NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
— 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
Eagle
, which are owned, and
Speedo
,
Geoffrey Beene
,
Kenneth Cole New York
,
Kenneth Cole Reaction
,
Sean John
,
MICHAEL Michael Kors
,
Michael Kors Collection
and
Chaps
, which are 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.
Principles of Consolidation
— The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see
Note 5
, “Investments in Unconsolidated Affiliates,” for a further discussion. 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. The Company acquired in 2013 a
51%
economic interest in a Calvin Klein joint venture in India, which is now known as Calvin Klein Arvind Fashion Private Limited (“CK India”). CK India was consolidated and the minority shareholder’s proportionate share (
49%
) of the equity in this joint venture was accounted for as a redeemable non-controlling interest. During 2014, Arvind purchased the Company’s prior joint venture partners’ shares in CK India and, as a result of the entry into a shareholder agreement with different governing arrangements between the Company and Arvind than those with the Company’s prior partners, the Company no longer was deemed to hold a controlling interest in the joint venture. CK India was deconsolidated as a result and the Company began reporting its 51% interest as an equity method investment in the first quarter of 2014. Please see
Note 6
, “Redeemable Non-Controlling Interests,” for a further discussion.
Use of Estimates
— The preparation of the consolidated 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 consolidated financial statements and accompanying notes. Actual results could differ materially from the estimates.
Fiscal Year
— The Company uses a
52
-
53
week fiscal year ending on the Sunday closest to February 1. References to a year are to the Company’s fiscal year, unless the context requires otherwise. Results for
2016
,
2015
and
2014
represent the 52 weeks ended
January 29, 2017
,
January 31, 2016
and
February 1, 2015
, respectively.
Cash and Cash Equivalents
— The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents also includes amounts due from third party credit card processors for the settlement of customer debit and credit card transactions that are collectible in one week or less. The Company’s balances of cash and cash equivalents at
January 29, 2017
consisted principally of bank deposits and investments in money market funds.
Accounts Receivable
— Trade receivables, as presented in the Company’s Consolidated Balance Sheets, are net of returns and allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectibility based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill and Other Intangible Assets
— The Company assesses the recoverability of goodwill annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of the reporting unit may have been reduced below its carrying amount. Impairment testing for goodwill is done at a reporting unit level. Under Financial Accounting Standards Board (“FASB”) guidance for goodwill and intangible assets, a reporting unit is defined as an operating segment or one level below the operating segment, called a component. However,
two
or more components of an operating segment will be aggregated and deemed a single reporting unit if the components have similar economic characteristics.
FASB guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform the more detailed two-step quantitative goodwill impairment test. The Company may elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting unit. The quantitative goodwill impairment test, if necessary, is a two-step process. The first step is to identify the existence of a potential impairment by comparing the fair value of a reporting unit (the fair value of a reporting unit is estimated using a discounted cash flow model) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the reporting unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative goodwill impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined using the same approach as employed when determining the amount of goodwill that would be recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
For the 2016 annual goodwill impairment test, the Company elected to first assess qualitative factors to determine whether it was more likely than not that the fair value of any reporting unit was less than its carrying amount as a basis for determining whether it was necessary to perform the two-step goodwill impairment test. In evaluating whether it was more likely than not that the fair value of any reporting unit was less than its carrying amount, the Company assessed relevant events and circumstances including the change in the Company’s market capitalization and its implied impact on reporting unit fair value, industry and market conditions, macroeconomic conditions, trends in product costs and financial performance of the Company’s businesses. After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of any reporting unit was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required.
During 2016, and subsequent to the 2016 annual goodwill impairment test, the Company formed a joint venture in Mexico by merging its wholly owned subsidiary that principally operated and managed the Calvin Klein business in Mexico with a wholly owned subsidiary of the joint venture partner, which resulted in the deconsolidation of the Company’s wholly owned subsidiary, including goodwill assigned to the business. This transaction was a triggering event that indicated that the amount of remaining goodwill allocated to the Calvin Klein North America Wholesale, Calvin Klein North America Retail and Heritage Brands Wholesale reporting units could be impaired, prompting the need for the Company to perform a goodwill impairment test for these reporting units in 2016. No goodwill impairment resulted from this interim test in 2016.
For the 2015 annual goodwill impairment test, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. The Company’s annual goodwill impairment test during 2015 yielded estimated fair values in excess of the carrying amounts for all of the Company’s reporting units and therefore the second step of the quantitative goodwill impairment test was not required.
During the fourth quarter of 2014, the Company announced its plan to exit the Izod retail business in 2015 (which was completed in the third quarter of 2015). The decision to exit this business was a triggering event that indicated that the amount of goodwill allocated to the Heritage Brands Retail reporting unit could be impaired, prompting the need for the Company to perform a goodwill impairment test for this reporting unit in 2014. As a result of this interim test in 2014, the goodwill allocated to the Heritage Brands Retail reporting unit was determined to be impaired and an impairment charge of $
11.9
million was recorded in selling, general and administrative expenses.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Indefinite-lived intangible assets not subject to amortization are tested for impairment annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. FASB guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform a more detailed quantitative impairment test for its indefinite-lived intangible assets. The Company may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment test. When performing the quantitative test, an impairment loss is recognized if the carrying amount of the asset exceeds the fair value of the asset, which is generally determined using the estimated discounted cash flows associated with the asset’s use. Intangible assets with finite lives are amortized over their estimated useful lives and are tested for impairment along with other long-lived assets.
For the 2016 and 2015 annual impairment tests of certain indefinite-lived intangible assets, the Company elected to first assess qualitative factors to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount. In performing this evaluation, the Company assessed relevant events and circumstances including industry and market conditions, macroeconomic conditions, trends in product costs and financial performance of the Company’s businesses. After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of these certain indefinite-lived intangible assets were less than their carrying amount and concluded that the quantitative impairment test was not required. For certain other indefinite-lived intangible assets impairment tests, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. No impairment of indefinite-lived intangible assets resulted from any of the Company’s annual impairment tests in 2016 and 2015.
Asset Impairments
— The Company reviews for and records impairment losses on long-lived assets (excluding goodwill and other indefinite-lived intangible assets) in accordance with FASB guidance for the impairment or disposal of long-lived assets. The Company records impairment losses when events and circumstances indicate that the assets might be impaired and the carrying amount of the asset is not recoverable and exceeds its fair value. Please see
Note 11
, “Fair Value Measurements” for a further discussion.
Inventories
—
Inventories are comprised principally of finished goods and are stated at the lower of cost or market. Cost for principally 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 agings and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at the lower of cost or market.
Inventory held on consignment by third parties totaled $
19.6
million at
January 29, 2017
and
$19.1
million at
January 31, 2016
. The Company retains the title to its inventory stored at third party facilities.
Property, Plant and Equipment
— Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is generally provided over the estimated useful lives of the related assets on a straight-line basis. The range of useful lives is principally as follows: Buildings and building improvements —
15
-
40
years; machinery, software and equipment —
2
-
10
years; furniture and fixtures —
2
-
10
years; and fixtures located in third party customer locations (“shop-in-shops”) and their related costs —
3
-4 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the term of the related lease or the estimated useful life of the asset. In certain circumstances, contractual renewal options are considered when determining the term of the related lease. Major additions and betterments are capitalized, and repairs and maintenance are charged to operations in the period incurred. Depreciation expense totaled
$228.4
million,
$210.8
million and
$193.8
million in
2016
,
2015
and
2014
, respectively.
Leases
— The Company leases retail locations, warehouses, showrooms, office space and equipment. Assets held under capital leases are included in property, plant and equipment and are amortized over the lesser of the term of the related lease or the estimated useful life of the asset. The Company accounts for rent expense under non-cancelable operating leases with scheduled rent increases and rent holidays on a straight-line basis over the lease term. The Company determines the lease term at the inception of a lease by assuming the exercise of those renewal options that are reasonably assured because of the significant economic penalty that exists for not exercising those options. The excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. In addition, the Company receives build out contributions from landlords
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
primarily as an incentive for the Company to lease retail store space from the landlords. Such amounts are amortized as a reduction of rent expense over the life of the related lease.
Revenue Recognition
— Revenue from the Company’s wholesale operations is recognized at the time title to the goods is passed and the risk of loss is transferred to customers. For sales by the Company’s retail stores, revenue is recognized when goods are sold to consumers. Revenue from the Company’s digital commerce transactions is recognized at the estimated time of delivery to the customer. Allowances for estimated returns and discounts are provided when sales are recorded. Royalty revenue for licensees whose sales exceed contractual sales minimums, including licensee contributions toward advertising, is recognized when licensed products are sold as reported by the Company’s licensees. For licensees whose sales do not exceed contractual sales minimums, royalty revenue is recognized ratably based on contractual minimum requirements.
The Company sells gift cards to customers in its retail stores. The Company does not charge administrative fees on gift cards nor do they expire. Upon the purchase of a gift card by a customer, a liability is established for the cash value of the gift card. The liability is relieved and revenue is recognized when the gift card is redeemed by the customer or if the Company determines that the likelihood of the gift card being redeemed is remote (also known as “gift card breakage”) and that it does not have a legal obligation to remit the value of such unredeemed gift card to any jurisdiction. Gift card breakage was immaterial in each of the last three years.
Sales Incentives
— The Company uses certain sales incentive programs related to certain of the Company’s retail operations, such as customer loyalty programs and the issuance of coupons. The Company’s loyalty programs are structured such that customers receive specified amounts off of future purchases for a specified period of time after certain levels of spending are achieved. Costs associated with the Company’s loyalty programs are recorded ratably as a cost of goods sold based on enrolled customers’ spending. Costs associated with coupons are recorded as a reduction of revenue at the time of coupon redemption.
Cost of Goods Sold and Selling, General and Administrative Expenses
— Costs associated with the production and procurement of product are included in cost of goods sold, including inbound freight costs, purchasing and receiving costs, inspection costs and other product procurement related charges. Shipping and handling costs incurred by the Company associated with digital commerce transactions are also included in cost of goods sold. Generally, all other expenses, excluding interest and income taxes, are included in selling, general and administrative expenses, including warehousing and distribution expenses, as the predominant expenses associated therewith are general and administrative in nature, including rent, utilities, payroll and depreciation and amortization. Warehousing and distribution expenses, which are subject to exchange rate fluctuations, totaled $
246.5
million, $
232.4
million and $
250.4
million in 2016, 2015 and 2014, respectively.
Shipping and Handling Fees
— Shipping and handling fees billed to customers are included in net sales.
Advertising
— Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Costs associated with cooperative advertising programs, under which the Company shares the cost of a customer’s advertising expenditures, are treated as a reduction of revenue. Advertising expenses, which are subject to exchange rate fluctuations, totaled $
416.3
million,
$376.6
million and
$384.6
million in
2016
,
2015
and
2014
, respectively. Prepaid advertising expenses recorded in prepaid expenses and other assets totaled $
7.5
million and
$2.9
million at
January 29, 2017
and
January 31, 2016
, respectively.
Sales Taxes
— The Company accounts for sales taxes and other related taxes on a net basis, excluding such taxes from revenue.
Income Taxes
— Deferred tax assets and liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
Significant judgment is required in assessing the timing and amount of deductible and taxable items, evaluating tax positions and in determining the income tax provision. The Company recognizes income tax benefits only when it is more
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. If the recognition threshold is met, the Company measures the tax benefit at the largest amount with a greater than
50
percent likelihood of being realized upon ultimate settlement. For tax positions that are
50
percent or less likely of being sustained upon audit, the Company does not recognize any portion of that benefit in the financial statements. When the outcome of these tax matters changes, the change in estimate impacts the provision for income taxes in the period that such a determination is made. The Company recognizes interest and penalties related to unrecognized tax benefits in the Company’s income tax provision.
Financial
Instruments
— The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows primarily associated with certain international inventory purchases. The Company periodically 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 secured term loan facilities. The Company enters into interest rate swap and cap agreements to hedge against a portion of this exposure. The Company records the foreign currency forward exchange contracts and interest rate contracts at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. 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 contracts is based on observable interest rate yield curves and represents the expected discounted cash flows underlying the financial instruments. Changes in fair value of the foreign currency forward exchange contracts primarily associated with certain international inventory purchases and the interest rate contracts that are designated as effective hedging instruments (collectively referred to as “cash flow hedges”) are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”). Any ineffectiveness in such cash flow hedges is immediately recognized in earnings. Cash flows from such hedges are presented in the Consolidated Statements of Cash Flows in the same category as the items being hedged.
The Company also 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, the Company designates certain foreign currency borrowings issued in the United States as a net investment hedge of its investments in certain of its foreign subsidiaries that use a functional currency other than the United States dollar. Changes in fair value of the foreign currency borrowings designated as a net investment hedge are recorded in equity as a component of AOCL. The Company evaluates the effectiveness of its net investment hedge as of the beginning of each quarter. Any ineffectiveness in such net investment hedge is immediately recognized in earnings.
The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”). Undesignated contracts include 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. Undesignated contracts also include foreign currency option contracts used to hedge against changes in foreign currency exchange rates related to the translation of the earnings of the Company’s subsidiaries that use a functional currency other than the United States dollar. 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. The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes. Please see Note 10, “Derivative Financial Instruments” for a further discussion.
Foreign Currency Translation and Transactions
— The consolidated financial statements of the Company are prepared in United States dollars. If the functional currency of a foreign subsidiary is not the United States dollar, assets and liabilities are translated to United States dollars at the exchange rates in effect at the applicable balance sheet date and revenue and expenses are translated to United States dollars at the average exchange rate for the applicable period. Gains and losses on the revaluation of intercompany loans made between foreign subsidiaries that are of a long-term investment nature are included in AOCL. Gains and losses arising from transactions denominated in a currency other than the functional currency of a particular entity, not including inventory purchases, are principally included in selling, general and administrative expenses and totaled a loss of $
4.7
million, $
17.3
million and $
49.8
million in
2016
,
2015
and
2014
, respectively. The transaction loss recorded in 2014 included a loss of $
38.0
million on the revaluation of certain intercompany loans, which was mostly offset by a gain on undesignated foreign currency forward exchange contracts. Please see
Note 10
, “Derivative Financial Instruments” for a further discussion.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Balance Sheet Classification of Early Settlements of Long-Term Obligations
— The Company classifies obligations settled after the balance sheet date but prior to the issuance of the consolidated financial statements based on the contractual payment terms of the underlying agreements.
Pension and Other Postretirement Plans
— Employee pension benefits earned during the year, as well as interest on the projected benefit obligations or accumulated benefit obligations, are accrued quarterly. Prior service costs and credits resulting from changes in plan benefits are generally amortized over the average remaining service period of the employees expected to receive benefits. The expected return on plan assets is recognized quarterly and determined by applying the assumed return on assets to the actual fair value of plan assets adjusted for expected benefit payments, contributions and plan expenses. Actuarial gains and losses are recognized in the Company’s operating results in the year in which they occur. These gains and losses are measured at least annually at the end of the Company’s fiscal year and, as such, are generally recorded during the fourth quarter of each year. Please see
Note 12
, “Retirement and Benefit Plans” for a further discussion of the Company’s pension and other postretirement plans.
Stock
-Based Compensation
—
The Company recognizes all share-based payments to employees and non-employee directors, net of estimated forfeitures, as compensation expense in the consolidated financial statements based on their grant date fair values. Please see
Note 14
, “Stock-Based Compensation” for a further discussion.
Recently Adopted Accounting Guidance
— The FASB issued in April 2015 an update to accounting guidance related to debt issuance costs. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The Company adopted this update during the first quarter of 2016 on a retrospective basis, which resulted in decreases to prepaid expenses and other assets of $
8.1
million and $
14.5
million, respectively, as of
January 31, 2016
with corresponding decreases in long-term debt.
The FASB issued in April 2015 an update to accounting guidance related to retirement benefits. This update provides a practical expedient which allows a company with fiscal years that do not fall on a calendar month-end to measure defined benefit plan assets and obligations using the month end that is closest to the company’s fiscal year end. If elected, this update should be applied consistently from year to year for all plans. The update became effective for the Company in the first quarter of 2016. Prospective application is required. The Company has not elected to change its measurement date under this update.
Accounting Guidance Issued But Not Adopted as of
January 29, 2017
— The FASB issued in May 2014 guidance that supersedes most of the current revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. In August 2015, the FASB approved a one year delay to the required adoption date of the standard, which makes it effective for the Company no later than the first quarter of 2018, with adoption in 2017 permitted. In 2016, the FASB issued several amendments to clarify various aspects of the implementation guidance. The new standard is required to be applied retrospectively to each prior reporting period (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized as an adjustment to opening retained earnings at the date of initial adoption (modified retrospective method).
The Company formed a global, cross-functional project team to analyze the impacts of the guidance across all of its revenue streams. This included review of current accounting policies and practices to identify potential differences that would result from applying the guidance. The majority of the Company’s revenue is generated from sales of finished products, which will continue to be recognized when control is transferred to the customer. The Company’s assessment included an evaluation of the impact that the guidance will have on the Company’s accounting for royalty and advertising revenue, loyalty programs and gift cards. Under the guidance, the Company’s royalty and advertising revenue will continue to be recognized over time. However, the Company is still assessing the impact of decisions reached by the FASB Transition Resource Group in November 2016 on the treatment of minimum guarantees in licensing arrangements, which may affect the timing of the Company’s recognition of royalty and advertising revenue. For loyalty programs, the Company records costs associated with such programs ratably as a cost of goods sold based on enrolled customers’ spending. Under the guidance, the revenue associated with the loyalty award will be initially deferred when the loyalty awards are earned and recognized, along with the related cost of goods
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
sold, as the loyalty awards are redeemed or expire. Revenue for the unredeemed portion of gift cards, which is currently recognized when the likelihood of redemption becomes remote, will be recognized under the guidance proportionately over the estimated customer redemption period, subject to the constraint that it must be highly probable that a significant reversal of revenue will not occur. While the Company’s assessment of the impacts of the guidance is still in process, the adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements. The Company plans to adopt the standard in the first quarter of 2018 using the modified retrospective method.
The FASB issued in July 2015 an update to accounting guidance to simplify the measurement of inventory. Currently, all inventory is measured at the lower of cost or market. The update requires an entity to measure inventory within the scope of the guidance at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The update does not apply to inventory measured using last-in, first-out or the retail inventory methods. This update will be effective for the Company in the first quarter of 2017. Prospective adoption is required. The adoption is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued in January 2016 an update to accounting guidance for the recognition and measurement of financial instruments. The update requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. The update will be effective for the Company in the first quarter of 2018 with limited early adoption permitted. The adoption is not expected to have any impact on the Company’s consolidated financial statements as the Company does not currently have such investments.
The FASB issued in February 2016 a new accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and a lease liability in the balance sheet for most leases. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs (
e.g
., commissions). The guidance will be effective for the Company in the first quarter of 2019 with early adoption permitted. The adoption will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period presented. The Company is currently evaluating the standard to determine the impact of the adoption on the Company’s consolidated financial statements but expects that it will result in a significant increase to its other assets and other liabilities.
The FASB issued in March 2016 an update to accounting guidance to simplify several aspects of accounting for share-based payment award transactions, including the accounting for forfeitures, income taxes and statutory tax withholding requirements, as well as classification of these transactions in the statement of cash flows. The update will be effective for the Company in the first quarter of 2017. The Company has elected not to continue estimating expected forfeitures in determining compensation expense. With respect to the accounting for income taxes, this update requires, on a prospective basis, recognition of excess tax benefits and tax deficiencies (resulting from an increase or decrease in the fair value of an award from grant date to the vesting or exercise date) in the provision for income taxes as a discrete item in the quarterly period in which they occur. Currently, excess tax benefits or tax deficiencies are recognized in equity as a component of Additional Paid in Capital. As such, the adoption of this update is expected to impact the Company’s Consolidated Income Statements and Balance Sheets on a prospective basis. The Company recognized, in equity, a tax deficiency of $
7.2
million and a tax benefit of $
4.8
million in 2016 and 2015, respectively. These amounts may not be indicative of future amounts that may be recognized subsequent to the adoption of this update, as any excess tax benefits or tax deficiencies recognized will be dependent upon unpredictable future events, including the timing of exercises, the value realized upon the vesting or exercise of shares versus the fair value of the shares when they were granted and applicable tax rates. In addition, these excess tax benefits and deficiencies will be classified as an operating activity in the Consolidated Statement of Cash Flows instead of as a financing activity, and such classification will be applied on a retrospective basis to all periods presented. The update also requires that the value of shares withheld from employees upon vesting of stock awards in order to satisfy any applicable tax withholding requirements are to be presented within financing activities in the Consolidated Statement of Cash Flows, which is consistent with the Company’s current presentation, and will therefore have no impact to the Company.
The FASB issued in August 2016 an update to accounting guidance to clarify and provide specific guidance on how certain cash receipts and cash payments are classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costs related to debt prepayments or extinguishments, payments of contingent consideration after a business combination and distributions from
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
equity method investees. The update will be effective for the Company in the first quarter of 2018, with early adoption permitted. Retrospective adoption is required. Upon adoption, contingent purchase price payments that are currently classified as cash flows from investing activities will be classified as cash flows from operating activities in the Company’s Consolidated Statements of Cash Flows. Otherwise, the adoption of the update is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued in October 2016 an update to accounting guidance to simplify income tax accounting on intercompany sales or transfers of assets other than inventory. The existing guidance requires entities to defer the income tax effect of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. The update requires companies to immediately recognize in their income statement the income tax effects of an intercompany sale or transfer of an asset other than inventory. The update will be effective for the Company in the first quarter of 2018, with early adoption permitted as of the beginning of an annual period. Entities are required to apply the update using a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. As of January 29, 2017, the Company had deferred charges of $
7.5
million related to intercompany sales and transfers of assets recorded in other assets. Upon adoption of this update, other assets will be reduced by the then current amount of deferred charges with a corresponding adjustment to opening retained earnings.
The FASB issued in November 2016 an update to accounting guidance to clarify and provide specific guidance on the cash flow classifications and presentation of changes in restricted cash. The update requires that restricted cash be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the statement of cash flows. The update will be effective for the Company in the first quarter of 2018, with early adoption permitted. Retrospective adoption is required. The adoption is not expected to have a material impact on the Company’s Consolidated Statement of Cash Flows.
The FASB issued in January 2017 an update to accounting guidance to revise the definition of a business. The update requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of identifiable assets, the set of assets would not represent a business. Also, in order to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. Under the update, fewer sets of assets are expected to be considered businesses. The update will be effective for the Company in the first quarter of 2018, with early adoption permitted. The Company will apply the update to applicable transactions after the adoption date. The impact on the Company’s consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
The FASB issued in January 2017 an update to the accounting guidance to simplify the testing for goodwill impairment. The update eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The update will be effective for the Company in the first quarter of 2020, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Prospective adoption is required. The adoption is not expected to have a material impact on the Company’s consolidated financial statements.
2. ACQUISITIONS
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.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 of a pre-tax noncash gain of $
153.1
million during the first quarter of 2016, which was included in other noncash gain, net in the Company’s Consolidated Income Statement for the year ended January 29, 2017. 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. Together with the fair value of the Company’s
45%
interest, the total fair value of TH China was $
471.4
million. The estimated fair value of assets acquired and liabilities assumed included net assets of $
102.2
million (including $
105.3
million of cash acquired), $
110.6
million of other intangible assets and $
258.6
million of goodwill. 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. Please see
Note 7
, “Goodwill and Other Intangible Assets,” for a further discussion. The Company finalized the purchase price allocation during the fourth quarter of 2016.
Acquisition of Russia Franchisee
In 2014, the Company acquired for $
4.3
million
two
Tommy Hilfiger
stores in Russia from a former
Tommy Hilfiger
franchisee. This transaction was accounted for as a business combination.
Acquisition of Ireland Franchisee
In 2014, the Company acquired for
$3.1
million
six
Tommy Hilfiger
stores in Ireland from a former
Tommy Hilfiger
franchisee. This transaction was accounted for as a business combination.
Acquisition of Calvin Klein Performance Retail Businesses in Hong Kong and China
In 2014, the Company acquired for
$6.7
million the Calvin Klein performance retail businesses in Hong Kong and China from a former
CALVIN KLEIN
sublicensee. This transaction was accounted for as a business combination. The adjustment to the purchase price was finalized during 2015.
3. 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. The building had a carrying value of $
14.7
million as of January 31, 2016, which was determined to be lower than the fair value, less costs to sell, and was included in the Calvin Klein International segment.
The Company completed the sale of the building on July 4, 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 selling, general and administrative expenses in the Company’s Consolidated Income Statement during the second quarter of 2016 and was included in the Calvin Klein International segment.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, was as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Land
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Buildings and building improvements
|
57.4
|
|
|
53.3
|
|
Machinery, software and equipment
|
533.2
|
|
|
456.0
|
|
Furniture and fixtures
|
406.0
|
|
|
370.3
|
|
Shop-in-shops
|
164.1
|
|
|
146.8
|
|
Leasehold improvements
|
622.5
|
|
|
576.1
|
|
Construction in progress
|
30.0
|
|
|
33.3
|
|
Property, plant and equipment, gross
|
1,814.3
|
|
|
1,636.9
|
|
Less: Accumulated depreciation
|
(1,054.4
|
)
|
|
(892.3
|
)
|
Property, plant and equipment, net
|
$
|
759.9
|
|
|
$
|
744.6
|
|
Construction in progress at
January 29, 2017
and
January 31, 2016
represents costs incurred for machinery, software and equipment, furniture and fixtures and leasehold improvements not yet placed in use, principally related to the construction of retail stores. Interest costs capitalized in construction in progress were immaterial during
2016
,
2015
and
2014
.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Karl Lagerfeld
The Company acquired an economic interest of approximately
10%
in the parent company of the
Karl Lagerfeld
brand (“Karl Lagerfeld”) during 2014 for $
18.9
million. During 2016, a third party acquired a minority stake in Karl Lagerfeld, diluting the Company’s economic interest to approximately
8%
. The Company has significant influence as defined under FASB guidance with respect to this investment, which is being accounted for under the equity method of accounting.
PVH Australia
The Company formed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), in 2013 with Gazal Corporation Limited (“Gazal”), in which the Company owns a
50%
economic interest. PVH Australia has licensed from a subsidiary of the Company since the first quarter of 2014 the rights to distribute and sell certain
CALVIN KLEIN
brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the transaction, the Company contributed to PVH Australia its subsidiaries that were operating the Calvin Klein Jeans businesses in Australia and New Zealand (the “Australia business”). In connection with this contribution, which took place on the first day of 2014, the Company deconsolidated the contributed subsidiaries and recognized a net gain of $
2.1
million during the first quarter of 2014, which was recorded in selling, general and administrative expenses. The gain was measured as the difference between the fair value of the Company’s
50%
interest in PVH Australia and the carrying value of the net assets and cash contributed. The fair value of PVH Australia was determined using the discounted cash flow method, based on net sales projections for the Calvin Klein business in Australia, New Zealand and other island nations in the South Pacific, discounted using a rate of return that accounted for the relative risks of the estimated future cash flows.
The Company completed a transaction in 2015 in which the
Tommy Hilfiger
and
Van Heusen
trademarks were licensed for certain product categories to subsidiaries of PVH Australia for use in Australia, New Zealand and, in the case of
Tommy Hilfiger
, other island nations in the South Pacific. The
Tommy Hilfiger
trademarks had previously been licensed to a third party and the
Van Heusen
trademarks had previously been licensed to Gazal. Additionally, subsidiaries of PVH Australia license other trademarks for certain product categories.
The Company made net payments of $
21.0
million (of which $
20.2
million was placed into an escrow account prior to the end of 2014) and $
7.3
million to PVH Australia during
2015
and
2014
, respectively, to contribute its
50%
share of the joint venture funding for the periods. This investment is being accounted for under the equity method of accounting.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company received a $
1.5
million dividend from PVH Australia during 2016.
Gazal
The Company acquired approximately
10%
of the outstanding capital stock of Gazal, which is listed on the Australian Securities Exchange, during the third quarter of 2016 for approximately $
9.2
million. The Company has significant influence as defined under FASB guidance 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.
CK India
The Company acquired a
51%
economic interest in CK India in 2013. CK India licenses from a subsidiary of the Company the rights to the
CALVIN KLEIN
trademarks in India for certain product categories. CK India was consolidated in the Company’s financial statements during 2013. During the first quarter of 2014, Arvind purchased the Company’s prior joint venture partners’ shares in CK India and, as a result of the entry into a shareholder agreement with different governing arrangements between the Company and Arvind than those with the Company’s prior partners, the Company no longer was deemed to hold a controlling interest in the joint venture. CK India was deconsolidated as a result and the Company began reporting its
51%
interest as an equity method investment in the first quarter of 2014. Please see
Note 6
, “Redeemable Non-Controlling Interests,” for a further discussion.
The Company made payments of $
1.5
million and $
4.0
million to CK India during 2016 and 2015, respectively, to contribute its
51%
share of the joint venture funding for the periods.
TH Brazil
The Company formed a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”), in Brazil in 2012, in which the Company owns a
40%
economic interest. 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 payments of $
1.5
million and $
1.6
million to TH Brazil during 2016 and 2015, respectively, to contribute its
40%
share of the joint venture funding for the periods.
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 during the fourth quarter of 2016. As of
January 29, 2017
, the interest rate on the note was
13.00%
and the outstanding balance, including accrued interest, was $
7.0
million.
TH India
The Company acquired in 2011 a
50%
economic interest in a company that has since been renamed Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a 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.
TH China
The Company formed TH China as a joint venture in 2010. This investment was accounted for under the equity method of accounting until April 13, 2016, on which date the Company acquired the
55%
of the ownership interests in TH China that it did not already own. Please see
Note 2
, “Acquisitions,” for a further discussion.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 (the “Mexico deconsolidation”) and began accounting for its
49%
interest under the equity method of accounting in the fourth quarter of 2016.
In connection with the Mexico deconsolidation, the Company recorded a pre-tax noncash loss of $
81.8
million in 2016 (including $
56.7
million related to foreign currency translation adjustment losses previously recorded in AOCL) to write down the net assets of the Mexico business to fair value. The loss was included in other noncash gain, net in the Company’s Consolidated Income Statement for the year ended January 29, 2017. The fair value of the net assets of $
64.3
million was estimated as the fair value of the
49%
interest in PVH Mexico that the Company acquired upon its formation, based on future operating cash flow projections that were discounted at a rate of
15.0%
, 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 Company made payments of $
7.3
million to PVH Mexico during 2016, to contribute its
49%
share of the joint venture funding for the period.
Total Investments in Unconsolidated Affiliates
Included in other assets in the Company’s Consolidated Balance Sheets as of
January 29, 2017
and
January 31, 2016
is $
180.0
million (of which $
7.0
million is related to the note receivable due from TH Brazil) and
$140.7
million (of which $
52.9
million related to TH China), respectively, related to these investments in unconsolidated affiliates.
6. REDEEMABLE NON-CONTROLLING INTERESTS
PVH Ethiopia
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 will produce finished products for the Company for distribution primarily in the United States. The Company expects the manufacturing facility will begin operations in the first half of 2017.
The shareholders agreement entered into by the parties to 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 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
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
fair value, increased to $
2.0
million as of January 29, 2017, principally attributable to additional contributions of $
2.2
million made by Arvind during 2016 for its proportionate share of the joint venture funding.
CK India
During the first quarter of 2014, CK India was deconsolidated, as discussed in
Note 5
, “Investments in Unconsolidated Affiliates.” The Company recognized a net gain of
$5.9
million in connection with the deconsolidation of CK India during the first quarter of 2014 that was recorded in selling, general and administrative expenses in the Company’s Consolidated Income Statement. The gain was measured as the difference between the fair value of the Company’s
51%
interest in CK India and the carrying value. The fair value of CK India was determined using the discounted cash flow method, based on net sales projections for the Calvin Klein business in India and was discounted using a rate of return that accounted for the relative risks of the estimated future cash flows.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment (please see Note 19, “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 February 1, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
705.4
|
|
|
$
|
859.6
|
|
|
$
|
204.4
|
|
|
$
|
1,251.4
|
|
|
$
|
238.3
|
|
|
$
|
11.9
|
|
|
$
|
3,271.0
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
705.4
|
|
|
859.6
|
|
|
204.4
|
|
|
1,251.4
|
|
|
238.3
|
|
|
—
|
|
|
3,259.1
|
|
Contingent purchase price payments to Mr. Calvin Klein
|
31.2
|
|
|
20.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51.7
|
|
Currency translation and other
|
(8.6
|
)
|
|
(38.6
|
)
|
|
—
|
|
|
(43.0
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
(91.5
|
)
|
Balance as of January 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
728.0
|
|
|
841.5
|
|
|
204.4
|
|
|
1,208.4
|
|
|
237.0
|
|
|
11.9
|
|
|
3,231.2
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
728.0
|
|
|
841.5
|
|
|
204.4
|
|
|
1,208.4
|
|
|
237.0
|
|
|
—
|
|
|
3,219.3
|
|
Contingent purchase price payments to Mr. Calvin Klein
|
31.3
|
|
|
21.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52.6
|
|
TH China acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
258.6
|
|
|
—
|
|
|
—
|
|
|
258.6
|
|
Mexico deconsolidation
|
(20.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
(21.5
|
)
|
Currency translation and other
|
0.6
|
|
|
1.7
|
|
|
—
|
|
|
(41.2
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(39.1
|
)
|
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
|
|
The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Company’s acquisition in 2003 of all of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies (collectively, “Calvin Klein”). Such payments are based on
1.15%
of total worldwide net sales, as defined in the acquisition agreement (as amended), of products bearing any of the
CALVIN KLEIN
brands and are required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by the Company and its licensees and other partners to retailers.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2017
|
|
January 31, 2016
|
(In millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1) (2)
|
$
|
296.7
|
|
|
$
|
(130.8
|
)
|
|
$
|
165.9
|
|
|
$
|
291.9
|
|
|
$
|
(108.7
|
)
|
|
$
|
183.2
|
|
Order backlog
(1)
|
24.6
|
|
|
(24.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reacquired license rights
(1) (2)
|
524.7
|
|
|
(78.1
|
)
|
|
446.6
|
|
|
494.8
|
|
|
(47.7
|
)
|
|
447.1
|
|
Total intangible assets subject to amortization
|
846.0
|
|
|
(233.5
|
)
|
|
612.5
|
|
|
786.7
|
|
|
(156.4
|
)
|
|
630.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
2,783.4
|
|
|
—
|
|
|
2,783.4
|
|
|
2,802.6
|
|
|
—
|
|
|
2,802.6
|
|
Perpetual license rights
|
203.9
|
|
|
—
|
|
|
203.9
|
|
|
203.1
|
|
|
—
|
|
|
203.1
|
|
Reacquired perpetual license rights
|
10.2
|
|
|
—
|
|
|
10.2
|
|
|
10.4
|
|
|
—
|
|
|
10.4
|
|
Total indefinite-lived intangible assets
|
2,997.5
|
|
|
—
|
|
|
2,997.5
|
|
|
3,016.1
|
|
|
—
|
|
|
3,016.1
|
|
Total intangible assets
|
$
|
3,843.5
|
|
|
$
|
(233.5
|
)
|
|
$
|
3,610.0
|
|
|
$
|
3,802.8
|
|
|
$
|
(156.4
|
)
|
|
$
|
3,646.4
|
|
The gross carrying amount and accumulated amortization of certain intangible assets include the impact of changes in foreign currency exchange rates.
|
|
(1)
|
The change from January 31, 2016 to January 29, 2017 primarily related to intangible assets recorded in connection with the TH China acquisition. The intangible assets as of the acquisition date amounted to $
110.6
million and included reacquired license rights of $
72.0
million, order backlog of $
26.2
million and customer relationships of $
12.4
million, which are subject to amortization on a straight-line basis over 2.7 years, 0.8 years and 10.0 years, respectively, and exchange rate fluctuations after the acquisition date.
|
|
|
(2)
|
The change from January 31, 2016 to January 29, 2017 included decreases to customer relationships and reacquired license rights for the net amounts of $
3.3
million and $
44.1
million, respectively, in connection with the Mexico deconsolidation.
|
Amortization expense related to the Company’s amortizable intangible assets was
$86.2
million and
$40.3
million for
2016
and
2015
, respectively.
Assuming constant foreign currency exchange rates and no change in the gross carrying amount of the intangible assets, amortization expense for the next five years related to the Company’s amortizable intangible assets as of
January 29, 2017
is expected to be as follows:
|
|
|
|
|
|
(In millions)
|
|
|
Fiscal Year
|
|
Amount
|
2017
|
|
$
|
63.3
|
|
2018
|
|
60.8
|
|
2019
|
|
38.4
|
|
2020
|
|
38.3
|
|
2021
|
|
38.1
|
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. DEBT
Short-Term Borrowings
One of the Company’s Asian subsidiaries has a yen-denominated short-term line of credit and a yen-denominated overdraft facility with a Japanese bank that together provide for borrowings of up to
¥2,200.0
million (approximately
$19.1
million based on exchange rates in effect on
January 29, 2017
) and are utilized primarily to fund working capital needs. Borrowings under the short-term line of credit bear interest at the one-month Tokyo interbank offered rate plus
0.15%
. As of
January 29, 2017
, the Company had
$17.4
million of borrowings outstanding under these facilities. The weighted average interest rate on the funds borrowed at
January 29, 2017
was
0.19%
. The maximum amount of borrowings outstanding under these facilities during 2016 was ¥
2,000
million (approximately $
17.4
million based on exchange rates in effect on
January 29, 2017
).
One of the Company’s Asian subsidiaries has a won-denominated overdraft facility with a South Korean bank that provides for borrowings of up to ₩
3,500.0
million (approximately $
3.0
million based on exchange rates in effect on January 29, 2017) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the South Korean bank three-month certificate of deposit rate plus
1.50%
. There were no borrowings outstanding under this facility as of or during the year ended January 29, 2017.
One of the Company’s Asian subsidiaries has a United States dollar-denominated short-term revolving credit facility with a bank that provides for borrowings of up to $
10.0
million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the one-month London interbank borrowing rate (“LIBOR”) plus
1.50%
. At the end of each month, amounts outstanding under this facility may be carried forward for additional one-month periods for up to one year. This facility is subject to certain terms and conditions and may be terminated at any time at the discretion of the bank. There were no borrowings outstanding under this facility as of or during the year ended January 29, 2017.
One of the Company’s European subsidiaries has a euro-denominated short-term revolving note and a euro-denominated overdraft facility with a bank that together provide for borrowings of up to
€40.0
million (approximately
$42.7
million based on exchange rates in effect on
January 29, 2017
) and are utilized primarily to fund working capital needs. Borrowings under the revolving note bear interest at the one-month Euro Interbank Offered Rate (“EURIBOR”) plus
1.50%
. There were no borrowings outstanding under these facilities as of or during the year ended
January 29, 2017
.
One of the Company’s European subsidiaries has a United States dollar-denominated short-term line of credit facility with a bank that provides for borrowings of up to $
3.4
million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at
13.50%
. As of
January 29, 2017
, the Company had $
0.4
million of borrowings outstanding under this facility, which represented the maximum amount of borrowings outstanding under this facility during 2016.
One of the Company’s European subsidiaries has a United States dollar-denominated short-term line of credit facility with a Turkish bank that provides for borrowings of up to
$3.7
million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish overnight lending rate plus
3.00%
. As of January 29, 2017, the Company had $
1.3
million of borrowings outstanding under this facility. The weighted average interest rate on the funds borrowed at January 29, 2017 was
13.50%
. The maximum amount of borrowings outstanding under this facility during 2016 was $
3.3
million.
One of the Company’s European subsidiaries has a Turkish lira-denominated short-term line of credit facility with a Turkish bank that provides for borrowings of up to lira
2.6
million (approximately $
0.7
million based on exchange rates in effect on January 29, 2017) and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish overnight lending rate plus
4.00%
. As of January 29, 2017, the Company had no borrowings outstanding under this facility. The maximum amount of borrowings outstanding under this facility during 2016 was equal to the maximum amount of borrowings available under this facility.
One of the Company’s Latin American subsidiaries has a Brazilian real-denominated short-term revolving credit facility with a Brazilian bank that provides for borrowings of up to R
$25.0
million (approximately
$7.9
million based on exchange rates in effect on
January 29, 2017
) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured. There were no borrowings outstanding under this facility as of or during the year ended
January 29, 2017
.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company also 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 January 29, 2017, the Company had no borrowings outstanding under these facilities. The maximum amount of revolving borrowings outstanding under these facilities during 2016 was
$15.3
million.
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
|
|
|
Senior secured Term Loan A facility due 2021
|
$
|
2,039.9
|
|
|
$
|
1,804.6
|
|
Senior secured Term Loan B facility
|
—
|
|
|
575.5
|
|
4 1/2% senior unsecured notes due 2022
|
690.4
|
|
|
688.8
|
|
7 3/4% debentures due 2023
|
99.5
|
|
|
99.4
|
|
3 5/8% senior unsecured euro notes due 2024
|
367.5
|
|
|
—
|
|
Total
|
3,197.3
|
|
|
3,168.3
|
|
Less: Current portion of long-term debt
|
—
|
|
|
136.6
|
|
Long-term debt
|
$
|
3,197.3
|
|
|
$
|
3,031.7
|
|
Please see
Note 11
, “Fair Value Measurements,” for the fair value of the Company’s long-term debt as of
January 29, 2017
and
January 31, 2016
.
As of
January 29, 2017
, the Company’s mandatory long-term debt repayments for the next five years were as follows:
|
|
|
|
|
(In millions)
|
|
Fiscal Year
|
Amount
|
2017
|
$
|
—
|
|
2018
|
68.7
|
|
2019
|
220.1
|
|
2020
|
234.7
|
|
2021
|
1,525.8
|
|
Total debt repayments for the next five years exceed the carrying amount of the Company’s Term Loan A facility as of January 29, 2017 because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of January 29, 2017, after taking into account the effect of the Company’s interest rate swap agreements discussed in the section below entitled “2016 Senior Secured Credit Facilities,” which were in effect as of such date, approximately
65%
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”). Among other things, the amendment provided for an additional
$350.0
million principal amount of loans under the Term Loan A facility and an additional
$250.0
million principal amount of loans under the Term Loan B facility. On March 21, 2014, the Company borrowed the additional principal amounts described above and used the proceeds to redeem all of its outstanding 7 3/8% senior notes, as discussed below in the section entitled “7 3/8% Senior Notes Due 2020.” In connection with entering into an amendment, the Company paid debt issuance costs of
$13.3
million (of which
$8.0
million was expensed as debt modification and extinguishment costs and
$5.3
million is being amortized over the term of the related debt agreement)
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and recorded additional debt modification and extinguishment costs of
$3.2
million to write-off previously capitalized debt issuance costs.
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.
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
January 29, 2017
, the Company had
$24.6
million of outstanding letters of credit. There were no borrowings outstanding under the revolving credit facilities. 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
$350.0
million,
$350.0
million and
$425.5
million during 2016, 2015 and 2014, respectively, on its term loans under the 2016 and 2014 facilities. As a result of the voluntary repayments made by the Company, as of January 29, 2017 the Company is not required to make a long-term debt repayment until September 2018. The Company had term loans outstanding of $
2,039.9
million, net of original issue discounts and debt issuance costs, as of January 29, 2017.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 2014, the Company entered into an interest rate cap agreement for an 18-month term commencing on August 18, 2014. The agreement was designed with the intended effect of capping the interest rate on an initial notional amount of
$514.2
million of the Company’s variable rate debt obligation under the 2014 facilities or any replacement facility with similar terms. Under the terms of this agreement, the one-month LIBOR that the Company paid was capped at a rate of
1.50%
. Therefore, the maximum amount of interest that the Company would have paid on the then-outstanding notional amount was at the
1.50%
capped rate, plus the current applicable margin. The agreement expired on February 17, 2016.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 $
925.1
million as of January 29, 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 under the Company’s previously outstanding facilities or any replacement facility with similar terms, including 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 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;
|
|
|
•
|
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.
7 3/8% Senior Notes Due 2020
On May 6, 2010, the Company issued
$600.0
million principal amount of 7 3/8% senior notes due May 15, 2020. On March 24, 2014, in connection with an amendment to its senior secured credit facilities discussed above in the section entitled “2014 Senior Secured Credit Facilities,” the Company redeemed all of its outstanding 7 3/8% senior notes and, pursuant to the indenture under which the notes were issued, paid a “make whole” premium of
$67.6
million to the holders of the notes. The Company also recorded costs of
$14.3
million to write-off previously capitalized debt issuance costs associated with these notes.
4 1/2% Senior Notes Due 2022
On December 20, 2012, the Company issued
$700.0
million principal amount of 4 1/2% senior notes due December 15, 2022. The Company paid
$16.3
million of fees during 2013 in connection with the issuance of these notes, which are amortized
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and Other Intangible Assets.”
Interest paid was
$109.8
million,
$104.9
million and
$141.7
million during 2016, 2015 and 2014, respectively.
9. INCOME TAXES
The domestic and foreign components of income (loss) before provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
60.9
|
|
|
$
|
117.5
|
|
|
$
|
(103.4
|
)
|
Foreign
|
613.3
|
|
|
530.0
|
|
|
494.8
|
|
Total
|
$
|
674.2
|
|
|
$
|
647.5
|
|
|
$
|
391.4
|
|
Domestic income (loss) before provision for income taxes included an actuarial gain (loss) related to the Company’s United States retirement plans of $
39.1
million, $
20.2
million and $
(138.9)
million in
2016
,
2015
and
2014
, respectively.
Taxes paid were $
85.3
million,
$91.5
million and
$102.9
million in
2016
,
2015
and
2014
, respectively.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The provision (benefit) for income taxes attributable to income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Federal:
|
|
|
|
|
|
Current
|
$
|
(2.7
|
)
|
|
$
|
6.8
|
|
|
$
|
(35.4
|
)
|
Deferred
|
(9.3
|
)
|
|
(4.1
|
)
|
|
(54.8
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
(2.4
|
)
|
|
6.4
|
|
|
3.4
|
|
Deferred
|
(0.9
|
)
|
|
(22.2
|
)
|
|
(4.3
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
Current
|
129.3
|
|
|
70.6
|
|
|
15.5
|
|
Deferred
|
11.5
|
|
|
17.6
|
|
|
28.1
|
|
Total
|
$
|
125.5
|
|
|
$
|
75.1
|
|
|
$
|
(47.5
|
)
|
The provision (benefit) for income taxes for the years
2016
,
2015
and
2014
was different from the amount computed by applying the statutory United States federal income tax rate to the underlying income as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal income tax benefit
|
0.4
|
%
|
|
(1.3
|
)%
|
|
(1.1
|
)%
|
Effects of international jurisdictions, including foreign tax credits
|
(12.9
|
)%
|
|
(15.0
|
)%
|
|
(23.3
|
)%
|
Change in estimates for uncertain tax positions
|
(3.7
|
)%
|
|
(7.6
|
)%
|
|
(24.0
|
)%
|
Change in valuation allowance
|
(0.1
|
)%
|
|
(0.2
|
)%
|
|
1.1
|
%
|
Other, net
|
(0.1
|
)%
|
|
0.7
|
%
|
|
0.2
|
%
|
Effective tax rate
|
18.6
|
%
|
|
11.6
|
%
|
|
(12.1
|
)%
|
Effects of international jurisdictions, including foreign tax credits, reflected in the above table for
2016
,
2015
and
2014
include not only those taxes at statutory income tax rates but also taxes at special rates levied on income from certain jurisdictional activities. The Company expects to benefit from these special rates until 2023.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of deferred income tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Gross deferred tax assets
|
|
|
|
Tax loss and credit carryforwards
|
$
|
248.1
|
|
|
$
|
240.1
|
|
Employee compensation and benefits
|
88.7
|
|
|
135.3
|
|
Inventories
|
27.2
|
|
|
24.0
|
|
Accounts receivable
|
26.6
|
|
|
28.5
|
|
Accrued expenses
|
31.7
|
|
|
31.6
|
|
Other, net
|
0.0
|
|
|
37.1
|
|
Subtotal
|
422.3
|
|
|
496.6
|
|
Valuation allowances
|
(43.9
|
)
|
|
(43.8
|
)
|
Total gross deferred tax assets, net of valuation allowances
|
$
|
378.4
|
|
|
$
|
452.8
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
Intangibles
|
$
|
(1,157.0
|
)
|
|
$
|
(1,199.2
|
)
|
Property, plant and equipment
|
(67.6
|
)
|
|
(77.8
|
)
|
Other, net
|
(14.1
|
)
|
|
—
|
|
Total gross deferred tax liabilities
|
$
|
(1,238.7
|
)
|
|
$
|
(1,277.0
|
)
|
Net deferred tax liability
|
$
|
(860.3
|
)
|
|
$
|
(824.2
|
)
|
At the end of 2016, the Company had on a tax effected basis approximately $
286.3
million of net operating loss and tax credit carryforwards available to offset future taxable income in various jurisdictions. This included net operating loss carryforwards of approximately $
19.5
million and $
37.2
million for federal and various state and local jurisdictions, respectively, and $
28.9
million for various foreign jurisdictions. The Company also had federal and state tax credit and other carryforwards of $
200.7
million. The carryforwards expire principally between 2017 and 2037.
The Company does not provide for deferred taxes on the excess of financial reporting over tax basis on its investments in all of its foreign subsidiaries that are essentially permanent in duration. The earnings that are permanently reinvested were $
2.6
billion as of
January 29, 2017
. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Uncertain tax positions activity for each of the last three years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
226.8
|
|
|
$
|
244.5
|
|
|
$
|
485.7
|
|
Increases related to prior year tax positions
|
2.8
|
|
|
4.3
|
|
|
16.8
|
|
Decreases related to prior year tax positions
|
(9.9
|
)
|
|
(12.5
|
)
|
|
(239.3
|
)
|
Increases related to current year tax positions
|
52.0
|
|
|
40.0
|
|
|
38.2
|
|
Lapses in statute of limitations
|
(24.4
|
)
|
|
(44.6
|
)
|
|
(36.3
|
)
|
Effects of foreign currency translation
|
(1.7
|
)
|
|
(4.9
|
)
|
|
(20.6
|
)
|
Balance at end of year
|
$
|
245.6
|
|
|
$
|
226.8
|
|
|
$
|
244.5
|
|
In 2014, the Company resolved for
$179.0
million an uncertain tax position related to European and United States transfer pricing arrangements, for which it had previously recorded a liability of approximately
$185.0
million.
The entire amount of uncertain tax positions as of
January 29, 2017
, if recognized, would reduce the future effective tax rate under current accounting provisions.
Interest and penalties related to uncertain tax positions are recorded in the Company’s income tax provision. Interest and penalties recognized in the Company’s Consolidated Income Statements for the years
2016
,
2015
and
2014
totaled an expense
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of $
1.0
million, a benefit of
$(0.9)
million and a benefit of
$(25.9)
million, respectively. Interest and penalties accrued in the Company’s Consolidated Balance Sheets as of
January 29, 2017
,
January 31, 2016
and
February 1, 2015
totaled $
27.8
million,
$27.6
million and
$28.6
million, respectively. The Company recorded its liabilities for uncertain tax positions principally in accrued expenses and other liabilities in its Consolidated Balance Sheets.
The Company files income tax returns in the United States and in various foreign, state and local jurisdictions. With few exceptions, examinations have been completed by tax authorities or the statute of limitations has expired for United States federal, foreign, state and local income tax returns filed by the Company for years through 2005. It is reasonably possible that a reduction of uncertain tax positions in a range of $
45.0
million to $
55.0
million may occur within
12
months of
January 29, 2017
.
10. 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 periodically 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. The Company had also entered into an interest rate cap agreement, which expired on February 17, 2016. Please see Note 8, “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 contracts at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. Changes in fair value of the foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate contracts that are designated as effective hedging instruments (collectively referred to as “cash flow hedges”) are recorded in equity as a component of 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 2016 and 2015.
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 8, “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. As of January 29, 2017, the fair value and the carrying value of the foreign currency borrowings designated as a net investment hedge were $
384.1
million and $
367.5
million, respectively. 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 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
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, the Company entered into several foreign currency option contracts during 2016. These contracts represent the Company’s purchase of euro put/United States dollar call options. In connection with the foreign currency option contracts, the Company paid total cash premiums of $
2.3
million during 2016.
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 recognized immediately in earnings. This mitigates the effect of a strengthening United States dollar against the euro on the reporting of the Company’s euro-denominated earnings.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets (Classified in Other Current Assets and Other Assets)
|
|
Liabilities (Classified in Accrued
Expenses and Other Liabilities)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
25.1
|
|
|
$
|
24.9
|
|
|
$
|
2.6
|
|
|
$
|
1.7
|
|
Interest rate contracts
|
—
|
|
|
—
|
|
|
7.1
|
|
|
20.6
|
|
Total contracts designated as cash flow hedges
|
25.1
|
|
|
24.9
|
|
|
9.7
|
|
|
22.3
|
|
Undesignated contracts:
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
0.8
|
|
|
19.3
|
|
|
0.0
|
|
|
0.1
|
|
Foreign currency option contracts
|
3.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total undesignated contracts
|
4.0
|
|
|
19.3
|
|
|
0.0
|
|
|
0.1
|
|
Total
|
$
|
29.1
|
|
|
$
|
44.2
|
|
|
$
|
9.7
|
|
|
$
|
22.4
|
|
At
January 29, 2017
, the notional amount outstanding of foreign currency forward exchange contracts and foreign currency option contracts was $
954.0
million and $
100.0
million, respectively. Such contracts expire principally between February 2017 and April 2018.
The following table summarizes the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in Other
Comprehensive Loss
|
|
Gain (Loss) Reclassified from
AOCL into Income (Expense)
|
|
|
|
|
|
|
(In millions)
|
|
Location
|
|
Amount
|
|
2016
|
|
2015
|
|
|
|
2016
|
|
2015
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
2.4
|
|
|
$
|
36.3
|
|
|
Cost of goods sold
|
|
$
|
14.0
|
|
|
$
|
92.1
|
|
Interest rate contracts
|
1.4
|
|
|
(9.4
|
)
|
|
Interest expense
|
|
(12.1
|
)
|
|
(3.7
|
)
|
Foreign currency borrowings (net investment hedge)
|
22.7
|
|
|
—
|
|
|
N/A
|
|
—
|
|
|
—
|
|
Total
|
$
|
26.5
|
|
|
$
|
26.9
|
|
|
|
|
$
|
1.9
|
|
|
$
|
88.4
|
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A net gain in AOCL on foreign currency forward exchange contracts at
January 29, 2017
of $
32.3
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 contracts at
January 29, 2017
of $
7.0
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.
The following table summarizes the effect of the Company’s undesignated contracts recognized in selling, general and administrative expenses in its Consolidated Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in (Expense) Income
|
(In millions)
|
|
2016
|
|
2015
|
Foreign currency forward exchange contracts
|
|
$
|
(1.2
|
)
|
|
$
|
4.7
|
|
Foreign currency option contracts
|
|
0.9
|
|
|
—
|
|
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of
January 29, 2017
.
11. FAIR VALUE MEASUREMENTS
FASB guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
25.9
|
|
|
N/A
|
|
$
|
25.9
|
|
|
N/A
|
|
$
|
44.2
|
|
|
N/A
|
|
$
|
44.2
|
|
Foreign currency option contracts
|
N/A
|
|
3.2
|
|
|
N/A
|
|
3.2
|
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Total Assets
|
N/A
|
|
$
|
29.1
|
|
|
N/A
|
|
$
|
29.1
|
|
|
N/A
|
|
$
|
44.2
|
|
|
N/A
|
|
$
|
44.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
2.6
|
|
|
N/A
|
|
$
|
2.6
|
|
|
N/A
|
|
$
|
1.8
|
|
|
N/A
|
|
$
|
1.8
|
|
Interest rate contracts
|
N/A
|
|
7.1
|
|
|
N/A
|
|
7.1
|
|
|
N/A
|
|
20.6
|
|
|
N/A
|
|
20.6
|
|
Contingent purchase price payments related to reacquisition of the perpetual rights to the
Tommy Hilfiger
trademarks in India
|
N/A
|
|
N/A
|
|
$
|
1.6
|
|
|
1.6
|
|
|
N/A
|
|
N/A
|
|
$
|
2.2
|
|
|
2.2
|
|
Total Liabilities
|
N/A
|
|
$
|
9.7
|
|
|
$
|
1.6
|
|
|
$
|
11.3
|
|
|
N/A
|
|
$
|
22.4
|
|
|
$
|
2.2
|
|
|
$
|
24.6
|
|
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 contracts 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 selling, general and administrative expenses in the Company’s Consolidated Income Statements.
The following table presents the change in the Level 3 contingent purchase price payment liability during
2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
2.2
|
|
|
$
|
4.0
|
|
Payments
|
(0.6
|
)
|
|
(0.6
|
)
|
Adjustments included in earnings
|
—
|
|
|
(1.2
|
)
|
Balance at end of year
|
$
|
1.6
|
|
|
$
|
2.2
|
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additional information with respect to assumptions used to value the contingent purchase price payment liability as of
January 29, 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 following table shows the fair value of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a nonrecurring basis (consisting principally of property, plant and equipment) during
2016
,
2015
and 2014, and the total impairments recorded as a result of the remeasurement process:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Fair Value Measurement Using
|
|
Fair Value
As Of
Impairment Date
|
|
Total
Impairments
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
2016
|
N/A
|
|
N/A
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
10.1
|
|
2015
|
N/A
|
|
N/A
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
11.4
|
|
2014
|
N/A
|
|
N/A
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
29.7
|
|
Long-lived assets with carrying amounts of
$10.5
million,
$12.8
million and
$13.3
million were written down to fair values of
$0.4
million,
$1.4
million and
$1.3
million during 2016, 2015 and 2014, respectively, in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using sales trends and market participant assumptions. The
$10.1
million impairment charge recorded in 2016 was included in selling, general and administrative expenses, of which
$1.0
million was recorded in the Calvin Klein North America segment,
$3.7
million was recorded in the Calvin Klein International segment,
$1.4
million was recorded in the Tommy Hilfiger North America segment and
$4.0
million was recorded in the Tommy Hilfiger International segment. The
$11.4
million impairment charge recorded in 2015 was included in selling, general and administrative expenses, of which
$2.0
million was recorded in the Calvin Klein North America segment,
$3.1
million was recorded in the Calvin Klein International segment and
$6.3
million was recorded in the Tommy Hilfiger International segment. The
$12.0
million impairment charge recorded in 2014 was included in selling, general and administrative expenses, of which
$0.1
million was recorded in the Calvin Klein North America segment,
$3.8
million was recorded in the Calvin Klein International segment,
$3.4
million was recorded in the Tommy Hilfiger North America segment,
$1.7
million was recorded in the Tommy Hilfiger International segment and
$3.0
million was recorded in the Heritage Brands Retail segment.
Long-lived assets with a carrying amount of
$5.8
million and goodwill of
$11.9
million were written down to a fair value of
zero
during 2014 in connection with the exit from the Company’s Izod retail business. The impairment charge was included in selling, general and administrative expenses in the Heritage Brands Retail segment.
The Company is deemed to have guaranteed lease payments for substantially all G. H. Bass & Co. (“Bass”) retail stores included in the sale of substantially all of the assets of the Company’s Bass business in the fourth quarter of 2013 pursuant to the terms of noncancelable leases expiring on various dates through
2022
. These obligations deemed to be guaranteed include minimum rent payments and relate to leases that commenced prior to the sale of the Bass assets. In certain instances, the Company’s obligations remain in effect when an option is exercised to extend the term of the lease. The estimated fair value of these obligations as of
January 29, 2017
and
January 31, 2016
was $
1.1
million and
$1.9
million, respectively, which was included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets. The Company classifies these
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
as Level 3 measurements. The fair value of such obligations was determined using the discounted cash flow method, based on the lease payments, the estimated probability of lease extensions and estimates of the risk of default by the buyer of the Bass assets, and was discounted using rates of return that account for the relative risks of the estimated future cash flows.
The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
$
|
730.1
|
|
|
$
|
730.1
|
|
|
$
|
556.4
|
|
|
$
|
556.4
|
|
Short-term borrowings
|
19.1
|
|
|
19.1
|
|
|
25.9
|
|
|
25.9
|
|
Long-term debt (including portion classified as current)
|
3,197.3
|
|
|
3,248.7
|
|
|
3,168.3
|
|
|
3,190.5
|
|
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 year. 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.
12. RETIREMENT AND BENEFIT PLANS
The Company has
five
qualified defined benefit pension plans as of
January 29, 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. During 2002, the postretirement plan was amended to eliminate the Company contribution, which partially subsidized benefits, for active participants who, as of January 1, 2003, had not attained age
55
and
10
years of service. As a result of the Company’s acquisition of The Warnaco Group, Inc. (“Warnaco”) in 2013, the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. This plan was frozen on January 1, 2014. The Company refers to these two plans as its “Postretirement Plans.”
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reconciliations of the changes in the projected benefit obligation (Pension Plans and SERP Plans) and the accumulated benefit obligation (Postretirement Plans) for each of the last two years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
SERP Plans
|
|
Postretirement Plans
|
(In millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
651.7
|
|
|
$
|
734.8
|
|
|
$
|
88.6
|
|
|
$
|
98.5
|
|
|
$
|
15.8
|
|
|
$
|
18.1
|
|
Service cost
|
24.4
|
|
|
29.9
|
|
|
4.3
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
Interest cost
|
29.8
|
|
|
27.8
|
|
|
3.9
|
|
|
3.7
|
|
|
0.5
|
|
|
0.6
|
|
Benefit payments
|
(75.6
|
)
|
|
(49.1
|
)
|
|
(8.5
|
)
|
|
(10.1
|
)
|
|
—
|
|
|
—
|
|
Benefit payments, net of retiree contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.9
|
)
|
|
(1.9
|
)
|
Medicare subsidy
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.0
|
|
|
0.0
|
|
Actuarial gain
|
(2.8
|
)
|
|
(91.7
|
)
|
|
(0.7
|
)
|
|
(9.1
|
)
|
|
(3.0
|
)
|
|
(1.0
|
)
|
Balance at end of year
|
$
|
627.5
|
|
|
$
|
651.7
|
|
|
$
|
87.6
|
|
|
$
|
88.6
|
|
|
$
|
11.4
|
|
|
$
|
15.8
|
|
In 2016 and 2015, benefit payments from the Pension Plans include lump sum payments, as certain vested participants, whose employment has been terminated, were offered an opportunity to elect a lump sum payment of their accrued pension benefit from the Pension Plans. Such payments totaling $
44.8
million and $
20.1
million were made in 2016 and 2015, respectively, using assets from the Pension Plans. The lump sum payments resulted in settlements of the Company’s benefit obligation. The actuarial gains in 2015 were due principally to increases in the discount rates.
Reconciliations of the fair value of the assets held by the Pension Plans and the funded status for each of the last two years were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Fair value of plan assets at beginning of year
|
$
|
567.4
|
|
|
$
|
654.8
|
|
Actual return (loss), net of plan expenses
|
67.7
|
|
|
(39.8
|
)
|
Benefit payments
|
(75.6
|
)
|
|
(49.1
|
)
|
Company contributions
|
100.0
|
|
|
1.5
|
|
Fair value of plan assets at end of year
|
$
|
659.5
|
|
|
$
|
567.4
|
|
Funded status at end of year
|
$
|
32.0
|
|
|
$
|
(84.3
|
)
|
Amounts recognized in the Company’s Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
SERP Plans
|
|
Postretirement Plans
|
(In millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Noncurrent assets
|
$
|
32.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
—
|
|
|
—
|
|
|
(8.5
|
)
|
|
(7.5
|
)
|
|
(1.5
|
)
|
|
(1.9
|
)
|
Non-current liabilities
|
(0.6
|
)
|
|
(84.3
|
)
|
|
(79.1
|
)
|
|
(81.1
|
)
|
|
(9.9
|
)
|
|
(13.9
|
)
|
Net amount recognized
|
$
|
32.0
|
|
|
$
|
(84.3
|
)
|
|
$
|
(87.6
|
)
|
|
$
|
(88.6
|
)
|
|
$
|
(11.4
|
)
|
|
$
|
(15.8
|
)
|
Pre-tax amounts in AOCL that had not yet been recognized as components of net benefit cost in the Pension Plans, SERP Plans and Postretirement Plans were immaterial as of January 29, 2017 and January 31, 2016.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pre-tax amounts in AOCL as of
January 29, 2017
expected to be recognized as components of net benefit cost in 2017 in the Pension Plans, SERP Plans and Postretirement Plans were immaterial.
The assets of the Pension Plans are invested with the objective of being able to meet current and future benefit payment needs, while controlling future contributions. The assets of the Pension Plans are diversified among United States equities, international equities, fixed income investments and cash. The strategic target allocation for the majority of the Pension Plans as of
January 29, 2017
was approximately
40%
United States equities,
20%
international equities and
40%
fixed income investments and cash. Equity securities primarily include investments in large-, mid- and small-cap companies located in the United States and abroad. Fixed income securities include corporate bonds of companies from diversified industries, municipal bonds, collective funds and United States Treasury bonds. Actual investment allocations may vary from the Company’s target investment allocations due to prevailing market conditions.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In accordance with the fair value hierarchy described in
Note 11
, “Fair Value Measurements,” the following tables show the fair value of the total assets of the Pension Plans for each major category as of
January 29, 2017
and
January 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Fair Value Measurements as of
January 29, 2017
(8)
|
Asset Category
|
|
Total
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
Equity securities:
|
|
|
|
|
|
|
|
|
United States equities
(1)
|
|
$
|
193.0
|
|
|
$
|
193.0
|
|
|
$
|
—
|
|
|
—
|
|
International equities
(1)
|
|
12.2
|
|
|
12.2
|
|
|
—
|
|
|
—
|
|
United States equity fund
(2)
|
|
51.6
|
|
|
—
|
|
|
51.6
|
|
|
—
|
|
International equity funds
(3)
|
|
130.5
|
|
|
70.4
|
|
|
60.1
|
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
(4)
|
|
63.3
|
|
|
—
|
|
|
63.3
|
|
|
—
|
|
Corporate securities
(4)
|
|
181.0
|
|
|
—
|
|
|
181.0
|
|
|
—
|
|
Short-term investment funds
(5)
|
|
18.9
|
|
|
—
|
|
|
18.9
|
|
|
—
|
|
Total return mutual fund
(6)
|
|
5.6
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
Subtotal
|
|
$
|
656.1
|
|
|
$
|
281.2
|
|
|
$
|
374.9
|
|
|
—
|
|
Other assets and liabilities
(7)
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
659.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Fair Value Measurements as of
January 31, 2016
(8)
|
Asset Category
|
|
Total
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
Equity securities:
|
|
|
|
|
|
|
|
|
United States equities
(1)
|
|
$
|
155.9
|
|
|
$
|
155.9
|
|
|
$
|
—
|
|
|
—
|
|
International equities
(1)
|
|
13.2
|
|
|
13.2
|
|
|
—
|
|
|
—
|
|
United States equity fund
(2)
|
|
34.1
|
|
|
—
|
|
|
34.1
|
|
|
—
|
|
International equity funds
(3)
|
|
101.8
|
|
|
68.4
|
|
|
33.4
|
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
(4)
|
|
64.1
|
|
|
—
|
|
|
64.1
|
|
|
—
|
|
Corporate securities
(4)
|
|
176.2
|
|
|
—
|
|
|
176.2
|
|
|
—
|
|
Short-term investment funds
(5)
|
|
13.8
|
|
|
—
|
|
|
13.8
|
|
|
—
|
|
Total return mutual fund
(6)
|
|
5.1
|
|
|
5.1
|
|
|
—
|
|
|
—
|
|
Subtotal
|
|
$
|
564.2
|
|
|
$
|
242.6
|
|
|
$
|
321.6
|
|
|
—
|
|
Other assets and liabilities
(7)
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
567.4
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Valued at the closing price or unadjusted quoted price in the active market in which the individual securities are traded.
|
|
|
(2)
|
Valued at the net asset value of the fund, as determined by a pricing vendor or the fund family. The Company has the ability to redeem this investment at net asset value within the near term and therefore classifies this investment within Level 2. This commingled fund invests in United States large cap equities that track the Russell 1000 Index.
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
(3)
|
Valued at the net asset value of the funds, either as determined by the closing price in the active market in which the individual fund is traded and classified within Level 1, or as determined by a pricing vendor or the fund family and classified within Level 2. This category includes funds that invest in equities of companies outside of the United States.
|
|
|
(4)
|
Valued with bid evaluation pricing where the inputs are based on actual trades in active markets, when available, as well as observable market inputs that include actual and comparable trade data, market benchmarks, broker quotes, trading spreads and/or other applicable data.
|
|
|
(5)
|
Valued at the net asset value of the funds, as determined by a pricing vendor or the fund family. The Company has the ability to redeem these investments at net asset value within the near term and therefore classifies these investments within Level 2. These funds invest in high-grade, short-term, money market instruments.
|
|
|
(6)
|
Valued at the net asset value of the fund, as determined by the closing price in the active market in which the individual fund is traded. This fund invests in both equity securities and fixed income securities.
|
|
|
(7)
|
This category includes other pension assets and liabilities such as pending trades and accrued income.
|
|
|
(8)
|
The Company uses third party pricing services to determine the fair values of the financial instruments held by the Pension Plans. The Company obtains an understanding of the pricing services’ valuation methodologies and related inputs and validates a sample of prices provided by the pricing services by reviewing prices from other pricing sources and analyzing pricing data in certain instances. The Company has not adjusted any prices received from the third party pricing services.
|
The Company believes that there are no significant concentrations of risk within the plan assets as of
January 29, 2017
.
In 2016, two of the Company’s Pension Plans had projected benefit obligations in excess of plan assets and one of the Company’s Pension Plans had accumulated benefit obligations in excess of plan assets. In 2015, all of the Pension Plans had projected benefit obligations and accumulated benefit obligations in excess of plan assets. The balances were as follows:
|
|
|
|
|
|
|
|
|
(In millions, except plan count)
|
2016
|
|
2015
|
Number of plans with projected benefit obligations in excess of plan assets
|
2
|
|
|
5
|
|
Aggregate projected benefit obligation
|
$
|
34.6
|
|
|
$
|
651.7
|
|
Aggregate fair value of related plan assets
|
$
|
34.0
|
|
|
$
|
567.4
|
|
|
|
|
|
Number of plans with accumulated benefit obligations in excess of plan assets
|
1
|
|
|
5
|
|
Aggregate accumulated benefit obligation
|
$
|
3.3
|
|
|
$
|
610.7
|
|
Aggregate fair value of related plan assets
|
$
|
3.1
|
|
|
$
|
567.4
|
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of net benefit cost and other pre-tax amounts recognized in other comprehensive loss in each of the last three years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Benefit Cost Recognized in Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
SERP Plans
|
|
Postretirement Plans
|
(In millions)
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost, including plan expenses
|
|
$
|
25.2
|
|
|
$
|
30.6
|
|
|
$
|
20.0
|
|
|
$
|
4.4
|
|
|
$
|
5.6
|
|
|
$
|
4.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
29.8
|
|
|
27.8
|
|
|
28.5
|
|
|
3.9
|
|
|
3.7
|
|
|
4.0
|
|
|
0.5
|
|
|
0.6
|
|
|
0.8
|
|
Actuarial (gain) loss
|
|
(35.4
|
)
|
|
(10.1
|
)
|
|
121.8
|
|
|
(0.7
|
)
|
|
(9.1
|
)
|
|
13.9
|
|
|
(3.0
|
)
|
|
(1.0
|
)
|
|
3.2
|
|
Expected return on plan assets
|
|
(35.9
|
)
|
|
(42.5
|
)
|
|
(43.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(0.8
|
)
|
Total
|
|
$
|
(16.3
|
)
|
|
$
|
5.8
|
|
|
$
|
126.8
|
|
|
$
|
7.5
|
|
|
$
|
0.1
|
|
|
$
|
22.3
|
|
|
$
|
(2.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
SERP Plans
|
|
Postretirement Plans
|
(In millions)
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Amortization of prior service (cost) credit
|
|
$
|
(0.0
|
)
|
|
$
|
(0.0
|
)
|
|
$
|
(0.0
|
)
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
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. The expected benefit payments associated with the Pension Plans and SERP Plans, and expected benefit payments, net of retiree contributions, associated with the Postretirement Plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Fiscal Year
|
|
Pension Plans
|
|
SERP Plans
|
|
Postretirement Plans
|
2017
|
|
$
|
29.8
|
|
|
$
|
8.5
|
|
|
$
|
1.5
|
|
2018
|
|
30.3
|
|
|
6.7
|
|
|
1.4
|
|
2019
|
|
30.7
|
|
|
6.8
|
|
|
1.3
|
|
2020
|
|
31.3
|
|
|
7.6
|
|
|
1.2
|
|
2021
|
|
32.1
|
|
|
7.9
|
|
|
1.1
|
|
2022-2026
|
|
175.0
|
|
|
46.7
|
|
|
4.2
|
|
The medical health care cost trend rate assumed for 2017 is
7.83%
and is assumed to decrease by approximately
0.17%
per year through 2038. Thereafter, the rate assumed is
4.48%
. If the assumed health care cost trend rate increased or decreased by
1%
, the aggregate effect on the service and interest cost components of the net postretirement benefit cost for
2016
and on the accumulated postretirement benefit obligation at
January 29, 2017
would be as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
1% Increase
|
|
1% Decrease
|
Impact on service and interest cost
|
$
|
0.0
|
|
|
$
|
(0.0
|
)
|
Impact on year end accumulated postretirement benefit obligation
|
0.7
|
|
|
(0.6
|
)
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant weighted average rate assumptions used in determining the projected and accumulated benefit obligations at the end of each year and benefit cost in the following year were as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate (applies to Pension Plans and SERP Plans)
|
4.59
|
%
|
|
4.72
|
%
|
|
3.94
|
%
|
Discount rate (applies to Postretirement Plans)
|
4.04
|
%
|
|
4.28
|
%
|
|
3.53
|
%
|
Rate of increase in compensation levels (applies to Pension Plans)
|
4.27
|
%
|
|
4.22
|
%
|
|
4.28
|
%
|
Long-term rate of return on assets (applies to Pension Plans)
|
6.50
|
%
|
|
6.50
|
%
|
|
6.75
|
%
|
To develop the expected weighted average long-term rate of return on assets assumption, the Company considered the historical level of the risk premium associated with the asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
The Company has savings and retirement plans and a supplemental savings plan for the benefit of its eligible employees in the United States who elect to participate. The Company matches a portion of employee contributions to the plans. The Company also has a defined contribution plan for certain employees associated with certain businesses acquired in the Tommy Hilfiger acquisition, whereby the Company pays a percentage of the contribution for the employee. The Company’s contributions to these plans were
$19.7
million,
$18.2
million and
$20.3
million in
2016
,
2015
and
2014
, respectively.
13. STOCKHOLDERS’ EQUITY
Acquisition of Treasury Shares
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
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. 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 2016 and 2015, the Company purchased
3.2
million shares and
1.3
million shares, respectively, of its common stock under the program in open market transactions for $
315.1
million and $
126.2
million, respectively. As of January 29, 2017, the repurchased shares were held as treasury stock and $
58.7
million of the authorization remained available for future share repurchases.
Treasury stock activity also includes shares that were withheld in conjunction with the settlement of vested restricted stock, restricted stock units and performance share units to satisfy tax withholding requirements.
Common Stock Dividends
During each of
2016
,
2015
and
2014
, the Company paid
four
$0.0375
per share cash dividends on its common stock.
14. 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.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
January 29, 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.
Total shares available for grant at
January 29, 2017
amounted to
7.0
million shares.
Net income for
2016
,
2015
and
2014
included $
38.2
million,
$42.0
million and
$48.7
million, respectively, of pre-tax expense related to stock-based compensation, with recognized income tax benefits of $
11.5
million, $
10.7
million and $
12.7
million, respectively.
The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions were $
6.6
million,
$10.2
million and
$20.1
million in
2016
,
2015
and
2014
, respectively. Of those amounts, $
0.9
million,
$5.5
million and
$11.0
million, respectively, were reported as excess tax benefits. Excess tax benefits arise when the actual tax benefit resulting from a stock plan award transaction exceeds the tax benefit associated with the grant date fair value of the related stock award.
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, net of estimated forfeitures, is expensed over the options’ vesting periods.
The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted average risk-free interest rate
|
1.45
|
%
|
|
1.54
|
%
|
|
2.15
|
%
|
Weighted average expected option term (in years)
|
6.25
|
|
|
6.25
|
|
|
6.25
|
|
Weighted average Company volatility
|
34.54
|
%
|
|
36.26
|
%
|
|
44.12
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per option
|
$
|
35.62
|
|
|
$
|
40.20
|
|
|
$
|
56.21
|
|
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.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving option grants, mainly due to acquisitions. The Company will continue to evaluate the appropriateness of utilizing such method.
Service-based stock option activity for the year was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except years and per option data)
|
Options
|
|
Weighted Average Exercise
Price Per Option
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at January 31, 2016
|
1,443
|
|
|
$
|
70.79
|
|
|
5.3
|
|
$
|
26,643
|
|
Granted
|
237
|
|
|
99.59
|
|
|
|
|
|
|
Exercised
|
201
|
|
|
66.05
|
|
|
|
|
|
|
Cancelled
|
13
|
|
|
108.65
|
|
|
|
|
|
|
Outstanding at January 29, 2017
|
1,466
|
|
|
$
|
75.74
|
|
|
5.3
|
|
$
|
34,996
|
|
Exercisable at January 29, 2017
|
1,009
|
|
|
$
|
61.90
|
|
|
3.9
|
|
$
|
34,996
|
|
As of
January 29, 2017
, any service-based stock options that were outstanding but not yet exercisable had an intrinsic value of
zero
.
The aggregate grant date fair value of service-based options granted during
2016
,
2015
and
2014
was $
8.4
million,
$7.0
million and
$7.9
million, respectively.
The aggregate grant date fair value of service-based options that vested during
2016
,
2015
and
2014
was $
6.9
million,
$7.2
million and
$9.8
million, respectively.
The aggregate intrinsic value of service-based options exercised was $
6.9
million,
$8.4
million and
$15.6
million in
2016
,
2015
and
2014
, respectively.
At
January 29, 2017
, there was $
12.1
million of unrecognized pre-tax compensation expense, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted average period of
1.6
years.
Restricted Stock Units
RSUs granted to employees in 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, net of estimated forfeitures, over the RSUs’ vesting periods.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
RSU activity for the year was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per RSU data)
|
RSUs
|
|
Weighted Average
Grant Date
Fair Value Per RSU
|
Non-vested at January 31, 2016
|
653
|
|
|
$
|
111.61
|
|
Granted
|
394
|
|
|
98.29
|
|
Vested
|
159
|
|
|
108.88
|
|
Cancelled
|
76
|
|
|
108.61
|
|
Non-vested at January 29, 2017
|
812
|
|
|
$
|
105.96
|
|
The aggregate grant date fair value of RSUs granted during
2016
,
2015
and
2014
was $
38.8
million,
$31.7
million and
$29.3
million, respectively. The aggregate grant date fair value of RSUs vested during
2016
,
2015
and
2014
was $
17.3
million,
$18.1
million and
$18.5
million, respectively.
At
January 29, 2017
, there was $
45.1
million of unrecognized pre-tax compensation expense, net of estimated forfeitures, related to non-vested RSUs, which is expected to be recognized over a weighted average period of
1.7
years.
Performance Share Units
The Company granted contingently issuable PSUs to certain of the Company’s senior executives during 2013 and 2014 subject to the achievement of an earnings per share goal for the two-year performance period beginning with the year of grant and a service period of one year beyond the certification of performance. For the awards granted in 2014, the two-year performance period has ended and the holders did not earn any shares based on earnings per share growth over the performance period. For the awards granted in 2013, the holders earned an aggregate of
26,000
shares, which were paid out in 2016. For such awards, the Company recorded expense ratably over each applicable vesting period based on fair value and the Company’s expectations of the probable number of shares to be issued. The fair value of these contingently issuable PSUs was equal to the closing price of the Company’s common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Company’s common stock during the performance cycle, as these contingently issuable PSUs did not accrue dividends prior to the completion of the performance cycle.
In addition, the Company granted contingently issuable PSUs to certain of the Company’s executives during 2013 and to certain of the Company’s senior executives during 2015 and 2016 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. For the awards granted in 2013, the performance period ended on May 5, 2016 and the holders did not earn any shares, as the Company did not achieve either of the threshold performance levels required for payout. The Company records expense ratably over the applicable vesting period, net of estimated forfeitures, regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in 2016 and 2015 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.04
|
%
|
|
0.90
|
%
|
Expected Company volatility
|
28.33
|
%
|
|
29.10
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per PSU
|
$
|
87.16
|
|
|
$
|
101.23
|
|
Certain of the awards granted in 2016 are subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted
12.99%
for the restriction of liquidity.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PSU activity for the year was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per PSU data)
|
PSUs
|
|
Weighted Average
Grant Date
Fair Value Per PSU
|
Non-vested at January 31, 2016
|
493
|
|
|
$
|
121.41
|
|
Granted
|
79
|
|
|
87.16
|
|
Vested
|
26
|
|
|
114.77
|
|
Cancelled
|
421
|
|
|
124.01
|
|
Non-vested at January 29, 2017
|
125
|
|
|
$
|
92.32
|
|
The aggregate grant date fair value of PSUs granted during 2016, 2015 and 2014 was $
6.9
million,
$4.6
million and
$10.4
million, respectively. The aggregate grant date fair value of PSUs vested during 2016 and 2015 was $
3.0
million and
$4.8
million, respectively. No PSUs vested during 2014. PSUs in the above table and the aggregate grant date fair value amounts reflect (i) PSUs subject to market conditions at the target level, which is consistent with how expense will be recorded, regardless of the numbers of shares actually earned; and (ii) PSUs that are not subject to market conditions at the maximum level.
At
January 29, 2017
, there was $
7.1
million of unrecognized pre-tax compensation expense, net of estimated forfeitures, related to non-vested PSUs, which is expected to be recognized over a weighted average period of
2.0
years.
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in AOCL, net of related taxes, by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign currency translation adjustments
|
|
Retirement liability adjustment
|
|
Net unrealized and realized gain on effective cash flow hedges
|
|
Total
|
Balance at February 1, 2015
|
$
|
(496.2
|
)
|
|
$
|
0.4
|
|
|
$
|
79.3
|
|
|
$
|
(416.5
|
)
|
Other comprehensive (loss) income before reclassifications
|
(234.3
|
)
|
|
—
|
|
|
33.1
|
|
|
(201.2
|
)
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
0.3
|
|
|
86.2
|
|
|
86.5
|
|
Other comprehensive loss
|
(234.3
|
)
|
|
(0.3
|
)
|
|
(53.1
|
)
|
|
(287.7
|
)
|
Balance at January 31, 2016
|
$
|
(730.5
|
)
|
|
$
|
0.1
|
|
|
$
|
26.2
|
|
|
$
|
(704.2
|
)
|
Other comprehensive (loss) income before reclassifications
|
(63.8
|
)
|
(1)
|
—
|
|
|
5.2
|
|
|
(58.6
|
)
|
Less: Amounts reclassified from AOCL
|
(56.7
|
)
|
(2)
|
0.2
|
|
|
4.5
|
|
|
(52.0
|
)
|
Other comprehensive (loss) income
|
(7.1
|
)
|
|
(0.2
|
)
|
|
0.7
|
|
|
(6.6
|
)
|
Balance at January 29, 2017
|
$
|
(737.6
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
26.9
|
|
|
$
|
(710.8
|
)
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents reclassifications out of AOCL to earnings:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Amount Reclassified from AOCL
|
|
Amount Reclassified from AOCL
|
|
Affected Line Item in the Company’s Consolidated Income Statements
|
|
2016
|
|
2015
|
|
|
Realized gain (loss) on effective cash flow hedges:
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
14.0
|
|
|
$
|
92.1
|
|
|
Cost of goods sold
|
Interest rate contracts
|
(12.1
|
)
|
|
(3.7
|
)
|
|
Interest expense
|
Less: Tax effect
|
(2.6
|
)
|
|
2.2
|
|
|
Income tax expense
|
Total, net of tax
|
$
|
4.5
|
|
|
$
|
86.2
|
|
|
|
|
|
|
|
|
|
Amortization of retirement liability items:
|
|
|
|
|
|
Prior service credit
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
Selling, general and administrative expenses
|
Less: Tax effect
|
0.2
|
|
|
0.2
|
|
|
Income tax expense
|
Total, net of tax
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Mexico deconsolidation
|
$
|
(56.7
|
)
|
(2)
|
$
|
—
|
|
|
Other noncash gain, net
|
Less: Tax effect
|
—
|
|
|
—
|
|
|
Income tax expense
|
Total, net of tax
|
$
|
(56.7
|
)
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Foreign currency translation adjustment losses included a net gain on net investment hedge of $
14.1
million.
|
|
|
(2)
|
Foreign currency translation adjustment losses were reclassified from AOCL during the fourth quarter of 2016 in connection with the Mexico deconsolidation. Please see
Note 5
, “Investments in Unconsolidated Affiliates,” for a further discussion.
|
16. LEASES
The Company leases retail locations, warehouses, showrooms, office space, equipment and a factory in Ethiopia. The leases, excluding equipment leases, generally provide for the payment of real estate taxes and certain other occupancy expenses. Retail location leases generally are renewable and provide for the payment of percentage rentals based on location sales and other costs associated with the leased property.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At
January 29, 2017
, minimum annual rental commitments under non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Capital
Leases
|
|
Operating
Leases
|
|
Total
|
2017
|
$
|
4.7
|
|
|
$
|
457.6
|
|
|
$
|
462.3
|
|
2018
|
3.9
|
|
|
394.3
|
|
|
398.2
|
|
2019
|
2.9
|
|
|
327.5
|
|
|
330.4
|
|
2020
|
2.0
|
|
|
266.9
|
|
|
268.9
|
|
2021
|
1.8
|
|
|
221.2
|
|
|
223.0
|
|
Thereafter
|
4.0
|
|
|
697.6
|
|
|
701.6
|
|
Total minimum lease payments
|
$
|
19.3
|
|
|
$
|
2,365.1
|
|
|
$
|
2,384.4
|
|
Less: Amount representing interest
|
(2.9
|
)
|
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
$
|
16.4
|
|
|
|
|
|
|
|
The Company’s retail location leases represent $
1,575.8
million of the total minimum lease payments. The Company’s administrative offices and showrooms located in New York, New York represent $
465.9
million of the total minimum lease payments. The Company’s Europe headquarters and showrooms, the largest of which are located in Amsterdam, the Netherlands, represent $
114.2
million of the total minimum lease payments.
At
January 29, 2017
, aggregate future minimum rentals to be received under non-cancelable capital and operating subleases were $
2.1
million and $
3.0
million, respectively.
Rent expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Minimum
|
$
|
437.0
|
|
|
$
|
413.8
|
|
|
$
|
434.5
|
|
Percentage and other
|
143.0
|
|
|
146.7
|
|
|
158.8
|
|
Less: Sublease rental income
|
(4.9
|
)
|
|
(4.6
|
)
|
|
(4.9
|
)
|
Total
|
$
|
575.1
|
|
|
$
|
555.9
|
|
|
$
|
588.4
|
|
The gross book value of assets under capital leases, which are classified within property, plant and equipment in the Company’s Consolidated Balance Sheets, amounted to $
30.1
million and
$25.1
million as of
January 29, 2017
and
January 31, 2016
, respectively. Accumulated amortization related to assets under capital leases amounted to $
13.5
million and
$10.1
million as of
January 29, 2017
and
January 31, 2016
, respectively. The Company includes amortization of assets under capital leases in depreciation and amortization expense. The Company did not incur any expense in percentage rentals under capital leases during the years ended
January 29, 2017
and
January 31, 2016
.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. NET INCOME PER COMMON SHARE
The Company computed its basic and diluted net income per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
2016
|
|
2015
|
|
2014
|
Net income attributable to PVH Corp.
|
$
|
549.0
|
|
|
$
|
572.4
|
|
|
$
|
439.0
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
80.2
|
|
|
82.4
|
|
|
82.4
|
|
Weighted average impact of dilutive securities
|
0.7
|
|
|
0.7
|
|
|
0.9
|
|
Total shares for diluted net income per common share
|
80.9
|
|
|
83.1
|
|
|
83.3
|
|
|
|
|
|
|
|
Basic net income per common share attributable to PVH Corp.
|
$
|
6.84
|
|
|
$
|
6.95
|
|
|
$
|
5.33
|
|
|
|
|
|
|
|
Diluted net income per common share attributable to PVH Corp.
|
$
|
6.79
|
|
|
$
|
6.89
|
|
|
$
|
5.27
|
|
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Weighted average potentially dilutive securities
|
0.8
|
|
|
0.6
|
|
|
0.4
|
|
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
January 29, 2017
,
January 31, 2016
and
February 1, 2015
and, therefore, were excluded from the calculation of diluted net income per common share for each applicable year. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was
0.3
million,
0.9
million and
0.9
million as of
January 29, 2017
,
January 31, 2016
and
February 1, 2015
, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
18. NONCASH INVESTING AND FINANCING TRANSACTIONS
Omitted from the Company’s Consolidated Statement of Cash Flows for
2016
were capital expenditures related to property, plant and equipment of $
35.6
million, which will not be paid until 2017. The Company paid
$24.5
million in cash during
2016
related to property, plant and equipment that was acquired in
2015
. This amount was omitted from the Company’s Consolidated Statement of Cash Flows for
2015
. The Company paid
$17.0
million in cash during
2015
related to property, plant and equipment that was acquired in
2014
. This amount was omitted from the Company’s Consolidated Statement of Cash Flows for
2014
.
Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statements of Cash Flows for
2016
,
2015
and
2014
were $
6.8
million,
$4.3
million and
$4.2
million, respectively, of assets acquired through capital leases.
Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statement of Cash Flows for 2015 was
$4.1
million of leasehold improvements paid for directly by the lessor as a lease incentive to the Company.
The Company recorded increases to goodwill of $
52.6
million,
$51.7
million and
$50.5
million during
2016
,
2015
and
2014
, 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
2016
,
2015
and
2014
, the Company paid $
53.1
million,
$50.7
million and
$51.1
million, respectively, in cash related to contingent purchase price payments to Mr. Calvin Klein that were recorded as additions to goodwill during the periods the liabilities were incurred.
The Company completed during 2016 the acquisition of TH China. Included in the acquisition consideration was the elimination of a $
2.8
million pre-acquisition receivable owed to the Company by TH China.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company recorded during 2016 a loss of $
11.2
million to write-off previously capitalized debt issuance costs in connection with the amendment of its credit facilities.
The Company recorded during 2014 a loss of $
17.5
million to write-off previously capitalized debt issuance costs in connection with the amendment and restatement of its senior secured credit facilities and the related redemption of its
7 3/8%
senior notes due 2020.
Omitted from investments in unconsolidated affiliates in the Company’s Consolidated Statement of Cash Flows for 2016 was a noncash increase in the investment balance related to the Company’s PVH Mexico joint venture of $
64.3
million resulting from the deconsolidation of the Mexico business during 2016. Please see
Note 5
, “Investments in Unconsolidated Affiliates” for further discussion.
Omitted from investments in unconsolidated affiliates in the Company’s Consolidated Statement of Cash Flows for 2014 were noncash increases in the investment balances related to the Company’s Calvin Klein Australia joint venture and Calvin Klein India joint venture of $
3.7
million and $
6.2
million, respectively, resulting from the deconsolidation of the Australia business and CK India during 2014. Please see
Note 5
, “Investments in Unconsolidated Affiliates,” and
Note 6
, “Redeemable Non-Controlling Interests,” for further discussion.
19. SEGMENT DATA
The Company manages its operations through its operating divisions, which are presented as
six
reportable segments: (i) Calvin Klein North America; (ii) Calvin Klein International; (iii) Tommy Hilfiger North America; (iv) Tommy Hilfiger International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.
Calvin Klein North America Segment
- This segment consists of the 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 North America, 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 brand names
CALVIN KLEIN
,
CALVIN KLEIN 205 W39 NYC
and
CK Calvin Klein
for a broad array of products and retail services 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 of
CALVIN KLEIN,
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 brand names
CALVIN KLEIN 205 W39 NYC
,
CK Calvin Klein
and
CALVIN KLEIN
for a broad array of products and retail services outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in unconsolidated Calvin Klein foreign affiliates in Australia and India.
Tommy Hilfiger North America Segment
- This segment consists of the 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 North America, 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 North America, 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 name 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.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 of
Tommy Hilfiger
, 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 name 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 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 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 2
, “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, 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 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
.
The Company exited the Izod retail business in the third quarter of 2015. As of the end of 2015, the Company’s Heritage Brands retail business primarily consisted of its
Van Heusen
stores but, beginning in 2015, the Company started offering a limited selection of
IZOD Golf
,
Warner’s
and
Speedo
products in some of its Heritage Brands stores. A majority of the Company’s Heritage Brands stores now offer a broad selection of
Van Heusen
men’s and women’s apparel with limited selections of these other brands, some of which feature multiple brand names on the door signage.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables present summarized information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2016
|
(1)
|
2015
|
(1)
|
2014
|
|
Revenue – Calvin Klein North America
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,513.0
|
|
|
$
|
1,457.0
|
|
|
$
|
1,391.1
|
|
|
Royalty revenue
|
|
131.7
|
|
|
133.7
|
|
|
115.6
|
|
|
Advertising and other revenue
|
|
45.2
|
|
|
44.0
|
|
|
44.1
|
|
|
Total
|
|
1,689.9
|
|
|
1,634.7
|
|
|
1,550.8
|
|
|
|
|
|
|
|
|
|
|
Revenue – Calvin Klein International
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
1,346.2
|
|
|
1,183.4
|
|
|
1,198.8
|
|
|
Royalty revenue
|
|
72.9
|
|
|
78.2
|
|
|
78.6
|
|
|
Advertising and other revenue
|
|
26.2
|
|
|
26.3
|
|
|
30.6
|
|
|
Total
|
|
1,445.3
|
|
|
1,287.9
|
|
|
1,308.0
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger North America
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
1,502.4
|
|
|
1,567.6
|
|
|
1,595.6
|
|
|
Royalty revenue
|
|
48.9
|
|
|
42.4
|
|
|
30.2
|
|
|
Advertising and other revenue
|
|
12.0
|
|
|
12.7
|
|
|
10.0
|
|
|
Total
|
|
1,563.3
|
|
|
1,622.7
|
|
|
1,635.8
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger International
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
1,899.4
|
|
|
1,693.6
|
|
|
1,886.1
|
|
|
Royalty revenue
|
|
44.5
|
|
|
49.3
|
|
|
56.2
|
|
|
Advertising and other revenue
|
|
3.6
|
|
|
3.9
|
|
|
3.7
|
|
|
Total
|
|
1,947.5
|
|
|
1,746.8
|
|
|
1,946.0
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Wholesale
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
1,271.6
|
|
|
1,387.6
|
|
|
1,425.1
|
|
|
Royalty revenue
|
|
20.3
|
|
|
19.0
|
|
|
17.2
|
|
|
Advertising and other revenue
|
|
3.9
|
|
|
2.9
|
|
|
2.7
|
|
|
Total
|
|
1,295.8
|
|
|
1,409.5
|
|
|
1,445.0
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Retail
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
258.8
|
|
|
316.3
|
|
|
352.4
|
|
|
Royalty revenue
|
|
2.3
|
|
|
2.2
|
|
|
2.7
|
|
|
Advertising and other revenue
|
|
0.2
|
|
|
0.2
|
|
|
0.5
|
|
|
Total
|
|
261.3
|
|
|
318.7
|
|
|
355.6
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
7,791.4
|
|
|
7,605.5
|
|
|
7,849.1
|
|
|
Royalty revenue
|
|
320.6
|
|
|
324.8
|
|
|
300.5
|
|
|
Advertising and other revenue
|
|
91.1
|
|
|
90.0
|
|
|
91.6
|
|
|
Total
(2)
|
|
$
|
8,203.1
|
|
|
$
|
8,020.3
|
|
|
$
|
8,241.2
|
|
|
|
|
(1)
|
Revenue was impacted by the strengthening of the United States dollar against foreign currencies in which the Company transacts significant levels of business. Please see section entitled “Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for a further discussion.
|
|
|
(2)
|
No single customer accounted for more than
10%
of the Company’s revenue in
2016
,
2015
or
2014
.
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
(1)
|
|
2015
|
|
(1)
|
|
2014
|
|
|
Income before interest and taxes – Calvin Klein North America
|
$
|
123.9
|
|
|
(3)(7)(9)
|
|
$
|
226.4
|
|
|
(10)
|
|
$
|
225.6
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Calvin Klein International
|
209.6
|
|
|
(7)(9)
|
|
186.6
|
|
|
(10)
|
|
118.7
|
|
|
(13)(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger North America
|
135.8
|
|
|
(4)
|
|
173.9
|
|
|
|
|
242.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger International
|
328.3
|
|
|
(5)(6)
|
|
224.7
|
|
|
|
|
261.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Wholesale
|
90.2
|
|
|
(7)
|
|
90.4
|
|
|
(10)(11)
|
|
96.6
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before interest and taxes – Heritage Brands Retail
|
8.8
|
|
|
|
|
(3.4
|
)
|
|
(12)
|
|
(24.8
|
)
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest and taxes – Corporate
(2)
|
(107.4
|
)
|
|
(7)(8)
|
|
(138.1
|
)
|
|
(10)
|
|
(390.3
|
)
|
|
(13)(16)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
$
|
789.2
|
|
|
|
|
$
|
760.5
|
|
|
|
|
$
|
529.9
|
|
|
|
|
|
(1)
|
Income (loss) before interest and taxes was significantly impacted by the strengthening of the United States dollar against foreign currencies in which the Company transacts significant levels of business. Please see section entitled “Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for a further discussion.
|
|
|
(2)
|
Includes corporate expenses not allocated to any reportable segments, the Company’s proportionate share of the net income or loss of its investment in Karl Lagerfeld and Gazal and the results of PVH Ethiopia. Corporate expenses represent overhead operating expenses and include expenses for senior corporate management, corporate finance, information technology related to corporate infrastructure and actuarial gains and losses from the Company’s pension and other postretirement plans. Actuarial gains (losses) from the Company’s United States pension and other postretirement plans totaled $
39.1
million, $
20.2
million and $
(138.9)
million in
2016
,
2015
and
2014
, respectively.
|
|
|
(3)
|
Income before interest and taxes for 2016 included a noncash loss of $
81.8
million related to the Mexico deconsolidation. Please see
Note 5
, “Investments in Unconsolidated Affiliates” for a further discussion.
|
|
|
(4)
|
Income before interest and taxes for 2016 included costs of $
11.0
million associated with the early termination of the license agreement for the Tommy Hilfiger men’s tailored clothing business in North America in order to consolidate the men’s tailored businesses for all brands in North America under one partner (the “TH men’s tailored license termination”).
|
|
|
(5)
|
Income before interest and taxes for 2016 included a gain of $
18.1
million associated with a payment made to the Company to exit a
Tommy Hilfiger
flagship store in Europe.
|
|
|
(6)
|
Income before interest and taxes for 2016 included a noncash gain of $
153.1
million to write-up the Company’s equity investment in TH China to fair value in connection with the TH China acquisition. Partially offsetting the gain were acquisition related costs of $
76.9
million, principally consisting of valuation adjustments and amortization of short-lived assets, and a one-time cost of $
5.9
million recorded on the Company’s equity investment in TH China. Please see
Note 2
, “Acquisitions,” for a further discussion.
|
|
|
(7)
|
Income (loss) before interest and taxes for 2016 included costs of $
9.8
million associated with the integration of Warnaco and the related restructuring. Such costs were included in the Company’s segments as follows: $
0.2
million in Calvin Klein North America; $
2.6
million in Calvin Klein International; $
0.4
million in Heritage Brands Wholesale; and $
6.6
million in corporate expenses not allocated to any reportable segments.
|
|
|
(8)
|
Loss before interest and taxes for 2016 included costs of $
15.8
million related to the Company’s amendment of its credit facilities. Please see
Note 8
, “Debt,” for a further discussion.
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
(9)
|
Income before interest and taxes for 2016 included costs of $
5.5
million associated with the restructuring related to the new global creative strategy for
CALVIN KLEIN
. Such costs were included in the Company’s segments as follows: $
2.7
million in Calvin Klein North America; and $
2.8
million in Calvin Klein International.
|
|
|
(10)
|
Income (loss) before interest and taxes for 2015 includes costs of $
73.4
million associated with the integration of Warnaco and the related restructuring. Such costs were included in the Company’s segments as follows: $
8.3
million in Calvin Klein North America; $
12.9
million in Calvin Klein International; $
8.1
million in Heritage Brands Wholesale and $
44.1
million in corporate expenses not allocated to any reportable segments.
|
|
|
(11)
|
Income before interest and taxes for 2015 included costs of $
16.5
million principally related to the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business.
|
|
|
(12)
|
Loss before interest and taxes for 2015 includes costs of $
10.3
million related to the operation of and exit from the Izod retail business.
|
|
|
(13)
|
Income (loss) before interest and taxes for 2014 includes costs of $
139.4
million associated with the integration of Warnaco and the related restructuring. Such costs were included in the Company’s segments as follows: $
14.0
million in Calvin Klein North America; $
51.1
million in Calvin Klein International; $
17.7
million in Heritage Brands Wholesale and $
56.6
million in corporate expenses not allocated to any reportable segments.
|
|
|
(14)
|
Loss before interest and taxes for 2014 includes costs of $
21.0
million associated with the exit from the Company’s Izod retail business, the majority of which was noncash impairment charges.
|
|
|
(15)
|
Income before interest and taxes for 2014 includes a net gain of $
8.0
million associated with the deconsolidation of certain Calvin Klein subsidiaries in Australia and the Company’s previously consolidated Calvin Klein joint venture in India. Please see
Note 5
, “Investments in Unconsolidated Affiliates” and
Note 6
, “Redeemable Non-Controlling Interests” for further discussion.
|
|
|
(16)
|
Loss before interest and taxes for 2014 includes costs of $
93.1
million associated with the Company’s amendment and restatement of its credit facilities and the related redemption of its 7 3/8% senior notes due 2020. Please see
Note 8
, “Debt,” for a further discussion.
|
Intersegment transactions primarily consist of transfers of inventory principally from the Heritage Brands Wholesale segment to the Heritage Brands Retail segment, the Calvin Klein North America segment and the Tommy Hilfiger North America segment. These transfers are recorded at cost plus a standard markup percentage. Such markup percentage on ending inventory is eliminated principally in the Heritage Brands Retail segment, the Calvin Klein North America segment and the Tommy Hilfiger North America Segment.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2016
|
|
2015
|
|
2014
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
Calvin Klein North America
(1)
|
|
$
|
1,752.1
|
|
|
$
|
1,935.7
|
|
|
$
|
1,834.9
|
|
|
Calvin Klein International
|
|
2,821.0
|
|
|
2,752.8
|
|
|
2,819.9
|
|
|
Tommy Hilfiger North America
|
|
1,229.8
|
|
|
1,222.8
|
|
|
1,258.6
|
|
|
Tommy Hilfiger International
(2)
|
|
3,481.3
|
|
|
3,213.1
|
|
|
3,255.8
|
|
|
Heritage Brands Wholesale
|
|
1,203.5
|
|
|
1,297.0
|
|
|
1,342.7
|
|
|
Heritage Brands Retail
|
|
75.5
|
|
|
76.1
|
|
|
91.9
|
|
|
Corporate
(3)
|
|
504.7
|
|
|
176.3
|
|
|
192.8
|
|
|
Total
|
|
$
|
11,067.9
|
|
|
$
|
10,673.8
|
|
|
$
|
10,796.6
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
Calvin Klein North America
|
|
$
|
47.6
|
|
|
$
|
43.3
|
|
|
$
|
38.0
|
|
|
Calvin Klein International
|
|
70.5
|
|
|
61.1
|
|
|
58.6
|
|
|
Tommy Hilfiger North America
|
|
35.3
|
|
|
35.4
|
|
|
31.9
|
|
|
Tommy Hilfiger International
(4)
|
|
139.2
|
|
|
87.0
|
|
|
87.4
|
|
|
Heritage Brands Wholesale
|
|
15.6
|
|
|
15.3
|
|
|
14.6
|
|
|
Heritage Brands Retail
|
|
5.4
|
|
|
5.2
|
|
|
7.2
|
|
|
Corporate
|
|
8.2
|
|
|
10.1
|
|
|
7.0
|
|
|
Total
|
|
$
|
321.8
|
|
|
$
|
257.4
|
|
|
$
|
244.7
|
|
|
Identifiable Capital Expenditures
(5)
|
|
|
|
|
|
|
|
|
|
|
Calvin Klein North America
|
|
$
|
39.3
|
|
|
$
|
55.1
|
|
|
$
|
52.1
|
|
|
Calvin Klein International
|
|
79.5
|
|
|
70.6
|
|
|
49.9
|
|
|
Tommy Hilfiger North America
|
|
26.9
|
|
|
36.1
|
|
|
38.9
|
|
|
Tommy Hilfiger International
|
|
82.0
|
|
|
83.2
|
|
|
93.2
|
|
|
Heritage Brands Wholesale
|
|
14.1
|
|
|
14.6
|
|
|
10.2
|
|
|
Heritage Brands Retail
|
|
7.0
|
|
|
4.4
|
|
|
8.2
|
|
|
Corporate
|
|
8.9
|
|
|
7.3
|
|
|
6.7
|
|
|
Total
|
|
$
|
257.7
|
|
|
$
|
271.3
|
|
|
$
|
259.2
|
|
|
|
|
(1)
|
Identifiable assets in 2016 included a net reduction of $
125.6
million resulting from the Mexico deconsolidation. Please see
Note 5
, “Investments in Unconsolidated Affiliates,” for a further discussion.
|
|
|
(2)
|
Identifiable assets in 2016 included a net increase of $
387.3
million resulting from the TH China acquisition. Please see
Note 2
, “Acquisitions,” for a further discussion.
|
|
|
(3)
|
The increase in Corporate identifiable assets in 2016 is largely due to an increase in cash.
|
|
|
(4)
|
Depreciation and amortization in 2016 included a $
47.1
million increase in amortization resulting from the TH China acquisition. Please see
Note 2
, “Acquisitions,” and Note 7, “Goodwill and Other Intangible Assets,” for further discussion.
|
|
|
(5)
|
Capital expenditures in
2016
included $
35.6
million of accruals that will not be paid until 2017. Capital expenditures in
2015
included $
24.5
million of accruals that were not paid until
2016
. Capital expenditures in
2014
included $
17.0
million of accruals that were not paid until
2015
.
|
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, plant and equipment, net based on the location where such assets are held, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
(1)
|
|
2015
(1)
|
|
2014
|
Domestic
|
$
|
412.8
|
|
|
$
|
419.1
|
|
|
$
|
388.6
|
|
Canada
|
31.0
|
|
|
31.8
|
|
|
38.3
|
|
Europe
|
230.5
|
|
|
221.6
|
|
|
230.2
|
|
Asia
(2)
|
66.8
|
|
|
57.9
|
|
|
53.1
|
|
Other foreign
(3)
|
18.8
|
|
|
14.2
|
|
|
15.5
|
|
Total
|
$
|
759.9
|
|
|
$
|
744.6
|
|
|
$
|
725.7
|
|
|
|
(1)
|
Property, plant and equipment, net was impacted by the strengthening of the United States dollar against certain foreign currencies in which the Company transacts significant levels of business. Please see section entitled “Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for a further discussion.
|
|
|
(2)
|
Property, plant and equipment, net as of January 29, 2017 included an increase resulting from the TH China acquisition. Please see
Note 2
, “Acquisitions,” for a further discussion of the TH China acquisition.
|
|
|
(3)
|
Property, plant and equipment, net as of January 29, 2017 included a net increase, consisting of an increase related to PVH Ethiopia, partially offset by a decrease as a result of the Mexico deconsolidation. Please see
Note 6
, “Redeemable Non-Controlling Interests”and
Note 5
, “Investments in Unconsolidated Affiliates,” for further discussion of PVH Ethiopia and the Mexico deconsolidation, respectively.
|
Revenue, based on location of origin, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
(1)
|
|
2015
(1)
|
|
2014
|
Domestic
|
$
|
4,226.6
|
|
|
$
|
4,406.2
|
|
|
$
|
4,404.8
|
|
Canada
|
484.5
|
|
|
454.2
|
|
|
468.5
|
|
Europe
|
2,372.7
|
|
|
2,130.8
|
|
|
2,304.9
|
|
Asia
(2)
|
910.4
|
|
|
785.3
|
|
|
779.3
|
|
Other foreign
(3)
|
208.9
|
|
|
243.8
|
|
|
283.7
|
|
Total
|
$
|
8,203.1
|
|
|
$
|
8,020.3
|
|
|
$
|
8,241.2
|
|
|
|
(1)
|
Revenue was impacted by the strengthening of the United States dollar against foreign currencies in which the Company transacts significant levels of business. Please see section entitled “Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for a further discussion.
|
|
|
(2)
|
Revenue in Asia in 2016 included an increase resulting from the TH China acquisition. Please see
Note 2
, “Acquisitions,” for a further discussion of the TH China acquisition.
|
|
|
(3)
|
Revenue in other foreign countries in 2016 included a decrease resulting from the Mexico deconsolidation. Please see
Note 5
, “Investments in Unconsolidated Affiliates,” for a further discussion of the Mexico deconsolidation.
|
20. GUARANTEES
The Company is deemed to have guaranteed lease payments for substantially all
Bass
retail stores included in the sale of substantially all of the assets of the Company’s Bass business in the fourth quarter of 2013 pursuant to the terms of noncancelable leases expiring on various dates through
2022
. These obligations deemed to be guaranteed include minimum rent
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
payments and relate to leases that commenced prior to the sale of the Bass assets. In certain instances, the Company’s obligations remain in effect when an option is exercised to extend the term of the lease. The maximum amount deemed to have been guaranteed for all leases as of
January 29, 2017
was $
23.2
million and the Company has the right to seek recourse from the buyer of the Bass assets for the full amount. The estimated fair value of these obligations as of
January 29, 2017
and
January 31, 2016
was $
1.1
million and $
1.9
million, respectively, which was included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets. Please see
Note 11
, “Fair Value Measurements,” for a further discussion.
In connection with the Company’s investments in PVH Australia and CK India, the Company has guaranteed a portion of the entities’ debt and other obligations. The maximum amount guaranteed as of
January 29, 2017
was approximately $
11.5
million, which is subject to exchange rate fluctuation.
The guarantees are in effect for the entire terms of the respective obligations. The estimated fair value of these guarantee obligations was immaterial as of
January 29, 2017
and
January 31, 2016
, respectively.
The Company has certain other guarantees whereby it guaranteed the payment of amounts on behalf of certain other parties, none of which are material individually or in the aggregate.
21. OTHER COMMENTS
Included in accrued expenses in the Company’s Consolidated Balance Sheets were certain incentive compensation accruals of $
96.1
million and $
56.5
million as of
January 29, 2017
and
January 31, 2016
, respectively, and certain wholesale sales allowance accruals of $
113.7
million and
$112.6
million as of
January 29, 2017
and
January 31, 2016
, respectively.
The Company’s asset retirement obligations are included in other liabilities in the Company’s Consolidated Balance Sheets and relate to the Company’s obligation to dismantle or remove leasehold improvements from leased office, retail store or warehouse locations at the end of a lease term in order to restore a facility to a condition specified in the lease agreement. The Company records the fair value of the liability for asset retirement obligations in the period in which it is legally or contractually incurred. Upon initial recognition of the asset retirement liability, an asset retirement cost is capitalized by increasing the carrying amount of the asset by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement cost is recognized as expense through depreciation over the asset’s useful life. Changes in the liability for the asset retirement obligations are recognized for the passage of time and revisions to either the timing or the amount of estimated cash flows. Accretion expense is recognized in selling, general and administrative expenses for the impacts of increasing the discounted fair value to its estimated settlement value.
The following table presents the activity related to the Company’s asset retirement obligations for each of the last two years:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
17.9
|
|
|
$
|
16.2
|
|
Business acquisitions
|
0.4
|
|
|
—
|
|
Liabilities incurred
|
3.9
|
|
|
4.4
|
|
Liabilities settled (payments)
|
(0.6
|
)
|
|
(2.2
|
)
|
Accretion expense
|
0.4
|
|
|
0.4
|
|
Revisions in estimated cash flows
|
(0.2
|
)
|
|
(0.5
|
)
|
Currency translation adjustment
|
0.0
|
|
|
(0.4
|
)
|
Balance at end of year
|
$
|
21.8
|
|
|
$
|
17.9
|
|
The Company is a party to certain litigation which, in management’s judgment, based in part on the opinions of legal counsel, will not have a material adverse effect on the Company’s financial position.
Wuxi Jinmao Foreign Trade Co., Ltd. (“Wuxi”), one of the Company’s finished goods inventory suppliers, has a wholly owned subsidiary with which the Company entered into a loan agreement in 2016. Under the agreement, Wuxi’s subsidiary borrowed a principal amount of $
13.8
million for the development and operation of a fabric mill. Principal payments are due in semi-annual installments through November 29, 2026. The outstanding principal balance of the loan bears interest at a rate of
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(i)
4.50%
per annum until the sixth anniversary of the closing date of the loan and (ii) a rate of LIBOR plus
4.00%
thereafter. As of
January 29, 2017
, the outstanding balance, including accrued interest, of $
13.9
million was included in other assets in the Company’s Consolidated Balance Sheet.
22. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to January 29, 2017, the Company completed the purchase of a group annuity using assets from the Pension Plans. Under the group annuity, the accrued pension obligations of approximately
4,000
select retiree participants who have deferred vested benefits under the Pension Plans were transferred to an insurer. The amount of the pension benefit obligation transferred was approximately $
65.3
million.
On March 20, 2017, the Company entered into agreements for a transaction to restructure its supply chain relationship with Li & Fung Trading Limited (“Li & Fung”). The transaction establishes a new strategic partnership with Li & Fung to provide services to the Company and also provides for the termination of the Company’s non-exclusive buying agency agreement with Li & Fung, pursuant to which the Company is obligated to source certain
Calvin Klein Jeans
products and at least
54%
of certain
Tommy Hilfiger
products through Li & Fung. The transaction is expected to close July 1, 2017. The Company expects to incur one-time costs of approximately $
55.0
million principally in connection with the termination of the non-exclusive buying agency agreement.
PVH CORP.
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(In millions, except per share data)
The following table sets forth selected quarterly financial data (unaudited) for the corresponding thirteen week periods of the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
2016
(1),(2),(3),(4),(5)
|
|
2015
(11),(12),(13)
|
|
2016
(1),(2),(6)
|
|
2015
(11),(12),(13),(14)
|
|
2016
(1),(3),(7),(8)
|
|
2015
(11),(12),(13),(14)
|
|
2016
(1),(3),(8),(9),(10)
|
|
2015
(11),(12),(13),(14),(15),(16)
|
Total revenue
|
$
|
1,917.8
|
|
|
$
|
1,879.3
|
|
|
$
|
1,933.3
|
|
|
$
|
1,864.0
|
|
|
$
|
2,244.3
|
|
|
$
|
2,164.5
|
|
|
$
|
2,107.7
|
|
|
$
|
2,112.5
|
|
Gross profit
|
1,006.9
|
|
|
985.6
|
|
|
1,033.8
|
|
|
1,002.1
|
|
|
1,191.6
|
|
|
1,101.0
|
|
|
1,138.0
|
|
|
1,072.9
|
|
Net income attributable to PVH Corp.
|
231.6
|
|
|
114.1
|
|
|
90.5
|
|
|
102.2
|
|
|
126.2
|
|
|
221.9
|
|
|
100.7
|
|
|
134.2
|
|
Basic net income per common share attributable to PVH Corp.
|
2.85
|
|
|
1.38
|
|
|
1.12
|
|
|
1.24
|
|
|
1.58
|
|
|
2.69
|
|
|
1.27
|
|
|
1.64
|
|
Diluted net income per common share attributable to PVH Corp.
|
2.83
|
|
|
1.37
|
|
|
1.11
|
|
|
1.22
|
|
|
1.56
|
|
|
2.67
|
|
|
1.26
|
|
|
1.63
|
|
Price range of stock per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
100.00
|
|
|
113.84
|
|
|
103.36
|
|
|
118.27
|
|
|
115.40
|
|
|
120.67
|
|
|
114.88
|
|
|
96.16
|
|
Low
|
68.96
|
|
|
93.80
|
|
|
82.10
|
|
|
102.12
|
|
|
92.83
|
|
|
87.12
|
|
|
88.71
|
|
|
64.16
|
|
|
|
(1)
|
The first, second, third and fourth quarters of 2016 included pre-tax costs of $30.1 million, $20.3 million, $17.3 million and $15.1 million, respectively, associated with the TH China acquisition.
|
|
|
(2)
|
The first and second quarters of 2016 included pre-tax costs of $7.5 million and $2.3 million, respectively, associated with the integration of Warnaco and the related restructuring.
|
|
|
(3)
|
The first, third and fourth quarters of 2016 included tax benefits of $5.8 million, $7.8 million and $1.1 million, respectively, associated with discrete items related to the resolution of uncertain tax positions.
|
|
|
(4)
|
The first quarter of 2016 included pre-tax costs of $5.5 million associated with the restructuring related to the new global creative strategy for
CALVIN KLEIN
.
|
|
|
(5)
|
The first quarter of 2016 included a pre-tax noncash gain of $153.1 million to write-up the Company’s equity investment in TH China to fair value in connection with the TH China acquisition.
|
|
|
(6)
|
The second quarter of 2016 included pre-tax costs of $15.8 million associated with the Company’s amendment of its credit facilities.
|
|
|
(7)
|
The third quarter of 2016 included a pre-tax gain of $18.1 million associated with a payment made to the Company to exit a
Tommy Hilfiger
flagship store in Europe.
|
|
|
(8)
|
The third and fourth quarters of 2016 included pre-tax noncash losses of $76.9 million and $4.9 million, respectively, related to the Mexico deconsolidation.
|
|
|
(9)
|
The fourth quarter of 2016 included pre-tax costs of $11.0 million associated with the TH men’s tailored license termination.
|
|
|
(10)
|
The fourth quarter of 2016 included a pre-tax actuarial gain of $39.1 million from the Company’s pension and other postretirement plans.
|
|
|
(11)
|
The first, second, third and fourth quarters of 2015 included pre-tax costs of $18.8 million, $13.1 million, $18.9 million and $22.6 million, respectively, associated with the integration of Warnaco and the related restructuring.
|
|
|
(12)
|
The first, second, third and fourth quarters of 2015 included pre-tax costs of $0.5 million, $5.8 million, $2.8 million and $1.2 million, respectively, related to the operation of and exit from the Izod retail business.
|
|
|
(13)
|
The first, second, third and fourth quarters of 2015 included tax benefits of $2.3 million, $0.7 million, $18.5 million and $1.8 million, respectively, associated with discrete items primarily related to the resolution of uncertain tax positions.
|
|
|
(14)
|
The second, third and fourth quarters of 2015 included pre-tax costs of $3.3 million, $13.1 million and $0.1 million, respectively, principally related to the discontinuation of several licensed product lines in the Heritage Brands dress furnishings business.
|
|
|
(15)
|
The fourth quarter of 2015 included a pre-tax actuarial gain of $20.2 million from the Company’s pension and other postretirement plans.
|
|
|
(16)
|
The fourth quarter of 2015 included tax benefits of $11.2 million associated with discrete items related to the impact of enacted tax law and tax rate changes on deferred taxes.
|
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for the preparation and integrity of the consolidated financial statements appearing in this Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include certain amounts based on management’s best judgments and estimates.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the underlying transactions, including the acquisition and disposition of assets; (ii) provide reasonable assurance that the Company’s assets are safeguarded and transactions are executed in accordance with management’s authorization and are recorded as necessary to permit preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Audit & Risk Management Committee of the Company’s Board of Directors, composed solely of directors who are independent in accordance with New York Stock Exchange listing standards, the Securities Exchange Act of 1934, the Company’s Corporate Governance Guidelines and the Committee’s charter, meets periodically with the Company’s independent auditors, the Company’s internal auditors and management to discuss internal control over financial reporting, auditing and financial reporting matters. Both the independent auditors and the Company’s internal auditors periodically meet alone with the Audit Committee and have free access to the Committee.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
January 29, 2017
. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 framework). Based on management’s assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of
January 29, 2017
.
The Company’s independent auditors, Ernst & Young LLP, a registered public accounting firm, are appointed by the Audit & Risk Management Committee, subject to ratification by the Company’s stockholders. Ernst & Young LLP have audited and reported on the consolidated financial statements of the Company and the effectiveness of the Company’s internal control over financial reporting. The reports of the independent auditors are contained in this Annual Report on Form 10-K.
|
|
|
/s/ EMANUEL CHIRICO
|
/s/ MICHAEL SHAFFER
|
|
|
Emanuel Chirico
|
Michael Shaffer
|
Chairman and Chief Executive Officer
|
Executive Vice President and Chief
|
March 24, 2017
|
Operating & Financial Officer
|
|
March 24, 2017
|