NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company with a brand portfolio consisting of nationally and internationally recognized trademarks, including
CALVIN KLEIN
,
TOMMY HILFIGER
,
Van Heusen
,
IZOD
,
ARROW
,
Warner’s
,
Olga
,
True&Co.
and
Geoffrey Beene
,
which are owned, and
Speedo
, which is
licensed in perpetuity for North America and the Caribbean, as well as various other owned, licensed and private label brands. The Company designs and markets branded dress shirts, neckwear, sportswear, jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products, handbags, accessories, footwear and other related products and licenses its owned brands globally over a broad array of product categories and for use in numerous discrete jurisdictions. 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 further discussion. The Company and Arvind Limited (“Arvind”) have 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 further discussion.
The Company’s fiscal years are based on the
52-53
week periods ending on the Sunday closest to February 1 and are designated by the calendar year in which the fiscal year commences. References to a year are to the Company’s fiscal year, unless the context requires otherwise.
The accompanying unaudited consolidated financial statements have been prepared in conformity 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
February 4, 2018
.
The preparation of the 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 consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates.
The results of operations for the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
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 were normal and recurring in nature) have been made to present fairly the consolidated operating results for the unaudited periods.
Certain reclassifications have been made to the consolidated financial statements for the prior year periods to present that information on a basis consistent with the current year.
2. REVENUE
The Company generates revenue primarily from sales of finished products under its owned and licensed trademarks through its wholesale and retail operations. The Company also generates royalty and advertising revenue from licensing the rights to its trademarks to third parties. Revenue is recognized upon the transfer of control of products or services to the Company’s customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those products or services.
Product Sales
The Company generates revenue from the wholesale distribution of its products to traditional retailers (including for sale through their digital commerce sites), pure play digital commerce retailers, franchisees, licensees and distributors. Revenue is
recognized upon transfer of control of goods to the customer, which generally occurs when title to goods is passed and risk of loss transfers to the customer. Depending on the contract terms, transfer of control is upon shipment of goods to or upon receipt of goods by the customer.
Payment is typically due within 30 to 90 days.
The amount of revenue recognized is net of returns, sales allowances and other discounts that the Company offers to its wholesale customers. The Company estimates returns based on an analysis of historical experience and specific customer arrangements and estimates sales allowances and other discounts based on seasonal negotiations, historical experience and an evaluation of current market conditions.
The Company also generates revenue from the retail distribution of its products through its free-standing stores, shop-in-shop/concession locations and digital commerce sites. Revenue is recognized at the point of sale in the stores and shop-in-shop/concession locations and upon estimated time of delivery for sales through the Company’s digital commerce sites, at which point control of the products passes to the customer. The amount of revenue recognized is net of returns, which are estimated based on an analysis of historical experience.
The Company excludes from revenue taxes collected from customers and remitted to government authorities related to sales of the Company’s products. Shipping and handling costs that are billed to customers are included in net sales, with costs recorded in cost of goods sold. Shipping and handling costs that occur after control of goods has been transferred to the customer and that are not billed to the customer are accounted for as fulfillment costs.
Customer Loyalty Programs
The Company uses loyalty programs that offer customers of its retail businesses specified amounts off of future purchases for a specified period of time after certain levels of spending are achieved. Customers that are enrolled in the programs earn loyalty points for each purchase made.
Loyalty points earned under the customer loyalty programs provide the customer a material right to acquire additional products and give rise to the Company having a separate performance obligation. For each transaction where a customer earns loyalty points, the Company allocates revenue between the products purchased and the loyalty points earned based on the relative standalone selling prices. Revenue allocated to loyalty points is recorded as deferred revenue until the loyalty points are redeemed or expire.
Gift Cards
The Company sells gift cards to customers in its retail stores. Gift card purchases by a customer are prepayments for products to be provided by the Company in the future and are therefore considered to be performance obligations of the Company. Upon the purchase of a gift card by a customer, the Company records deferred revenue for the cash value of the gift card. Deferred revenue is relieved and revenue is recognized when the gift card is redeemed by the customer. The portion of gift cards that the Company does not expect to be redeemed (referred to as “breakage”) is recognized proportionately over the estimated customer redemption period, subject to the constraint that it must be probable that a significant reversal of revenue will not occur, if the Company determines that it does not have a legal obligation to remit the value of such unredeemed gift cards to any jurisdiction.
License Agreements
The Company generates royalty and advertising revenue from licensing the rights to access its trademarks to third parties, including the Company’s joint ventures. The license agreements are generally exclusive to a territory or product category, have terms in excess of one year and, in most cases, include renewal options. In exchange for providing these rights, the license agreements require the licensees to pay the Company a royalty and, in certain agreements, an advertising fee. In both cases, the Company generally receives the greater of (i) a sales-based percentage fee and (ii) a contractual minimum fee for each annual performance period under the license agreement.
In addition to the rights to access its trademarks, the Company provides ongoing support to its licensees over the term of the agreements. As such, the Company’s license agreements are licenses of symbolic intellectual property and, therefore, revenue is recognized over time. For license agreements where the sales-based percentage fee exceeds the contractual minimum fee, the Company recognizes revenues as the licensed products are sold as reported to the Company by its licensees. For license agreements where the sales-based percentage fee does not exceed the contractual minimum fee, the Company recognizes the contractual minimum fee as revenue ratably over the contractual period.
Under the terms of the license agreements, payments are generally due quarterly from the licensees. The Company records deferred revenue when amounts are received or receivable from the licensee in advance of the recognition of revenue.
As of
November 4, 2018
, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $
1,178.4
million, of which the Company expects to recognize $
42.3
million as revenue during the remainder of 2018, $
241.1
million in 2019 and $
895.0
million thereafter.
Deferred Revenue
Changes in deferred revenue related to customer loyalty programs, gift cards and license agreements for the
thirty-nine weeks ended
November 4, 2018
were as follows:
|
|
|
|
|
(In millions)
|
Thirty-Nine Weeks Ended
|
Deferred revenue balance at February 4, 2018
|
$
|
39.2
|
|
Impact of adopting the new revenue standard
(1)
|
15.6
|
|
Net additions to deferred revenue during the period
|
34.2
|
|
Reductions in deferred revenue for revenue recognized during the period
(2)
|
(49.7
|
)
|
Deferred revenue balance at November 4, 2018
|
$
|
39.3
|
|
(1)
Please see Note 20, “Recent Accounting Guidance,” for further discussion of the adoption of the new revenue standard.
(2)
Represents the amount of revenue recognized during the period that was included in the deferred revenue balance at February 4, 2018, as adjusted for the impact of adopting the new revenue standard, and does not contemplate revenue recognized from amounts deferred after February 4, 2018. This amount includes $
1.7
million of revenue recognized during the thirteen weeks ended November 4, 2018.
The Company also had long-term deferred revenue liabilities included in other liabilities in its Consolidated Balance Sheets of $
2.6
million and $
3.9
million as of
November 4, 2018
and February 4, 2018, respectively.
Optional Exemptions
The Company elected not to disclose the remaining performance obligations for contracts that have an original expected term of one year or less (
e.g.,
backlog of customer orders) and expected sales-based percentage fees for the portion of all license agreements not yet satisfied.
Please see Note 18, “Segment Data,” for information on the disaggregation of revenue by segment and distribution channel.
3. 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 inventories in Asia 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.
4. ACQUISITIONS
Acquisition of the
Geoffrey Beene
Tradename
The Company acquired on April 20, 2018 the
Geoffrey Beene
tradename from Geoffrey Beene, LLC (“Geoffrey Beene”). Prior to the acquisition, the Company licensed the rights to design, market and distribute
Geoffrey Beene
dress shirts and neckwear from Geoffrey Beene.
The tradename was acquired for $
17.0
million, consisting of $
15.9
million paid in cash, $
0.7
million of royalties prepaid to Geoffrey Beene by the Company under the license agreement, and $
0.4
million of liabilities assumed by the Company. The transaction was accounted for as an asset acquisition.
Acquisition of the Wholesale and Concessions Businesses in Belgium and Luxembourg
The Company acquired on September 1, 2017 the Tommy Hilfiger and Calvin Klein wholesale and concessions businesses in Belgium and Luxembourg from a former agent (the “Belgian acquisition”). As a result of the Belgian acquisition, the Company now operates directly the Tommy Hilfiger and Calvin Klein businesses in this region.
The acquisition date fair value of the consideration was $
13.9
million, consisting of $
12.0
million paid in cash in 2017 and $
1.9
million expected to be paid in the fourth quarter of 2018, which amount is included in accrued expenses in the Company’s Consolidated Balance Sheet as of November 4, 2018. The estimated fair value of assets acquired and liabilities assumed consisted of $
12.4
million of goodwill and $
1.5
million of other net assets. The goodwill of $
12.4
million was assigned as of the acquisition date to the Company’s Tommy Hilfiger International and Calvin Klein International segments in the amounts of $
11.1
million and $
1.3
million, respectively, which are the Company’s reporting units that are expected to benefit from the synergies of the combination. Goodwill will not be deductible for tax purposes. The Company finalized the purchase price allocation during the first quarter of 2018.
Acquisition of True & Co.
The Company acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital commerce retailer. This acquisition enabled the Company to participate further in the fast-growing online channel and provided 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 consisted of $
20.9
million of goodwill and $
7.6
million of other net assets (including $
7.3
million of deferred tax assets and $
0.4
million of cash acquired). The goodwill of $
20.9
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 $
5.4
million, $
4.8
million and $
10.7
million, respectively, which include 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 will not be deductible for tax purposes. The Company finalized the purchase price allocation during the fourth quarter of 2017.
5. REDEEMABLE NON-CONTROLLING INTEREST
The Company and Arvind have a joint venture in Ethiopia, PVH Ethiopia, in which the Company owns a
75
% interest. The Company has consolidated PVH Ethiopia 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 2017.
The shareholders agreement governing PVH Ethiopia (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 10% 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 PVH Ethiopia’s earnings before interest, taxes, depreciation and amortization for the prior 12 months, less PVH Ethiopia’s net debt.
The fair value of the redeemable non-controlling interest (“RNCI”) as of the date of formation of PVH Ethiopia 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, decreased to $
0.5
million as of
November 4, 2018
from $
2.0
million as of
February 4, 2018
, resulting from a net loss attributable to the RNCI for the
thirty-nine weeks ended
November 4, 2018
of $
1.5
million. The carrying amount of the RNCI as of
October 29, 2017
was $
2.6
million.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company had investments in unconsolidated affiliates of $
198.0
million, $
208.4
million and $
186.3
million as of
November 4, 2018
, February 4, 2018 and
October 29, 2017
, respectively. These investments are accounted for under the equity method of accounting and included in other assets in the Company’s Consolidated Balance Sheets. The Company received dividends of $
3.6
million and $
3.7
million from these investments during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
, respectively, and made payments related to these investments of $
4.5
million during the
thirty-nine weeks ended
October 29, 2017
to contribute its share of funding for the period.
The Company issued a note receivable due April 2, 2017 to its joint venture in Brazil in 2016 for $
12.5
million, of which $
6.2
million was repaid in 2016 and the remaining balance, including accrued interest, was repaid in the first quarter of 2017.
7. GOODWILL
The changes in the carrying amount of goodwill for the
thirty-nine weeks ended
November 4, 2018
, by segment (please see
Note 18
, “
Segment Data
,” for further discussion of the Company’s reportable segments), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Calvin Klein North America
|
|
Calvin Klein International
|
|
Tommy Hilfiger North America
|
|
Tommy Hilfiger International
|
|
Heritage Brands Wholesale
|
|
Heritage Brands Retail
|
|
Total
|
Balance as of February 4, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
780.2
|
|
|
$
|
942.0
|
|
|
$
|
204.4
|
|
|
$
|
1,661.6
|
|
|
$
|
246.5
|
|
|
$
|
11.9
|
|
|
$
|
3,846.6
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
780.2
|
|
|
942.0
|
|
|
204.4
|
|
|
1,661.6
|
|
|
246.5
|
|
|
—
|
|
|
3,834.7
|
|
Contingent purchase price payments to Mr. Calvin Klein
|
1.0
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Currency translation
|
(1.2
|
)
|
|
(37.1
|
)
|
|
—
|
|
|
(142.9
|
)
|
|
—
|
|
|
—
|
|
|
(181.2
|
)
|
Balance as of November 4, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
780.0
|
|
|
905.6
|
|
|
204.4
|
|
|
1,518.7
|
|
|
246.5
|
|
|
11.9
|
|
|
3,667.1
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
$
|
780.0
|
|
|
$
|
905.6
|
|
|
$
|
204.4
|
|
|
$
|
1,518.7
|
|
|
$
|
246.5
|
|
|
$
|
—
|
|
|
$
|
3,655.2
|
|
The Company was 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 were 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 were 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 were made were wholesale sales by the Company and its licensees and other partners to retailers. The final payment due to Mr. Klein was made in the second quarter of 2018. All payments are subject to audit, as per the terms of the acquisition agreement.
8. RETIREMENT AND BENEFIT PLANS
The Company, as of
November 4, 2018
, has
five
noncontributory qualified defined benefit pension plans 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 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 the program will receive a predetermined amount during the ten 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 ten 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 that 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. 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 the applicable plan, both of which are unfunded and frozen. The Company refers to these
two
plans as its “Postretirement Plans.”
The components of net benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Pension Plans
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(In millions)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
|
|
|
|
|
|
|
|
Service cost, including plan expenses
|
$
|
8.4
|
|
|
$
|
6.8
|
|
|
$
|
25.3
|
|
|
$
|
20.4
|
|
Interest cost
|
6.5
|
|
|
6.4
|
|
|
19.5
|
|
|
19.3
|
|
Expected return on plan assets
|
(10.1
|
)
|
|
(9.6
|
)
|
|
(30.2
|
)
|
|
(28.9
|
)
|
Settlement loss
|
—
|
|
|
—
|
|
|
—
|
|
|
9.4
|
|
Curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Total
|
$
|
4.8
|
|
|
$
|
3.6
|
|
|
$
|
14.6
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Plans
|
|
SERP Plans
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(In millions)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
|
|
|
|
|
|
|
|
Service cost, including plan expenses
|
$
|
1.5
|
|
|
$
|
1.1
|
|
|
$
|
4.4
|
|
|
$
|
3.4
|
|
Interest cost
|
0.9
|
|
|
1.0
|
|
|
2.9
|
|
|
2.9
|
|
Total
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
7.3
|
|
|
$
|
6.3
|
|
Net benefit cost related to the Postretirement Plans was immaterial for the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
.
The service cost component of net benefit cost is recorded in selling, general and administrative (“SG&A”) expenses and the other components of net benefit cost are recorded in non-service related pension and postretirement (income) cost in the Company’s Consolidated Income Statements. Please see
Note 20
, “
Recent Accounting Guidance
,” for further discussion of the updated guidance related to the presentation of net benefit cost.
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
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 non-service related pension and postretirement cost in the Company’s Consolidated Income Statement for the
thirty-nine weeks ended
October 29, 2017
. The amount of the pension benefit obligation settled was $
65.3
million.
The Company made a voluntary contribution of $
10.0
million to its Pension Plans during the third quarter of 2018 and does not expect to make any additional contributions to the Pension Plans in 2018. The Company’s actual contributions may differ from planned contributions due to many factors, including changes in tax and other laws, as well as 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. The Company had $
259.0
million outstanding under these facilities as of
November 4, 2018
. The weighted average interest rate on funds borrowed as of
November 4, 2018
was
3.8
%. The maximum amount of revolving borrowings outstanding under these facilities during the
thirty-nine weeks ended
November 4, 2018
was $
274.4
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 $
97.4
million based on exchange rates in effect on
November 4, 2018
and are utilized primarily to fund working capital needs. The Company had $
17.7
million outstanding under these facilities as of
November 4, 2018
. The weighted average interest rate on funds borrowed as of
November 4, 2018
was
0.21
%. The maximum amount of borrowings outstanding under these facilities during the
thirty-nine weeks ended
November 4, 2018
was $
38.6
million.
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
11/4/18
|
|
2/4/18
|
|
10/29/17
|
|
|
|
|
|
|
Senior secured Term Loan A facility due 2021
|
$
|
1,708.3
|
|
|
$
|
1,792.1
|
|
|
$
|
1,991.6
|
|
4 1/2% senior unsecured notes due 2022
|
—
|
|
|
—
|
|
|
691.6
|
|
7 3/4% debentures due 2023
|
99.6
|
|
|
99.5
|
|
|
99.5
|
|
3 5/8% senior unsecured euro notes due 2024
(1)
|
394.4
|
|
|
430.8
|
|
|
400.0
|
|
3 1/8% senior unsecured euro notes due 2027
(1)
|
676.0
|
|
|
738.9
|
|
|
—
|
|
Total
|
2,878.3
|
|
|
3,061.3
|
|
|
3,182.7
|
|
Less: Current portion of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
2,878.3
|
|
|
$
|
3,061.3
|
|
|
$
|
3,182.7
|
|
(1)
The carrying amount of the Company’s senior unsecured euro notes includes the impact of changes in the exchange rate of the United States dollar against the euro.
Please see
Note 12
, “
Fair Value Measurements
,” for the fair value of the Company’s long-term debt as of
November 4, 2018
,
February 4, 2018
and
October 29, 2017
.
As of
November 4, 2018
, the Company’s mandatory long-term debt repayments for the remainder of 2018 through 2023 were as follows:
|
|
|
|
|
(In millions)
|
|
Fiscal Year
|
Amount
|
|
Remainder of 2018
|
$
|
—
|
|
2019
|
—
|
|
2020
|
188.5
|
|
2021
|
1,525.8
|
|
2022
|
—
|
|
2023
|
100.0
|
|
Total debt repayments for the remainder of 2018 through 2023 exceed the total carrying amount of the Company’s Term Loan A facility and 7 3/4% debentures due 2023 as of
November 4, 2018
because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of
November 4, 2018
, after taking into account the effect of the Company’s interest rate swap agreements discussed in the section entitled “2016 Senior Secured Credit Facilities,” which were in effect as of such date, approximately
50
% of the Company’s long-term debt had fixed interest rates, with the remainder at variable interest rates.
2016 Senior Secured Credit Facilities
The Company has senior secured credit facilities due May 19, 2021 (the “2016 facilities”) that consist of a $
2,347.4
million United States dollar-denominated Term Loan A facility and senior secured revolving credit facilities consisting of (i) a $
475.0
million United States dollar-denominated revolving credit facility, (ii) a $
25.0
million United States dollar-denominated revolving credit facility available in United States dollars and Canadian dollars and (iii) a €
185.9
million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen and Swiss francs. Borrowings under the 2016 facilities bear interest at variable rates calculated in the manner set forth in the terms of the 2016 facilities.
The Company had loans outstanding of $
1,708.3
million, net of original issue discounts and debt issuance costs, under the Term Loan A facility, $
259.0
million of borrowings outstanding under the senior secured revolving credit facilities and $
20.5
million of outstanding letters of credit under the senior secured revolving credit facilities as of
November 4, 2018
.
The Company made payments of $
85.0
million and $
50.0
million during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
, respectively, on its term loans under the 2016 facilities. As a result of the voluntary repayments the Company has made to date, it is not required to make a long-term debt repayment until March 2020.
The Company entered into an interest rate swap agreement during the third quarter of 2018 for a two-year term commencing on February 19, 2019. The agreement was designed with the intended effect of converting an initial notional amount of $
115.7
million of the Company’s variable rate debt obligation 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 offered rate (“LIBOR”) will be eliminated and the Company will pay a fixed rate of
2.9975%
plus the current applicable margin.
The Company entered into an interest rate swap agreement during the second quarter of 2018 for a 30-month term commencing on August 6, 2018. The agreement was designed with the intended effect of converting a notional amount of $
50.0
million of the Company’s variable rate debt obligation to fixed rate debt. Under the terms of the agreement for the notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and the Company pays a fixed rate of
2.6825%
plus the current applicable margin.
The Company entered into an interest rate swap agreement during the second quarter of 2017 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 to fixed rate debt. Such agreement remains outstanding with a notional amount of $
244.0
million as of
November 4, 2018
. 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 pays a fixed rate of
1.566%
plus the current applicable margin.
The notional amounts of the outstanding interest rate swap that commenced on February 20, 2018 and the interest rate swap that will commence on February 19, 2019 will be adjusted according to pre-set schedules during the terms of the swap agreements 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 Company entered into an interest rate swap agreement during the second quarter of 2014 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 to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR was eliminated and the Company paid a weighted average fixed rate of
1.924%
plus the current applicable margin. The agreement expired in February 2018.
4 1/2% Senior Notes Due 2022
The Company had outstanding
$700.0
million principal amount of
4 1/2%
senior notes due December 15, 2022. The Company redeemed these notes on January 5, 2018 in connection with the issuance of €
600.0
million euro-denominated principal amount of
3 1/8%
senior notes due December 15, 2027, as discussed below. The Company paid a premium of $
15.8
million to the holders of these notes in connection with the redemption and recorded debt extinguishment costs of $
8.1
million to write-off previously capitalized debt issuance costs associated with these notes during the fourth quarter of 2017.
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%
.
3 5/8% Euro Senior Notes Due 2024
The Company has outstanding €
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 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.
3 1/8% Euro Senior Notes Due 2027
The Company issued on December 21, 2017 €
600.0
million euro-denominated principal amount of
3 1/8%
senior notes due December 15, 2027. Interest on the notes is payable in euros. The Company paid €
8.7
million (approximately $
10.3
million based on exchange rates in effect on the payment date) of fees during the fourth quarter of 2017 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 September 15, 2027 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 September 15, 2027 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 2016 facilities and the
7 3/4%
debentures due 2023.
The Company’s financing arrangements contain financial and non-financial covenants and customary events of default. As of
November 4, 2018
, the Company was in compliance with all applicable covenants under its financing arrangements.
Please refer to Note 8, “Debt,” in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended
February 4, 2018
for further discussion of the Company’s debt.
10. INCOME TAXES
The effective income tax rates for the
thirteen weeks ended
November 4, 2018
and
October 29, 2017
were
4.1
% and
4.4
%, respectively. The effective income tax rates for the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
were
12.7
% and
11.7
%, respectively. The effective income tax rates for the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
were lower than the applicable United States statutory income tax rate primarily due to the benefit of overall lower tax rates in certain international jurisdictions where the Company files tax returns and the benefit of certain discrete items, including the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, which resulted in a benefit to the Company’s effective income tax rates of
16.6%
and
5.9%
for the thirteen and
thirty-nine weeks ended
November 4, 2018
, respectively, and
14.7%
and
6.9%
for the thirteen and
thirty-nine weeks ended
October 29, 2017
, respectively.
The Company files income tax returns in more than
40
international jurisdictions each year. Most of the international jurisdictions in which the Company files tax returns had lower statutory income tax rates than the United States statutory income tax rate in 2017 prior to enactment of the United States Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”). A substantial amount of the Company’s earnings comes from international operations, particularly in the Netherlands and Hong Kong, where income tax rates continue to be lower than the United States statutory income tax rate after giving effect to the Tax Legislation, and which coupled with special rates levied on income from certain jurisdictional activities, reduced the Company’s consolidated effective income tax rate during the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
. As a result of the Tax Legislation, the United States statutory income tax rate was reduced from
35.0%
to
21.0%
effective January 1, 2018. However, the reduction in the United States statutory income tax rate did not have a significant impact on the Company’s overall effective tax rate due to its mix of earnings.
The Tax Legislation significantly revised the United States tax code by, among other things, (i) reducing the corporate income tax rate from
35.0%
to
21.0%
, (ii) imposing a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated, (iii) implementing a modified territorial tax system, (iv) introducing a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and (v) introducing a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between United States corporations and their subsidiaries.
The Company recorded a provisional net tax benefit of $
52.8
million in the fourth quarter of 2017, which included a $
265.0 million
benefit primarily from the remeasurement of the Company’s net deferred tax liabilities to the lower United States corporate income tax rate, partially offset by a $
38.5
million valuation allowance on the Company’s foreign tax credits and a $
173.7
million transition tax on undistributed post-1986 earnings and profits of foreign subsidiaries deemed to be repatriated. The Company’s estimates were recorded on a provisional basis and are subject to adjustment in 2018 under the permitted measurement period. The Company will finalize its accounting related to the impacts of the Tax Legislation on the one-time transition tax liability, deferred taxes, valuation allowances, state tax considerations, and any remaining outside basis differences in the Company’s foreign subsidiaries in the fourth quarter of 2018. As the Company completes its analysis of the Tax Legislation, collects and prepares necessary data and interprets any additional guidance issued by the United States Department of the Treasury, the Internal Revenue Service and other standard-setting bodies, the Company may make adjustments in the fourth quarter of 2018 to these provisional amounts recorded in 2017. There were no adjustments made to these provisional amounts during the
thirty-nine weeks ended
November 4, 2018
.
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 further discussion of the 2016 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 the cash flow hedges during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
.
Net Investment Hedges
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 fourth quarter of 2017 and the second quarter of 2016, the Company designated the carrying amounts of its €
600.0
million euro-denominated principal amount of 3 1/8% senior notes due 2027 and €
350.0
million euro-denominated principal amount of 3 5/8% senior notes due 2024, respectively (collectively referred to as the “foreign currency borrowings”), that it had issued in the United States, as net investment hedges of its investments in certain of its foreign subsidiaries that use the euro as their functional currency. Please see
Note 9
, “
Debt
,” for 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 net investment hedges, 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 net investment hedges were $
1,102.2
million and $
1,070.4
million, respectively, as of
November 4, 2018
, $
1,226.7
million and $
1,169.7
million, respectively, as of
February 4, 2018
and $
448.8
million and $
400.0
million, respectively, as of
October 29, 2017
. The Company evaluates the effectiveness of its net investment hedges at inception and at the beginning of each quarter thereafter. No amounts were excluded from effectiveness testing. There was no ineffective portion of the net investment hedges during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
.
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, the Company entered into several foreign currency option contracts during 2017 and 2016. These contracts represented the Company’s purchase of euro put/United States dollar call options and Chinese yuan renminbi put/United States dollar call options. All foreign currency option contracts expired in 2017.
The Company’s foreign currency option contracts were also undesignated contracts. As such, the changes in the fair value of these foreign currency option contracts were immediately recognized in earnings. This mitigated, to an extent, the effect of any strengthening of the 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets
|
|
Liabilities
|
|
11/4/2018
|
|
2/4/2018
|
|
10/29/2017
|
|
11/4/2018
|
|
2/4/2018
|
|
10/29/2017
|
|
Other Current Assets
|
Other Assets
|
|
Other Current Assets
|
Other Assets
|
|
Other Current Assets
|
Other Assets
|
|
Accrued Expenses
|
Other Liabilities
|
|
Accrued Expenses
|
Other Liabilities
|
|
Accrued Expenses
|
Other Liabilities
|
Contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
33.7
|
|
$
|
1.7
|
|
|
$
|
0.9
|
|
$
|
0.1
|
|
|
$
|
5.8
|
|
$
|
1.3
|
|
|
$
|
0.3
|
|
$
|
0.1
|
|
|
$
|
62.4
|
|
$
|
4.1
|
|
|
$
|
30.5
|
|
$
|
0.8
|
|
Interest rate swap agreements
|
2.0
|
|
0.9
|
|
|
1.1
|
|
1.3
|
|
|
0.1
|
|
0.7
|
|
|
0.1
|
|
—
|
|
|
0.1
|
|
—
|
|
|
1.1
|
|
—
|
|
Total contracts designated as cash flow hedges
|
35.7
|
|
2.6
|
|
|
2.0
|
|
1.4
|
|
|
5.9
|
|
2.0
|
|
|
0.4
|
|
0.1
|
|
|
62.5
|
|
4.1
|
|
|
31.6
|
|
0.8
|
|
Undesignated contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
0.1
|
|
—
|
|
|
0.5
|
|
—
|
|
|
2.1
|
|
—
|
|
|
3.5
|
|
—
|
|
|
0.9
|
|
—
|
|
|
1.0
|
|
—
|
|
Total
|
$
|
35.8
|
|
$
|
2.6
|
|
|
$
|
2.5
|
|
$
|
1.4
|
|
|
$
|
8.0
|
|
$
|
2.0
|
|
|
$
|
3.9
|
|
$
|
0.1
|
|
|
$
|
63.4
|
|
$
|
4.1
|
|
|
$
|
32.6
|
|
$
|
0.8
|
|
The notional amount outstanding of foreign currency forward exchange contracts was $
1,105.7
million at
November 4, 2018
. Such contracts expire principally between November 2018 and March 2020.
The following table summarizes the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other Comprehensive (Loss) Income
|
|
Gain (Loss) Reclassified from AOCL into Income (Expense)
|
(In millions)
|
|
|
Location
|
Amount
|
Thirteen Weeks Ended
|
|
11/4/18
|
|
10/29/17
|
|
|
11/4/18
|
|
10/29/17
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
23.4
|
|
|
$
|
8.9
|
|
|
Cost of goods sold
|
$
|
5.5
|
|
|
$
|
(6.9
|
)
|
Interest rate swap agreements
|
|
0.4
|
|
|
0.8
|
|
|
Interest expense
|
0.2
|
|
|
(1.3
|
)
|
Foreign currency borrowings (net investment hedges)
|
|
16.0
|
|
|
4.3
|
|
|
N/A
|
—
|
|
|
—
|
|
Total
|
|
$
|
39.8
|
|
|
$
|
14.0
|
|
|
|
$
|
5.7
|
|
|
$
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
11/4/18
|
|
10/29/17
|
|
|
11/4/18
|
|
10/29/17
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
89.8
|
|
|
$
|
(61.3
|
)
|
|
Cost of goods sold
|
$
|
(23.1
|
)
|
|
$
|
1.2
|
|
Interest rate swap agreements
|
|
1.1
|
|
|
1.5
|
|
|
Interest expense
|
0.6
|
|
|
(5.3
|
)
|
Foreign currency borrowings (net investment hedges)
|
|
100.7
|
|
|
(31.8
|
)
|
|
N/A
|
—
|
|
|
—
|
|
Total
|
|
$
|
191.6
|
|
|
$
|
(91.6
|
)
|
|
|
$
|
(22.5
|
)
|
|
$
|
(4.1
|
)
|
A net gain in AOCL on foreign currency forward exchange contracts at
November 4, 2018
of $
34.0
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 gain in AOCL for interest rate swap agreements at
November 4, 2018
of $
1.9
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 substantially complete 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)
|
|
(Loss) Gain Recognized in (Expense) Income
|
Thirteen Weeks Ended
|
|
11/4/18
|
|
10/29/17
|
Foreign currency forward exchange contracts
|
|
$
|
(3.0
|
)
|
|
$
|
(0.2
|
)
|
Foreign currency option contracts
|
|
—
|
|
|
(0.0
|
)
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
11/4/18
|
|
10/29/17
|
Foreign currency forward exchange contracts
|
|
$
|
(3.0
|
)
|
|
$
|
1.5
|
|
Foreign currency option contracts
|
|
—
|
|
|
(4.3
|
)
|
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of
November 4, 2018
.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/18
|
|
2/4/18
|
|
10/29/17
|
(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
|
|
$
|
35.5
|
|
|
N/A
|
|
$
|
35.5
|
|
|
N/A
|
|
$
|
1.5
|
|
|
N/A
|
|
$
|
1.5
|
|
|
N/A
|
|
$
|
9.2
|
|
|
N/A
|
|
$
|
9.2
|
|
Interest rate swap agreements
|
N/A
|
|
2.9
|
|
|
N/A
|
|
2.9
|
|
|
N/A
|
|
2.4
|
|
|
N/A
|
|
2.4
|
|
|
N/A
|
|
0.8
|
|
|
N/A
|
|
0.8
|
|
Total Assets
|
N/A
|
|
$
|
38.4
|
|
|
N/A
|
|
$
|
38.4
|
|
|
N/A
|
|
$
|
3.9
|
|
|
N/A
|
|
$
|
3.9
|
|
|
N/A
|
|
$
|
10.0
|
|
|
N/A
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
3.9
|
|
|
N/A
|
|
$
|
3.9
|
|
|
N/A
|
|
$
|
67.4
|
|
|
N/A
|
|
$
|
67.4
|
|
|
N/A
|
|
$
|
32.3
|
|
|
N/A
|
|
$
|
32.3
|
|
Interest rate swap agreements
|
N/A
|
|
0.1
|
|
|
N/A
|
|
0.1
|
|
|
N/A
|
|
0.1
|
|
|
N/A
|
|
0.1
|
|
|
N/A
|
|
1.1
|
|
|
N/A
|
|
1.1
|
|
Total Liabilities
|
N/A
|
|
$
|
4.0
|
|
|
N/A
|
|
$
|
4.0
|
|
|
N/A
|
|
$
|
67.5
|
|
|
N/A
|
|
$
|
67.5
|
|
|
N/A
|
|
$
|
33.4
|
|
|
N/A
|
|
$
|
33.4
|
|
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.
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), the Company was required to make annual contingent purchase price payments, with the final payment made in the third quarter of 2017. The Company was required to remeasure this liability at fair value on a recurring basis and classified this as a Level 3 measurement.
The following table presents the change in the Level 3 contingent purchase price payment liability:
|
|
|
|
|
(In millions)
|
Thirty-Nine Weeks Ended
|
10/29/17
|
Beginning Balance
|
$
|
1.6
|
|
Payments
|
(0.8
|
)
|
Adjustments included in earnings
|
(0.8
|
)
|
Ending Balance
|
$
|
—
|
|
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
The following table shows the fair value of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a nonrecurring basis (consisting of property, plant and equipment) during the thirty-nine weeks ended November 4, 2018 and October 29, 2017, and the total impairments recorded as a result of the remeasurement process:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Fair Value Measurement Using
|
|
Fair Value
As Of
Impairment Date
|
|
Total
Impairments
|
Assets:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
November 4, 2018
|
N/A
|
|
N/A
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.7
|
|
October 29, 2017
|
N/A
|
|
N/A
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
2.2
|
|
Long-lived assets with a carrying amount of
$4.7
million were written down to a fair value of
zero
during the thirty-nine weeks ended November 4, 2018 primarily in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using sales trends and market participant assumptions. The impairment charge of
$4.7
million was included in SG&A expenses, of which
$1.8
million was recorded in the Calvin Klein North America segment,
$2.0
million was recorded in the Calvin Klein International segment,
$0.2
million was recorded in the Tommy Hilfiger North America segment and
$0.7
million was recorded in the Tommy Hilfiger International segment.
Long-lived assets with a carrying amount of
$2.6
million were written down to a fair value of
$0.4
million during the thirty-nine weeks ended October 29, 2017 in connection with the financial performance in certain of the Company’s retail stores. Fair value was determined based on the estimated discounted future cash flows associated with the assets using sales trends and market participant assumptions. The impairment charge of
$2.2
million was included in SG&A expenses, of which
$1.8
million was recorded in the Calvin Klein North America segment and
$0.4
million was recorded in the Tommy Hilfiger North America segment.
The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/18
|
|
2/4/18
|
|
10/29/17
|
(In millions)
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
398.5
|
|
|
$
|
398.5
|
|
|
$
|
493.9
|
|
|
$
|
493.9
|
|
|
$
|
612.3
|
|
|
$
|
612.3
|
|
Short-term borrowings
|
276.7
|
|
|
276.7
|
|
|
19.5
|
|
|
19.5
|
|
|
207.5
|
|
|
207.5
|
|
Long-term debt
|
2,878.3
|
|
|
2,929.0
|
|
|
3,061.3
|
|
|
3,140.9
|
|
|
3,182.7
|
|
|
3,277.5
|
|
The fair values of cash and cash equivalents and short-term borrowings approximate their carrying amounts due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable 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”). 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 (“stock options”); (ii) incentive stock options; (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. Awards granted under the 2006 Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s Consolidated Balance Sheets.
Through
November 4, 2018
, the Company has granted under the 2006 Plan (i) service-based stock options, RSUs and restricted stock; and (ii) contingently issuable PSUs and RSUs. All restricted stock granted by the Company was fully vested at the end of 2015.
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 RSU or PSU reduces the number available by
two
shares.
Net income for the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
included $
41.9
million and $
33.0
million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $
8.4
million and $
10.2
million, respectively.
The Company receives a tax deduction for certain transactions associated with its stock-based plan awards. The actual income tax benefits realized from these transactions during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
were $
13.3
million and $
9.3
million, respectively. The tax benefits realized included discrete net excess tax benefits of $
4.9
million recognized in the Company’s provision for income taxes during the
thirty-nine weeks ended
November 4, 2018
. The discrete net excess tax deficiencies recognized in the Company’s provision for income taxes during the
thirty-nine weeks ended
October 29, 2017
were immaterial.
Stock Options
Stock options granted to employees are generally exercisable in
four
equal annual installments commencing one year after the date of grant. The underlying stock option award agreements generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). Such stock options are granted with a
10
-year term and the per share exercise price cannot be less than the closing price of the common stock on the date of grant.
The Company estimates the fair value of stock options at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the stock options granted is expensed over the stock options’ vesting periods.
The following summarizes the assumptions used to estimate the fair value of stock options granted during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
and the resulting weighted average grant date fair value per stock option:
|
|
|
|
|
|
|
|
|
|
11/4/18
|
|
10/29/17
|
Weighted average risk-free interest rate
|
2.78
|
%
|
|
2.10
|
%
|
Weighted average expected stock option term (in years)
|
6.25
|
|
|
6.25
|
|
Weighted average Company volatility
|
26.92
|
%
|
|
29.46
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per stock option
|
$
|
51.66
|
|
|
$
|
33.50
|
|
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 stock option term. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock 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 stock option grants. The Company will continue to evaluate the appropriateness of utilizing such method.
Stock option activity for the
thirty-nine weeks ended
November 4, 2018
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per stock option data)
|
Stock Options
|
|
Weighted Average Exercise Price
Per Stock Option
|
Outstanding at February 4, 2018
|
921
|
|
|
$
|
102.18
|
|
Granted
|
86
|
|
|
158.53
|
|
Exercised
|
200
|
|
|
103.04
|
|
Cancelled
|
4
|
|
|
100.67
|
|
Outstanding at November 4, 2018
|
803
|
|
|
$
|
108.01
|
|
Exercisable at November 4, 2018
|
463
|
|
|
$
|
102.05
|
|
RSUs
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
thirty-nine weeks ended
November 4, 2018
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per RSU data)
|
RSUs
|
|
Weighted Average Grant Date Fair Value Per RSU
|
Non-vested at February 4, 2018
|
917
|
|
|
$
|
103.90
|
|
Granted
|
337
|
|
|
158.12
|
|
Vested
|
327
|
|
|
107.08
|
|
Cancelled
|
46
|
|
|
114.14
|
|
Non-vested at November 4, 2018
|
881
|
|
|
$
|
122.91
|
|
PSUs
Contingently issuable PSUs granted to certain of the Company’s senior executives since 2015 are subject to a three-year performance period. For such awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. For awards granted in 2015, the three-year performance period ended during the first quarter of 2018. Holders of the awards earned an aggregate of
78,000
shares, which was between the target and maximum levels. 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 was established for each grant on the grant date using the Monte Carlo simulation model.
The following summarizes the assumptions used to estimate the fair value of PSUs granted during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
and the resulting weighted average grant date fair value per PSU:
|
|
|
|
|
|
|
|
|
|
11/4/18
|
|
10/29/17
|
Risk-free interest rate
|
2.62
|
%
|
|
1.49
|
%
|
Expected Company volatility
|
29.78
|
%
|
|
31.29
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per PSU
|
$
|
159.53
|
|
|
$
|
96.81
|
|
Certain of the awards granted in 2018, 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
7.09
% in 2018 and
12.67%
in 2017 for the restriction of liquidity, which was calculated using the Chaffe model.
PSU activity for the
thirty-nine weeks ended
November 4, 2018
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per PSU data)
|
PSUs
|
|
Weighted Average Grant Date Fair Value Per PSU
|
Non-vested at February 4, 2018
|
197
|
|
|
$
|
93.97
|
|
Granted at target
|
44
|
|
|
159.53
|
|
Change due to market condition achieved above target
|
32
|
|
|
101.23
|
|
Vested
|
78
|
|
|
101.23
|
|
Cancelled
|
—
|
|
|
—
|
|
Non-vested at November 4, 2018
|
195
|
|
|
$
|
107.03
|
|
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the changes in AOCL, net of related taxes, by component for the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign currency translation adjustments
|
|
Net unrealized and realized (loss) gain on effective cash flow hedges
|
|
Total
|
Balance, February 4, 2018
|
$
|
(249.4
|
)
|
|
$
|
(72.1
|
)
|
|
$
|
(321.5
|
)
|
Other comprehensive (loss) income before reclassifications
|
(321.0
|
)
|
(1)(2)
|
86.9
|
|
|
(234.1
|
)
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
(21.3
|
)
|
|
(21.3
|
)
|
Other comprehensive (loss) income
|
(321.0
|
)
|
|
108.2
|
|
|
(212.8
|
)
|
Balance, November 4, 2018
|
$
|
(570.4
|
)
|
|
$
|
36.1
|
|
|
$
|
(534.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
241.9
|
|
(1)(3)
|
(58.8
|
)
|
|
183.1
|
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
Other comprehensive income (loss)
|
241.9
|
|
|
(56.6
|
)
|
|
185.3
|
|
Balance, October 29, 2017
|
$
|
(495.8
|
)
|
|
$
|
(29.7
|
)
|
|
$
|
(525.5
|
)
|
(1)
Foreign currency translation adjustments included a net gain (loss) on net investment hedges of $
75.9
million and $
(19.8)
million during the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
, respectively.
(2)
Unfavorable foreign currency translation adjustments were principally driven by a strengthening of the United States dollar against the euro.
(3)
Favorable foreign currency translation adjustments were principally driven by a weakening of the United States dollar against the euro.
The following table presents reclassifications out of AOCL to earnings for the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCL
|
Affected Line Item in the Company’s Consolidated Income Statements
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
|
Realized gain (loss) on effective cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
5.5
|
|
|
$
|
(6.9
|
)
|
|
$
|
(23.1
|
)
|
|
$
|
1.2
|
|
Cost of goods sold
|
Interest rate swap agreements
|
0.2
|
|
|
(1.3
|
)
|
|
0.6
|
|
|
(5.3
|
)
|
Interest expense
|
Less: Tax effect
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(1.2
|
)
|
|
(1.9
|
)
|
Income tax expense
|
Total, net of tax
|
$
|
5.8
|
|
|
$
|
(7.8
|
)
|
|
$
|
(21.3
|
)
|
|
$
|
(2.2
|
)
|
|
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
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
, the Company purchased
1.7
million shares and
1.8
million shares, respectively, of its common stock under the program in open market transactions for $
247.4
million and $
192.3
million, respectively. As of
November 4, 2018
, the repurchased shares were held as treasury stock and $
311.0
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
|
|
Thirty-Nine Weeks Ended
|
(In millions, except per share data)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
|
|
|
|
|
|
|
|
Net income attributable to PVH Corp.
|
$
|
243.1
|
|
|
$
|
239.2
|
|
|
$
|
587.7
|
|
|
$
|
429.3
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
76.4
|
|
|
77.3
|
|
|
76.8
|
|
|
77.8
|
|
Weighted average impact of dilutive securities
|
0.7
|
|
|
1.2
|
|
|
0.9
|
|
|
0.9
|
|
Total shares for diluted net income per common share
|
77.1
|
|
|
78.5
|
|
|
77.7
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
Basic net income per common share attributable to PVH Corp.
|
$
|
3.18
|
|
|
$
|
3.09
|
|
|
$
|
7.65
|
|
|
$
|
5.52
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share attributable to PVH Corp.
|
$
|
3.15
|
|
|
$
|
3.05
|
|
|
$
|
7.56
|
|
|
$
|
5.45
|
|
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
|
|
Thirty-Nine Weeks Ended
|
(In millions)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
|
|
|
|
|
|
|
|
Weighted average potentially dilutive securities
|
0.3
|
|
|
0.3
|
|
|
0.2
|
|
|
0.6
|
|
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
November 4, 2018
and
October 29, 2017
and, therefore, were excluded from the calculation of diluted net income per common share for the
thirteen and thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was
0.2
million and
0.1
million as of
November 4, 2018
and
October 29, 2017
, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
17. NONCASH INVESTING AND FINANCING TRANSACTIONS
Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statements of Cash Flows for the
thirty-nine weeks ended
November 4, 2018
and
October 29, 2017
were $
2.9
million and $
2.1
million, respectively, of assets acquired through capital leases.
Omitted from acquisition of treasury shares in the Company’s Consolidated Statements of Cash Flows for both the
thirty-nine weeks ended
November 4, 2018 and
October 29, 2017
were $
1.9
million 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 acquisition of the
Geoffrey Beene
tradename during the
thirty-nine weeks ended
November 4, 2018
. Omitted from acquisitions, net of cash acquired in the Company’s Consolidated Statement of Cash Flows for the
thirty-nine weeks ended
November 4, 2018
was $
0.7
million of acquisition consideration related to royalties prepaid to Geoffrey Beene by the Company under the prior license agreement and $
0.4
million of liabilities assumed by the Company.
The Company completed the Belgian acquisition during the thirty-nine weeks ended October 29, 2017. Omitted from acquisitions, net of cash acquired in the Company’s Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 29, 2017 was a $
1.9
million payable for the portion of the acquisition consideration expected to be paid in the fourth quarter of 2018.
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, 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, and digital commerce sites in the United States and Canada, 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 product categories in North America. This segment also includes the Company’s proportionate share of the net income or loss of its investment in its unconsolidated foreign affiliate in Mexico relating to the affiliate’s Calvin Klein business.
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
,
distributors and franchisees; (ii) operating retail stores, concession locations 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 product categories 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 foreign affiliate in Australia relating to the affiliate’s Calvin Klein business and its unconsolidated Calvin Klein foreign affiliate in 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 a digital commerce site in the United States, 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 product categories in North America. This segment also includes the Company’s proportionate share of the net income or loss of its investment in its unconsolidated foreign affiliate in Mexico relating to the affiliate’s Tommy Hilfiger business.
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, distributors and franchisees; (ii) operating retail stores and concession locations 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 product categories 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 and India and its unconsolidated foreign affiliate in Australia relating to the affiliate’s Tommy Hilfiger business.
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, warehouse clubs and mass market and off-price retailers, as well as 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, pool and deck footwear, and swim-related products and accessories under the brand name
Speedo
; and (iv) women’s intimate apparel, shapewear and loungewear under the brand names
Warner’s
and
Olga
. Additionally, this segment derives revenue from Company operated digital commerce sites in the United States through
SpeedoUSA
.com,
TrueandCo
.com and, since July 2018,
VanHeusen
.com
,
IZOD
.com and
styleBureau
.com. This segment also includes the Company’s proportionate share of the net income or loss of its investments in its unconsolidated foreign affiliates in Australia and in Mexico relating to the affiliates’ Heritage Brands businesses.
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 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, to a lesser extent,
Speedo
products. The majority of these stores feature multiple brand names on the store signage, with the remaining stores operating under the
Van Heusen
name.
The Company’s revenue by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
11/4/18
|
(1)
|
10/29/17
|
(1)
|
|
11/4/18
|
(1)
|
10/29/17
|
(1)
|
Revenue – Calvin Klein North America
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
420.3
|
|
|
$
|
413.4
|
|
|
|
$
|
1,212.6
|
|
|
$
|
1,091.8
|
|
|
Royalty revenue
|
45.9
|
|
|
46.3
|
|
|
|
111.9
|
|
|
113.0
|
|
|
Advertising and other revenue
|
14.8
|
|
|
16.0
|
|
|
|
38.5
|
|
|
38.5
|
|
|
Total
|
481.0
|
|
|
475.7
|
|
|
|
1,363.0
|
|
|
1,243.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Calvin Klein International
|
|
|
|
|
|
|
|
|
|
Net sales
|
452.8
|
|
|
439.5
|
|
|
|
1,336.9
|
|
|
1,164.3
|
|
|
Royalty revenue
|
21.7
|
|
|
20.2
|
|
|
|
56.2
|
|
|
57.1
|
|
|
Advertising and other revenue
|
7.7
|
|
|
7.2
|
|
|
|
22.2
|
|
|
20.2
|
|
|
Total
|
482.2
|
|
|
466.9
|
|
|
|
1,415.3
|
|
|
1,241.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger North America
|
|
|
|
|
|
|
|
|
|
Net sales
|
394.9
|
|
|
383.2
|
|
|
|
1,151.6
|
|
|
1,062.1
|
|
|
Royalty revenue
|
23.8
|
|
|
22.0
|
|
|
|
56.7
|
|
|
53.8
|
|
|
Advertising and other revenue
|
5.6
|
|
|
5.1
|
|
|
|
13.8
|
|
|
12.7
|
|
|
Total
|
424.3
|
|
|
410.3
|
|
|
|
1,222.1
|
|
|
1,128.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger International
|
|
|
|
|
|
|
|
|
|
Net sales
|
688.1
|
|
|
595.0
|
|
|
|
1,897.6
|
|
|
1,581.9
|
|
|
Royalty revenue
|
14.4
|
|
|
11.8
|
|
|
|
39.4
|
|
|
33.6
|
|
|
Advertising and other revenue
|
5.7
|
|
|
1.7
|
|
|
|
17.8
|
|
|
8.3
|
|
|
Total
|
708.2
|
|
|
608.5
|
|
|
|
1,954.8
|
|
|
1,623.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Wholesale
|
|
|
|
|
|
|
|
|
|
Net sales
|
357.9
|
|
|
324.4
|
|
|
|
1,000.7
|
|
|
967.9
|
|
|
Royalty revenue
|
5.4
|
|
|
4.7
|
|
|
|
15.8
|
|
|
14.4
|
|
|
Advertising and other revenue
|
1.0
|
|
|
0.8
|
|
|
|
3.0
|
|
|
2.6
|
|
|
Total
|
364.3
|
|
|
329.9
|
|
|
|
1,019.5
|
|
|
984.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Retail
|
|
|
|
|
|
|
|
|
|
Net sales
|
63.4
|
|
|
64.7
|
|
|
|
194.7
|
|
|
190.7
|
|
|
Royalty revenue
|
1.0
|
|
|
0.8
|
|
|
|
3.1
|
|
|
2.6
|
|
|
Advertising and other revenue
|
0.1
|
|
|
0.2
|
|
|
|
0.3
|
|
|
0.4
|
|
|
Total
|
64.5
|
|
|
65.7
|
|
|
|
198.1
|
|
|
193.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
Net sales
|
2,377.4
|
|
|
2,220.2
|
|
|
|
6,794.1
|
|
|
6,058.7
|
|
|
Royalty revenue
|
112.2
|
|
|
105.8
|
|
|
|
283.1
|
|
|
274.5
|
|
|
Advertising and other revenue
|
34.9
|
|
|
31.0
|
|
|
|
95.6
|
|
|
82.7
|
|
|
Total
|
$
|
2,524.5
|
|
|
$
|
2,357.0
|
|
|
|
$
|
7,172.8
|
|
|
$
|
6,415.9
|
|
|
|
|
(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 further discussion.
|
The Company’s revenue by distribution channel was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
(In millions)
|
11/4/18
|
|
10/29/17
|
|
11/4/18
|
|
10/29/17
|
Wholesale net sales
|
$
|
1,415.5
|
|
|
$
|
1,275.9
|
|
|
$
|
3,830.1
|
|
|
$
|
3,352.5
|
|
Retail net sales
|
961.9
|
|
|
944.3
|
|
|
2,964.0
|
|
|
2,706.2
|
|
Net sales
|
2,377.4
|
|
|
2,220.2
|
|
|
6,794.1
|
|
|
6,058.7
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
112.2
|
|
|
105.8
|
|
|
283.1
|
|
|
274.5
|
|
Advertising and other revenue
|
34.9
|
|
|
31.0
|
|
|
95.6
|
|
|
82.7
|
|
Total
|
$
|
2,524.5
|
|
|
$
|
2,357.0
|
|
|
$
|
7,172.8
|
|
|
$
|
6,415.9
|
|
The Company’s income before interest and taxes by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
(In millions)
|
11/4/18
|
(1)
|
|
10/29/17
|
(1)
|
|
11/4/18
|
(1)
|
|
10/29/17
|
(1)
|
Income before interest and taxes – Calvin Klein North America
|
$
|
51.2
|
|
|
|
$
|
66.1
|
|
|
|
$
|
154.5
|
|
|
|
$
|
156.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Calvin Klein International
|
69.7
|
|
|
|
76.3
|
|
|
|
180.0
|
|
|
|
175.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger North America
|
64.6
|
|
|
|
52.6
|
|
(3)
|
|
179.6
|
|
|
|
87.0
|
|
(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger International
|
112.6
|
|
|
|
94.1
|
|
|
|
263.6
|
|
|
|
184.4
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Wholesale
|
23.8
|
|
|
|
28.4
|
|
|
|
90.1
|
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Retail
|
0.4
|
|
|
|
1.5
|
|
|
|
8.3
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest and taxes – Corporate
(2)
|
(40.0
|
)
|
|
|
(38.3
|
)
|
(5)
|
|
(118.1
|
)
|
|
|
(125.1
|
)
|
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
$
|
282.3
|
|
|
|
$
|
280.7
|
|
|
|
$
|
758.0
|
|
|
|
$
|
574.4
|
|
|
|
|
(1)
|
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 further discussion.
|
|
|
(2)
|
Includes corporate expenses not allocated to any reportable segments, the Company’s proportionate share of the net income or loss of its investments in Gazal Corporation Limited and Karl Lagerfeld Holding B.V., 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, certain digital investments, 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.
|
|
|
(3)
|
Income before interest and taxes for the
thirteen and thirty-nine weeks ended
October 29, 2017
included costs of $
5.1
million and $
19.2
million, respectively, associated with the relocation of the Tommy Hilfiger office in New York, including noncash depreciation expense.
|
|
|
(4)
|
Income before interest and taxes for the
thirty-nine weeks ended
October 29, 2017
included costs of $
54.2
million associated with the agreements to restructure the Company’s supply chain relationship with Li & Fung Trading Limited (“Li & Fung”), under which the Company terminated its non-exclusive buying agency agreement with Li & Fung in 2017. 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.
|
|
|
(5)
|
Loss before interest and taxes for the
thirteen and thirty-nine weeks ended
October 29, 2017
included costs of $
2.5
million and $
9.8
million, respectively, associated with the consolidation within the Company’s warehouse and distribution network in North America.
|
|
|
(6)
|
Loss before interest and taxes for the
thirty-nine weeks ended
October 29, 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 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 2013 pursuant to the terms of noncancelable leases expiring on various dates through
2022
. The 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
November 4, 2018
was $
9.8
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 was immaterial as of
November 4, 2018
,
February 4, 2018
and
October 29, 2017
.
The Company has guaranteed a portion of the respective debt and other obligations of its joint venture in Australia and one of its joint ventures in India. The maximum amount guaranteed as of
November 4, 2018
was approximately $
10.8
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
November 4, 2018
,
February 4, 2018
and
October 29, 2017
.
The Company guaranteed to a financial institution the repayment of a store security deposit in Japan paid to a landlord on behalf of the Company. The amount guaranteed as of November 4, 2018 was approximately $
4.4
million, which is subject to exchange rate fluctuation. The Company has the right to seek recourse from the landlord for the full amount. The guarantee expires on March 28, 2022. The liability for this guarantee obligation was immaterial as of November 4, 2018.
The Company has 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 Financial Accounting Standards Board (“FASB”) issued in May 2014 guidance that superseded most of the previous 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 under the new guidance.
The majority of the Company’s revenue is generated from sales of finished products, which continues to be recognized when control of the product is transferred to the customer. Under the guidance, the Company’s royalty and advertising revenue continues to be recognized over time, however, the timing of the recognition of revenue among quarters may be affected for certain of the Company’s license agreements. For loyalty programs, the Company previously recorded 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 is deferred initially when the loyalty awards are earned, and recognized, along with the related cost of goods sold, as the loyalty awards are redeemed or, if not redeemed, as they expire. Revenue for the unredeemed portion of gift cards, which was previously recognized when the likelihood of redemption became remote, is now recognized under the guidance proportionately over the estimated customer redemption period, subject to the constraint that it must be probable that a significant reversal of revenue will not occur. The Company adopted the guidance in the first quarter of 2018 by applying a
modified retrospective approach to all contracts. As a result of the adoption, the Company recognized the cumulative effect of initially applying the guidance as a $
1.9
million decrease to opening retained earnings with offsetting increases to deferred revenue and accrued expenses of $
1.5
million and $
0.4
million, respectively. Additionally, at the time of adoption, the Company reclassified the liabilities related to loyalty awards and the unredeemed portion of gift cards of $
7.2
million and $
6.9
million, respectively, from accrued expenses to deferred revenue in the Company’s Consolidated Balance Sheet. Otherwise, the adoption of the guidance did not have a material impact on the Company’s consolidated financial statements as of and for the
thirteen and thirty-nine weeks ended
November 4, 2018
, including the Company’s Consolidated Income Statement and Consolidated Balance Sheet, or on any individual caption therein. Please see
Note 2
, “
Revenue
,” for further discussion.
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 revises certain presentation and disclosure requirements. The Company adopted this update in the first quarter of 2018 and it did not have any impact on the Company’s consolidated financial statements as the Company does not currently have such investments.
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 Company adopted this update in the first quarter of 2018 on a retrospective basis. As a result, contingent purchase price payments to Mr. Calvin Klein of $
37.7
million were reclassified from investing activities to operating activities, consistent with the current period classification under the update, and contingent purchase price payments related to the reacquisition of the rights in India to the
TOMMY HILFIGER
trademarks of $
0.8
million were reclassified from investing activities to financing activities in the Company’s Consolidated Statement of Cash Flows for the
thirty-nine weeks ended
October 29, 2017
. Otherwise, the adoption of the update did not have a material impact on the Company’s Consolidated Statements of Cash Flows, as the Company’s historical presentation of cash receipts and cash payments has been consistent with this guidance.
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. Previous guidance required entities to defer the income tax effect of intercompany transfers of assets until the asset was sold to an outside party or otherwise recognized. The update requires companies to recognize immediately in their income statement the income tax effects of an intercompany sale or transfer of an asset other than inventory. The Company adopted this update in the first quarter of 2018 using a modified retrospective approach, resulting in a cumulative-effect adjustment to decrease opening retained earnings by $
8.0
million, with a corresponding decrease in other assets.
The FASB issued in November 2016 an update to accounting guidance to clarify and provide specific guidance on the cash flow classification 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 Company adopted this update in the first quarter of 2018 and it did not have any impact on the Company’s Consolidated Statements of Cash Flows, as the Company does not currently have any restricted cash.
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 similar 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 Company adopted this update in the first quarter of 2018. This updated guidance was applied to applicable transactions after the adoption date and did not have a material impact on the Company’s consolidated financial statements.
The FASB issued in March 2017 an update to accounting guidance to change the income statement presentation of net periodic pension and postretirement benefit cost. The update requires employers to report the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered by the employees during the applicable period. The other components of net periodic 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 periodic benefit cost is eligible for capitalization, when applicable. The Company adopted this update in the first quarter of 2018 on a retrospective basis. As a result, the Company reclassified $
(2.2)
million and $
2.4
million from SG&A expenses to non-service related pension and postretirement (income) cost within income before interest and taxes in the Company’s Consolidated Income Statements for the
thirteen and thirty-nine weeks ended
October 29, 2017
, respectively. Otherwise, the adoption of the update did not have a material impact on the Company’s consolidated financial statements.
Accounting Guidance Issued But Not Adopted as of
November 4, 2018
The FASB issued in February 2016 new guidance on leases. The new guidance, among other changes, will require lessees to recognize a right-of-use asset and a lease liability in the balance sheet for most leases, but retains an expense recognition model similar to the current guidance. 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 also requires additional quantitative and qualitative disclosures. The guidance will be effective for the Company in the first quarter of 2019, with early adoption permitted. Entities are required to adopt the guidance using a modified retrospective approach, with the option to apply the guidance either at the beginning of the earliest period presented or at the beginning of the period in which it is adopted.
The Company formed a global, cross-functional project team to implement the new guidance and analyze its impacts. The Company has collected relevant data for all of its leases and is implementing changes needed to its policies, processes and internal controls as a result of the guidance. To facilitate the adoption and the related reporting requirements, the Company selected a global lease management and accounting software, which has been implemented in North America and is in the final stages of testing internationally. While the Company’s quantification of the impact of the guidance is still in process, it will result in a significant increase to the Company’s other assets and other liabilities, but is not expected to have a material impact on the Company’s results of operations. The Company will adopt the guidance in the first quarter of 2019 using the modified retrospective approach applied as of the period of adoption, with no restatement of prior periods.
The FASB issued in August 2017 an update to accounting guidance to simplify the application of hedge accounting in certain situations and allow companies to better align their hedge accounting with their risk management activities. The update eliminates the requirement to separately measure and report hedge ineffectiveness and requires companies to recognize all elements of hedge accounting that impact earnings in the same income statement line as the hedged item. The update also simplifies the requirements for hedge documentation and effectiveness assessments and amends the presentation and disclosure requirements. The update will be effective for the Company in the first quarter of 2019, with early adoption permitted. Entities are required to adopt the update using a modified retrospective approach, except for the presentation and disclosure guidance, which is required to be applied on a prospective basis. The adoption of the update is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued in January 2018 guidance related to the accounting for tax on the GILTI provisions of the Tax Legislation. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations for tax years beginning after December 31, 2017. The guidance indicates that companies must make a policy election to either record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future years or treat any taxes on GILTI inclusions as period costs when incurred. The Company is currently in the process of analyzing the effects of the GILTI provisions and plans to make an accounting policy election within the permitted measurement period.
The FASB issued in August 2018 an update to accounting guidance related to implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred under such arrangements with the requirements for capitalizing costs incurred to develop or obtain internal-use software. The update will be effective for the Company in the first quarter of 2020, with early adoption permitted. Entities have the option of adopting the guidance using either a prospective or retrospective approach. The Company intends to adopt the update in the first quarter of 2019 using the prospective approach. The Company will apply the update to applicable implementation costs incurred after the adoption date and the impact on the Company’s consolidated financial statements will depend on the nature and amount of such costs.
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 Company received principal payments of $
0.2
million during the
thirty-nine weeks ended
November 4, 2018
. The outstanding balance, including accrued interest, was $
13.6
million, $
14.0
million and $
13.9
million as of
November 4,
2018
,
February 4, 2018
, and
October 29, 2017
, respectively, and was included in other assets in the Company’s Consolidated Balance Sheets.
The Company records warehousing and distribution expenses, which are subject to exchange rate fluctuations, as a component of SG&A expenses in its Consolidated Income Statements. Warehousing and distribution expenses incurred in the
thirteen and thirty-nine weeks ended
November 4, 2018
totaled $
73.0
million and $
211.6
million, respectively. Warehousing and distribution expenses incurred in the
thirteen and thirty-nine weeks ended
October 29, 2017
totaled $
72.3
million and $
200.2
million, respectively, and included costs of $
2.5
million and $
9.8
million, respectively, related to the consolidation within the Company’s warehouse and distribution network in North America.