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EX-32.2 - EXHIBIT 32.2 - PVH CORP. /DE/ex32220172q10q.htm
EX-32.1 - EXHIBIT 32.1 - PVH CORP. /DE/ex32120172q10q.htm
EX-31.2 - EXHIBIT 31.2 - PVH CORP. /DE/ex31220172q10q.htm
EX-31.1 - EXHIBIT 31.1 - PVH CORP. /DE/ex31120172q10q.htm


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

FORM 10-Q

(Mark One)
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
July 30, 2017
 

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


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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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  x 
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
 
Emerging growth company  o 

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. o

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

The number of outstanding shares of common stock, par value $1.00 per share, of the registrant as of August 25, 2017 was 77,424,422.




PVH CORP.
INDEX

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

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

PART I -- FINANCIAL INFORMATION

Item 1 - Financial Statements

PART II -- OTHER INFORMATION





PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

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

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 30,
 
July 31,
 
July 30,
 
July 31,
 
2017
 
2016
 
2017
 
2016
Net sales    
$
1,963.5

 
$
1,845.4

 
$
3,838.5

 
$
3,663.1

Royalty revenue    
81.4

 
69.9

 
168.7

 
147.0

Advertising and other revenue    
25.0

 
18.0

 
51.7

 
41.0

Total revenue    
2,069.9

 
1,933.3

 
4,058.9

 
3,851.1

Cost of goods sold (exclusive of depreciation and amortization)
922.6

 
899.5

 
1,830.8

 
1,810.4

Gross profit    
1,147.3

 
1,033.8

 
2,228.1

 
2,040.7

Selling, general and administrative expenses    
968.5

 
874.7

 
1,936.5

 
1,739.9

Debt modification and extinguishment costs

 
15.8

 

 
15.8

Gain to write-up equity investment in joint venture to fair value

 

 

 
153.1

Equity in net income (loss) of unconsolidated affiliates
1.7

 
(0.3
)
 
2.1

 
(0.5
)
Income before interest and taxes
180.5

 
143.0

 
293.7

 
437.6

Interest expense    
30.9

 
29.2

 
61.3

 
59.1

Interest income    
1.2

 
1.1

 
2.9

 
2.0

Income before taxes
150.8

 
114.9

 
235.3

 
380.5

Income tax expense
31.4

 
24.4

 
45.8

 
58.4

Net income
119.4

 
90.5

 
189.5

 
322.1

Less: Net loss attributable to redeemable non-controlling interest
(0.3
)
 

 
(0.6
)
 

Net income attributable to PVH Corp.
$
119.7

 
$
90.5

 
$
190.1

 
$
322.1

Basic net income per common share attributable to PVH Corp.
$
1.54

 
$
1.12

 
$
2.44

 
$
3.98

Diluted net income per common share attributable to PVH Corp.
$
1.52

 
$
1.11

 
$
2.41

 
$
3.95

Dividends declared per common share    
$
0.0375

 
$
0.0375

 
$
0.1125

 
$
0.1125


See accompanying notes.

1



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


 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 30,
 
July 31,
 
July 30,
 
July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
119.4

 
$
90.5

 
$
189.5

 
$
322.1

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
232.6

 
(99.6
)
 
308.9

 
84.6

Net unrealized and realized (loss) gain related to effective cash flow hedges, net of tax (benefit) expense of $(3.9), $2.1, $(1.4) and $(3.8)
(60.6
)
 
16.9

 
(72.2
)
 
(38.0
)
Net (loss) gain on net investment hedge, net of tax (benefit) expense of $(10.3), $2.9, $(13.6) and $2.9
(17.2
)
 
4.9

 
(22.5
)
 
4.9

Total other comprehensive income (loss)
154.8

 
(77.8
)
 
214.2

 
51.5

Comprehensive income
274.2

 
12.7

 
403.7

 
373.6

Less: Comprehensive loss attributable to redeemable non-controlling interest
(0.3
)
 

 
(0.6
)
 

Comprehensive income attributable to PVH Corp.
$
274.5

 
$
12.7

 
$
404.3

 
$
373.6


See accompanying notes.


2




PVH Corp.
Consolidated Balance Sheets
(In millions, except share and per share data)
 
July 30,
 
January 29,
 
July 31,
 
2017
 
2017
 
2016
 
UNAUDITED
 
AUDITED
 
UNAUDITED
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents    
$
559.4

 
$
730.1

 
$
741.7

Trade receivables, net of allowances for doubtful accounts of $18.5, $15.0 and $15.4
646.2

 
616.0

 
569.6

Other receivables    
26.4

 
25.4

 
24.7

Inventories, net    
1,498.6

 
1,317.9

 
1,412.1

Prepaid expenses    
171.8

 
133.2

 
156.0

Other
33.1

 
57.0

 
34.9

Total Current Assets
2,935.5

 
2,879.6

 
2,939.0

Property, Plant and Equipment, net
805.8

 
759.9

 
736.0

Goodwill    
3,669.4

 
3,469.9

 
3,536.1

Tradenames    
2,867.3

 
2,783.4

 
2,818.0

Other Intangibles, net
812.0

 
826.6

 
934.0

Other Assets, including deferred taxes of $24.4, $17.4 and $11.4
363.9

 
348.5

 
216.7

Total Assets
$
11,453.9

 
$
11,067.9

 
$
11,179.8

 
 
 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
Current Liabilities:
 
 
 
 
 
Accounts payable    
$
767.1

 
$
682.6

 
$
631.8

Accrued expenses
811.0

 
832.4

 
703.2

Deferred revenue    
37.1

 
30.7

 
33.8

Short-term borrowings    
18.0

 
19.1

 
19.4

Current portion of long-term debt    

 

 

Total Current Liabilities    
1,633.2

 
1,564.8

 
1,388.2

Long-Term Debt
3,185.7

 
3,197.3

 
3,358.2

Other Liabilities, including deferred taxes of $842.4, $877.7 and $872.5
1,536.7

 
1,499.3

 
1,629.8

Redeemable Non-Controlling Interest
3.1

 
2.0

 
0.1

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

 

 

Common stock, par value $1 per share; 240,000,000 shares authorized; 84,268,459; 83,923,184 and 83,872,364 shares issued
84.3

 
83.9

 
83.9

Additional paid in capital - common stock    
2,895.2

 
2,866.2

 
2,844.8

Retained earnings    
3,278.4

 
3,098.0

 
2,874.1

Accumulated other comprehensive loss
(496.6
)
 
(710.8
)
 
(652.7
)
Less: 6,694,076; 5,371,660 and 3,540,949 shares of common stock held in treasury, at cost
(666.1
)
 
(532.8
)
 
(346.6
)
Total Stockholders’ Equity    
5,095.2

 
4,804.5

 
4,803.5

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity
$
11,453.9

 
$
11,067.9

 
$
11,179.8



See accompanying notes.

3




PVH Corp.
Consolidated Statements of Cash Flows
Unaudited
(In millions)
 
Twenty-Six Weeks Ended
 
July 30,
 
July 31,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
189.5

 
$
322.1

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization    
157.8

 
153.2

Equity in net (income) loss of unconsolidated affiliates
(2.1
)
 
0.5

Deferred taxes    
(48.1
)
 
(3.8
)
Stock-based compensation expense    
21.1

 
19.5

Debt modification and extinguishment costs

 
15.8

Settlement loss on retirement plans
9.4

 

Gain to write-up equity investment in joint venture to fair value


 
(153.1
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables, net    
(8.0
)
 
97.7

Inventories, net    
(120.4
)
 
(55.6
)
Accounts payable, accrued expenses and deferred revenue    
19.8

 
(15.9
)
Prepaid expenses    
(31.8
)
 
(0.8
)
Other, net    
15.7

 
29.6

Net cash provided by operating activities
202.9

 
409.2

INVESTING ACTIVITIES(1)
 
 
 
Business acquisitions, net of cash acquired
(28.1
)
 
(157.7
)
Purchase of property, plant and equipment    
(156.0
)
 
(102.8
)
Proceeds from sale of building

 
16.7

Contingent purchase price payments
(25.6
)
 
(25.2
)
Investments in unconsolidated affiliates
(2.0
)
 
(1.5
)
Payment received on advance to unconsolidated affiliate
6.3

 

Net cash used by investing activities
(205.4
)
 
(270.5
)
FINANCING ACTIVITIES(1)
 
 
 
Net payments on short-term borrowings
(1.1
)
 
(6.5
)
Proceeds from 2016 facilities, net of related fees

 
571.1

Repayment of Term Loan B in connection with amendment to 2014 facilities

 
(582.0
)
Repayment of 2016/2014 facilities
(50.0
)
 
(201.2
)
Proceeds from 3 5/8% senior notes, net of related fees

 
389.6

Net proceeds from settlement of awards under stock plans
7.2

 
10.3

Cash dividends    
(8.9
)
 
(9.2
)
Acquisition of treasury shares    
(130.2
)
 
(133.9
)
Payments of capital lease obligations
(2.5
)
 
(3.6
)
Contributions from non-controlling interest
1.7

 

Net cash (used) provided by financing activities
(183.8
)
 
34.6

Effect of exchange rate changes on cash and cash equivalents    
15.6

 
12.0

(Decrease) increase in cash and cash equivalents
(170.7
)
 
185.3

Cash and cash equivalents at beginning of period    
730.1

 
556.4

Cash and cash equivalents at end of period    
$
559.4

 
$
741.7


(1) See Note 17 for information on Noncash Investing and Financing Transactions.

See accompanying notes.

4



PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. GENERAL

PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company whose brand portfolio consists of nationally and internationally recognized brand names, including CALVIN KLEIN, TOMMY HILFIGER, Van Heusen, IZOD, ARROW, Warner’s, Olga and, as of March 30, 2017, True&Co., which are owned, and Speedo, which is licensed, as well as various other owned, licensed and private label brands. The Company designs and markets branded dress shirts, neckwear, sportswear, jeanswear, performance apparel, intimate apparel, underwear, swim products, handbags, accessories, footwear and other related products and licenses its owned brands over a broad range of products. References to the aforementioned and other brand names are to registered and common law trademarks owned by the Company or licensed to the Company by third parties and are identified by italicizing the brand name.

The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see Note 6, “Investments in Unconsolidated Affiliates,” for a further discussion. During the second quarter of 2016, the Company and Arvind Limited (“Arvind”) formed a joint venture in Ethiopia, PVH Arvind Manufacturing Private Limited Company (“PVH Ethiopia”), in which the Company owns a 75% interest. PVH Ethiopia is consolidated and the minority shareholder’s proportionate share (25%) of the equity in this joint venture is accounted for as a redeemable non-controlling interest. Please see Note 5, “Redeemable Non-Controlling Interest,” for a further discussion.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not contain all disclosures required by accounting principles generally accepted in the United States for complete financial statements. Reference is made to the Company’s audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2017.

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

The results of operations for the thirteen and twenty-six weeks ended July 30, 2017 and July 31, 2016 are not necessarily indicative of those for a full fiscal year due, in part, to seasonal factors. The data contained in these consolidated financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments (which consist of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods.

The Company records warehousing and distribution expenses, which are subject to exchange rate fluctuations, as a component of selling, general and administrative (“SG&A”) expenses in its Consolidated Income Statements. Warehousing and distribution expenses incurred in the thirteen and twenty-six weeks ended July 30, 2017 totaled $65.3 million and $127.9 million, respectively, and included costs of $5.5 million and $7.3 million, respectively, related to the consolidation of the Company’s warehouse and distribution network in North America. Warehousing and distribution expenses incurred in the thirteen and twenty-six weeks ended July 31, 2016 totaled $57.4 million and $115.7 million, respectively.

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

2. INVENTORIES

Inventories are comprised principally of finished goods and are stated at the lower of cost or net realizable value, except for certain retail inventories in North America that are stated at the lower of cost or market using the retail inventory method. Cost

5



for substantially all wholesale inventories in North America and certain wholesale and retail inventories in Asia and Latin America is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. The Company reviews current business trends, inventory aging and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market using the retail inventory method, as applicable.

3. ACQUISITIONS

Acquisition of True & Co.

The Company acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital commerce retailer. This acquisition enables the Company to participate further in the fast-growing online channel and provides a platform to increase innovation, data-driven decisions and speed in the way it serves its consumers across its channels of distribution.

The acquisition date fair value of the consideration paid was $28.5 million. The estimated fair value of assets acquired and liabilities assumed included $28.2 million of goodwill and $0.3 million of other net assets (including $0.4 million of cash acquired). The goodwill of $28.2 million was assigned as of the acquisition date to the Company’s Calvin Klein North America, Calvin Klein International and Heritage Brands Wholesale segments in the amounts of $7.3 million, $6.4 million and $14.5 million, respectively, which are the Company’s reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before and after the acquisition. Goodwill is not expected to be deductible for tax purposes. The Company is still in the process of finalizing the valuation of the assets acquired and liabilities assumed; thus, the allocation of the acquisition consideration is subject to change.

Acquisition of TH China

The Company acquired on April 13, 2016 the 55% of the ownership interests in TH Asia, Ltd. (“TH China”), its former joint venture for TOMMY HILFIGER in China, that it did not already own (the “TH China acquisition”). Prior to April 13, 2016, the Company accounted for its 45% interest in TH China under the equity method of accounting. Since the completion of the TH China acquisition, the results of TH China’s operations have been consolidated in the Company’s consolidated financial statements.

TH China began operating the Tommy Hilfiger wholesale and retail distribution businesses in China in 2011 and held a license from a subsidiary of the Company for the TOMMY HILFIGER trademarks for use in connection with these businesses.

The carrying value of the Company’s 45% interest in TH China prior to the acquisition was $52.5 million. In connection with the acquisition, this investment was remeasured to a fair value of $205.6 million, resulting in the recognition during the first quarter of 2016 of a pre-tax noncash gain of $153.1 million. Such fair value was estimated using future operating cash flow projections that were discounted at a rate of 14.4%, which accounted for the relative risks of the estimated future cash flows. Such fair value also included an estimated discount for a lack of marketability of 10.0%. The Company classified this as a Level 3 fair value measurement due to the use of these significant unobservable inputs.

The acquisition date fair value of the consideration for the 55% interest that the Company did not already own was $265.8 million, consisting of $263.0 million paid in cash and the elimination of a $2.8 million pre-acquisition receivable owed to the Company by TH China. The total fair value of TH China (at 100%) was $471.4 million. The estimated fair value of assets acquired and liabilities assumed included $258.6 million of goodwill, $110.6 million of other intangible assets and $102.2 million of other net assets (including $105.3 million of cash acquired). The goodwill of $258.6 million was assigned to the Company’s Tommy Hilfiger International segment. Goodwill is not expected to be deductible for tax purposes. The other intangible assets of $110.6 million included reacquired license rights of $72.0 million, order backlog of $26.2 million and customer relationships of $12.4 million. The Company finalized the purchase price allocation during the fourth quarter of 2016.

4. ASSETS HELD FOR SALE

During 2015, one of the Company’s European subsidiaries entered into an agreement to sell a building in Amsterdam, the Netherlands. The Company classified the building as held for sale in the fourth quarter of 2015 and ceased recording depreciation on the building at that time.


6



The Company completed the sale of the building in the second quarter of 2016 for proceeds of €15.0 million (approximately $16.7 million based on the exchange rate in effect on that date) and recorded a gain of $1.5 million, which represented the excess of the proceeds, less costs to sell, over the carrying value on that date. The gain was recorded in SG&A expenses in the Company’s Consolidated Income Statement during the second quarter of 2016 and was included in the Calvin Klein International Segment.

5. REDEEMABLE NON-CONTROLLING INTEREST

During the second quarter of 2016, the Company and Arvind formed PVH Ethiopia, in which the Company owns a 75% interest. The Company has consolidated the joint venture in its consolidated financial statements. PVH Ethiopia was formed to operate a manufacturing facility that produces finished products for the Company for distribution primarily in the United States. The manufacturing facility began operations in the first half of 2017.

The shareholders agreement governing the joint venture (the “Shareholders Agreement”) contains a put option under which Arvind can require the Company to purchase all of its shares in the joint venture during various future periods as specified in the Shareholders Agreement. The first such period immediately precedes the ninth anniversary of the date of incorporation of PVH Ethiopia. The Shareholders Agreement also contains call options under which the Company can require Arvind to sell to the Company (i) all or a portion of its shares during various future periods as specified in the Shareholders Agreement; (ii) all of its shares in the event of a change of control of Arvind; or (iii) all of its shares in the event that Arvind ceases to hold at least ten percent of the outstanding shares. The Company’s first call option referred to in clause (i) immediately follows the fifth anniversary of the date of incorporation of PVH Ethiopia. The put and call prices are the fair market value of the shares on the redemption date based upon a multiple of the joint venture’s earnings before interest, taxes, depreciation and amortization for the prior 12 months, less the joint venture’s net debt.

The fair value of the redeemable non-controlling interest (“RNCI”) as of the date of formation of the joint venture was $0.1 million. The carrying amount of the RNCI is adjusted to equal the redemption amount at the end of each reporting period, provided that this amount at the end of each reporting period cannot be lower than the initial fair value adjusted for the minority shareholder’s share of net income or loss. Any adjustment to the redemption amount of the RNCI is determined after attribution of net income or loss of the RNCI and will be recognized immediately in retained earnings of the Company, since it is probable that the RNCI will become redeemable in the future based on the passage of time. The carrying amount of the RNCI, which is also its fair value, increased to $3.1 million as of July 30, 2017 from $2.0 million as of January 29, 2017, principally attributable to additional contributions of $1.7 million made by Arvind during the first quarter of 2017 for its proportionate share of the joint venture funding. The carrying amount of the RNCI as of July 31, 2016 was $0.1 million.

6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Karl Lagerfeld
The Company owns an economic interest of approximately 8% in the parent company of the Karl Lagerfeld brand (“Karl Lagerfeld”). The Company is deemed to have significant influence with respect to this investment, which is being accounted for under the equity method of accounting.
PVH Australia
The Company owns a 50% economic interest in a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”). PVH Australia licenses from subsidiaries of the Company the rights to distribute and sell certain CALVIN KLEIN, TOMMY HILFIGER and Van Heusen brand products in Australia, New Zealand and, in the cases of CALVIN KLEIN and TOMMY HILFIGER, other island nations in the South Pacific. Additionally, subsidiaries of PVH Australia license other trademarks for certain product categories. This investment is being accounted for under the equity method of accounting.

The Company received a $1.5 million dividend from PVH Australia during the twenty-six weeks ended July 30, 2017.

Gazal

The Company acquired approximately 10% of the outstanding capital stock of Gazal Corporation Limited (“Gazal”), which is listed on the Australian Securities Exchange, during the third quarter of 2016 for approximately $9.2 million. The Company is deemed to have significant influence with respect to this investment, which is being accounted for under the equity method of accounting. Gazal is also the Company’s joint venture partner in PVH Australia.

The Company received a $0.3 million dividend from Gazal during the twenty-six weeks ended July 30, 2017.

7




CK India

The Company owns a 51% economic interest in a joint venture, Calvin Klein Arvind Fashion Private Limited (“CK India”). CK India licenses from a subsidiary of the Company the rights to the CALVIN KLEIN trademarks in India for certain product categories. The Company is deemed not to hold a controlling interest in the joint venture. This investment is being accounted for under the equity method of accounting.

The Company made a payment of $0.8 million to CK India during the twenty-six weeks ended July 30, 2017 to contribute its 51% share of the joint venture funding for the period.

TH Brazil

The Company owns a 40% economic interest in a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”). TH Brazil licenses from a subsidiary of the Company the rights to the TOMMY HILFIGER trademarks in Brazil for certain product categories. This investment is being accounted for under the equity method of accounting.

The Company made a payment of $1.5 million to TH Brazil during the twenty-six weeks ended July 31, 2016 to contribute its 40% share of the joint venture funding for the period.

The Company issued a note receivable due April 2, 2017 to TH Brazil during the third quarter of 2016 for $12.5 million, of which $6.2 million was repaid in the fourth quarter of 2016 and the remaining balance, including accrued interest, was repaid in the first quarter of 2017.

TH India

The Company owns a 50% economic interest in a joint venture, Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a subsidiary of the Company the rights to the TOMMY HILFIGER trademarks in India for certain product categories. This investment is being accounted for under the equity method of accounting. Arvind, the Company’s joint venture partner in PVH Ethiopia and in CK India, is also the Company’s joint venture partner in TH India.

The Company made a payment of $1.2 million to TH India during the twenty-six weeks ended July 30, 2017 to contribute its 50% share of the joint venture funding for the period.

PVH Mexico

The Company and Grupo Axo, S.A.P.I. de C.V. (“Grupo Axo”) formed a joint venture (“PVH Mexico”) in the fourth quarter of 2016, in which the Company owns a 49% economic interest. PVH Mexico licenses from certain wholly owned subsidiaries of the Company the rights to distribute and sell certain CALVIN KLEIN, TOMMY HILFIGER, Warner’s, Olga and Speedo brand products in Mexico. PVH Mexico was formed by merging the Company’s wholly owned subsidiary that principally operated and managed the Calvin Klein business in Mexico (the “Mexico business”) with a wholly owned subsidiary of Grupo Axo that distributes certain TOMMY HILFIGER brand products in Mexico. In connection with the formation of PVH Mexico, the Company deconsolidated the Mexico business and began accounting for its 49% interest under the equity method of accounting in the fourth quarter of 2016.

Total Investments in Unconsolidated Affiliates

Included in other assets in the Company’s Consolidated Balance Sheets as of July 30, 2017, January 29, 2017 and July 31, 2016 was $191.7 million, $180.0 million (of which $7.0 million was related to the note receivable, including accrued interest, due from TH Brazil) and $94.6 million, respectively, related to these investments in unconsolidated affiliates.


8



7. GOODWILL

The changes in the carrying amount of goodwill for the twenty-six weeks ended July 30, 2017, by segment (please see Note 18, “Segment Data,” for a further discussion of the Company’s reportable segments), were as follows:
(In millions)
Calvin Klein North America
 
Calvin Klein International
 
Tommy Hilfiger North America
 
Tommy Hilfiger International
 
Heritage Brands Wholesale
 
Heritage Brands Retail
 
Total
Balance as of January 29, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
$
739.4

 
$
864.5

 
$
204.4

 
$
1,425.8

 
$
235.8

 
$
11.9

 
$
3,481.8

Accumulated impairment losses    

 

 

 

 

 
(11.9
)
 
(11.9
)
Goodwill, net    
739.4

 
864.5

 
204.4

 
1,425.8

 
235.8

 

 
3,469.9

Contingent purchase price payments to Mr. Calvin Klein
14.8

 
10.2

 

 

 

 

 
25.0

True & Co. acquisition
7.3

 
6.4

 

 

 
14.5

 

 
28.2

Currency translation and other
0.8

 
23.8

 

 
121.7

 

 

 
146.3

Balance as of July 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
762.3

 
904.9

 
204.4

 
1,547.5

 
250.3

 
11.9

 
3,681.3

Accumulated impairment losses    

 

 

 

 

 
(11.9
)
 
(11.9
)
Goodwill, net    
$
762.3

 
$
904.9

 
$
204.4

 
$
1,547.5

 
$
250.3

 
$

 
$
3,669.4


The goodwill acquired in the True & Co. acquisition was assigned as of the acquisition date to the Company’s reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before and after the acquisition.
 
The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Company’s acquisition of all of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies. Such payments are based on 1.15% of total worldwide net sales, as defined in the acquisition agreement (as amended), of products bearing any of the CALVIN KLEIN brands and are required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by the Company and its licensees and other partners to retailers.
  
8. RETIREMENT AND BENEFIT PLANS

The Company has five qualified defined benefit pension plans as of July 30, 2017 covering substantially all employees resident in the United States who meet certain age and service requirements. The plans provide monthly benefits upon retirement generally based on career average compensation and years of credited service. Vesting in plan benefits generally occurs after five years of service. The Company refers to these five noncontributory plans as its “Pension Plans.”
 
The Company also has for certain members of Tommy Hilfiger’s domestic senior management a supplemental executive retirement plan, which is an unfunded non-qualified supplemental defined benefit pension plan. Such plan is frozen and, as a result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation program, which is an unfunded non-qualified supplemental defined benefit plan. Under the individual participants’ agreements, the participants in this plan will receive a predetermined amount during the 10 years following the attainment of age 65, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least 10 years and has attained age 55. The Company also has for certain employees resident in the United States who meet certain age and service requirements an unfunded non-qualified supplemental defined benefit pension plan, which provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. The Company refers to these three noncontributory plans as its “SERP Plans.”

The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. As a result of the Company’s acquisition of The Warnaco Group, Inc. (“Warnaco”), the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. Both of

9




the Company’s postretirement health care and life insurance benefit plans are frozen. The Company refers to these two plans as its “Postretirement Plans.”

Net benefit cost related to the Pension Plans was recognized in SG&A expenses in the Company’s Consolidated Income Statements as follows:

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/30/17
 
7/31/16
 
7/30/17
 
7/31/16
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$
6.4

 
$
6.1

 
$
13.3

 
$
12.6

Interest cost    
6.5

 
7.4

 
12.9

 
14.9

Expected return on plan assets    
(9.6
)
 
(8.9
)
 
(19.3
)
 
(17.9
)
Loss on settlement

 

 
9.4

 

Total    
$
3.3

 
$
4.6

 
$
16.3

 
$
9.6


During the first quarter of 2017, the Company completed the purchase of a group annuity using assets from the Pension Plans. Under the group annuity, the accrued pension obligations for approximately 4,000 select retiree participants who had deferred vested benefits under the Pension Plans were transferred to an insurer. As a result, the Company recognized a loss of $9.4 million, which was recorded in SG&A expenses in the Company’s Consolidated Income Statement for the twenty-six weeks ended July 30, 2017. The amount of the pension benefit obligation settled was $65.3 million.

Net benefit cost related to the SERP Plans was recognized in SG&A expenses in the Company’s Consolidated Income Statements as follows:

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/30/17
 
7/31/16
 
7/30/17
 
7/31/16
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$
1.1

 
$
0.9

 
$
2.3

 
$
2.2

Interest cost    
0.9

 
0.9

 
1.9

 
1.9

Total    
$
2.0

 
$
1.8

 
$
4.2

 
$
4.1


Net benefit cost related to the Postretirement Plans was immaterial for the thirteen and twenty-six weeks ended July 30, 2017 and July 31, 2016.

Currently, the Company does not expect to make any material contributions to the Pension Plans in 2017. The Company’s actual contributions may differ from planned contributions due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.

9. DEBT

Short-Term Borrowings

The Company has the ability to draw revolving borrowings under its senior secured credit facilities, as discussed in the section entitled “2016 Senior Secured Credit Facilities” below. As of July 30, 2017, the Company had no borrowings outstanding under these facilities. The maximum amount of revolving borrowings outstanding under these facilities during the twenty-six weeks ended July 30, 2017 was $78.0 million.

Additionally, the Company has the availability to borrow under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies. These facilities provided for borrowings of up to $95.7 million based on exchange rates in effect on July 30, 2017 and are utilized primarily to fund working capital needs. As of July 30, 2017, the Company had $18.0 million outstanding under these facilities. The weighted average interest rate on the funds borrowed as of July 30, 2017 was approximately 0.18%. The maximum amount of borrowings outstanding under these facilities during the twenty-six weeks ended July 30, 2017 was $27.3 million.



10




Long-Term Debt

The carrying amounts of the Company’s long-term debt were as follows:
(In millions)
7/30/17
 
1/29/17
 
7/31/16
 
 
 
 
 
 
Senior secured Term Loan A facility due 2021
$
1,990.9

 
$
2,039.9

 
$
2,187.3

4 1/2% senior unsecured notes due 2022
691.2

 
690.4

 
689.6

7 3/4% debentures due 2023
99.5

 
99.5

 
99.4

3 5/8% senior unsecured euro notes due 2024
404.1

 
367.5

 
381.9

Total    
3,185.7

 
3,197.3

 
3,358.2

Less: Current portion of long-term debt    

 

 

Long-term debt    
$
3,185.7

 
$
3,197.3

 
$
3,358.2


Please see Note 12, “Fair Value Measurements,” for the fair value of the Company’s long-term debt as of July 30, 2017, January 29, 2017 and July 31, 2016.

As of July 30, 2017, the Company’s mandatory long-term debt repayments for the next five years were as follows:
(In millions)
 
Fiscal Year
Amount

Remainder of 2017
$

2018
18.7

2019
220.1

2020
234.7

2021
1,525.8

2022
700.0


Total debt repayments for the next five years exceed the carrying amount of the Company’s Term Loan A facility and 4 1/2% senior unsecured notes due 2022 as of July 30, 2017 because the carrying amounts reflect the unamortized portions of debt issuance costs and the original issue discounts.

As of July 30, 2017, after taking into account the effect of the Company’s interest rate swap agreement discussed in the section below entitled “2016 Senior Secured Credit Facilities,” which was in effect as of such date, approximately 60% of the Company’s long-term debt had a fixed interest rate, with the remainder at variable interest rates.

2014 Senior Secured Credit Facilities

On March 21, 2014, the Company entered into an amendment to its senior secured credit facilities (as amended, the “2014 facilities”). The 2014 facilities consisted of a $1,986.3 million United States dollar-denominated Term Loan A facility, a $1,188.6 million United States dollar-denominated Term Loan B facility and senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen or Swiss francs.

On May 19, 2016, the Company amended the 2014 facilities, as discussed in the following section.

2016 Senior Secured Credit Facilities

On May 19, 2016 (the “Amendment Date”), the Company entered into an amendment (the “Amendment”) to the 2014 facilities (as amended by the Amendment, the “2016 facilities”). Among other things, the Amendment provided for (i) the Company to borrow an additional $582.0 million principal amount of loans under the Term Loan A facility, (ii) the repayment of all outstanding loans under the Term Loan B facility with the proceeds of the additional loans under the Term Loan A facility, and (iii) the termination of the Term Loan B facility. In addition, the Amendment extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2019 to May 19, 2021.

11





The 2016 facilities consist of a $2,347.4 million United States dollar-denominated Term Loan A facility and the senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen or Swiss francs. In connection with entering into the Amendment, the Company paid debt issuance costs of $10.9 million (of which $4.6 million was expensed as debt modification costs and $6.3 million is being amortized over the term of the related debt agreement) and recorded debt extinguishment costs of $11.2 million to write-off previously capitalized debt issuance costs.

The revolving credit facilities also include amounts available for letters of credit. As of July 30, 2017, the Company had $22.6 million of outstanding letters of credit. There were no borrowings outstanding under the revolving credit facilities as of July 30, 2017. A portion of each of the United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more term loan facilities or increase the commitments under the revolving credit facilities by an aggregate amount not to exceed the sum of (1) the sum of (x) $1,350.0 million plus (y) the aggregate amount of all voluntary prepayments of loans under the Term Loan A and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an additional unlimited amount as long as the ratio of the Company’s senior secured net debt to consolidated adjusted earnings before interest, taxes, depreciation and amortization (in each case calculated as set forth in the documentation relating to the 2016 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase. The lenders under the 2016 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.

The terms of the Term Loan A facility require the Company to make quarterly repayments of amounts outstanding under the 2016 facilities, which commenced with the calendar quarter ended June 30, 2016. Such amounts equal 5.00% per annum of the principal amount outstanding on the Amendment Date for the first eight calendar quarters following the Amendment Date, 7.50% per annum of the principal amount for the four calendar quarters thereafter and 10.00% per annum of the principal amount for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the Term Loan A facility.

The Company made payments of $50.0 million and $201.2 million during the twenty-six weeks ended July 30, 2017 and July 31, 2016, respectively, on its term loans under the 2016 and 2014 facilities. As a result of the voluntary repayments made by the Company, as of July 30, 2017, the Company is not required to make a long-term debt repayment until December 2018.

The Company’s obligations under the 2016 facilities are guaranteed by substantially all of its existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European borrower under the 2016 facilities are guaranteed by the Company, substantially all of the Company’s existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., one of the Company’s wholly owned subsidiaries. The Company and its United States subsidiary guarantors have pledged certain of their assets as security for the obligations under the 2016 facilities.

The outstanding borrowings under the 2016 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2016 facilities require the Company to repay certain amounts outstanding thereunder with (a) net cash proceeds of the incurrence of certain indebtedness, (b) net cash proceeds of certain asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds, to the extent such proceeds are not reinvested or committed to be reinvested in the business in accordance with customary reinvestment provisions, and (c) a percentage of excess cash flow that exceeds the voluntary debt payments the Company has made during the applicable year, which percentage is based upon its net leverage ratio during the relevant fiscal period.

The United States dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds rate plus 1/2 of 1.00% and (iii) a one-month adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The Canadian dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes at its main office in Toronto, Ontario as the reference rate of interest

12




in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian dollar bankers’ acceptances having a term of one month that appears on the display referred to as “CDOR Page” of Reuters Monitor Money Rate Services as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the administrative agent (and if such screen is not available, any successor or similar service as may be selected by the administrative agent), and (y) 0.75%, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The borrowings under the 2016 facilities in currencies other than United States dollars or Canadian dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is 1.50% for adjusted Eurocurrency rate loans and 0.50% for base rate loans, respectively. After the date of delivery of the compliance certificate and financial statements with respect to each of the Company’s fiscal quarters, the applicable margin for borrowings under the Term Loan A facility and the revolving credit facilities is subject to adjustment based upon the Company’s net leverage ratio.

The 2016 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by the Company and certain of its subsidiaries, and certain pledges of the Company’s assets and those of certain of the Company’s subsidiaries, as security for the obligations under the 2016 facilities; and a change in control (as defined in the 2016 facilities).

During the second quarter of 2017, the Company entered into an interest rate swap agreement for a two-year term commencing on February 20, 2018. The agreement was designed with the intended effect of converting an initial notional amount of $306.5 million of the Company’s variable rate debt obligation under the 2016 facilities or any replacement facility with similar terms to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month London Interbank Borrowing rate (“LIBOR”) will be eliminated and the Company will pay a fixed rate of 1.566%, plus the current applicable margin.

During the second quarter of 2014, the Company entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $682.6 million of the Company’s variable rate debt obligation under the 2014 facilities or any replacement facility with similar terms, including the 2016 facilities, to fixed rate debt. Such agreement remains outstanding with a notional amount of $711.1 million as of July 30, 2017, and is now converting a portion of the Company’s variable rate debt obligation under the 2016 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and the Company will pay a weighted average fixed rate of 1.924%, plus the current applicable margin.

During the second quarter of 2013, the Company entered into an interest rate swap agreement for a three-year term commencing on August 19, 2013. The agreement was designed with the intended effect of converting an initial notional amount of $1,228.8 million of the Company’s variable rate debt obligation to fixed rate debt and applied to debt incurred under its then outstanding facilities and, subsequently, to the 2014 facilities and the 2016 facilities. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR was eliminated and the Company paid a fixed rate of 0.604%, plus the current applicable margin. The agreement expired on August 17, 2016.

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

The 2016 facilities also contain covenants that restrict the Company’s ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in its interest or to satisfy its obligations under its other outstanding debt. These covenants restrict its ability to, among other things:

incur or guarantee additional debt or extend credit;
make restricted payments, including paying dividends or making distributions on, or redeeming or repurchasing, the Company’s capital stock or certain debt;
make acquisitions and investments;
dispose of assets;

13




engage in transactions with affiliates;
enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends;
create liens on the Company’s assets or engage in sale/leaseback transactions; and
effect a consolidation or merger, or sell, transfer, or lease all or substantially all of the Company’s assets.

The 2016 facilities require the Company to comply with certain financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the applicable facility. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable which would result in acceleration of its other debt. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of the Company’s other indebtedness.

4 1/2% Senior Notes Due 2022

The Company has outstanding $700.0 million principal amount of 4 1/2% senior notes due December 15, 2022. The Company paid $16.3 million of fees during 2013 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to December 15, 2017 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after December 15, 2017 at specified redemption prices plus any accrued and unpaid interest. The Company’s ability to pay cash dividends and make other restricted payments is limited, in each case, over specified amounts as defined in the indenture governing the notes.

7 3/4% Debentures Due 2023

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

3 5/8% Euro Senior Notes Due 2024

On June 20, 2016, the Company issued €350.0 million euro-denominated principal amount of 3 5/8% senior notes due July 15, 2024. Interest on the notes is payable in euros. The Company paid €6.4 million (approximately $7.3 million based on exchange rates in effect on the payment date) of fees during the second quarter of 2016 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.

Substantially all of the Company’s assets have been pledged as collateral to secure the Company’s obligations under its senior secured credit facilities, the 7 3/4% debentures due 2023 and contingent purchase price payments to Mr. Calvin Klein as discussed in Note 7, “Goodwill.”

10. INCOME TAXES

The effective income tax rates for the thirteen weeks ended July 30, 2017 and July 31, 2016 were 20.8% and 21.2%, respectively. The effective income tax rates for the twenty-six weeks ended July 30, 2017 and July 31, 2016 were 19.5% and 15.3%, respectively. The effective income tax rates for the thirteen and twenty-six weeks ended July 30, 2017 and July 31, 2016 were lower than the United States statutory rate due to the benefit of overall lower tax rates in certain international jurisdictions where the Company files tax returns. Also contributing to the lower effective income tax rate for the twenty-six weeks ended July 31, 2016 was the benefit of certain discrete items, including the lower tax rate applicable to the pre-tax gain recorded to write-up the Company’s equity investment in TH China to fair value that resulted in a 10.1% benefit to the Company’s effective income tax rate.
The Company files income tax returns in more than 40 international jurisdictions each year. All of the international jurisdictions in which the Company files tax returns, with the exception of Japan, have lower statutory tax rates than the United States statutory tax rate. A substantial amount of the Company’s earnings come from international operations, largely attributable to earnings in the Netherlands, Hong Kong, China, Korea and Canada. The lower statutory income tax rates in these jurisdictions, as compared to the United States statutory rate, coupled with special rates levied on income from certain of the Company’s jurisdictional activities, significantly reduce the Company’s consolidated effective income tax rate.


14




11. DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges

The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure.

The Company also has exposure to interest rate volatility related to its term loans under the 2016 facilities. The Company has entered into interest rate swap agreements to hedge against a portion of this exposure. Please see Note 9, “Debt,” for a further discussion of the Company’s facilities and these agreements.

The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. The foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate swap agreements are designated as effective hedging instruments (collectively referred to as “cash flow hedges”). The changes in the fair value of the cash flow hedges are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”). The cash flows from such hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged. No amounts were excluded from effectiveness testing. There was no ineffective portion of cash flow hedges during the twenty-six weeks ended July 30, 2017 and July 31, 2016.

Net Investment Hedge

The Company has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, during the second quarter of 2016, the Company designated the carrying amount of its €350.0 million euro-denominated principal amount of 3 5/8% senior notes due 2024 (the “foreign currency borrowings”) that it had issued in the United States as a net investment hedge of its investments in certain of its foreign subsidiaries that use the euro as their functional currency. Please see Note 9, “Debt,” for a further discussion of the Company’s foreign currency borrowings.

The Company records the foreign currency borrowings at carrying value in its Consolidated Balance Sheets. The carrying value of the foreign currency borrowings is remeasured at the end of each reporting period to reflect changes in the foreign currency exchange spot rate. Since the foreign currency borrowings are designated as a net investment hedge, such remeasurement is recorded in equity as a component of AOCL. The fair value and the carrying value of the foreign currency borrowings designated as a net investment hedge were $436.2 million and $404.1 million, respectively, as of July 30, 2017, $384.1 million and $367.5 million, respectively, as of January 29, 2017 and $406.5 million and $381.9 million, respectively, as of July 31, 2016. The Company evaluates the effectiveness of its net investment hedge as of the beginning of each quarter. No amounts were excluded from effectiveness testing. There was no ineffective portion of the net investment hedge during the twenty-six weeks ended July 30, 2017 and July 31, 2016.

Undesignated Contracts

The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”), including all of the foreign currency forward exchange contracts related to intercompany transactions and intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts are largely offset by the remeasurement of the underlying intercompany balances.

In addition, the Company has exposure to changes in foreign currency exchange rates related to the translation of the earnings of its subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, beginning in the second quarter of 2016, the Company entered into several foreign currency option contracts. These contracts represent the Company’s purchase of euro put/United States dollar call options and Chinese yuan renminbi put/United States dollar call options.

The Company’s foreign currency option contracts are also undesignated contracts. As such, the changes in the fair value of these foreign currency option contracts are immediately recognized in earnings. This mitigates, to an extent, the effect of a strengthening United States dollar against the euro and Chinese yuan renminbi on the reporting of the Company’s euro-denominated and Chinese yuan renminbi-denominated earnings, respectively.


15




The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes.

The following table summarizes the fair value and presentation of the Company’s derivative financial instruments in its Consolidated Balance Sheets:
 
Assets (Classified in Other Current Assets and Other Assets)
Liabilities (Classified in Accrued Expenses and Other Liabilities)
(In millions)
7/30/17
 
1/29/17
 
7/31/16
 
7/30/17
 
1/29/17
 
7/31/16
Contracts designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
$
2.6

 
$
25.1

 
$
6.8

 
$
57.5

 
$
2.6

 
$
12.5

Interest rate swap agreements
0.2

 

 

 
2.6

 
7.1

 
17.0

Total contracts designated as cash flow hedges
2.8

 
25.1

 
6.8

 
60.1

 
9.7

 
29.5

Undesignated contracts:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
2.1

 
0.8

 
1.8

 
0.7

 
0.0

 
0.7

Foreign currency option contracts
0.1

 
3.2

 
1.0

 

 

 

Total undesignated contracts
2.2

 
4.0

 
2.8

 
0.7

 
0.0

 
0.7

Total
$
5.0

 
$
29.1

 
$
9.6

 
$
60.8

 
$
9.7

 
$
30.2


At July 30, 2017, the notional amount outstanding of foreign currency forward exchange contracts and foreign currency option contracts was $1,062.9 million and $100.0 million, respectively. Such contracts expire principally between August 2017 and January 2019.

The following table summarizes the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
 
 
(Loss) Gain Recognized in Other Comprehensive Income (Loss)
 
Gain (Loss) Reclassified from AOCL into Income (Expense)
(In millions)
 
 
Location
Amount
Thirteen Weeks Ended
 
7/30/17
 
7/31/16
 
 
7/30/17
 
7/31/16
Foreign currency forward exchange contracts     (inventory purchases)
 
$
(62.4
)
 
$
21.2

 
Cost of goods sold
$
3.7

 
$
3.5

Interest rate swap agreements
 
(0.1
)
 
(1.4
)
 
Interest expense
(1.7
)
 
(2.7
)
Foreign currency borrowings (net investment hedge)
 
(27.5
)
 
7.8

 
N/A

 

Total    
 
$
(90.0
)
 
$
27.6

 
 
$
2.0

 
$
0.8

 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
7/30/17
 
7/31/16
 
 
7/30/17
 
7/31/16
Foreign currency forward exchange contracts     (inventory purchases)
 
$
(70.2
)
 
$
(37.2
)
 
Cost of goods sold
$
8.1

 
$
8.2

Interest rate swap agreements
 
0.7

 
(1.5
)
 
Interest expense
(4.0
)
 
(5.1
)
Foreign currency borrowings (net investment hedge)
 
(36.1
)
 
7.8

 
N/A

 

Total
 
$
(105.6
)
 
$
(30.9
)
 
 
$
4.1

 
$
3.1


A net loss in AOCL on foreign currency forward exchange contracts at July 30, 2017 of $40.1 million is estimated to be reclassified in the next 12 months in the Company’s Consolidated Income Statement to costs of goods sold as the underlying inventory hedged by such forward exchange contracts is sold. In addition, a net loss in AOCL for interest rate swap agreements at July 30, 2017 of $2.4 million is estimated to be reclassified to interest expense within the next 12 months. Amounts recognized in AOCL for foreign currency borrowings would be recognized in earnings only upon the sale or liquidation of the hedged net investment.


16




The following table summarizes the effect of the Company’s undesignated contracts recognized in SG&A expenses in its Consolidated Income Statements:
(In millions)
 
Gain (Loss) Recognized in Income (Expense)
Thirteen Weeks Ended
 
7/30/17
 
7/31/16
Foreign currency forward exchange contracts
 
$
1.5

 
$
(2.9
)
Foreign currency option contracts
 
(1.7
)
 
(0.2
)

Twenty-Six Weeks Ended
 
7/30/17
 
7/31/16
Foreign currency forward exchange contracts
 
$
1.7

 
$
(6.7
)
Foreign currency option contracts
 
(4.3
)
 
(0.2
)

The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of July 30, 2017.

12. FAIR VALUE MEASUREMENTS

In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy prioritizes the inputs used to measure fair value as follows:

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

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

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


17




In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
 
7/30/17
 
1/29/17
 
7/31/16
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
4.7

 
N/A
 
$
4.7

 
N/A
 
$
25.9

 
N/A
 
$
25.9

 
N/A
 
$
8.6

 
N/A
 
$
8.6

Interest rate swap agreements
N/A
 
0.2

 
N/A
 
0.2

 
N/A
 

 
N/A
 

 
N/A
 

 
N/A
 

Foreign currency option contracts
N/A
 
0.1

 
N/A
 
0.1

 
N/A
 
3.2

 
N/A
 
3.2

 
N/A
 
1.0

 
N/A
 
1.0

Total Assets
N/A
 
$
5.0

 
N/A
 
$
5.0

 
N/A
 
$
29.1

 
N/A
 
$
29.1

 
N/A
 
$
9.6

 
N/A
 
$
9.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
58.2

 
N/A
 
$
58.2

 
N/A
 
$
2.6

 
N/A
 
$
2.6

 
N/A
 
$
13.2

 
N/A
 
$
13.2

Interest rate swap agreements
N/A
 
2.6

 
N/A
 
2.6

 
N/A
 
7.1

 
N/A
 
7.1

 
N/A
 
17.0

 
N/A
 
17.0

Contingent purchase price payments related to reacquisition of the perpetual rights to the TOMMY HILFIGER trademarks in India    
N/A
 
N/A
 
$
1.7

 
1.7

 
N/A
 
N/A
 
$
1.6

 
1.6

 
N/A
 
N/A
 
$
2.2

 
2.2

Total Liabilities
N/A
 
$
60.8

 
$
1.7


$
62.5

 
N/A
 
$
9.7

 
$
1.6

 
$
11.3

 
N/A
 
$
30.2

 
$
2.2

 
$
32.4


The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair value of the interest rate swap agreements is based on observable interest rate yield curves and represents the expected discounted cash flows underlying the financial instruments. The fair value of the foreign currency option contracts is estimated based on external valuation models, which use the original strike price, current foreign currency exchange rates, the implied volatility in foreign currency exchange rates and length of time to expiration as inputs.

Pursuant to the agreement governing the reacquisition of the rights in India to the TOMMY HILFIGER trademarks (which the Company entered into in September 2011 in connection with its acquisition of its 50% ownership of TH India), the Company is required to make annual contingent purchase price payments based on a percentage of sales of TOMMY HILFIGER products in India in excess of an agreed upon threshold during each of six consecutive 12-month periods. Such payments are subject to a $25.0 million aggregate maximum and are due within 60 days following each one-year period. The Company made annual contingent purchase price payments of $0.6 million, $0.6 million, $0.6 million, $0.4 million and $0.2 million during 2016, 2015, 2014, 2013 and 2012, respectively. The Company is required to remeasure this liability at fair value on a recurring basis and classifies this as a Level 3 measurement. The fair value of such liability was determined using the discounted cash flow method, based on net sales projections for the Tommy Hilfiger apparel and accessories businesses in India, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, changes in the fair value are included within SG&A expenses in the Company’s Consolidated Income Statements.

The following table presents the change in the Level 3 contingent purchase price payment liability during the twenty-six weeks ended July 30, 2017 and July 31, 2016:

Twenty-Six Weeks Ended
(In millions)
7/30/17
 
7/31/16
Beginning Balance
$
1.6

 
$
2.2

Payments

 

Adjustments included in earnings
0.1

 
0.0

Ending Balance
$
1.7

 
$
2.2



18




Additional information with respect to assumptions used to value the contingent purchase price payment liability as of July 30, 2017 is as follows:
Unobservable Inputs
 
Amount
Approximate compounded annual net sales growth rate
 
35.0
%
Approximate
discount rate
 
15.0
%

A five percentage point increase or decrease in the discount rate or the compounded annual net sales growth rate would result in an immaterial change to the liability.

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

The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt as of July 30, 2017, January 29, 2017 and July 31, 2016 were as follows:

 
7/30/17
 
1/29/17
 
7/31/16
(In millions)
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
 
 

 
 

 
 
 
 
 
 

 
 

Cash and cash equivalents
$
559.4

 
$
559.4

 
$
730.1

 
$
730.1

 
$
741.7

 
$
741.7

Short-term borrowings
18.0

 
18.0

 
19.1

 
19.1

 
19.4

 
19.4

Long-term debt (including portion classified as current)
3,185.7

 
3,269.6

 
3,197.3

 
3,248.7

 
3,358.2

 
3,434.6


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

13. STOCK-BASED COMPENSATION

The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan replaced certain other prior stock option plans. These other plans terminated upon the 2006 Plan’s initial stockholder approval in June 2006. Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

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

Through July 30, 2017, the Company has granted under the 2006 Plan (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable PSUs; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share and each share underlying a restricted stock award, RSU or PSU reduces the number available by two shares. The per share exercise price of options granted under the 2006 Plan cannot be less than the closing price of the common stock on the date of grant.

Net income for the twenty-six weeks ended July 30, 2017 and July 31, 2016 included $21.1 million and $19.5 million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $6.5 million and $5.8 million, respectively.

19





Effective the first quarter of 2017, the Company adopted an update to accounting guidance that simplifies several aspects of accounting for share-based payment award transactions, which resulted in the Company’s election to recognize forfeitures as they occur rather than continue to estimate expected forfeitures in determining compensation expense. This accounting change was applied on a modified retrospective basis and resulted in a cumulative-effect adjustment to decrease beginning retained earnings by $0.8 million, with an offsetting increase to additional paid in capital of $1.1 million and an increase to deferred tax assets of $0.3 million. Please see Note 20, “Recent Accounting Guidance,” for a further discussion.

The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions for the twenty-six weeks ended July 30, 2017 and July 31, 2016 were $8.4 million and $5.8 million, respectively. As a result of the Company’s adoption of the update discussed above, the Company recognized $0.1 million of discrete net excess tax benefits related to share-based payments in its provision for income taxes for the twenty-six weeks ended July 30, 2017. Prior to the adoption of this update, the Company recognized excess tax benefits or tax deficiencies in equity as a component of additional paid in capital.

Stock Options

Stock options currently outstanding are generally exercisable in four equal annual installments commencing one year after the date of grant. The vesting of such options outstanding is also generally accelerated upon retirement (as defined in the 2006 Plan). Such options are granted with a 10-year term.

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

The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during the twenty-six weeks ended July 30, 2017 and July 31, 2016:
 
Twenty-Six Weeks Ended
 
7/30/17
 
7/31/16
Weighted average risk-free interest rate
2.10
%
 
1.45
%
Weighted average expected option term (in years)    
6.25

 
6.25

Weighted average Company volatility
29.46
%
 
34.64
%
Expected annual dividends per share    
$
0.15

 
$
0.15

Weighted average grant date fair value per option
$
33.50

 
$
35.60


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

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

Service-based stock option activity for the twenty-six weeks ended July 30, 2017 was as follows:
(In thousands, except per option data)
Options
 
Weighted Average Exercise Price
Per Option
Outstanding at January 29, 2017
1,466

 
$
75.74

  Granted
142

 
101.94

  Exercised
105

 
66.49

  Cancelled
10

 
108.23

Outstanding at July 30, 2017
1,493

 
$
78.67

Exercisable at July 30, 2017
1,062

 
$
68.51



20




Restricted Stock Units

RSUs granted to employees since 2016 generally vest in four equal annual installments commencing one year after the date of grant. Outstanding RSUs granted to employees prior to 2016 generally vest in three annual installments of 25%, 25% and 50% commencing two years after the date of grant. Service-based RSUs granted to non-employee directors vest in full one year after the date of grant. The underlying RSU award agreements (excluding agreements for non-employee director awards) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed over the RSUs’ vesting periods.

RSU activity for the twenty-six weeks ended July 30, 2017 was as follows:
(In thousands, except per RSU data)
RSUs
 
Weighted Average Grant Date Fair Value Per RSU
Non-vested at January 29, 2017
812

 
$
105.96

  Granted
441

 
103.04

  Vested
247

 
108.98

  Cancelled
38

 
105.19

Non-vested at July 30, 2017
968

 
$
103.89


Performance Share Units

The Company granted contingently issuable PSUs to certain of the Company’s senior executives during 2015, 2016 and 2017 subject to a three-year performance period. For such awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. The Company records expense ratably over the applicable vesting period regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in the first quarters of 2017 and 2016 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:

 
2017
 
2016
Risk-free interest rate
1.49
%
 
1.04
%
Expected Company volatility
31.29
%
 
28.33
%
Expected annual dividends per share
$
0.15

 
$
0.15

Weighted average grant date fair value per PSU
$
96.81

 
$
87.16


Certain of the awards granted in the first quarters of 2017 and 2016 are subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted 12.67% and 12.99%, respectively, for the restriction of liquidity.

PSU activity for the twenty-six weeks ended July 30, 2017 was as follows:
(In thousands, except per PSU data)
PSUs
 
Weighted Average Grant Date Fair Value Per PSU
Non-vested at January 29, 2017
125

 
$
92.32

  Granted
72

 
96.81

  Vested

 

  Cancelled

 

Non-vested at July 30, 2017
197

 
$
93.97



21




14. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in AOCL, net of related taxes, by component for the twenty-six weeks ended July 30, 2017:

(In millions)
Foreign currency translation adjustments
 
Net unrealized and realized gain (loss) on effective cash flow hedges
 
Total
Balance, January 29, 2017
$
(737.7
)
 
$
26.9

 
$
(710.8
)
Other comprehensive income (loss) before reclassifications
286.4

(1) 
(66.6
)
 
219.8

Less: Amounts reclassified from AOCL

 
5.6

 
5.6

Other comprehensive income (loss)
286.4

 
(72.2
)
 
214.2

Balance, July 30, 2017
$
(451.3
)
 
$
(45.3
)
 
$
(496.6
)

(1) Foreign currency translation adjustments included a net loss on net investment hedge of $22.5 million.

The following table presents the changes in AOCL, net of related taxes, by component for the twenty-six weeks ended July 31, 2016:

(In millions)
Foreign currency translation adjustments
 
Net unrealized and realized gain (loss) on effective cash flow hedges
 
Total
Balance, January 31, 2016
$
(730.4
)
 
$
26.2

 
$
(704.2
)
Other comprehensive income (loss) before reclassifications
89.5

(2) 
(35.2
)
 
54.3

Less: Amounts reclassified from AOCL

 
2.8

 
2.8

Other comprehensive income (loss)
89.5

 
(38.0
)
 
51.5

Balance, July 31, 2016
$
(640.9
)
 
$
(11.8
)
 
$
(652.7
)

(2) Foreign currency translation adjustments included a net gain on net investment hedge of $4.9 million.

The following table presents reclassifications out of AOCL to earnings for the thirteen and twenty-six weeks ended July 30, 2017 and July 31, 2016:

Amount Reclassified from AOCL
Affected Line Item in the Company’s Consolidated Income Statements
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
(In millions)
7/30/17
 
7/31/16
 
7/30/17
 
7/31/16
 
Realized gain (loss) on effective cash flow hedges:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
$
3.7

 
$
3.5

 
$
8.1

 
$
8.2

Cost of goods sold
Interest rate swap agreements
(1.7
)
 
(2.7
)
 
(4.0
)
 
(5.1
)
Interest expense
Less: Tax effect
(0.5
)
 
0.4

 
(1.5
)
 
0.3

Income tax expense
Total, net of tax
$
2.5

 
$
0.4

 
$
5.6

 
$
2.8

 

15. STOCKHOLDERS’ EQUITY

The Company’s Board of Directors authorized a $500.0 million three-year stock repurchase program effective June 3, 2015. On March 21, 2017, the Board of Directors authorized a $750.0 million increase to the program and extended the program to June 3, 2020. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as the Company deems appropriate.

22




Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, restrictions under the Company’s debt arrangements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.

During the twenty-six weeks ended July 30, 2017 and July 31, 2016, the Company purchased 1.2 million shares and 1.4 million shares, respectively, of its common stock under the program in open market transactions for $123.7 million and $129.2 million, respectively. As of July 30, 2017, the repurchased shares were held as treasury stock and $685.0 million of the authorization remained available for future share repurchases.

Treasury stock activity also includes shares that were withheld principally in conjunction with the settlement of vested restricted stock, RSUs and PSUs to satisfy tax withholding requirements.

16. NET INCOME PER COMMON SHARE

The Company computed its basic and diluted net income per common share as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions, except per share data)
7/30/17
 
7/31/16
 
7/30/17

7/31/16
 
 
 
 
 
 
 
 
Net income attributable to PVH Corp.
$
119.7

 
$
90.5

 
$
190.1

 
$
322.1

 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic net income per common share
77.8

 
80.7

 
78.0

 
81.0

Weighted average impact of dilutive securities
0.9

 
0.6

 
0.8

 
0.6

Total shares for diluted net income per common share
78.7

 
81.3

 
78.8

 
81.6

 
 
 
 
 
 
 
 
Basic net income per common share attributable to PVH Corp.
$
1.54

 
$
1.12

 
$
2.44

 
$
3.98

 
 
 
 
 
 
 
 
Diluted net income per common share attributable to PVH Corp.
$
1.52

 
$
1.11

 
$
2.41

 
$
3.95


Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/30/17
 
7/31/16
 
7/30/17
 
7/31/16
 
 
 
 
 
 
 
 
Weighted average potentially dilutive securities
0.6

 
1.0

 
0.8

 
1.0


Shares underlying contingently issuable awards that have not met the necessary conditions as of the end of a reporting period are not included in the calculation of diluted net income per common share for that period. The Company had contingently issuable awards outstanding that did not meet the performance conditions as of July 30, 2017 and July 31, 2016 and, therefore, were excluded from the calculation of diluted net income per common share for the thirteen and twenty-six weeks ended July 30, 2017 and July 31, 2016. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was 0.2 million as of each of July 30, 2017 and July 31, 2016. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.

17. NONCASH INVESTING AND FINANCING TRANSACTIONS

The Company recorded increases to goodwill of $25.0 million and $23.6 million during the twenty-six weeks ended July 30, 2017 and July 31, 2016, respectively, related to liabilities incurred for contingent purchase price payments to Mr. Calvin Klein. Such amounts are not due or paid in cash until 45 days subsequent to the Company’s applicable quarter end. As such, during the twenty-six weeks ended July 30, 2017 and July 31, 2016, the Company paid $25.6 million and $25.2 million, respectively, in cash related to contingent purchase price payments to Mr. Calvin Klein that were recorded as additions to goodwill during the periods the liabilities were incurred.


23



Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2017 and July 31, 2016 were $1.6 million and $2.4 million, respectively, of assets acquired through capital leases.

Omitted from acquisition of treasury shares in the Company’s Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2017 and July 31, 2016 were $3.0 million and $2.0 million, respectively, of shares repurchased under the stock repurchase program for which the trades occurred but remained unsettled as of the end of the respective period.

The Company completed the TH China acquisition during the first quarter of 2016. Included in the acquisition consideration was the elimination of a $2.8 million pre-acquisition receivable owed to the Company by TH China.

The Company recorded during the second quarter of 2016 a loss of $11.2 million to write-off previously capitalized debt issuance costs in connection with the amendment of its senior secured credit facilities.

18. SEGMENT DATA

The Company manages its operations through its operating divisions, which are presented as six reportable segments: (i) Calvin Klein North America; (ii) Calvin Klein International; (iii) Tommy Hilfiger North America; (iv) Tommy Hilfiger International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.

Calvin Klein North America Segment - This segment consists of the Company’s Calvin Klein North America division. This segment derives revenue principally from (i) marketing CALVIN KLEIN branded apparel and related products at wholesale in the United States and Canada, primarily to department and specialty stores and digital commerce sites operated by key department store customers and pure play digital commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and digital commerce sites in North America, which sell CALVIN KLEIN branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the CALVIN KLEIN brand names for a broad array of products in North America. This segment also includes, since December 2016, the Company’s proportionate share of the net income or loss of its investment in its unconsolidated Calvin Klein foreign affiliate in Mexico.

Calvin Klein International Segment - This segment consists of the Company’s Calvin Klein International division. This segment derives revenue principally from (i) marketing CALVIN KLEIN branded apparel and related products at wholesale principally in Europe, Asia and Brazil, primarily to department and specialty stores, digital commerce sites operated by key department store customers and pure play digital commerce retailers, franchisees, distributors and licensees; (ii) operating retail stores and digital commerce sites in Europe, Asia and Brazil, which sell CALVIN KLEIN branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the CALVIN KLEIN brand names for a broad array of products outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Calvin Klein foreign affiliates in Australia and India.

Tommy Hilfiger North America Segment - This segment consists of the Company’s Tommy Hilfiger North America division. This segment derives revenue principally from (i) marketing TOMMY HILFIGER branded apparel and related products at wholesale in the United States and Canada, primarily to department stores, principally Macy’s, Inc. and Hudson’s Bay Company, as well as digital commerce sites operated by these department store customers and pure play digital commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and digital commerce sites in North America, which sell TOMMY HILFIGER branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the TOMMY HILFIGER brand names for a broad array of products in North America. This segment also includes, since December 2016, the Company’s proportionate share of the net income or loss of its investment in its unconsolidated Tommy Hilfiger foreign affiliate in Mexico.

Tommy Hilfiger International Segment - This segment consists of the Company’s Tommy Hilfiger International division. This segment derives revenue principally from (i) marketing TOMMY HILFIGER branded apparel and related products at wholesale principally in Europe and China, primarily to department and specialty stores, digital commerce sites operated by key department store customers and pure play digital commerce retailers, franchisees, distributors and licensees; (ii) operating retail stores in Europe, China and Japan and international digital commerce sites, which sell TOMMY HILFIGER branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the TOMMY HILFIGER brand names for a broad array of products outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Tommy Hilfiger foreign affiliates in Brazil, India and Australia. This segment included the Company’s proportionate share of the net income or loss of its investment in TH

24




China until April 13, 2016, on which date the Company began to consolidate the operations as a wholly owned subsidiary of the Company in conjunction with the TH China acquisition. Please see Note 3, “Acquisitions,” for a further discussion.

Heritage Brands Wholesale Segment - This segment consists of the Company’s Heritage Brands Wholesale division. This segment derives revenue primarily from the marketing to department, chain and specialty stores and digital commerce sites operated by select wholesale partners and pure play digital commerce retailers in North America of (i) dress shirts and neckwear under various owned and licensed brand names, including several private label brands; (ii) men’s sportswear principally under the brand names Van Heusen, IZOD and ARROW; (iii) swimwear, fitness apparel, swim accessories and related products under the brand name Speedo; and (iv) women’s intimate apparel under the brand names Warner’s and Olga. This segment also derives revenue from Company operated digital commerce sites in the United States through SpeedoUSA.com and, since March 30, 2017, TrueandCo.com. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Heritage Brands foreign affiliates in Australia and, since December 2016, in Mexico.

Heritage Brands Retail Segment - This segment consists of the Company’s Heritage Brands Retail division. This segment derives revenue principally from operating retail stores, primarily located in outlet centers throughout the United States and Canada, which primarily sell apparel, accessories and related products. A majority of the Company’s Heritage Brands stores operate under the Van Heusen name and offer a broad selection of Van Heusen men’s and women’s apparel, along with a limited selection of the Company’s dress shirt and neckwear offerings and IZOD Golf, Warner’s and Speedo brand products. Some of these stores feature multiple brand names on the door signage.

25




The following tables present summarized information by segment:
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
(In millions)
7/30/17
 
7/31/16
 
 
7/30/17
(1) 
7/31/16
(1) 
Revenue – Calvin Klein North America
 
 
 
 
 
 
 
 
 
Net sales    
$
348.3

 
$
361.3

 
 
$
678.4

 
$
700.1

 
Royalty revenue    
31.6

 
28.0

 
 
66.7

 
58.3

 
Advertising and other revenue    
12.3

 
8.7

 
 
22.5

 
20.2

 
Total    
392.2

 
398.0

 
 
767.6

 
778.6

 
 
 
 
 
 
 
 
 
 
 
Revenue – Calvin Klein International
 
 
 
 
 
 
 
 
 
Net sales
370.0

 
306.2

 

724.8

 
622.5

 
Royalty revenue
17.3

 
16.8

 
 
36.9

 
35.4

 
Advertising and other revenue
7.0

 
5.4

 
 
13.0

 
12.6

 
Total
394.3

 
328.4

 
 
774.7

 
670.5

 
 
 
 
 
 
 
 
 
 
 
Revenue – Tommy Hilfiger North America
 
 
 
 
 
 
 
 
 
Net sales    
380.8

 
396.0

 
 
678.9

 
717.1

 
Royalty revenue    
15.3

 
9.2

 
 
31.8

 
20.2

 
Advertising and other revenue    
3.7

 
2.2

 
 
7.6

 
4.7

 
Total    
399.8

 
407.4

 
 
718.3

 
742.0

 
 
 
 
 
 
 
 
 
 
 
Revenue – Tommy Hilfiger International
 
 
 
 
 
 
 
 
 
Net sales    
479.1

 
442.1

 
 
986.9

 
886.7

 
Royalty revenue    
11.7

 
10.1

 
 
21.8

 
21.7