017. The fair value of the 77/8% senior subordinated notes payable was approximately $50.2 million and $50.1 million as of July 29, 2017 and January 28, 2017, respectively, based on quoted market prices.

See footnote 13 to the consolidated financial statements for disclosure of the fair value and line item caption of derivative instruments recorded in the consolidated balance sheets.

These estimated fair value amounts have been determined using available market information and appropriate valuation methods.

19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company and several of its subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis. These guarantees are subject to release in limited circumstances (only upon the occurrence of certain customary conditions). The following are condensed consolidating financial statements, which present, in separate columns: Perry Ellis International, Inc., (Parent Only), the Guarantors on a combined, or where appropriate, consolidated basis, and the Non-Guarantors on a combined, or where appropriate, consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of July 29, 2017 and January 28, 2017 and for the three and six months ended July 29, 2017 and July 30, 2016. The combined Guarantors are 100% owned subsidiaries of Perry Ellis International, Inc., and have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis.

The Company adopted the provisions of ASU 2016-09 in the first quarter of fiscal 2018 and the change was retrospectively applied to the condensed consolidating financial statements for all periods presented. The effect on the condensed consolidating statement of cash flows, as a result of the adoption, is an increase of approximately $0.9 million in cash provided by operating activities to the guarantor subsidiaries for the six months ended July 30, 2016, with a corresponding increase in cash used in financing activities to the guarantor for the respective periods from the previously reported amounts.

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF JULY 29, 2017

(amounts in thousands)

 

     Parent Only      Guarantors      Non-Guarantors      Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —        $ 8,229      $ 15,583      $ —       $ 23,812  

Investment, at fair value

     —          —          28,870        —         28,870  

Accounts receivable, net

     —          103,110        28,345        —         131,455  

Intercompany receivable, net

     89,162        —          —          (89,162     —    

Inventories

     —          107,531        23,666        —         131,197  

Prepaid expenses and other current assets

     —          5,978        841        —         6,819  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     89,162        224,848        97,305        (89,162     322,153  

Property and equipment, net

     —          56,722        2,550        —         59,272  

Other intangible assets, net

     —          154,301        32,332        —         186,633  

Deferred income taxes

     —          —          462        —         462  

Investment in subsidiaries

     292,983        —          —          (292,983     —    

Other assets

     —          1,641        585        —         2,226  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 382,145      $ 437,512      $ 133,234      $ (382,145   $ 570,746  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —        $ 56,906      $ 12,452      $ —       $ 69,358  

Accrued expenses and other liabilities

     —          19,930        5,976        —         25,906  

Accrued interest payable

     1,407        —          —          —         1,407  

Income taxes payable

     659        583        92        —         1,334  

Unearned revenues

     —          3,074        505        —         3,579  

Intercompany payable, net

     —          76,594        18,999        (95,593     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,066        157,087        38,024        (95,593     101,584  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,744        —          —          —         49,744  

Real estate mortgages

     —          33,153        —          —         33,153  

Unearned revenues and other long-term liabilities

     —          19,074        284        —         19,358  

Deferred income taxes

     —          36,572        —          —         36,572  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     49,744        88,799        284        —         138,827  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     51,810        245,886        38,308        (95,593     240,411  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     330,335        191,626        94,926        (286,552     330,335  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 382,145      $ 437,512      $ 133,234      $ (382,145   $ 570,746  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF JANUARY 28, 2017

(amounts in thousands)

 

     Parent Only      Guarantors      Non-Guarantors      Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —        $ 2,578      $ 28,117      $ —       $ 30,695  

Investment, at fair value

     —          —          10,921        —         10,921  

Accounts receivable, net

     —          116,874        23,366        —         140,240  

Intercompany receivable, net

     85,028        —          —          (85,028     —    

Inventories

     —          126,557        24,694        —         151,251  

Prepaid income taxes

     549        —          25        1,073       1,647  

Prepaid expenses and other current assets

     —          5,584        878        —         6,462  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     85,577        251,593        88,001        (83,955     341,216  

Property and equipment, net

     —          59,651        2,184        —         61,835  

Other intangible assets, net

     —          154,719        32,332        —         187,051  

Deferred income taxes

     —          —          334        —         334  

Investment in subsidiaries

     279,233        —          —          (279,233     —    

Other assets

     —          1,797        472        —         2,269  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 364,810      $ 467,760      $ 123,323      $ (363,188   $ 592,705  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —        $ 79,600      $ 13,243      $ —       $ 92,843  

Accrued expenses and other liabilities

     —          15,543        5,318        —         20,861  

Accrued interest payable

     1,450        —          —          —         1,450  

Income taxes payable

     —          623        —          (623     —    

Unearned revenues

     —          2,353        357        —         2,710  

Intercompany payable, net

     —          77,398        15,614        (93,012     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,450        175,517        34,532        (93,635     117,864  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,673        —          —          —         49,673  

Senior credit facility

     —          22,504        —          —         22,504  

Real estate mortgages

     —          33,591        —          —         33,591  

Unearned revenues and other long-term liabilities

     —          17,945        326        —         18,271  

Deferred income taxes

     —          35,419        —          1,696       37,115  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     49,673        109,459        326        1,696       161,154  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     51,123        284,976        34,858        (91,939     279,018  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     313,687        182,784        88,465        (271,249     313,687  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 364,810      $ 467,760      $ 123,323      $ (363,188   $ 592,705  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE THREE MONTHS ENDED JULY 29, 2017

(amounts in thousands)

 

     Parent Only      Guarantors     Non-Guarantors     Eliminations     Consolidated  

Revenues:

           

Net sales

   $ —        $ 172,708     $ 25,686     $ —       $ 198,394  

Royalty income

     —          5,108       3,107       —         8,215  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          177,816       28,793       —         206,609  

Cost of sales

     —          113,243       16,886       —         130,129  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          64,573       11,907       —         76,480  

Operating expenses:

           

Selling, general and administrative expenses

     —          59,259       9,153       —         68,412  

Depreciation and amortization

     —          3,252       244       —         3,496  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          62,511       9,397       —         71,908  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          2,062       2,510       —         4,572  

Interest expense (income)

     —          1,920       (51     —         1,869  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —          142       2,561       —         2,703  

Income tax provision

     —          1,322       402       —         1,724  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     979        —         —         (979     —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     979        (1,180     2,159       (979     979  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     1,217        —         1,217       (1,217     1,217  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,196      $ (1,180   $ 3,376     $ (2,196   $ 2,196  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS ) INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED JULY 30, 2016

(amounts in thousands)

 

     Parent Only     Guarantors     Non-Guarantors     Eliminations      Consolidated  

Revenues:

           

Net sales

   $ —       $ 169,237     $ 24,104     $ —        $ 193,341  

Royalty income

     —         5,061       3,251       —          8,312  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

     —         174,298       27,355       —          201,653  

Cost of sales

     —         111,729       16,093       —          127,822  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     —         62,569       11,262       —          73,831  

Operating expenses:

           

Selling, general and administrative expenses

     —         62,361       10,293       —          72,654  

Depreciation and amortization

     —         3,276       440       —          3,716  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     —         65,637       10,733       —          76,370  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating (loss) income

     —         (3,068     529       —          (2,539

Interest expense (income)

     —         1,901       (12     —          1,889  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income before income taxes

     —         (4,969     541       —          (4,428

Income tax (benefit) provision

     —         (1,441     578       —          (863
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Equity in earnings of subsidiaries, net

     (3,565     —         —         3,565        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss

     (3,565     (3,528     (37     3,565        (3,565
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income

     (2,928     155       (3,083     2,928        (2,928
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive loss

   $ (6,493   $ (3,373   $ (3,120   $ 6,493      $ (6,493
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED JULY 29, 2017

(amounts in thousands)

 

     Parent Only      Guarantors      Non-Guarantors     Eliminations     Consolidated  

Revenues:

            

Net sales

   $ —        $ 379,394      $ 52,823     $ —       $ 432,217  

Royalty income

     —          10,494        5,988       —         16,482  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —          389,888        58,811       —         448,699  

Cost of sales

     —          247,170        33,961       —         281,131  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          142,718        24,850       —         167,568  

Operating expenses:

            

Selling, general and administrative expenses

     —          120,858        18,753       —         139,611  

Depreciation and amortization

     —          6,462        502       —         6,964  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          127,320        19,255       —         146,575  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —          15,398        5,595       —         20,993  

Interest expense (income)

     —          3,909        (84     —         3,825  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —          11,489        5,679       —         17,168  

Income tax provision

     —          2,647        771       —         3,418  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     13,750        —          —         (13,750     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     13,750        8,842        4,908       (13,750     13,750  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

     1,140        —          1,140       (1,140     1,140  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 14,890      $ 8,842      $ 6,048     $ (14,890   $ 14,890  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED JULY 30, 2016

(amounts in thousands)

 

     Parent Only     Guarantors      Non-Guarantors     Eliminations     Consolidated  

Revenues:

           

Net sales

   $ —       $ 394,142      $ 50,074     $ —       $ 444,216  

Royalty income

     —         12,275        6,456       —         18,731  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —         406,417        56,530       —         462,947  

Cost of sales

     —         260,705        33,327       —         294,032  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —         145,712        23,203       —         168,915  

Operating expenses:

           

Selling, general and administrative expenses

     —         123,794        18,794       —         142,588  

Depreciation and amortization

     —         6,467        716       —         7,183  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —         130,261        19,510       —         149,771  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —         15,451        3,693       —         19,144  

Interest expense (income)

     —         3,935        (21     —         3,914  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —         11,516        3,714       —         15,230  

Income tax provision

     —         3,025        1,520       —         4,545  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     10,685       —          —         (10,685     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     10,685       8,491        2,194       (10,685     10,685  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (1,103     310        (1,413     1,103       (1,103
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,582     $ 8,801      $ 781     $ (9,582   $ 9,582  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JULY 29, 2017

(amounts in thousands)

 

     Parent Only     Guarantors     Non-Guarantors     Eliminations     Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ 1,236     $ 35,631     $ 3,453     $ —       $ 40,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —         (3,121     (780     —         (3,901

Purchase of investments

     —         —         (28,124     —         (28,124

Proceeds from investments maturities

     —         —         10,136       —         10,136  

Intercompany transactions

     246       —         —         (246     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     246       (3,121     (18,768     (246     (21,889
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings from senior credit facility

     —         141,588       —         —         141,588  

Payments on senior credit facility

     —         (164,092     —         —         (164,092

Payments on real estate mortgages

     —         (435     —         —         (435

Purchase of treasury shares

     (937     —         —         —         (937

Payments for employee taxes on shares withheld

       (753     —         —         (753

Payments on capital leases

     —         (140     —         —         (140

Proceeds from exercise of stock options

     23       —         —         —         23  

Intercompany transactions

       (3,027     3,349       (322     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (914     (26,859     3,349       (322     (24,746

Effect of exchange rate changes on cash and cash equivalents

     (568     —         (568     568       (568
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     —         5,651       (12,534     —         (6,883

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —         2,578       28,117       —         30,695  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —       $ 8,229     $ 15,583     $ —       $ 23,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JULY 30, 2016

(amounts in thousands)

 

     Parent Only     Guarantors     Non-Guarantors     Eliminations     Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ 4,543     $ 29,241     $ 4,802     $ (2,706   $ 35,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —         (5,854     (755     —         (6,609

Purchase of investments

     —         —         (9,039     —         (9,039

Proceeds from investments maturities

     —         —         5,205       —         5,205  

Intercompany transactions

     (4,477     —         —         4,477       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,477     (5,854     (4,589     4,477       (10,443
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings from senior credit facility

     —         179,380       —         —         179,380  

Payments on senior credit facility

     —         (207,273     —         —         (207,273

Payments on real estate mortgages

     —         (423     —         —         (423

Payments for employee taxes on shares withheld

     —         (946     —         —         (946

Payments on capital leases

     —         (129     —         —         (129

Dividends paid to stockholder

     —         —         (2,706     2,706       —    

Proceeds from exercise of stock options

     5       —         —         —         5  

Intercompany transactions

     —         9,178       (4,630     (4,548     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     5       (20,213     (7,336     (1,842     (29,386

Effect of exchange rate changes on cash and cash equivalents

     (71     —         (71     71       (71
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —         3,174       (7,194     —         (4,020

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —         775       31,127       —         31,902  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —       $ 3,949     $ 23,933     $ —       $ 27,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

Forward–Looking Statements

We caution readers that the forward-looking statements (statements which are not historical facts) in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “proforma,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology. Such forward-looking statements include, but are not limited to, statements regarding Perry Ellis’ strategic operating review, growth initiatives and internal operating improvements intended to drive revenues and enhance profitability, the implementation of Perry Ellis’ profitability improvement plan and Perry Ellis’ plans to exit underperforming, low growth brands and businesses. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. These factors include:

 

    general economic conditions,

 

    a significant decrease in business from or loss of any of our major customers or programs,

 

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    anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,

 

    recent and future economic conditions, including turmoil in the financial and credit markets,

 

    the effectiveness of our planned advertising, marketing and promotional campaigns,

 

    our ability to contain costs,

 

    disruptions in the supply chain, including, but not limited to those caused by port disruptions,

 

    disruptions due to weather patterns,

 

    our future capital needs and our ability to obtain financing,

 

    our ability to protect our trademarks,

 

    our ability to integrate acquired businesses, trademarks, trade names, and licenses,

 

    our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

 

    the termination or non-renewal of any material license agreements to which we are a party,

 

    changes in the costs of raw materials, labor and advertising,

 

    our ability to carry out growth strategies including expansion in international and direct-to-consumer retail markets,

 

    the effectiveness of our plans, strategies, objectives, expectations and intentions, which are subject to change at any time at our discretion,

 

    potential cyber risk and technology failures that could disrupt operations or result in a data breach,

 

    the level of consumer spending for apparel and other merchandise,

 

    our ability to compete,

 

    exposure to foreign currency risk and interest rates risk,

 

    the impact to our business resulting from the United Kingdom’s referendum vote to exit the European Union and the uncertainty surrounding the terms and conditions of such a withdrawal, as well as the related impact to global stock markets and currency exchange rates,

 

    possible disruption in commercial activities due to terrorist activity and armed conflict,

 

    actions of activist investors and the cost and disruption of responding to those actions, and

 

    other factors set forth in Perry Ellis’ filings with the Securities and Exchange Commission.

 

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Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those risks and uncertainties detailed in Perry Ellis’ filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 28, 2017 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas in which we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets and the measurement of retirement related benefits. We believe that there have been no significant changes to our critical accounting policies during the three and six months ended July 29, 2017 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 28, 2017.

 

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Results of Operations

The following table sets forth, for the periods indicated, selected financial data expressed by segments and includes a reconciliation of EBITDA to operating income by segment, the most directly comparable GAAP financial measure:

 

     Three Months Ended     Six Months Ended  
     July 29,
2017
    July 30,
2016
    July 29,
2017
    July 30,
2016
 
     (in thousands)  

Revenues by segment:

        

Men’s Sportswear and Swim

   $ 155,466     $ 145,148     $ 341,332     $ 343,073  

Women’s Sportswear

     19,718       24,136       49,457       56,625  

Direct-to-Consumer

     23,210       24,057       41,428       44,518  

Licensing

     8,215       8,312       16,482       18,731  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 206,609     $ 201,653     $ 448,699     $ 462,947  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Six Months Ended  
Reconciliation of operating income (loss) to EBITDA    July 29,
2017
    July 30,
2016
    July 29,
2017
    July 30,
2016
 
Operating income (loss) by segment:    (in thousands)  

Men’s Sportswear and Swim

   $ 3,869     $ (2,425   $ 19,384     $ 14,517  

Women’s Sportswear

     (3,409     (3,106     (4,378     (3,457

Direct-to-Consumer

     (1,960     (2,933     (6,061     (6,305

Licensing

     6,072       5,925       12,048       14,389  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

   $ 4,572     $ (2,539   $ 20,993     $ 19,144  
  

 

 

   

 

 

   

 

 

   

 

 

 

Add:

        

Depreciation and amortization

        

Men’s Sportswear and Swim

   $ 1,786     $ 2,006     $ 3,637     $ 3,903  

Women’s Sportswear

     866       764       1,661       1,378  

Direct-to-Consumer

     784       889       1,550       1,785  

Licensing

     60       57       116       117  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   $ 3,496     $ 3,716     $ 6,964     $ 7,183  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA by segment:

        

Men’s Sportswear and Swim

   $ 5,655     $ (419   $ 23,021     $ 18,420  

Women’s Sportswear

     (2,543     (2,342     (2,717     (2,079

Direct-to-Consumer

     (1,176     (2,044     (4,511     (4,520

Licensing

     6,132       5,982       12,164       14,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 8,068     $ 1,177     $ 27,957     $ 26,327  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA margin by segment

        

Men’s Sportswear and Swim

     3.6     (0.3 %)      6.7     5.4

Women’s Sportswear

     (12.9 %)      (9.7 %)      (5.5 %)      (3.7 %) 

Direct-to-Consumer

     (5.1 %)      (8.5 %)      (10.9 %)      (10.2 %) 

Licensing

     74.6     72.0     73.8     77.4

Total EBITDA margin

     3.9     0.6     6.2     5.7

EBITDA consists of earnings before interest, depreciation and amortization, and income taxes. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. The most directly comparable GAAP financial measure, presented above, is operating income. EBITDA and EBITDA margin are presented solely as a supplemental disclosure because management believes that they are a common measure of operating performance in the apparel industry.

The following is a discussion of the results of operations for the three and six month periods ended July 29, 2017 of the fiscal year ending February 3, 2018 (“fiscal 2018”) compared with the three and six month periods ended July 30, 2016 of the fiscal year ended January 28, 2017 (“fiscal 2017”).

 

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Results of Operations—three and six months ended July 29, 2017 compared to the three and six months ended July 30, 2016.

Net sales. Men’s Sportswear and Swim net sales for the three months ended July 29, 2017 were $155.5 million, an increase of $10.4 million, or 7.2%, from $145.1 million for the three months ended July 30, 2016. The net sales increase was attributed to strong sell through rates throughout the spring season and some movement up in shipments that were originally anticipated for third quarter. Of particular strength were our core brands, specifically Perry Ellis, Original Penguin, Nike and golf apparel businesses.

Men’s Sportswear and Swim net sales for the six months ended July 29, 2017 were $341.3 million, a decrease of $1.8 million, or 0.5%, from $343.1 million for the six months ended July 30, 2016. Although we had an increase in the second quarter, it was offset by our customer’s preference to receive product closer to their needs resulting in a shift in sales from the first half of the year to the second half. The decrease was partially offset by increases in our Perry Ellis, Original Penguin, golf lifestyle apparel business, Nike swim, and other core global brands as described above.

Women’s Sportswear net sales for the three months ended July 29, 2017 were $19.7 million, a decrease of $4.4 million, or 18.3%, from $24.1 million for the three months ended July 30, 2016. The net sales decrease was attributed primarily to planned reductions as we continue to focus on re-launching the Laundry brand, as well as, a shift in planned sales from the second quarter to the third quarter.

Women’s Sportswear net sales for the six months ended July 29, 2017 were $49.5 million, a decrease of $7.1 million, or 12.5%, from $56.6 million for the six months ended July 30, 2016. The net sales decrease was primarily due to planned reductions in Laundry as we work on the re-launch of the brand. The decrease was partially offset by increases in Rafaella driven by the earlier timing of spring shipments.

Direct-to-Consumer net sales for the three months ended July 29, 2017 were $23.2 million, a decrease of $0.9 million, or 3.7%, from $24.1 million for the three months ended July 30, 2016. The decrease was driven by ten store closings since the second quarter of fiscal 2017, partially offset by a 5% increase in e-commerce. Comparable same store sales remained flat while comparable margins increased 4% due to strong consumer response to our product assortments.

Direct-to-Consumer net sales for the six months ended July 29, 2017 were $41.4 million, a decrease of $3.1 million, or 7.0%, from $44.5 million for the six months ended July 30, 2016. The decrease was driven by a retail stores sales decline of 1.9% in comparable same store sales for the direct-to-consumer business, coupled with ten fewer stores as compared to the prior period.

Royalty income. Royalty income for the three months ended July 29, 2017 was $8.2 million, a decrease of $0.1 million, or essentially flat, from $8.3 million for the three months ended July 30, 2016.

Royalty income for the six months ended July 29, 2017 was $16.5 million, a decrease of $2.2 million, or 11.8%, from $18.7 million for the six months ended July 30, 2016. Royalty income decreases were attributed to the transition of two of our licensed partners; one brought in-house and one to a new licensing partnership.

Gross profit. Gross profit was $76.5 million for the three months ended July 29, 2017, an increase of $2.7 million, or 3.7%, from $73.8 million for the three months ended July 30, 2016. This increase is attributed to a strong sales performance by our core brands coupled with strong inventory management.

Gross profit was $167.6 million for the six months ended July 29, 2017, a decrease of $1.3 million, or 0.8%, from $168.9 million for the six months ended July 30, 2016. This decrease is attributed to the sales reductions described above and the factors described within the gross profit margin section below.

Gross profit margin. As a percentage of total revenue, gross profit margins were 37.0% for the three months ended July 29, 2017, as compared to 36.6% for the three months ended July 30, 2016, an expansion of 40 basis points. The expansion was driven by stronger product margins in our men’s collection, golf apparel, Nike and direct-to-consumer businesses.

 

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For the six months ended July 29, 2017, gross profit margins were 37.3% as a percentage of total revenue as compared to 36.5% for the six months ended July 30, 2016, an expansion of 80 basis points. The increase is attributed to the disciplined management of inventory across all channels, increased sales of higher margin core brands and efficiencies achieved within our supply chain infrastructure. Additionally, our direct-to-consumer gross profit margin increased due to improved pricing strategies and a move away from highly promotional events.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended July 29, 2017 were $68.4 million, a decrease of $4.3 million, or 5.9%, from $72.7 million for the three months ended July 30, 2016. The decrease was attributed primarily to reduced employee expenses resulting from our continued focus on our core infrastructure. Additionally, during three months ended July 30, 2016, we had a required acceleration of compensation costs relating to the new contract for our executive chairman, which was not repeated in the comparable period of 2017.

Selling, general and administrative expenses for the six months ended July 29, 2017 were $139.6 million, a decrease of $3.0 million, or 2.1%, from $142.6 million for the six months ended July 30, 2016. The decrease was attributed primarily to reduced employee expenses resulting from our continued focus on our core infrastructure, and during three months ended July 30, 2016, we had a required acceleration of compensation costs relating to the new contract for our executive chairman.

EBITDA. Men’s Sportswear and Swim EBITDA margin for the three months ended July 29, 2017 increased 390 basis points to 3.6% from (0.3%) for the three months ended July 30, 2016. The EBITDA margin was favorably impacted by sourcing efficiencies and strong performance of our core brands, specifically Perry Ellis, Original Penguin, Nike and golf apparel businesses.

Men’s Sportswear and Swim EBITDA margin for the six months ended July 29, 2017 increased 130 basis points to 6.7%, from 5.4% for the six months ended July 30, 2016. The EBITDA margin was favorably impacted by sourcing efficiencies and the strong sales performance of our core brands, specifically Perry Ellis, Original Penguin, Nike and golf apparel businesses.

Women’s Sportswear EBITDA margin for the three months ended July 29, 2017 decreased 320 basis points to (12.9%) from (9.7%) for the three months ended July 30, 2016. The EBITDA margin was unfavorably impacted by planned reductions and shifts in sales as discussed above.

Women’s Sportswear EBITDA margin for the six months ended July 29, 2017 decreased 180 basis points to (5.5%) from (3.7%) for the six months ended July 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in net sales described above. As a result of this decrease in revenue, we were not able to realize favorable leverage in selling, general and administrative expenses.

Direct-to-Consumer EBITDA margin for the three months ended July 29, 2017 increased 340 basis points to (5.1%) from (8.5%) for the three months ended July 30, 2016. The EBITDA margin was favorably impacted by the product sales mix as we focus to be less dependent on everyday promotions.

Direct-to-Consumer EBITDA margin for the six months ended July 29, 2017 decreased 70 basis points to (10.9%), from (10.2%) for the six months ended July 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in revenue from our stores, as described above.

Licensing EBITDA margin for the three months ended July 29, 2017 increased 260 basis points to 74.6%, from 72.0% for the three months ended July 30, 2016. The EBITDA margin was favorably impacted by reductions in selling, general and administrative expenses associated with the licensing segment.

Licensing EBITDA margin for the six months ended July 29, 2017 decreased 360 basis points to 73.8%, from 77.4% for the six months ended July 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in royalty income described above.

 

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Depreciation and amortization. Depreciation and amortization for the three months ended July 29, 2017, was $3.5 million, a decrease of $0.2 million, or 5.4% from $3.7 million for the three months ended July 30, 2016. The decrease is primarily reflected in the direct-to-consumer segment as a result of ten store closures since the second half of fiscal 2017.

Depreciation and amortization for the six months ended July 29, 2017, was $7.0 million, a decrease of $0.2 million, or 2.8%, from $7.2 million for the six months ended July 30, 2016. The decrease is primarily reflected in the direct-to-consumer segment as a result of ten store closures since the second half of fiscal 2017.

Interest expense. Interest expense for the three months ended July 29, 2017 and the three months ended July 30, 2016 remained flat at $1.9 million. Interest expense for the six months ended July 29, 2017 was $3.8 million, a decrease of $0.1 million, or 2.6%, from $3.9 million for the six months ended July 30, 2016. This decrease was attributed to the lower average amount borrowed on our credit facility as compared to the prior year period.

Income taxes. The income tax expense for the three months ended July 29, 2017, was $1.7 million, an increase of $2.6 million, as compared to a tax benefit of $0.9 million for the three months ended July 30, 2016. For the three months ended July 29, 2017, our effective tax rate was 63.8% as compared to 19.5% for the three months ended July 30, 2016. This increase is attributed to the net impact of the increase in the reserve for uncertain tax positions associated with our Internal Revenue Service examination in the amount of $1 million, as well as, the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates. The income tax expense for the six months ended July 29, 2017, was $3.4 million, a decrease of $1.1 million, as compared to $4.5 million for the six months ended July 30, 2016. For the six months ended July 29, 2017, our effective tax rate was 19.9% as compared to 29.8% for the six months ended July 30, 2016. The overall change in the effective tax rate is attributed to the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates.

Net income (loss). Net income for the three months ended July 29, 2017 was $1.0 million, an increase of $4.6 million, or 127.8%, as compared to a net loss of $3.6 million for the three months ended July 30, 2016. Net income for the six months ended July 29, 2017 was $13.8 million, an increase of $3.1 million, or 29.0%, as compared to $10.7 million for the six months ended July 30, 2016. The changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, acquisitions, and capital expenditures. We believe that our working capital requirements will increase for next year as we continue to expand internationally. As of July 29, 2017, our total working capital was $220.6 million as compared to $223.4 million as of January 28, 2017 and $208.3 million as of July 30, 2016. We believe that our cash flows from operations, availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs and capital expenditure needs over the next year.

We consider the undistributed earnings of our foreign subsidiaries as of July 29, 2017, to be indefinitely reinvested and, accordingly, no United States income taxes have been provided thereon. As of July 29, 2017, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $15.6 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Net cash provided by operating activities was $40.3 million for the six months ended July 29, 2017, as compared to cash provided by operating activities of $35.9 million for the six months ended July 30, 2016.

The cash provided by operating activities for the six months ended July 29, 2017, is primarily attributable to a decreased inventory of $21.3 million, due to improved inventory management, a decrease in accounts receivable of $8.5 million, an increased income taxes payable of $1.4 million and an increase in unearned revenues of $2.0 million, as well as a decrease in prepaid income taxes of $1.6 million. This was partially offset by a decrease in accounts payable and accrued expenses of $19.7 million. Our inventory turnover ratio increased to 4.0 as compared to 3.6 in the prior period because of our continued focus on inventory management.

 

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The cash provided by operating activities for the six months ended July 30, 2016, is primarily attributable to a decrease in accounts receivable of $10.1 million, decreased inventory of $47.6 million due to improved inventory management, an increase in unearned revenues and other liabilities of $3.5 million, as well as a decrease in prepaid income taxes of $1.9 million. This was partially offset by a decrease in accounts payable and accrued expenses of $51.6 million.

Net cash used in investing activities was $21.9 million for the six months ended July 29, 2017 as compared to cash used in investing activities of $10.4 million for the six months ended July 30, 2016. The net cash used in investing activities during the first six months of fiscal 2018 primarily reflects the purchase of investments of $28.1 million and the purchase of property and equipment of $3.9 million primarily for leasehold improvements and store fixtures; offset by the proceeds from the maturities of investments in the amount of $10.1 million.

We anticipate capital expenditures during the remainder of fiscal 2018 of $8.0 million to $9.0 million in new office leasehold improvements, technology, systems, retail store leasehold improvements, and other expenditures.

Net cash used in investing activities was $10.4 million for the six months ended July 30, 2016. The net cash used in investing activities during the first six months of fiscal 2017 primarily reflects the purchase of investments of $9.0 million and the purchase of property and equipment of $6.6 million primarily for leasehold improvements and store fixtures; offset by the proceeds from the maturities of investments in the amount of $5.2 million.

Net cash used in financing activities was $24.7 million for the six months ended July 29, 2017 as compared to cash used in financing activities of $29.4 million for the six months ended July 30, 2016. The net cash used during the first six months of fiscal 2018 primarily reflects net payments on our senior credit facility of $22.5 million, purchase of treasury shares of $0.9 million, payments for employee taxes on shares withheld upon vesting of $0.8 million, payments of $0.4 million on our mortgage loans and payments on capital leases of $0.1 million.

Net cash used in financing activities was $29.4 million for the six months ended July 30, 2016. The net cash used during the first six months of fiscal 2017 primarily reflects net payments on our senior credit facility of $27.9 million, payments for employee taxes on shares withheld upon vesting of $0.9 million, payments of $0.4 million on our mortgage loans and payments on capital leases of $0.1 million.

Our Board of Directors has authorized us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis

During the second quarter of fiscal 2018, we repurchased 50,000 shares of common stock at a cost of $0.9 million. There were no treasury shares outstanding as of January 28, 2017. Total purchases under the plan to date amount to approximately $61.7 million.

Acquisitions

None.

7 78% $150 Million Senior Subordinated Notes Payable

In March 2011, we issued $150 million 7 78% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 8 78% senior subordinated notes due September 15, 2013 and to repay a portion of the outstanding balance on the senior credit facility. The proceeds to us were $146.5 million yielding an effective interest rate of 8.0%.

 

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On April 6, 2015, we elected to call for the partial redemption of $100 million of our $150 million 7 78% senior subordinated notes due 2019 and a notice of redemption was sent to all registered holders of the senior subordinated notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, we completed the redemption of the $100 million of our senior subordinated notes. We incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption, including the redemption premium as well as the write-off of note issuance costs. At July 29, 2017 and January 28, 2017, the balance of the 7 78% senior subordinated notes totaled $49.7 million, net of debt issuance costs in the amount of $0.3 million

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. We are not aware of any non-compliance with any of our covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Senior Credit Facility

On April 22, 2015, we amended and restated our existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $200 million. The Credit Facility has been extended through April 30, 2020 (“Maturity Date”). In connection with this amendment and restatement, we paid fees in the amount of $0.6 million. These fees will be amortized over the term of the Credit Facility as interest expense. At July 29, 2017, we had no outstanding borrowings under the Credit Facility. At January 28, 2017, we had outstanding borrowings of $22.5 million under the Credit Facility.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require us to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. We are not aware of any non-compliance with any of our covenants in this Credit Facility. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. We may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of a default. We could be materially harmed if we violate any covenants, as the lenders under the Credit Facility could declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets and the assets of our subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of our other outstanding indebtedness, such as the indenture relating to our 7 78% senior subordinated notes due April 1, 2019, our letter of credit facilities, or our real estate mortgage loans. A cross-default could result in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy. Additionally, our Credit Facility includes a subjective acceleration clause if a “material adverse change” in our business occurs. We believe that the likelihood of the lender exercising this right is remote.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables plus (b) 87.5% of eligible foreign accounts up to $1.5 million plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, (ii) a maximum of 70.0% of eligible finished goods inventory with an inventory limit not to exceed $125 million, or 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues at the prime rate and at the rate quoted by the agent for Eurodollar loans. The margin adjusts quarterly, in a range of 0.50% to 1.00% for prime rate loans and 1.50% to 2.00% for Eurodollar loans, based on the previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

 

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Security. As security for the indebtedness under the Credit Facility, we granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of our existing and future assets, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries, and real estate, but excluding our non-U.S. subsidiaries and all of our trademark portfolio.

Letter of Credit Facilities

As of July 29, 2017, we maintained one U.S. dollar letter of credit facility totaling $30.0 million. Each documentary letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets.

At July 29, 2017 and January 28, 2017, there was $19.3 million and $19.2 million, respectively, available under the existing letter of credit facilities.

Real Estate Mortgage Loans

In November 2016, we paid off our existing real estate mortgage loan and refinanced our main administrative office, warehouse and distribution facility in Miami with a $21.7 million mortgage loan. The loan is due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $112,000, based on a 25-year amortization with the outstanding principal due at maturity. At July 29, 2017, the balance of the real estate mortgage loan totaled $21.1 million, net of discount, of which $546,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan was due on January 23, 2019. In January 2014, we amended the mortgage loan to modify the interest rate. The interest rate was reduced to 3.25% per annum and the terms were restated to reflect new monthly payments of principal and interest of approximately $68,000, based on a 20-year amortization, with the outstanding principal due at maturity.

In November 2016, we amended the mortgage to increase the amount to $13.2 million. The loan is due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $68,000, based on a 25-year amortization with the outstanding principal due at maturity. At July 29, 2017, the balance of the real estate mortgage loan totaled $12.9 million, net of discount, of which approximately $333,000 is due within one year.

We used the excess funds generated from the new mortgage loans described above to pay down our senior credit facility.

The real estate mortgage loans contain certain covenants. We are not aware of any non-compliance with any of the covenants. If we violate any covenants, the lender under the real estate mortgage loans could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. A covenant violation could constitute a cross-default under our senior credit facility, our letter of credit facilities and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements,” as defined by applicable GAAP and SEC rules.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and six months ended July 29, 2017.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates or foreign currency. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate and foreign currency.

 

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Cash Flow Hedges

Our United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, we entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These contracts are formally designated and “highly effective” as cash flow hedges.

All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. We record the hedging instruments at fair value in our Consolidated Balance Sheet. The cash flows from such hedges are presented in the same category in our Consolidated Statement of Cash Flows as the items being hedged.

The notional amounts outstanding of foreign exchange forward contracts were $15.1 million and $15.0 million at July 29, 2017 and January 28, 2017, respectively. Such contracts expire through July 2018.

Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.6 million and $0.2 million at July 29, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

The total gain (loss) relating to hedging instruments reclassified to earnings during the first and second quarter of fiscal 2018 was $41,000 and ($33,000), respectively. There was no gain or loss relating to hedging instruments reclassified to earnings during the first and second quarter of fiscal 2017.

Commodity Price Risk

We are exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. Fabric is a portion of the overall product cost, which includes various components. We manage our fabric prices by using a combination of different strategies including the utilization of sophisticated logistics and supply chain management systems, which allow us to maintain maximum flexibility in our global sourcing of products. This provides us with the ability to re-direct our sourcing of products to the most cost-effective jurisdictions. In addition, we may modify our product offerings to our customers based on the availability of new fibers, yield enhancement techniques and other technological advances that allow us to utilize more cost effective fibers. Finally, we also have the ability to adjust our price points of such products, to the extent market conditions allow. These factors, along with our foreign-based sourcing offices, allow us to procure product from lower cost countries or capitalize on certain tariff-free arrangements, which help mitigate any commodity price increases that may occur. We have not historically managed, and do not currently intend to manage, commodity price exposures by using derivative instruments.

Other

We have a risk management policy to manage foreign currency risk relating to inventory purchases by our subsidiaries which are denominated in foreign currencies. As such, we may employ hedging and derivative strategies to limit the effects of changes in foreign currency on our operating income and cash flows. However, we consider our current exposure to foreign exchange risk as not significant.

Item 4: Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) of the Securities Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 29, 2017 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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There were no changes in our internal control over financial reporting during the quarter ended July 29, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Period

  

Total Number of
Shares Purchased

    

Average
Price Paid
per Share

    

Total Number of
Shares Purchased
as Part of  Publicly
Announced Plans
or Programs(1)

    

Maximum
Approximate Dollar
Value that May Yet
Be Purchased under
the Plans or
Programs

 

April 30, 2017 to May 27, 2017

     50,000      $ 18.74        50,000      $ 8,278,199  

July 2, 2017 to July 29, 2017 (2)

     11,259      $ 19.17        —        $ 8,278,199  

 

(1)  During fiscal 2017, our Board of Directors extended the stock repurchase program to authorize us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis. Total purchases under the plan to date amount to $61.7 million.
(2)  Represents shares withheld to pay statutory income taxes resulting from vesting of restricted shares.

 

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Item 6. Exhibits

Index to Exhibits

 

Exhibit
Number

  

Exhibit Description

  

Where Filed

  31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)    Filed herewith.
  31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)    Filed herewith.
  32.1    Certification of Principal Executive Officer pursuant to Section 1350    Filed herewith.
  32.2    Certification of Principal Financial Officer pursuant to Section 1350    Filed herewith.
101.INS    XBRL Instance Document    Filed herewith.
101.SCH    XBRL Taxonomy Extension Schema    Filed herewith.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase    Filed herewith.
101.DEF    XBRL Taxonomy Extension Definition Linkbase    Filed herewith.
101.LAB    XBRL Taxonomy Extension Label Linkbase    Filed herewith.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase    Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Perry Ellis International, Inc.
August 31, 2017     By: /S/ DAVID RATTNER
    David Rattner, Chief Financial Officer
    (Principal Financial Officer and Duly Authorized Officer)

 

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