NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company whose brand portfolio consists of nationally and internationally recognized brand names, including
CALVIN KLEIN
,
TOMMY HILFIGER
,
Van Heusen
,
IZOD
,
ARROW
,
Warner’s
,
Olga
and, as of March 30, 2017,
True&Co.,
which are owned, and
Speedo
, which is licensed, as well as various other owned, licensed and private label brands. The Company designs and markets branded dress shirts, neckwear, sportswear, jeanswear, performance apparel, intimate apparel, underwear, swim products, handbags, accessories, footwear and other related products and licenses its owned brands over a broad range of products. References to the aforementioned and other brand names are to registered and common law trademarks owned by the Company or licensed to the Company by third parties and are identified by italicizing the brand name.
The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see
Note 6
, “
Investments in Unconsolidated Affiliates
,” for a further discussion. During the second quarter of 2016, the Company and Arvind Limited (“Arvind”) formed a joint venture in Ethiopia, PVH Arvind Manufacturing Private Limited Company (“PVH Ethiopia”), in which the Company owns a
75%
interest. PVH Ethiopia is consolidated and the minority shareholder’s proportionate share (
25%
) of the equity in this joint venture is accounted for as a redeemable non-controlling interest. Please see
Note 5
, “
Redeemable Non-Controlling Interest
,” for a further discussion.
The Company’s fiscal years are based on the
52-53
week periods ending on the Sunday closest to February 1 of each calendar year and are designated by the calendar year in which the fiscal year commences. References to a year are to the Company’s fiscal year, unless the context requires otherwise.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not contain all disclosures required by accounting principles generally accepted in the United States for complete financial statements. Reference is made to the Company’s audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended
January 29, 2017
.
The preparation of interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates.
The results of operations for the
thirteen and twenty-six weeks ended
July 30, 2017
and
July 31, 2016
are not necessarily indicative of those for a full fiscal year due, in part, to seasonal factors. The data contained in these consolidated financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments (which consist of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods.
The Company records warehousing and distribution expenses, which are subject to exchange rate fluctuations, as a component of selling, general and administrative (“SG&A”) expenses in its Consolidated Income Statements. Warehousing and distribution expenses incurred in the thirteen and
twenty-six weeks ended
July 30, 2017
totaled $
65.3
million and $
127.9
million, respectively, and included costs of $
5.5
million and $
7.3
million, respectively, related to the consolidation of the Company’s warehouse and distribution network in North America. Warehousing and distribution expenses incurred in the thirteen and
twenty-six weeks ended
July 31, 2016
totaled $
57.4
million and $
115.7
million, respectively.
Certain reclassifications have been made to the consolidated financial statements for the prior year periods to present that information on a basis consistent with the current year.
2. INVENTORIES
Inventories are comprised principally of finished goods and are stated at the lower of cost or net realizable value, except for certain retail inventories in North America that are stated at the lower of cost or market using the retail inventory method. Cost
for substantially all wholesale inventories in North America and certain wholesale and retail inventories in Asia and Latin America is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. The Company reviews current business trends, inventory aging and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market using the retail inventory method, as applicable.
3. ACQUISITIONS
Acquisition of True & Co.
The Company acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital commerce retailer. This acquisition enables the Company to participate further in the fast-growing online channel and provides a platform to increase innovation, data-driven decisions and speed in the way it serves its consumers across its channels of distribution.
The acquisition date fair value of the consideration paid was $
28.5
million. The estimated fair value of assets acquired and liabilities assumed included $
28.2
million of goodwill and $
0.3
million of other net assets (including $
0.4
million of cash acquired). The goodwill of $
28.2
million was assigned as of the acquisition date to the Company’s Calvin Klein North America, Calvin Klein International and Heritage Brands Wholesale segments in the amounts of $
7.3
million, $
6.4
million and $
14.5
million, respectively, which are the Company’s reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before and after the acquisition. Goodwill is not expected to be deductible for tax purposes. The Company is still in the process of finalizing the valuation of the assets acquired and liabilities assumed; thus, the allocation of the acquisition consideration is subject to change.
Acquisition of TH China
The Company acquired on April 13, 2016 the
55%
of the ownership interests in TH Asia, Ltd. (“TH China”), its former joint venture for
TOMMY HILFIGER
in China, that it did not already own (the “TH China acquisition”). Prior to April 13, 2016, the Company accounted for its
45%
interest in TH China under the equity method of accounting. Since the completion of the TH China acquisition, the results of TH China’s operations have been consolidated in the Company’s consolidated financial statements.
TH China began operating the Tommy Hilfiger wholesale and retail distribution businesses in China in 2011 and held a license from a subsidiary of the Company for the
TOMMY HILFIGER
trademarks for use in connection with these businesses.
The carrying value of the Company’s
45%
interest in TH China prior to the acquisition was $
52.5
million. In connection with the acquisition, this investment was remeasured to a fair value of $
205.6
million, resulting in the recognition during the first quarter of 2016 of a pre-tax noncash gain of $
153.1
million. Such fair value was estimated using future operating cash flow projections that were discounted at a rate of
14.4%
, which accounted for the relative risks of the estimated future cash flows. Such fair value also included an estimated discount for a lack of marketability of
10.0%
. The Company classified this as a Level 3 fair value measurement due to the use of these significant unobservable inputs.
The acquisition date fair value of the consideration for the
55%
interest that the Company did not already own was $
265.8
million, consisting of $
263.0
million paid in cash and the elimination of a $
2.8
million pre-acquisition receivable owed to the Company by TH China. The total fair value of TH China (at
100%
) was $
471.4
million. The estimated fair value of assets acquired and liabilities assumed included $
258.6
million of goodwill, $
110.6
million of other intangible assets and $
102.2
million of other net assets (including $
105.3
million of cash acquired). The goodwill of $
258.6
million was assigned to the Company’s Tommy Hilfiger International segment. Goodwill is not expected to be deductible for tax purposes. The other intangible assets of $
110.6
million included reacquired license rights of $
72.0
million, order backlog of $
26.2
million and customer relationships of $
12.4
million. The Company finalized the purchase price allocation during the fourth quarter of 2016.
4. ASSETS HELD FOR SALE
During 2015, one of the Company’s European subsidiaries entered into an agreement to sell a building in Amsterdam, the Netherlands. The Company classified the building as held for sale in the fourth quarter of 2015 and ceased recording depreciation on the building at that time.
The Company completed the sale of the building in the second quarter of 2016 for proceeds of €
15.0
million (approximately $
16.7
million based on the exchange rate in effect on that date) and recorded a gain of $
1.5
million, which represented the excess of the proceeds, less costs to sell, over the carrying value on that date. The gain was recorded in SG&A expenses in the Company’s Consolidated Income Statement during the second quarter of 2016 and was included in the Calvin Klein International Segment.
5. REDEEMABLE NON-CONTROLLING INTEREST
During the second quarter of 2016, the Company and Arvind formed PVH Ethiopia, in which the Company owns a
75
% interest. The Company has consolidated the joint venture in its consolidated financial statements. PVH Ethiopia was formed to operate a manufacturing facility that produces finished products for the Company for distribution primarily in the United States. The manufacturing facility began operations in the first half of 2017.
The shareholders agreement governing the joint venture (the “Shareholders Agreement”) contains a put option under which Arvind can require the Company to purchase all of its shares in the joint venture during various future periods as specified in the Shareholders Agreement. The first such period immediately precedes the ninth anniversary of the date of incorporation of PVH Ethiopia. The Shareholders Agreement also contains call options under which the Company can require Arvind to sell to the Company (i) all or a portion of its shares during various future periods as specified in the Shareholders Agreement; (ii) all of its shares in the event of a change of control of Arvind; or (iii) all of its shares in the event that Arvind ceases to hold at least
ten percent
of the outstanding shares. The Company’s first call option referred to in clause (i) immediately follows the fifth anniversary of the date of incorporation of PVH Ethiopia. The put and call prices are the fair market value of the shares on the redemption date based upon a multiple of the joint venture’s earnings before interest, taxes, depreciation and amortization for the prior 12 months, less the joint venture’s net debt.
The fair value of the redeemable non-controlling interest (“RNCI”) as of the date of formation of the joint venture was $
0.1
million. The carrying amount of the RNCI is adjusted to equal the redemption amount at the end of each reporting period, provided that this amount at the end of each reporting period cannot be lower than the initial fair value adjusted for the minority shareholder’s share of net income or loss. Any adjustment to the redemption amount of the RNCI is determined after attribution of net income or loss of the RNCI and will be recognized immediately in retained earnings of the Company, since it is probable that the RNCI will become redeemable in the future based on the passage of time. The carrying amount of the RNCI, which is also its fair value, increased to $
3.1
million as of
July 30, 2017
from $
2.0
million as of
January 29, 2017
, principally attributable to additional contributions of $
1.7
million made by Arvind during the first quarter of 2017 for its proportionate share of the joint venture funding. The carrying amount of the RNCI as of July 31, 2016 was $
0.1
million.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Karl Lagerfeld
The Company owns an economic interest of approximately
8%
in the parent company of the
Karl Lagerfeld
brand (“Karl Lagerfeld”). The Company is deemed to have significant influence with respect to this investment, which is being accounted for under the equity method of accounting.
PVH Australia
The Company owns a
50%
economic interest in a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”). PVH Australia licenses from subsidiaries of the Company the rights to distribute and sell certain
CALVIN KLEIN
,
TOMMY HILFIGER
and
Van Heusen
brand products in Australia, New Zealand and, in the cases of
CALVIN KLEIN
and
TOMMY HILFIGER
, other island nations in the South Pacific. Additionally, subsidiaries of PVH Australia license other trademarks for certain product categories. This investment is being accounted for under the equity method of accounting.
The Company received a $
1.5
million dividend from PVH Australia during the
twenty-six weeks ended
July 30, 2017
.
Gazal
The Company acquired approximately
10%
of the outstanding capital stock of Gazal Corporation Limited (“Gazal”), which is listed on the Australian Securities Exchange, during the third quarter of 2016 for approximately $
9.2
million. The Company is deemed to have significant influence with respect to this investment, which is being accounted for under the equity method of accounting. Gazal is also the Company’s joint venture partner in PVH Australia.
The Company received a $
0.3
million dividend from Gazal during the
twenty-six weeks ended
July 30, 2017
.
CK India
The Company owns a
51%
economic interest in a joint venture, Calvin Klein Arvind Fashion Private Limited (“CK India”). CK India licenses from a subsidiary of the Company the rights to the
CALVIN KLEIN
trademarks in India for certain product categories. The Company is deemed not to hold a controlling interest in the joint venture. This investment is being accounted for under the equity method of accounting.
The Company made a payment of $
0.8
million to CK India during the
twenty-six weeks ended
July 30, 2017
to contribute its
51%
share of the joint venture funding for the period.
TH Brazil
The Company owns a
40%
economic interest in a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”). TH Brazil licenses from a subsidiary of the Company the rights to the
TOMMY HILFIGER
trademarks in Brazil for certain product categories. This investment is being accounted for under the equity method of accounting.
The Company made a payment of $
1.5
million to TH Brazil during the
twenty-six weeks ended
July 31, 2016
to contribute its
40%
share of the joint venture funding for the period.
The Company issued a note receivable due April 2, 2017 to TH Brazil during the third quarter of 2016 for $
12.5
million, of which $
6.2
million was repaid in the fourth quarter of 2016 and the remaining balance, including accrued interest, was repaid in the first quarter of 2017.
TH India
The Company owns a
50%
economic interest in a joint venture, Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a subsidiary of the Company the rights to the
TOMMY HILFIGER
trademarks in India for certain product categories. This investment is being accounted for under the equity method of accounting. Arvind, the Company’s joint venture partner in PVH Ethiopia and in CK India, is also the Company’s joint venture partner in TH India.
The Company made a payment of $
1.2
million to TH India during the
twenty-six weeks ended
July 30, 2017
to contribute its
50%
share of the joint venture funding for the period.
PVH Mexico
The Company and Grupo Axo, S.A.P.I. de C.V. (“Grupo Axo”) formed a joint venture (“PVH Mexico”) in the fourth quarter of 2016, in which the Company owns a
49%
economic interest. PVH Mexico licenses from certain wholly owned subsidiaries of the Company the rights to distribute and sell certain
CALVIN KLEIN
,
TOMMY HILFIGER
,
Warner’s
,
Olga
and
Speedo
brand products in Mexico. PVH Mexico was formed by merging the Company’s wholly owned subsidiary that principally operated and managed the Calvin Klein business in Mexico (the “Mexico business”) with a wholly owned subsidiary of Grupo Axo that distributes certain
TOMMY HILFIGER
brand products in Mexico. In connection with the formation of PVH Mexico, the Company deconsolidated the Mexico business and began accounting for its
49%
interest under the equity method of accounting in the fourth quarter of 2016.
Total Investments in Unconsolidated Affiliates
Included in other assets in the Company’s Consolidated Balance Sheets as of
July 30, 2017
,
January 29, 2017
and
July 31, 2016
was $
191.7
million, $
180.0
million (of which $
7.0
million was related to the note receivable, including accrued interest, due from TH Brazil) and $
94.6
million, respectively, related to these investments in unconsolidated affiliates.
7. GOODWILL
The changes in the carrying amount of goodwill for the
twenty-six weeks ended
July 30, 2017
, by segment (please see
Note 18
, “
Segment Data
,” for a further discussion of the Company’s reportable segments), were as follows:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Calvin Klein North America
|
|
Calvin Klein International
|
|
Tommy Hilfiger North America
|
|
Tommy Hilfiger International
|
|
Heritage Brands Wholesale
|
|
Heritage Brands Retail
|
|
Total
|
Balance as of January 29, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
739.4
|
|
|
$
|
864.5
|
|
|
$
|
204.4
|
|
|
$
|
1,425.8
|
|
|
$
|
235.8
|
|
|
$
|
11.9
|
|
|
$
|
3,481.8
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
739.4
|
|
|
864.5
|
|
|
204.4
|
|
|
1,425.8
|
|
|
235.8
|
|
|
—
|
|
|
3,469.9
|
|
Contingent purchase price payments to Mr. Calvin Klein
|
14.8
|
|
|
10.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25.0
|
|
True & Co. acquisition
|
7.3
|
|
|
6.4
|
|
|
—
|
|
|
—
|
|
|
14.5
|
|
|
—
|
|
|
28.2
|
|
Currency translation and other
|
0.8
|
|
|
23.8
|
|
|
—
|
|
|
121.7
|
|
|
—
|
|
|
—
|
|
|
146.3
|
|
Balance as of July 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
762.3
|
|
|
904.9
|
|
|
204.4
|
|
|
1,547.5
|
|
|
250.3
|
|
|
11.9
|
|
|
3,681.3
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
$
|
762.3
|
|
|
$
|
904.9
|
|
|
$
|
204.4
|
|
|
$
|
1,547.5
|
|
|
$
|
250.3
|
|
|
$
|
—
|
|
|
$
|
3,669.4
|
|
The goodwill acquired in the True & Co. acquisition was assigned as of the acquisition date to the Company’s reporting units that are expected to benefit from the synergies of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before and after the acquisition.
The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Company’s acquisition of all of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies. Such payments are based on
1.15%
of total worldwide net sales, as defined in the acquisition agreement (as amended), of products bearing any of the
CALVIN KLEIN
brands and are required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by the Company and its licensees and other partners to retailers.
8. RETIREMENT AND BENEFIT PLANS
The Company has
five
qualified defined benefit pension plans as of
July 30, 2017
covering substantially all employees resident in the United States who meet certain age and service requirements. The plans provide monthly benefits upon retirement generally based on career average compensation and years of credited service. Vesting in plan benefits generally occurs after
five
years of service. The Company refers to these five noncontributory plans as its “Pension Plans.”
The Company also has for certain members of Tommy Hilfiger’s domestic senior management a supplemental executive retirement plan, which is an unfunded non-qualified supplemental defined benefit pension plan. Such plan is frozen and, as a result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation program, which is an unfunded non-qualified supplemental defined benefit plan. Under the individual participants’ agreements, the participants in this plan will receive a predetermined amount during the
10
years following the attainment of age
65
, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least
10
years and has attained age
55
. The Company also has for certain employees resident in the United States who meet certain age and service requirements an unfunded non-qualified supplemental defined benefit pension plan, which provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. The Company refers to these
three
noncontributory plans as its “SERP Plans.”
The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. As a result of the Company’s acquisition of The Warnaco Group, Inc. (“Warnaco”), the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. Both of
the Company’s postretirement health care and life insurance benefit plans are frozen. The Company refers to these
two
plans as its “Postretirement Plans.”
Net benefit cost related to the Pension Plans was recognized in SG&A expenses in the Company’s Consolidated Income Statements as follows:
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|
|
|
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|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
(In millions)
|
7/30/17
|
|
7/31/16
|
|
7/30/17
|
|
7/31/16
|
|
|
|
|
|
|
|
|
Service cost, including plan expenses
|
$
|
6.4
|
|
|
$
|
6.1
|
|
|
$
|
13.3
|
|
|
$
|
12.6
|
|
Interest cost
|
6.5
|
|
|
7.4
|
|
|
12.9
|
|
|
14.9
|
|
Expected return on plan assets
|
(9.6
|
)
|
|
(8.9
|
)
|
|
(19.3
|
)
|
|
(17.9
|
)
|
Loss on settlement
|
—
|
|
|
—
|
|
|
9.4
|
|
|
—
|
|
Total
|
$
|
3.3
|
|
|
$
|
4.6
|
|
|
$
|
16.3
|
|
|
$
|
9.6
|
|
During the first quarter of 2017, the Company completed the purchase of a group annuity using assets from the Pension Plans. Under the group annuity, the accrued pension obligations for approximately
4,000
select retiree participants who had deferred vested benefits under the Pension Plans were transferred to an insurer. As a result, the Company recognized a loss of $
9.4 million
, which was recorded in SG&A expenses in the Company’s Consolidated Income Statement for the twenty-six weeks ended
July 30, 2017
. The amount of the pension benefit obligation settled was $
65.3
million.
Net benefit cost related to the SERP Plans was recognized in SG&A expenses in the Company’s Consolidated Income Statements as follows:
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|
|
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|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
(In millions)
|
7/30/17
|
|
7/31/16
|
|
7/30/17
|
|
7/31/16
|
|
|
|
|
|
|
|
|
Service cost, including plan expenses
|
$
|
1.1
|
|
|
$
|
0.9
|
|
|
$
|
2.3
|
|
|
$
|
2.2
|
|
Interest cost
|
0.9
|
|
|
0.9
|
|
|
1.9
|
|
|
1.9
|
|
Total
|
$
|
2.0
|
|
|
$
|
1.8
|
|
|
$
|
4.2
|
|
|
$
|
4.1
|
|
Net benefit cost related to the Postretirement Plans was immaterial for the
thirteen and twenty-six weeks ended
July 30, 2017
and
July 31, 2016
.
Currently, the Company does not expect to make any material contributions to the Pension Plans in 2017. The Company’s actual contributions may differ from planned contributions due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.
9. DEBT
Short-Term Borrowings
The Company has the ability to draw revolving borrowings under its senior secured credit facilities, as discussed in the section entitled “2016 Senior Secured Credit Facilities” below. As of
July 30, 2017
, the Company had no borrowings outstanding under these facilities. The maximum amount of revolving borrowings outstanding under these facilities during the
twenty-six weeks ended
July 30, 2017
was $
78.0
million.
Additionally, the Company has the availability to borrow under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies. These facilities provided for borrowings of up to $
95.7
million based on exchange rates in effect on
July 30, 2017
and are utilized primarily to fund working capital needs. As of
July 30, 2017
, the Company had $
18.0
million outstanding under these facilities. The weighted average interest rate on the funds borrowed as of
July 30, 2017
was approximately
0.18
%. The maximum amount of borrowings outstanding under these facilities during the
twenty-six weeks ended
July 30, 2017
was $
27.3
million.
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
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|
|
|
|
|
|
|
|
|
(In millions)
|
7/30/17
|
|
1/29/17
|
|
7/31/16
|
|
|
|
|
|
|
Senior secured Term Loan A facility due 2021
|
$
|
1,990.9
|
|
|
$
|
2,039.9
|
|
|
$
|
2,187.3
|
|
4 1/2% senior unsecured notes due 2022
|
691.2
|
|
|
690.4
|
|
|
689.6
|
|
7 3/4% debentures due 2023
|
99.5
|
|
|
99.5
|
|
|
99.4
|
|
3 5/8% senior unsecured euro notes due 2024
|
404.1
|
|
|
367.5
|
|
|
381.9
|
|
Total
|
3,185.7
|
|
|
3,197.3
|
|
|
3,358.2
|
|
Less: Current portion of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
3,185.7
|
|
|
$
|
3,197.3
|
|
|
$
|
3,358.2
|
|
Please see
Note 12
, “
Fair Value Measurements
,” for the fair value of the Company’s long-term debt as of
July 30, 2017
,
January 29, 2017
and
July 31, 2016
.
As of
July 30, 2017
, the Company’s mandatory long-term debt repayments for the next five years were as follows:
|
|
|
|
|
(In millions)
|
|
Fiscal Year
|
Amount
|
|
Remainder of 2017
|
$
|
—
|
|
2018
|
18.7
|
|
2019
|
220.1
|
|
2020
|
234.7
|
|
2021
|
1,525.8
|
|
2022
|
700.0
|
|
Total debt repayments for the next five years exceed the carrying amount of the Company’s Term Loan A facility and 4 1/2% senior unsecured notes due 2022 as of
July 30, 2017
because the carrying amounts reflect the unamortized portions of debt issuance costs and the original issue discounts.
As of
July 30, 2017
, after taking into account the effect of the Company’s interest rate swap agreement discussed in the section below entitled “2016 Senior Secured Credit Facilities,” which was in effect as of such date, approximately
60
% of the Company’s long-term debt had a fixed interest rate, with the remainder at variable interest rates.
2014 Senior Secured Credit Facilities
On March 21, 2014, the Company entered into an amendment to its senior secured credit facilities (as amended, the “2014 facilities”). The 2014 facilities consisted of a $
1,986.3
million United States dollar-denominated Term Loan A facility, a $
1,188.6
million United States dollar-denominated Term Loan B facility and senior secured revolving credit facilities consisting of (a) a $
475.0
million United States dollar-denominated revolving credit facility, (b) a $
25.0
million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €
185.9
million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen or Swiss francs.
On May 19, 2016, the Company amended the 2014 facilities, as discussed in the following section.
2016 Senior Secured Credit Facilities
On May 19, 2016 (the “Amendment Date”), the Company entered into an amendment (the “Amendment”) to the 2014 facilities (as amended by the Amendment, the “2016 facilities”). Among other things, the Amendment provided for (i) the Company to borrow an additional $
582.0
million principal amount of loans under the Term Loan A facility, (ii) the repayment of all outstanding loans under the Term Loan B facility with the proceeds of the additional loans under the Term Loan A facility, and (iii) the termination of the Term Loan B facility. In addition, the Amendment extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2019 to May 19, 2021.
The 2016 facilities consist of a $
2,347.4
million United States dollar-denominated Term Loan A facility and the senior secured revolving credit facilities consisting of (a) a $
475.0
million United States dollar-denominated revolving credit facility, (b) a $
25.0
million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €
185.9
million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen or Swiss francs. In connection with entering into the Amendment, the Company paid debt issuance costs of $
10.9
million (of which $
4.6
million was expensed as debt modification costs and $
6.3
million is being amortized over the term of the related debt agreement) and recorded debt extinguishment costs of $
11.2
million to write-off previously capitalized debt issuance costs.
The revolving credit facilities also include amounts available for letters of credit. As of
July 30, 2017
, the Company had $
22.6
million of outstanding letters of credit. There were no borrowings outstanding under the revolving credit facilities as of
July 30, 2017
. A portion of each of the United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more term loan facilities or increase the commitments under the revolving credit facilities by an aggregate amount not to exceed the sum of (1) the sum of (x) $
1,350.0
million plus (y) the aggregate amount of all voluntary prepayments of loans under the Term Loan A and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an additional unlimited amount as long as the ratio of the Company’s senior secured net debt to consolidated adjusted earnings before interest, taxes, depreciation and amortization (in each case calculated as set forth in the documentation relating to the 2016 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase. The lenders under the 2016 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
The terms of the Term Loan A facility require the Company to make quarterly repayments of amounts outstanding under the 2016 facilities, which commenced with the calendar quarter ended June 30, 2016. Such amounts equal
5.00%
per annum of the principal amount outstanding on the Amendment Date for the first eight calendar quarters following the Amendment Date,
7.50%
per annum of the principal amount for the four calendar quarters thereafter and
10.00%
per annum of the principal amount for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the Term Loan A facility.
The Company made payments of $
50.0
million and $
201.2
million during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
, respectively, on its term loans under the 2016 and 2014 facilities. As a result of the voluntary repayments made by the Company, as of
July 30, 2017
, the Company is not required to make a long-term debt repayment until December 2018.
The Company’s obligations under the 2016 facilities are guaranteed by substantially all of its existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European borrower under the 2016 facilities are guaranteed by the Company, substantially all of the Company’s existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., one of the Company’s wholly owned subsidiaries. The Company and its United States subsidiary guarantors have pledged certain of their assets as security for the obligations under the 2016 facilities.
The outstanding borrowings under the 2016 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2016 facilities require the Company to repay certain amounts outstanding thereunder with (a) net cash proceeds of the incurrence of certain indebtedness, (b) net cash proceeds of certain asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds, to the extent such proceeds are not reinvested or committed to be reinvested in the business in accordance with customary reinvestment provisions, and (c) a percentage of excess cash flow that exceeds the voluntary debt payments the Company has made during the applicable year, which percentage is based upon its net leverage ratio during the relevant fiscal period.
The United States dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds rate plus 1/2 of
1.00%
and (iii) a one-month adjusted Eurocurrency rate plus
1.00%
or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.
The Canadian dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes at its main office in Toronto, Ontario as the reference rate of interest
in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian dollar bankers’ acceptances having a term of one month that appears on the display referred to as “CDOR Page” of Reuters Monitor Money Rate Services as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the administrative agent (and if such screen is not available, any successor or similar service as may be selected by the administrative agent), and (y)
0.75%
, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.
The borrowings under the 2016 facilities in currencies other than United States dollars or Canadian dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.
The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is
1.50%
for adjusted Eurocurrency rate loans and
0.50%
for base rate loans, respectively. After the date of delivery of the compliance certificate and financial statements with respect to each of the Company’s fiscal quarters, the applicable margin for borrowings under the Term Loan A facility and the revolving credit facilities is subject to adjustment based upon the Company’s net leverage ratio.
The 2016 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by the Company and certain of its subsidiaries, and certain pledges of the Company’s assets and those of certain of the Company’s subsidiaries, as security for the obligations under the 2016 facilities; and a change in control (as defined in the 2016 facilities).
During the second quarter of 2017, the Company entered into an interest rate swap agreement for a two-year term commencing on February 20, 2018. The agreement was designed with the intended effect of converting an initial notional amount of $
306.5
million of the Company’s variable rate debt obligation under the 2016 facilities or any replacement facility with similar terms to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month London Interbank Borrowing rate (“LIBOR”) will be eliminated and the Company will pay a fixed rate of
1.566%
, plus the current applicable margin.
During the second quarter of 2014, the Company entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $
682.6
million of the Company’s variable rate debt obligation under the 2014 facilities or any replacement facility with similar terms, including the 2016 facilities, to fixed rate debt. Such agreement remains outstanding with a notional amount of $
711.1
million as of
July 30, 2017
, and is now converting a portion of the Company’s variable rate debt obligation under the 2016 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and the Company will pay a weighted average fixed rate of
1.924%
, plus the current applicable margin.
During the second quarter of 2013, the Company entered into an interest rate swap agreement for a three-year term commencing on August 19, 2013. The agreement was designed with the intended effect of converting an initial notional amount of $
1,228.8
million of the Company’s variable rate debt obligation to fixed rate debt and applied to debt incurred under its then outstanding facilities and, subsequently, to the 2014 facilities and the 2016 facilities. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR was eliminated and the Company paid a fixed rate of
0.604%
, plus the current applicable margin. The agreement expired on August 17, 2016.
The notional amount of any outstanding interest rate swap will be adjusted according to a pre-set schedule during the term of the applicable swap agreement such that, based on the Company’s projections for future debt repayments, the Company’s outstanding debt under the Term Loan A facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.
The 2016 facilities also contain covenants that restrict the Company’s ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in its interest or to satisfy its obligations under its other outstanding debt. These covenants restrict its ability to, among other things:
|
|
•
|
incur or guarantee additional debt or extend credit;
|
|
|
•
|
make restricted payments, including paying dividends or making distributions on, or redeeming or repurchasing, the Company’s capital stock or certain debt;
|
|
|
•
|
make acquisitions and investments;
|
|
|
•
|
engage in transactions with affiliates;
|
|
|
•
|
enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends;
|
|
|
•
|
create liens on the Company’s assets or engage in sale/leaseback transactions; and
|
|
|
•
|
effect a consolidation or merger, or sell, transfer, or lease all or substantially all of the Company’s assets.
|
The 2016 facilities require the Company to comply with certain financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the applicable facility. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable which would result in acceleration of its other debt. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of the Company’s other indebtedness.
4 1/2% Senior Notes Due 2022
The Company has outstanding
$700.0
million principal amount of
4 1/2%
senior notes due December 15, 2022. The Company paid $
16.3
million of fees during 2013 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to December 15, 2017 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after December 15, 2017 at specified redemption prices plus any accrued and unpaid interest. The Company’s ability to pay cash dividends and make other restricted payments is limited, in each case, over specified amounts as defined in the indenture governing the notes.
7 3/4% Debentures Due 2023
The Company has outstanding
$100.0
million of debentures due November 15, 2023 that accrue interest at the rate of
7 3/4%
. Pursuant to the indenture governing the debentures, the Company must maintain a certain level of stockholders’ equity in order to pay cash dividends and make other restricted payments, as defined in the indenture governing the debentures.
3 5/8% Euro Senior Notes Due 2024
On June 20, 2016, the Company issued €
350.0
million euro-denominated principal amount of
3 5/8%
senior notes due July 15, 2024. Interest on the notes is payable in euros. The Company paid €
6.4
million (approximately $
7.3
million based on exchange rates in effect on the payment date) of fees during the second quarter of 2016 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.
Substantially all of the Company’s assets have been pledged as collateral to secure the Company’s obligations under its senior secured credit facilities, the
7 3/4%
debentures due 2023 and contingent purchase price payments to Mr. Calvin Klein as discussed in
Note 7
, “
Goodwill
.”
10. INCOME TAXES
The effective income tax rates for the
thirteen weeks ended
July 30, 2017
and
July 31, 2016
were
20.8
% and
21.2%
, respectively. The effective income tax rates for the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
were
19.5%
and
15.3%
, respectively. The effective income tax rates for the
thirteen and twenty-six weeks ended
July 30, 2017
and
July 31, 2016
were lower than the United States statutory rate due to the benefit of overall lower tax rates in certain international jurisdictions where the Company files tax returns. Also contributing to the lower effective income tax rate for the
twenty-six weeks ended
July 31, 2016
was the benefit of certain discrete items, including the lower tax rate applicable to the pre-tax gain recorded to write-up the Company’s equity investment in TH China to fair value that resulted in a
10.1%
benefit to the Company’s effective income tax rate.
The Company files income tax returns in more than
40
international jurisdictions each year. All of the international jurisdictions in which the Company files tax returns, with the exception of Japan, have lower statutory tax rates than the United States statutory tax rate. A substantial amount of the Company’s earnings come from international operations, largely attributable to earnings in the Netherlands, Hong Kong, China, Korea and Canada. The lower statutory income tax rates in these jurisdictions, as compared to the United States statutory rate, coupled with special rates levied on income from certain of the Company’s jurisdictional activities, significantly reduce the Company’s consolidated effective income tax rate.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure.
The Company also has exposure to interest rate volatility related to its term loans under the 2016 facilities. The Company has entered into interest rate swap agreements to hedge against a portion of this exposure. Please see
Note 9
, “
Debt
,” for a further discussion of the Company’s facilities and these agreements.
The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. The foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate swap agreements are designated as effective hedging instruments (collectively referred to as “cash flow hedges”). The changes in the fair value of the cash flow hedges are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”). The cash flows from such hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged. No amounts were excluded from effectiveness testing. There was no ineffective portion of cash flow hedges during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
.
Net Investment Hedge
The Company has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, during the second quarter of 2016, the Company designated the carrying amount of its €
350.0
million euro-denominated principal amount of 3 5/8% senior notes due 2024 (the “foreign currency borrowings”) that it had issued in the United States as a net investment hedge of its investments in certain of its foreign subsidiaries that use the euro as their functional currency. Please see
Note 9
, “
Debt
,” for a further discussion of the Company’s foreign currency borrowings.
The Company records the foreign currency borrowings at carrying value in its Consolidated Balance Sheets. The carrying value of the foreign currency borrowings is remeasured at the end of each reporting period to reflect changes in the foreign currency exchange spot rate. Since the foreign currency borrowings are designated as a net investment hedge, such remeasurement is recorded in equity as a component of AOCL. The fair value and the carrying value of the foreign currency borrowings designated as a net investment hedge were $
436.2
million and $
404.1
million, respectively, as of
July 30, 2017
, $
384.1
million and $
367.5
million, respectively, as of
January 29, 2017
and $
406.5
million and $
381.9
million, respectively, as of July 31, 2016. The Company evaluates the effectiveness of its net investment hedge as of the beginning of each quarter. No amounts were excluded from effectiveness testing. There was no ineffective portion of the net investment hedge during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
.
Undesignated Contracts
The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”), including all of the foreign currency forward exchange contracts related to intercompany transactions and intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts are largely offset by the remeasurement of the underlying intercompany balances.
In addition, the Company has exposure to changes in foreign currency exchange rates related to the translation of the earnings of its subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, beginning in the second quarter of 2016, the Company entered into several foreign currency option contracts. These contracts represent the Company’s purchase of euro put/United States dollar call options and Chinese yuan renminbi put/United States dollar call options.
The Company’s foreign currency option contracts are also undesignated contracts. As such, the changes in the fair value of these foreign currency option contracts are immediately recognized in earnings. This mitigates, to an extent, the effect of a strengthening United States dollar against the euro and Chinese yuan renminbi on the reporting of the Company’s euro-denominated and Chinese yuan renminbi-denominated earnings, respectively.
The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes.
The following table summarizes the fair value and presentation of the Company’s derivative financial instruments in its Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Classified in Other Current Assets and Other Assets)
|
Liabilities (Classified in Accrued Expenses and Other Liabilities)
|
(In millions)
|
7/30/17
|
|
1/29/17
|
|
7/31/16
|
|
7/30/17
|
|
1/29/17
|
|
7/31/16
|
Contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
2.6
|
|
|
$
|
25.1
|
|
|
$
|
6.8
|
|
|
$
|
57.5
|
|
|
$
|
2.6
|
|
|
$
|
12.5
|
|
Interest rate swap agreements
|
0.2
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
7.1
|
|
|
17.0
|
|
Total contracts designated as cash flow hedges
|
2.8
|
|
|
25.1
|
|
|
6.8
|
|
|
60.1
|
|
|
9.7
|
|
|
29.5
|
|
Undesignated contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
2.1
|
|
|
0.8
|
|
|
1.8
|
|
|
0.7
|
|
|
0.0
|
|
|
0.7
|
|
Foreign currency option contracts
|
0.1
|
|
|
3.2
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total undesignated contracts
|
2.2
|
|
|
4.0
|
|
|
2.8
|
|
|
0.7
|
|
|
0.0
|
|
|
0.7
|
|
Total
|
$
|
5.0
|
|
|
$
|
29.1
|
|
|
$
|
9.6
|
|
|
$
|
60.8
|
|
|
$
|
9.7
|
|
|
$
|
30.2
|
|
At
July 30, 2017
, the notional amount outstanding of foreign currency forward exchange contracts and foreign currency option contracts was $
1,062.9
million and $
100.0
million, respectively. Such contracts expire principally between August 2017 and January 2019.
The following table summarizes the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in Other Comprehensive Income (Loss)
|
|
Gain (Loss) Reclassified from AOCL into Income (Expense)
|
(In millions)
|
|
|
Location
|
Amount
|
Thirteen Weeks Ended
|
|
7/30/17
|
|
7/31/16
|
|
|
7/30/17
|
|
7/31/16
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
(62.4
|
)
|
|
$
|
21.2
|
|
|
Cost of goods sold
|
$
|
3.7
|
|
|
$
|
3.5
|
|
Interest rate swap agreements
|
|
(0.1
|
)
|
|
(1.4
|
)
|
|
Interest expense
|
(1.7
|
)
|
|
(2.7
|
)
|
Foreign currency borrowings (net investment hedge)
|
|
(27.5
|
)
|
|
7.8
|
|
|
N/A
|
—
|
|
|
—
|
|
Total
|
|
$
|
(90.0
|
)
|
|
$
|
27.6
|
|
|
|
$
|
2.0
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
7/30/17
|
|
7/31/16
|
|
|
7/30/17
|
|
7/31/16
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
(70.2
|
)
|
|
$
|
(37.2
|
)
|
|
Cost of goods sold
|
$
|
8.1
|
|
|
$
|
8.2
|
|
Interest rate swap agreements
|
|
0.7
|
|
|
(1.5
|
)
|
|
Interest expense
|
(4.0
|
)
|
|
(5.1
|
)
|
Foreign currency borrowings (net investment hedge)
|
|
(36.1
|
)
|
|
7.8
|
|
|
N/A
|
—
|
|
|
—
|
|
Total
|
|
$
|
(105.6
|
)
|
|
$
|
(30.9
|
)
|
|
|
$
|
4.1
|
|
|
$
|
3.1
|
|
A net loss in AOCL on foreign currency forward exchange contracts at
July 30, 2017
of $
40.1
million is estimated to be reclassified in the next 12 months in the Company’s Consolidated Income Statement to costs of goods sold as the underlying inventory hedged by such forward exchange contracts is sold. In addition, a net loss in AOCL for interest rate swap agreements at
July 30, 2017
of $
2.4
million is estimated to be reclassified to interest expense within the next 12 months. Amounts recognized in AOCL for foreign currency borrowings would be recognized in earnings only upon the sale or liquidation of the hedged net investment.
The following table summarizes the effect of the Company’s undesignated contracts recognized in SG&A expenses in its Consolidated Income Statements:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Gain (Loss) Recognized in Income (Expense)
|
Thirteen Weeks Ended
|
|
7/30/17
|
|
7/31/16
|
Foreign currency forward exchange contracts
|
|
$
|
1.5
|
|
|
$
|
(2.9
|
)
|
Foreign currency option contracts
|
|
(1.7
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
7/30/17
|
|
7/31/16
|
Foreign currency forward exchange contracts
|
|
$
|
1.7
|
|
|
$
|
(6.7
|
)
|
Foreign currency option contracts
|
|
(4.3
|
)
|
|
(0.2
|
)
|
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of
July 30, 2017
.
12. FAIR VALUE MEASUREMENTS
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/30/17
|
|
1/29/17
|
|
7/31/16
|
(In millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
4.7
|
|
|
N/A
|
|
$
|
4.7
|
|
|
N/A
|
|
$
|
25.9
|
|
|
N/A
|
|
$
|
25.9
|
|
|
N/A
|
|
$
|
8.6
|
|
|
N/A
|
|
$
|
8.6
|
|
Interest rate swap agreements
|
N/A
|
|
0.2
|
|
|
N/A
|
|
0.2
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
—
|
|
Foreign currency option contracts
|
N/A
|
|
0.1
|
|
|
N/A
|
|
0.1
|
|
|
N/A
|
|
3.2
|
|
|
N/A
|
|
3.2
|
|
|
N/A
|
|
1.0
|
|
|
N/A
|
|
1.0
|
|
Total Assets
|
N/A
|
|
$
|
5.0
|
|
|
N/A
|
|
$
|
5.0
|
|
|
N/A
|
|
$
|
29.1
|
|
|
N/A
|
|
$
|
29.1
|
|
|
N/A
|
|
$
|
9.6
|
|
|
N/A
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
58.2
|
|
|
N/A
|
|
$
|
58.2
|
|
|
N/A
|
|
$
|
2.6
|
|
|
N/A
|
|
$
|
2.6
|
|
|
N/A
|
|
$
|
13.2
|
|
|
N/A
|
|
$
|
13.2
|
|
Interest rate swap agreements
|
N/A
|
|
2.6
|
|
|
N/A
|
|
2.6
|
|
|
N/A
|
|
7.1
|
|
|
N/A
|
|
7.1
|
|
|
N/A
|
|
17.0
|
|
|
N/A
|
|
17.0
|
|
Contingent purchase price payments related to reacquisition of the perpetual rights to the
TOMMY HILFIGER
trademarks in India
|
N/A
|
|
N/A
|
|
$
|
1.7
|
|
|
1.7
|
|
|
N/A
|
|
N/A
|
|
$
|
1.6
|
|
|
1.6
|
|
|
N/A
|
|
N/A
|
|
$
|
2.2
|
|
|
2.2
|
|
Total Liabilities
|
N/A
|
|
$
|
60.8
|
|
|
$
|
1.7
|
|
|
$
|
62.5
|
|
|
N/A
|
|
$
|
9.7
|
|
|
$
|
1.6
|
|
|
$
|
11.3
|
|
|
N/A
|
|
$
|
30.2
|
|
|
$
|
2.2
|
|
|
$
|
32.4
|
|
The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair value of the interest rate swap agreements is based on observable interest rate yield curves and represents the expected discounted cash flows underlying the financial instruments. The fair value of the foreign currency option contracts is estimated based on external valuation models, which use the original strike price, current foreign currency exchange rates, the implied volatility in foreign currency exchange rates and length of time to expiration as inputs.
Pursuant to the agreement governing the reacquisition of the rights in India to the
TOMMY HILFIGER
trademarks (which the Company entered into in September 2011 in connection with its acquisition of its
50%
ownership of TH India), the Company is required to make annual contingent purchase price payments based on a percentage of sales of
TOMMY HILFIGER
products in India in excess of an agreed upon threshold during each of six consecutive 12-month periods. Such payments are subject to a $
25.0
million aggregate maximum and are due within 60 days following each one-year period. The Company made annual contingent purchase price payments of $
0.6
million,
$0.6
million, $
0.6
million, $
0.4
million and $
0.2
million during 2016, 2015, 2014, 2013 and 2012, respectively. The Company is required to remeasure this liability at fair value on a recurring basis and classifies this as a Level 3 measurement. The fair value of such liability was determined using the discounted cash flow method, based on net sales projections for the Tommy Hilfiger apparel and accessories businesses in India, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, changes in the fair value are included within SG&A expenses in the Company’s Consolidated Income Statements.
The following table presents the change in the Level 3 contingent purchase price payment liability during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
(In millions)
|
7/30/17
|
|
7/31/16
|
Beginning Balance
|
$
|
1.6
|
|
|
$
|
2.2
|
|
Payments
|
—
|
|
|
—
|
|
Adjustments included in earnings
|
0.1
|
|
|
0.0
|
|
Ending Balance
|
$
|
1.7
|
|
|
$
|
2.2
|
|
Additional information with respect to assumptions used to value the contingent purchase price payment liability as of
July 30, 2017
is as follows:
|
|
|
|
|
Unobservable Inputs
|
|
Amount
|
Approximate compounded annual net sales growth rate
|
|
35.0
|
%
|
Approximate
discount rate
|
|
15.0
|
%
|
A five percentage point increase or decrease in the discount rate or the compounded annual net sales growth rate would result in an immaterial change to the liability.
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt as of
July 30, 2017
,
January 29, 2017
and
July 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/30/17
|
|
1/29/17
|
|
7/31/16
|
(In millions)
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
559.4
|
|
|
$
|
559.4
|
|
|
$
|
730.1
|
|
|
$
|
730.1
|
|
|
$
|
741.7
|
|
|
$
|
741.7
|
|
Short-term borrowings
|
18.0
|
|
|
18.0
|
|
|
19.1
|
|
|
19.1
|
|
|
19.4
|
|
|
19.4
|
|
Long-term debt (including portion classified as current)
|
3,185.7
|
|
|
3,269.6
|
|
|
3,197.3
|
|
|
3,248.7
|
|
|
3,358.2
|
|
|
3,434.6
|
|
The fair values of cash and cash equivalents and short-term borrowings approximate their carrying amounts due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable quarter. The Company classifies the measurement of its long-term debt as a Level 1 measurement. The carrying amounts of long-term debt reflect the unamortized portions of debt issuance costs and the original issue discounts.
13. STOCK-BASED COMPENSATION
The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan replaced certain other prior stock option plans. These other plans terminated upon the 2006 Plan’s initial stockholder approval in June 2006. Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.
The Company may grant the following types of incentive awards under the 2006 Plan: (i) non-qualified stock options (“NQs”); (ii) incentive stock options (“ISOs”); (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares; (vii) performance share units (“PSUs”); and (viii) other stock-based awards. Each award granted under the 2006 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance periods and performance measures, and such other terms and conditions as the plan committee determines.
Through
July 30, 2017
, the Company has granted under the 2006 Plan (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable PSUs; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by
one
share and each share underlying a restricted stock award, RSU or PSU reduces the number available by
two
shares. The per share exercise price of options granted under the 2006 Plan cannot be less than the closing price of the common stock on the date of grant.
Net income for the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
included $
21.1
million and $
19.5
million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $
6.5
million and $
5.8
million, respectively.
Effective the first quarter of 2017, the Company adopted an update to accounting guidance that simplifies several aspects of accounting for share-based payment award transactions, which resulted in the Company’s election to recognize forfeitures as they occur rather than continue to estimate expected forfeitures in determining compensation expense. This accounting change was applied on a modified retrospective basis and resulted in a cumulative-effect adjustment to decrease beginning retained earnings by $
0.8
million, with an offsetting increase to additional paid in capital of $
1.1
million and an increase to deferred tax assets of $
0.3
million. Please see
Note 20
, “
Recent Accounting Guidance
,” for a further discussion.
The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions for the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
were $
8.4
million and $
5.8
million, respectively. As a result of the Company’s adoption of the update discussed above, the Company recognized $
0.1
million of discrete net excess tax benefits related to share-based payments in its provision for income taxes for the
twenty-six weeks ended
July 30, 2017
. Prior to the adoption of this update, the Company recognized excess tax benefits or tax deficiencies in equity as a component of additional paid in capital.
Stock Options
Stock options currently outstanding are generally exercisable in
four
equal annual installments commencing one year after the date of grant. The vesting of such options outstanding is also generally accelerated upon retirement (as defined in the 2006 Plan). Such options are granted with a
10
-year term.
The Company estimates the fair value of stock options granted at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the options is expensed over the options’ vesting periods.
The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
7/30/17
|
|
7/31/16
|
Weighted average risk-free interest rate
|
2.10
|
%
|
|
1.45
|
%
|
Weighted average expected option term (in years)
|
6.25
|
|
|
6.25
|
|
Weighted average Company volatility
|
29.46
|
%
|
|
34.64
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per option
|
$
|
33.50
|
|
|
$
|
35.60
|
|
The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected option term. The expected option term represents the weighted average period of time that options granted are expected to be outstanding, based on vesting schedules and the contractual term of the options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected option term. Expected dividends are based on the Company’s common stock cash dividend rate at the date of grant.
The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving option grants. The Company will continue to evaluate the appropriateness of utilizing such method.
Service-based stock option activity for the
twenty-six weeks ended
July 30, 2017
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per option data)
|
Options
|
|
Weighted Average Exercise Price
Per Option
|
Outstanding at January 29, 2017
|
1,466
|
|
|
$
|
75.74
|
|
Granted
|
142
|
|
|
101.94
|
|
Exercised
|
105
|
|
|
66.49
|
|
Cancelled
|
10
|
|
|
108.23
|
|
Outstanding at July 30, 2017
|
1,493
|
|
|
$
|
78.67
|
|
Exercisable at July 30, 2017
|
1,062
|
|
|
$
|
68.51
|
|
Restricted Stock Units
RSUs granted to employees since 2016 generally vest in four equal annual installments commencing one year after the date of grant. Outstanding RSUs granted to employees prior to 2016 generally vest in
three
annual installments of
25%
,
25%
and
50%
commencing
two
years after the date of grant. Service-based RSUs granted to non-employee directors vest in full
one
year after the date of grant. The underlying RSU award agreements (excluding agreements for non-employee director awards) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed over the RSUs’ vesting periods.
RSU activity for the
twenty-six weeks ended
July 30, 2017
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per RSU data)
|
RSUs
|
|
Weighted Average Grant Date Fair Value Per RSU
|
Non-vested at January 29, 2017
|
812
|
|
|
$
|
105.96
|
|
Granted
|
441
|
|
|
103.04
|
|
Vested
|
247
|
|
|
108.98
|
|
Cancelled
|
38
|
|
|
105.19
|
|
Non-vested at July 30, 2017
|
968
|
|
|
$
|
103.89
|
|
Performance Share Units
The Company granted contingently issuable PSUs to certain of the Company’s senior executives during 2015, 2016 and 2017 subject to a three-year performance period. For such awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. The Company records expense ratably over the applicable vesting period regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in the first quarters of 2017 and 2016 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.49
|
%
|
|
1.04
|
%
|
Expected Company volatility
|
31.29
|
%
|
|
28.33
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per PSU
|
$
|
96.81
|
|
|
$
|
87.16
|
|
Certain of the awards granted in the first quarters of 2017 and 2016 are subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted
12.67
% and
12.99%
, respectively, for the restriction of liquidity.
PSU activity for the
twenty-six weeks ended
July 30, 2017
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per PSU data)
|
PSUs
|
|
Weighted Average Grant Date Fair Value Per PSU
|
Non-vested at January 29, 2017
|
125
|
|
|
$
|
92.32
|
|
Granted
|
72
|
|
|
96.81
|
|
Vested
|
—
|
|
|
—
|
|
Cancelled
|
—
|
|
|
—
|
|
Non-vested at July 30, 2017
|
197
|
|
|
$
|
93.97
|
|
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in AOCL, net of related taxes, by component for the
twenty-six weeks ended
July 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign currency translation adjustments
|
|
Net unrealized and realized gain (loss) on effective cash flow hedges
|
|
Total
|
Balance, January 29, 2017
|
$
|
(737.7
|
)
|
|
$
|
26.9
|
|
|
$
|
(710.8
|
)
|
Other comprehensive income (loss) before reclassifications
|
286.4
|
|
(1)
|
(66.6
|
)
|
|
219.8
|
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
5.6
|
|
|
5.6
|
|
Other comprehensive income (loss)
|
286.4
|
|
|
(72.2
|
)
|
|
214.2
|
|
Balance, July 30, 2017
|
$
|
(451.3
|
)
|
|
$
|
(45.3
|
)
|
|
$
|
(496.6
|
)
|
(1)
Foreign currency translation adjustments included a net loss on net investment hedge of $
22.5
million.
The following table presents the changes in AOCL, net of related taxes, by component for the
twenty-six weeks ended
July 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign currency translation adjustments
|
|
Net unrealized and realized gain (loss) on effective cash flow hedges
|
|
Total
|
Balance, January 31, 2016
|
$
|
(730.4
|
)
|
|
$
|
26.2
|
|
|
$
|
(704.2
|
)
|
Other comprehensive income (loss) before reclassifications
|
89.5
|
|
(2)
|
(35.2
|
)
|
|
54.3
|
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
2.8
|
|
|
2.8
|
|
Other comprehensive income (loss)
|
89.5
|
|
|
(38.0
|
)
|
|
51.5
|
|
Balance, July 31, 2016
|
$
|
(640.9
|
)
|
|
$
|
(11.8
|
)
|
|
$
|
(652.7
|
)
|
(2)
Foreign currency translation adjustments included a net gain on net investment hedge of $
4.9
million.
The following table presents reclassifications out of AOCL to earnings for the
thirteen and twenty-six weeks ended
July 30, 2017
and
July 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCL
|
Affected Line Item in the Company’s Consolidated Income Statements
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
(In millions)
|
7/30/17
|
|
7/31/16
|
|
7/30/17
|
|
7/31/16
|
|
Realized gain (loss) on effective cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
3.7
|
|
|
$
|
3.5
|
|
|
$
|
8.1
|
|
|
$
|
8.2
|
|
Cost of goods sold
|
Interest rate swap agreements
|
(1.7
|
)
|
|
(2.7
|
)
|
|
(4.0
|
)
|
|
(5.1
|
)
|
Interest expense
|
Less: Tax effect
|
(0.5
|
)
|
|
0.4
|
|
|
(1.5
|
)
|
|
0.3
|
|
Income tax expense
|
Total, net of tax
|
$
|
2.5
|
|
|
$
|
0.4
|
|
|
$
|
5.6
|
|
|
$
|
2.8
|
|
|
15. STOCKHOLDERS’ EQUITY
The Company’s Board of Directors authorized a $
500.0
million
three-year
stock repurchase program effective June 3, 2015. On March 21, 2017, the Board of Directors authorized a $
750.0
million increase to the program and extended the program to June 3, 2020. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as the Company deems appropriate.
Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, restrictions under the Company’s debt arrangements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.
During the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
, the Company purchased
1.2
million shares and
1.4
million shares, respectively, of its common stock under the program in open market transactions for $
123.7
million and
$129.2
million, respectively. As of
July 30, 2017
, the repurchased shares were held as treasury stock and $
685.0
million of the authorization remained available for future share repurchases.
Treasury stock activity also includes shares that were withheld principally in conjunction with the settlement of vested restricted stock, RSUs and PSUs to satisfy tax withholding requirements.
16. NET INCOME PER COMMON SHARE
The Company computed its basic and diluted net income per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
(In millions, except per share data)
|
7/30/17
|
|
7/31/16
|
|
7/30/17
|
|
7/31/16
|
|
|
|
|
|
|
|
|
Net income attributable to PVH Corp.
|
$
|
119.7
|
|
|
$
|
90.5
|
|
|
$
|
190.1
|
|
|
$
|
322.1
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
77.8
|
|
|
80.7
|
|
|
78.0
|
|
|
81.0
|
|
Weighted average impact of dilutive securities
|
0.9
|
|
|
0.6
|
|
|
0.8
|
|
|
0.6
|
|
Total shares for diluted net income per common share
|
78.7
|
|
|
81.3
|
|
|
78.8
|
|
|
81.6
|
|
|
|
|
|
|
|
|
|
Basic net income per common share attributable to PVH Corp.
|
$
|
1.54
|
|
|
$
|
1.12
|
|
|
$
|
2.44
|
|
|
$
|
3.98
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share attributable to PVH Corp.
|
$
|
1.52
|
|
|
$
|
1.11
|
|
|
$
|
2.41
|
|
|
$
|
3.95
|
|
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
(In millions)
|
7/30/17
|
|
7/31/16
|
|
7/30/17
|
|
7/31/16
|
|
|
|
|
|
|
|
|
Weighted average potentially dilutive securities
|
0.6
|
|
|
1.0
|
|
|
0.8
|
|
|
1.0
|
|
Shares underlying contingently issuable awards that have not met the necessary conditions as of the end of a reporting period are not included in the calculation of diluted net income per common share for that period. The Company had contingently issuable awards outstanding that did not meet the performance conditions as of
July 30, 2017
and
July 31, 2016
and, therefore, were excluded from the calculation of diluted net income per common share for the
thirteen and twenty-six weeks ended
July 30, 2017
and
July 31, 2016
. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was
0.2
million as of each of
July 30, 2017
and
July 31, 2016
. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
17. NONCASH INVESTING AND FINANCING TRANSACTIONS
The Company recorded increases to goodwill of $
25.0
million and
$23.6
million during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
, respectively, related to liabilities incurred for contingent purchase price payments to Mr. Calvin Klein. Such amounts are not due or paid in cash until 45 days subsequent to the Company’s applicable quarter end. As such, during the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
, the Company paid $
25.6
million and $
25.2
million, respectively, in cash related to contingent purchase price payments to Mr. Calvin Klein that were recorded as additions to goodwill during the periods the liabilities were incurred.
Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statements of Cash Flows for the
twenty-six weeks ended
July 30, 2017
and
July 31, 2016
were $
1.6
million and $
2.4
million, respectively, of assets acquired through capital leases.
Omitted from acquisition of treasury shares in the Company’s Consolidated Statements of Cash Flows for the
twenty-six weeks ended
July 30, 2017 and
July 31, 2016
were $
3.0
million and $
2.0
million, respectively, of shares repurchased under the stock repurchase program for which the trades occurred but remained unsettled as of the end of the respective period.
The Company completed the TH China acquisition during the first quarter of 2016. Included in the acquisition consideration was the elimination of a $
2.8
million pre-acquisition receivable owed to the Company by TH China.
The Company recorded during the second quarter of 2016 a loss of $
11.2
million to write-off previously capitalized debt issuance costs in connection with the amendment of its senior secured credit facilities.
18. SEGMENT DATA
The Company manages its operations through its operating divisions, which are presented as
six
reportable segments: (i) Calvin Klein North America; (ii) Calvin Klein International; (iii) Tommy Hilfiger North America; (iv) Tommy Hilfiger International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.
Calvin Klein North America Segment
- This segment consists of the Company’s Calvin Klein North America division. This segment derives revenue principally from (i) marketing
CALVIN KLEIN
branded apparel and related products at wholesale in the United States and Canada, primarily to department and specialty stores and digital commerce sites operated by key department store customers and pure play digital commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and digital commerce sites in North America, which sell
CALVIN KLEIN
branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the
CALVIN KLEIN
brand names for a broad array of products in North America. This segment also includes, since December 2016, the Company’s proportionate share of the net income or loss of its investment in its unconsolidated Calvin Klein foreign affiliate in Mexico.
Calvin Klein International Segment -
This segment consists of the Company’s Calvin Klein International division. This segment derives revenue principally from (i) marketing
CALVIN KLEIN
branded apparel and related products at wholesale principally in Europe, Asia and Brazil, primarily to department and specialty stores, digital commerce sites operated by key department store customers and pure play digital commerce retailers, franchisees
,
distributors and licensees; (ii) operating retail stores and digital commerce sites in Europe, Asia and Brazil, which sell
CALVIN KLEIN
branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the
CALVIN KLEIN
brand names for a broad array of products outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Calvin Klein foreign affiliates in Australia and India.
Tommy Hilfiger North America Segment
- This segment consists of the Company’s Tommy Hilfiger North America division. This segment derives revenue principally from (i) marketing
TOMMY HILFIGER
branded apparel and related products at wholesale in the United States and Canada, primarily to department stores, principally Macy’s, Inc. and Hudson’s Bay Company, as well as digital commerce sites operated by these department store customers and pure play digital commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in the United States and Canada, and digital commerce sites in North America, which sell
TOMMY HILFIGER
branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the
TOMMY HILFIGER
brand names for a broad array of products in North America. This segment also includes, since December 2016, the Company’s proportionate share of the net income or loss of its investment in its unconsolidated Tommy Hilfiger foreign affiliate in Mexico.
Tommy Hilfiger International Segment
- This segment consists of the Company’s Tommy Hilfiger International division. This segment derives revenue principally from (i) marketing
TOMMY HILFIGER
branded apparel and related products at wholesale principally in Europe and China, primarily to department and specialty stores, digital commerce sites operated by key department store customers and pure play digital commerce retailers, franchisees, distributors and licensees; (ii) operating retail stores in Europe, China and Japan and international digital commerce sites, which sell
TOMMY HILFIGER
branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the
TOMMY HILFIGER
brand names for a broad array of products outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Tommy Hilfiger foreign affiliates in Brazil, India and Australia. This segment included the Company’s proportionate share of the net income or loss of its investment in TH
China until April 13, 2016, on which date the Company began to consolidate the operations as a wholly owned subsidiary of the Company in conjunction with the TH China acquisition. Please see
Note 3
, “
Acquisitions
,” for a further discussion.
Heritage Brands Wholesale Segment
- This segment consists of the Company’s Heritage Brands Wholesale division. This segment derives revenue primarily from the marketing to department, chain and specialty stores and digital commerce sites operated by select wholesale partners and pure play digital commerce retailers in North America of (i) dress shirts and neckwear under various owned and licensed brand names, including several private label brands; (ii) men’s sportswear principally under the brand names
Van Heusen
,
IZOD
and
ARROW
; (iii) swimwear, fitness apparel, swim accessories and related products under the brand name
Speedo
; and (iv) women’s intimate apparel under the brand names
Warner’s
and
Olga.
This segment also derives revenue from Company operated digital commerce sites in the United States through
SpeedoUSA
.com and, since March 30, 2017,
TrueandCo
.com. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated Heritage Brands foreign affiliates in Australia and, since December 2016, in Mexico.
Heritage Brands Retail Segment -
This segment consists of the Company’s Heritage Brands Retail division. This segment derives revenue principally from operating retail stores, primarily located in outlet centers throughout the United States and Canada, which primarily sell apparel, accessories and related products
.
A majority of the Company’s Heritage Brands stores operate under the
Van Heusen
name and offer a broad selection of
Van Heusen
men’s and women’s apparel, along with a limited selection of the Company’s dress shirt and neckwear offerings and
IZOD Golf
,
Warner’s
and
Speedo
brand products. Some of these stores feature multiple brand names on the door signage.
The following tables present summarized information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
(In millions)
|
7/30/17
|
|
7/31/16
|
|
|
7/30/17
|
(1)
|
7/31/16
|
(1)
|
Revenue – Calvin Klein North America
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
348.3
|
|
|
$
|
361.3
|
|
|
|
$
|
678.4
|
|
|
$
|
700.1
|
|
|
Royalty revenue
|
31.6
|
|
|
28.0
|
|
|
|
66.7
|
|
|
58.3
|
|
|
Advertising and other revenue
|
12.3
|
|
|
8.7
|
|
|
|
22.5
|
|
|
20.2
|
|
|
Total
|
392.2
|
|
|
398.0
|
|
|
|
767.6
|
|
|
778.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Calvin Klein International
|
|
|
|
|
|
|
|
|
|
Net sales
|
370.0
|
|
|
306.2
|
|
|
|
724.8
|
|
|
622.5
|
|
|
Royalty revenue
|
17.3
|
|
|
16.8
|
|
|
|
36.9
|
|
|
35.4
|
|
|
Advertising and other revenue
|
7.0
|
|
|
5.4
|
|
|
|
13.0
|
|
|
12.6
|
|
|
Total
|
394.3
|
|
|
328.4
|
|
|
|
774.7
|
|
|
670.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger North America
|
|
|
|
|
|
|
|
|
|
Net sales
|
380.8
|
|
|
396.0
|
|
|
|
678.9
|
|
|
717.1
|
|
|
Royalty revenue
|
15.3
|
|
|
9.2
|
|
|
|
31.8
|
|
|
20.2
|
|
|
Advertising and other revenue
|
3.7
|
|
|
2.2
|
|
|
|
7.6
|
|
|
4.7
|
|
|
Total
|
399.8
|
|
|
407.4
|
|
|
|
718.3
|
|
|
742.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger International
|
|
|
|
|
|
|
|
|
|
Net sales
|
479.1
|
|
|
442.1
|
|
|
|
986.9
|
|
|
886.7
|
|
|
Royalty revenue
|
11.7
|
|
|
10.1
|
|
|
|
21.8
|
|
|
21.7
|
|
|
Advertising and other revenue
|
1.0
|
|
|
0.6
|
|
|
|
6.6
|
|
|
1.6
|
|
|
Total
|
491.8
|
|
|
452.8
|
|
|
|
1,015.3
|
|
|
910.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Wholesale
|
|
|
|
|
|
|
|
|
|
Net sales
|
316.7
|
|
|
270.7
|
|
|
|
643.5
|
|
|
609.9
|
|
|
Royalty revenue
|
4.7
|
|
|
5.2
|
|
|
|
9.7
|
|
|
10.2
|
|
|
Advertising and other revenue
|
0.9
|
|
|
1.1
|
|
|
|
1.8
|
|
|
1.8
|
|
|
Total
|
322.3
|
|
|
277.0
|
|
|
|
655.0
|
|
|
621.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Retail
|
|
|
|
|
|
|
|
|
|
Net sales
|
68.6
|
|
|
69.1
|
|
|
|
126.0
|
|
|
126.8
|
|
|
Royalty revenue
|
0.8
|
|
|
0.6
|
|
|
|
1.8
|
|
|
1.2
|
|
|
Advertising and other revenue
|
0.1
|
|
|
0.0
|
|
|
|
0.2
|
|
|
0.1
|
|
|
Total
|
69.5
|
|
|
69.7
|
|
|
|
128.0
|
|
|
128.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
Net sales
|
1,963.5
|
|
|
1,845.4
|
|
|
|
3,838.5
|
|
|
3,663.1
|
|
|
Royalty revenue
|
81.4
|
|
|
69.9
|
|
|
|
168.7
|
|
|
147.0
|
|
|
Advertising and other revenue
|
25.0
|
|
|
18.0
|
|
|
|
51.7
|
|
|
41.0
|
|
|
Total
|
$
|
2,069.9
|
|
|
$
|
1,933.3
|
|
|
|
$
|
4,058.9
|
|
|
$
|
3,851.1
|
|
|
|
|
(1)
|
Revenue was impacted by fluctuations 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 Part I, Item 2 of this report for a further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
(In millions)
|
7/30/17
|
(2)
|
|
7/31/16
|
(2)
|
|
7/30/17
|
(2)
|
|
7/31/16
|
(2)
|
Income before interest and taxes – Calvin Klein North America
|
$
|
48.0
|
|
|
|
$
|
55.2
|
|
|
|
$
|
89.9
|
|
|
|
$
|
93.3
|
|
(11)(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Calvin Klein International
|
47.5
|
|
|
|
50.5
|
|
|
|
99.1
|
|
|
|
102.7
|
|
(11)(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger North America
|
53.2
|
|
(3)
|
|
46.1
|
|
|
|
34.4
|
|
(3)(5)
|
|
69.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger International
|
38.2
|
|
(4)
|
|
29.5
|
|
(8)
|
|
90.3
|
|
(4)(5)
|
|
212.8
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Wholesale
|
30.5
|
|
|
|
8.3
|
|
|
|
60.8
|
|
|
|
36.2
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Retail
|
4.5
|
|
|
|
3.7
|
|
|
|
6.0
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest and taxes – Corporate
(1)
|
(41.4
|
)
|
(6)
|
|
(50.3
|
)
|
(10)(13)
|
|
(86.8
|
)
|
(6)(7)
|
|
(82.3
|
)
|
(11)(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
$
|
180.5
|
|
|
|
$
|
143.0
|
|
|
|
$
|
293.7
|
|
|
|
$
|
437.6
|
|
|
|
|
(1)
|
Includes corporate expenses not allocated to any reportable segments, the Company’s proportionate share of the net income or loss of its investments 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, actuarial gains and losses from the Company’s Pension Plans, SERP Plans and Postretirement Plans (which are generally recorded in the fourth quarter) and gains and losses from changes in the fair value of foreign currency option contracts.
|
|
|
(2)
|
Income (loss) before interest and taxes was impacted by fluctuations 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 Part I, Item 2 of this report for a further discussion.
|
|
|
(3)
|
Income before interest and taxes for the
thirteen and twenty-six weeks ended
July 30, 2017
included costs of $
7.1
million and $
14.1
million, respectively, associated with the relocation of the Company’s Tommy Hilfiger office in New York, including noncash depreciation expense.
|
|
|
(4)
|
Income before interest and taxes for the
thirteen and twenty-six weeks ended
July 30, 2017
included costs of $
6.6
million and $
13.5
million, respectively, associated with the TH China acquisition, primarily consisting of amortization of short-lived assets.
|
|
|
(5)
|
Income before interest and taxes for the
twenty-six weeks ended
July 30, 2017
included costs of $
54.2
million associated with the agreements entered into on March 20, 2017 for a transaction to restructure the Company’s 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. Such costs were included in the Company’s segments as follows: $
31.3
million in Tommy Hilfiger North America; and $
22.9
million in Tommy Hilfiger International.
|
|
|
(6)
|
Loss before interest and taxes for the
thirteen and twenty-six weeks ended
July 30, 2017
included costs of $
5.5
million and $
7.3
million, respectively, associated with the consolidation of the Company’s warehouse and distribution network in North America.
|
|
|
(7)
|
Loss before interest and taxes for the
twenty-six weeks ended
July 30, 2017
included costs of $
9.4
million related to the noncash settlement of certain of the Company’s benefit obligations related to its Pension Plans as a result of an annuity purchased for certain participants, under which such obligations were transferred to an insurer. Please see
Note 8
, “
Retirement and Benefit Plans
,” for a further discussion.
|
|
|
(8)
|
Income before interest and taxes for the
thirteen weeks ended
July 31, 2016
included costs of $
20.3
million associated with the TH China acquisition, primarily consisting of valuation adjustments and amortization of short-lived assets.
|
|
|
(9)
|
Income before interest and taxes for the
twenty-six weeks ended
July 31, 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 $
44.5
million, primarily 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 3
, “
Acquisitions
,” for a further discussion.
|
|
|
(10)
|
Loss before interest and taxes for the
thirteen weeks ended
July 31, 2016
included costs of $
2.3
million associated with the associated with the integration of Warnaco and the related restructuring.
|
|
|
(11)
|
Income before interest and taxes for the
twenty-six weeks ended
July 31, 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.
|
|
|
(12)
|
Income before interest and taxes for the
twenty-six weeks ended
July 31, 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.
|
|
|
(13)
|
Loss before interest and taxes for the
thirteen and twenty-six weeks ended
July 31, 2016
included costs of $
15.8
million related to the Company’s amendment of its senior secured credit facilities. Please see
Note 9
, “
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.
19. GUARANTEES
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 maximum amount deemed to have been guaranteed for all leases as of
July 30, 2017
was $
20.0
million and the Company has the right to seek recourse from the buyer of the Bass assets for the full amount. The liability for the guaranteed lease payments as of
July 30, 2017
,
January 29, 2017
and
July 31, 2016
was $
0.9
million, $
1.1
million and $
1.6
million, respectively, which was included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets.
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
July 30, 2017
was approximately $
12.2
million, which is subject to exchange rate fluctuation.
The guarantees are in effect for the entire terms of the respective obligations. The liability for these guarantee obligations was immaterial as of
July 30, 2017
,
January 29, 2017
and
July 31, 2016
.
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.
20. RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
The FASB issued in July 2015 an update to accounting guidance to simplify the measurement of inventory. 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. Previously, all inventory was measured at the lower of cost or market. The Company adopted this update in the first quarter of 2017 and it did not have a material impact on the Company’s consolidated financial statements.
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 Company adopted this update in the first quarter of 2017. With respect to accounting for forfeitures, the Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures in determining compensation expense. This accounting change was applied on a modified retrospective basis and resulted in a cumulative-effect adjustment to decrease beginning retained earnings by $
0.8
million, with an offsetting increase to additional paid in capital of $
1.1
million and an increase to deferred tax assets of $
0.3
million. 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. Prior to the adoption of this update, the Company recognized excess tax benefits or tax deficiencies in equity as a component of additional paid in capital. During the
twenty-six weeks ended
July 30, 2017
, the Company recognized in income tax expense discrete net excess tax benefits of $
0.1
million. In addition, excess tax benefits are now classified as an operating activity in the Company’s Consolidated Statements of Cash Flows instead of as a financing activity, and such classification has been applied on a retrospective basis to all periods presented. As a result, excess tax benefits of $
0.5
million for the twenty-six weeks ended July 31, 2016 was reclassified from financing activities to operating activities. 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 presented within financing activities in the Company’s Consolidated Statements of Cash Flows, which is consistent with the Company’s historical presentation, and therefore had no impact to the Company.
Accounting Guidance Issued But Not Adopted as of July 30, 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. 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 timing of the recognition of revenue among quarters may be affected for certain of the Company’s licensing arrangements. 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 loyalty awards will be initially deferred when the loyalty awards are earned and recognized, along with the related cost of goods 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. 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 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. 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 its consolidated financial statements but expects that the standard will result in a significant increase to its other assets and other liabilities.
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 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. 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 July 30, 2017, the Company had deferred charges of $
7.7
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 March 2017 an update to the accounting guidance to change the presentation of net periodic pension cost and net periodic postretirement benefit cost. The update requires employers to report the service cost component of pension and postretirement net benefit cost in the same line item as other compensation costs arising from services rendered by the employees during the applicable period. The other components of net benefit cost are required to be presented in the income statement separately from the service component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component of net benefit cost is eligible for capitalization, when applicable. The update will be effective for the Company in the first quarter of 2018. Retrospective adoption is required for the presentation updates and prospective adoption is required for the capitalization update. The update will impact the presentation of net periodic pension cost and net periodic postretirement benefit cost within income before interest and taxes in the Company’s Consolidated Income Statements. Otherwise, the adoption of this update will not have a material impact on the Company’s consolidated financial statements.
21. OTHER COMMENTS
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 beginning March 31, 2018 through September 30, 2026. The outstanding principal balance of the loan bears interest at a rate of (i)
4.50%
per annum until the sixth anniversary of the closing date of the loan and (ii) LIBOR plus
4.00%
thereafter. The outstanding balance, including accrued interest, was $
14.0
million and $
13.9
million as of July 30, 2017 and January 29, 2017, respectively, and was included in other assets in the Company’s Consolidated Balance Sheets.