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
TOMMY HILFIGER, CALVIN KLEIN, 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 3, 2019
.
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 weeks ended
May 5, 2019
and
May 6, 2018
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.
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 freestanding 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.
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
May 5, 2019
, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $
1,210.3
million, of which the Company expects to recognize $
208.1
million as revenue during the remainder of 2019, $
234.6
million in 2020 and $
767.6
million thereafter.
Deferred Revenue
Changes in deferred revenue related to customer loyalty programs, gift cards and license agreements for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
Thirteen Weeks Ended
|
|
5/5/19
|
|
5/6/18
|
Deferred revenue balance at beginning of period
|
$
|
65.3
|
|
|
$
|
39.2
|
|
Impact of adopting the new revenue standard
|
|
|
|
15.6
|
|
Net additions to deferred revenue during the period
|
42.0
|
|
|
32.5
|
|
Reductions in deferred revenue for revenue recognized during the period
(1)
|
(51.4
|
)
|
|
(39.5
|
)
|
Deferred revenue balance at end of period
|
$
|
55.9
|
|
|
$
|
47.8
|
|
(1)
Represents the amount of revenue recognized during the period that was included in the deferred revenue balance at the beginning of the period, as adjusted in 2018 for the impact of adopting the new revenue standard, and does not contemplate revenue recognized from amounts deferred during the period.
The Company also had long-term deferred revenue liabilities included in other liabilities in its Consolidated Balance Sheets of $
2.1
million, $
2.3
million and $
4.6
million as of
May 5, 2019
,
February 3, 2019
and
May 6, 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 20
, “
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.
5. REDEEMABLE NON-CONTROLLING INTEREST
The Company owns a
75
% interest in the PVH Ethiopia joint venture between the Company and Arvind. The Company consolidates 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 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 PVH Ethiopia’s date of incorporation. 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 as of May 5, 2019 was $
(0.2)
million, which is greater than the redemption amount. The carrying amount decreased from $
0.2
million as of
February 3, 2019
as a result of a net loss attributable to the RNCI for the
thirteen weeks ended
May 5, 2019
of $
0.4
million. The carrying amount of the RNCI as of
May 6, 2018
was $
1.5
million.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company had investments in unconsolidated affiliates of $
208.5
million, $
207.1
million and $
198.6
million as of
May 5, 2019
,
February 3, 2019
and
May 6, 2018
, 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 from these investments during the
thirteen weeks ended
May 6, 2018
.
7. GOODWILL
The changes in the carrying amount of goodwill for the
thirteen weeks ended
May 5, 2019
, by segment (please see
Note 20
, “
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 3, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
780.3
|
|
|
$
|
909.5
|
|
|
$
|
204.4
|
|
|
$
|
1,529.8
|
|
|
$
|
246.5
|
|
|
$
|
11.9
|
|
|
$
|
3,682.4
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
780.3
|
|
|
909.5
|
|
|
204.4
|
|
|
1,529.8
|
|
|
246.5
|
|
|
—
|
|
|
3,670.5
|
|
Currency translation
|
(0.2
|
)
|
|
(12.3
|
)
|
|
—
|
|
|
(32.3
|
)
|
|
—
|
|
|
—
|
|
|
(44.8
|
)
|
Balance as of May 5, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
780.1
|
|
|
897.2
|
|
|
204.4
|
|
|
1,497.5
|
|
|
246.5
|
|
|
11.9
|
|
|
3,637.6
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.9
|
)
|
|
(11.9
|
)
|
Goodwill, net
|
$
|
780.1
|
|
|
$
|
897.2
|
|
|
$
|
204.4
|
|
|
$
|
1,497.5
|
|
|
$
|
246.5
|
|
|
$
|
—
|
|
|
$
|
3,625.7
|
|
8. RETIREMENT AND BENEFIT PLANS
The Company, as of
May 5, 2019
, 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
three
noncontributory unfunded non-qualified supplemental defined benefit pension plans, including:
|
|
–
|
A plan for certain current and former members of Tommy Hilfiger’s domestic senior management. The plan is frozen and, as a result, participants do not accrue additional benefits.
|
|
|
–
|
A capital accumulation program for certain current and former senior executives. 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
.
|
|
–
|
A plan for certain employees resident in the United States who meet certain age and service requirements 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
plans as its “SERP Plans.”
The components of net benefit cost recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
SERP Plans
|
|
Thirteen Weeks Ended
|
|
Thirteen Weeks Ended
|
(In millions)
|
5/5/19
|
|
5/6/18
|
|
5/5/19
|
|
5/6/18
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
8.2
|
|
|
$
|
8.3
|
|
|
$
|
1.5
|
|
|
$
|
1.3
|
|
Interest cost
|
6.9
|
|
|
6.5
|
|
|
1.0
|
|
|
1.0
|
|
Expected return on plan assets
|
(10.1
|
)
|
|
(10.0
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
5.0
|
|
|
$
|
4.8
|
|
|
$
|
2.5
|
|
|
$
|
2.3
|
|
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.” Net benefit cost related to the Postretirement Plans was immaterial for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
.
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 in the Company’s Consolidated Income Statements.
Currently, the Company does not expect to make material contributions to the Pension Plans in 2019. 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 unsecured credit facilities, as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. The Company had $
284.4
million outstanding under these facilities as of
May 5, 2019
. The weighted average interest rate on funds borrowed as of
May 5, 2019
was
3.85
%. The maximum amount of revolving borrowings outstanding under these facilities during the
thirteen weeks ended
May 5, 2019
was $
284.4
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 $
97.8
million based on exchange rates in effect on
May 5, 2019
and are utilized primarily to fund working capital needs. The Company had $
15.3
million outstanding under these facilities as of
May 5, 2019
. The weighted average interest rate on funds borrowed as of
May 5, 2019
was
0.20
%. The maximum amount of borrowings outstanding under these facilities during the
thirteen weeks ended
May 5, 2019
was $
17.9
million.
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
5/5/19
|
|
2/3/19
|
|
5/6/18
|
|
|
|
|
|
|
Senior unsecured Term Loan A facilities due 2024
(1)(2)
|
$
|
1,644.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Senior secured Term Loan A facility due 2021
|
—
|
|
|
1,643.8
|
|
|
1,792.4
|
|
7 3/4% debentures due 2023
|
99.6
|
|
|
99.6
|
|
|
99.6
|
|
3 5/8% senior unsecured euro notes due 2024
(2)
|
385.8
|
|
|
396.5
|
|
|
413.0
|
|
3 1/8% senior unsecured euro notes due 2027
(2)
|
661.0
|
|
|
679.5
|
|
|
708.2
|
|
Total
|
2,790.4
|
|
|
2,819.4
|
|
|
3,013.2
|
|
Less: Current portion of long-term debt
|
31.0
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
2,759.4
|
|
|
$
|
2,819.4
|
|
|
$
|
3,013.2
|
|
(1)
The outstanding principal balance for the United States dollar-denominated Term Loan A facility and the euro-denominated Term Loan A facility was $
1,093.2
million and €
500.0
million, respectively, as of
May 5, 2019
.
(2)
The carrying amount of the Company’s euro-denominated Term Loan A facility and 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
May 5, 2019
,
February 3, 2019
and
May 6, 2018
.
As of
May 5, 2019
, the Company’s mandatory long-term debt repayments for the remainder of 2019 through 2024 were as follows:
|
|
|
|
|
(In millions)
|
|
Fiscal Year
|
Amount
(1)
|
Remainder of 2019
|
$
|
20.6
|
|
2020
|
41.3
|
|
2021
|
61.9
|
|
2022
|
103.2
|
|
2023
|
223.8
|
|
2024
|
1,690.6
|
|
(1)
A portion of the Company’s mandatory long-term debt repayments are denominated in euro and subject to changes in the exchange rate of the United States dollar against the euro.
Total debt repayments for the remainder of 2019 through 2024 exceed the total carrying amount of the Company’s Term Loan A facilities, 7 3/4% debentures due 2023 and 3 5/8% euro senior notes due 2024 as of
May 5, 2019
because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of
May 5, 2019
, after taking into account the effect of the Company’s interest rate swap agreements discussed in the section entitled “2019 Senior Unsecured Credit Facilities,” which were in effect as of such date, approximately
60
% of the Company’s long-term debt had fixed interest rates, with the remainder at variable interest rates.
2016 Senior Secured Credit Facilities
On May 19, 2016, the Company entered into an amendment to its senior secured credit facilities (as amended, the “2016 facilities”). The Company replaced the 2016 facilities with new senior unsecured credit facilities on April 29, 2019 as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. The 2016 facilities, as of the date they were replaced, consisted 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.
2019 Senior Unsecured Credit Facilities
The Company refinanced the 2016 facilities on April 29, 2019 (the “Closing Date”) by entering into senior unsecured credit facilities (the “2019 facilities”), the proceeds of which, along with cash on hand, were used to repay all of the outstanding borrowings under the 2016 facilities, as well as the related debt issuance costs.
The 2019 facilities consist of a $
1,093.2
million United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €
500.0
million euro-denominated Term Loan A facility (the “Euro TLA facility” and together with the USD TLA facility, the “TLA facilities”) and senior unsecured revolving credit facilities consisting of (i) a $
675.0
million United States dollar-denominated revolving credit facility, (ii) a CAD $
70.0
million Canadian dollar-denominated revolving credit facility available in United States dollars or Canadian dollars, (iii) a €
200.0
million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen, Swiss francs, Australian dollars and other agreed foreign currencies and (iv) a $
50.0
million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars. The 2019 facilities are due on April 29, 2024. In connection with the refinancing of the senior credit facilities, the Company incurred debt issuance costs of $
10.4
million (of which $
3.5
million was expensed as debt modification costs and $
6.9
million is being amortized over the term of the debt agreement) and recorded debt extinguishment costs of $
1.7
million to write-off previously capitalized debt issuance costs.
Each of the senior unsecured revolving facilities, except for the $
50.0
million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars, also include amounts available for letters of credit. A portion of each of these revolving credit facilities are also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more senior unsecured term loan facilities or increase the commitments under the senior unsecured revolving credit facilities by an aggregate amount not to exceed $
1,500.0
million. The lenders under the 2019 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
The Company had loans outstanding of $
1,644.0
million, net of debt issuance costs and based on applicable exchange rates, under the TLA facilities, $
284.4
million of borrowings outstanding under the senior unsecured revolving credit facilities and $
20.4
million of outstanding letters of credit under the senior unsecured revolving credit facilities as of
May 5, 2019
.
The terms of the TLA facilities require the Company to make quarterly repayments of amounts outstanding under the 2019 facilities, commencing with the calendar quarter ending September 30, 2019. Such required repayment amounts equal
2.50%
per annum of the principal amount outstanding on the Closing Date for the first eight calendar quarters following the Closing Date,
5.00%
per annum of the principal amount outstanding on the Closing Date for the four calendar quarters thereafter and
7.50%
per annum of the principal amount outstanding on the Closing Date for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the TLA facilities. The outstanding borrowings under the 2019 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments made by the Company would reduce the future required repayment amounts.
The Company made no repayments on its term loans under the 2019 facilities and 2016 facilities during the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
, other than the repayment of the 2016 facilities in connection with the refinancing of the senior credit facilities.
The United States dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company's option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds effective rate plus 1/2 of
1.00%
and (iii) a one-month reserve adjusted Eurocurrency rate plus
1.00%
or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The Canadian dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the average of the rates per annum for Canadian dollar bankers' acceptances having a term of one month or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The Hong Kong dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The borrowings under the 2019 facilities in currencies other than United States dollars, Canadian dollars or Hong Kong dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The current applicable margin with respect to the TLA facilities and each revolving credit facility is
1.375%
for adjusted Eurocurrency rate loans and
0.375%
for base rate or Canadian prime rate loans. The applicable margin for borrowings under the TLA facilities and the revolving credit facilities is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of the Company’s fiscal quarters, based upon the Company’s net leverage ratio or (ii) after the date of delivery of notice of a change in the Company’s public debt rating by Standard & Poor’s or Moody’s.
The Company entered into interest rate swap agreements designed with the intended effect of converting notional amounts of its variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for the outstanding notional amount, the Company’s exposure to fluctuations in the one-month London interbank offered rate (“LIBOR”) is eliminated and the Company pays a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during the
thirteen weeks ended
May 5, 2019
and/or
May 6, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Designation Date
|
|
Commencement Date
|
|
Initial Notional Amount
|
|
Notional Amount Outstanding as of May 5, 2019
|
|
Fixed Rate
|
|
Expiration Date
|
January 2019
|
|
February 2020
|
|
$
|
50.0
|
|
|
$
|
—
|
|
|
2.4187%
|
|
February 2021
|
November 2018
|
|
February 2019
|
|
139.2
|
|
|
139.2
|
|
|
2.8645%
|
|
February 2021
|
October 2018
|
|
February 2019
|
|
115.7
|
|
|
115.7
|
|
|
2.9975%
|
|
February 2021
|
June 2018
|
|
August 2018
|
|
50.0
|
|
|
50.0
|
|
|
2.6825%
|
|
February 2021
|
June 2017
|
|
February 2018
|
|
306.5
|
|
|
181.5
|
|
|
1.566%
|
|
February 2020
|
July 2014
|
|
February 2016
|
|
682.6
|
|
|
—
|
|
|
1.924%
|
|
February 2018
|
The notional amounts of the outstanding interest rate swaps that commenced in February 2018 and February 2019 are 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 USD TLA facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.
The 2019 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; certain events related to certain of the guarantees by the Company; and a change in control (as defined in the 2019 facilities).
The 2019 facilities require the Company to comply with customary affirmative, negative and financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the 2019 facilities. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable, which would result in acceleration of the Company’s other debt.
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%
. The debentures are not redeemable at the Company’s option prior to maturity.
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 has outstanding €
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 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.
As of
May 5, 2019
, the Company was in compliance with all applicable financial and non-financial covenants under its financing arrangements.
Please see 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 3, 2019
for further discussion of the Company’s debt.
10. INCOME TAXES
The effective income tax rates for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
were
22.4
% and
17.1
%, respectively.
The effective income tax rate for the
thirteen weeks ended
May 5, 2019
was higher than the United States statutory income tax rate due to the tax on foreign earnings in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) imposed by the United States Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Legislation”), offset by the benefit of overall lower tax rates in certain international jurisdictions where the Company files tax returns.
The effective income tax rate for the
thirteen weeks ended
May 6, 2018
was lower than the 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.
The Company files income tax returns in more than
40
international jurisdictions each year. A substantial amount of the Company’s earnings comes from international operations, particularly in the Netherlands and Hong Kong, where income tax rates, coupled with special rates levied on income from certain of the Company’s jurisdictional activities, are lower than the United States statutory income tax rate.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure.
The Company also has exposure to interest rate volatility related to its term loans under the 2019 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 2019 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”). No amounts were excluded from effectiveness testing.
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, 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 (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 $
1,144.1
million and $
1,046.8
million, respectively, as of
May 5, 2019
, $
1,098.3
million and $
1,076.0
million, respectively, as of
February 3, 2019
and $
1,164.4
million and $
1,121.2
million, respectively, as of
May 6, 2018
. 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.
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.
The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes. The cash flows from the Company’s hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged.
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
|
|
5/5/19
|
|
2/3/19
|
|
5/6/18
|
|
5/5/19
|
|
2/3/19
|
|
5/6/18
|
|
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)
|
$
|
35.6
|
|
$
|
1.5
|
|
|
$
|
24.0
|
|
$
|
0.7
|
|
|
$
|
8.1
|
|
$
|
1.6
|
|
|
$
|
0.5
|
|
$
|
0.0
|
|
|
$
|
3.5
|
|
$
|
0.7
|
|
|
$
|
14.8
|
|
$
|
0.2
|
|
Interest rate swap agreements
|
0.9
|
|
—
|
|
|
1.4
|
|
0.0
|
|
|
1.7
|
|
1.1
|
|
|
1.7
|
|
1.9
|
|
|
1.2
|
|
1.6
|
|
|
—
|
|
—
|
|
Total contracts designated as cash flow hedges
|
36.5
|
|
1.5
|
|
|
25.4
|
|
0.7
|
|
|
9.8
|
|
2.7
|
|
|
2.2
|
|
1.9
|
|
|
4.7
|
|
2.3
|
|
|
14.8
|
|
0.2
|
|
Undesignated contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
0.7
|
|
—
|
|
|
0.1
|
|
—
|
|
|
0.7
|
|
—
|
|
|
1.7
|
|
—
|
|
|
2.0
|
|
—
|
|
|
1.6
|
|
—
|
|
Total
|
$
|
37.2
|
|
$
|
1.5
|
|
|
$
|
25.5
|
|
$
|
0.7
|
|
|
$
|
10.5
|
|
$
|
2.7
|
|
|
$
|
3.9
|
|
$
|
1.9
|
|
|
$
|
6.7
|
|
$
|
2.3
|
|
|
$
|
16.4
|
|
$
|
0.2
|
|
The notional amount outstanding of foreign currency forward exchange contracts was $
1,169.2
million at
May 5, 2019
. Such contracts expire principally between May 2019 and August 2020.
The following tables summarize the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other Comprehensive (Loss) Income
|
(In millions)
|
|
Thirteen Weeks Ended
|
|
5/5/19
|
|
5/6/18
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
30.1
|
|
|
$
|
29.4
|
|
Interest rate swap agreements
|
|
(1.1
|
)
|
|
0.5
|
|
Foreign currency borrowings (net investment hedges)
|
|
29.6
|
|
|
49.0
|
|
Total
|
|
$
|
58.6
|
|
|
$
|
78.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from AOCL into Income (Expense), Consolidated Income Statement Location, and Total Amount of Consolidated Income Statement Line Item
|
(In millions)
|
|
Amount Reclassified
|
|
Location
|
|
Total Income Statement Amount
|
Thirteen Weeks Ended
|
|
5/5/19
|
|
5/6/18
|
|
|
|
5/5/19
|
|
5/6/18
|
Foreign currency forward exchange contracts (inventory purchases)
|
|
$
|
15.0
|
|
|
$
|
(22.9
|
)
|
|
Cost of goods sold
|
|
$
|
1,060.4
|
|
|
$
|
1,023.6
|
|
Interest rate swap agreements
|
|
0.2
|
|
|
0.0
|
|
|
Interest expense
|
|
31.0
|
|
|
29.4
|
|
Total
|
|
$
|
15.2
|
|
|
$
|
(22.9
|
)
|
|
|
|
|
|
|
|
|
A net gain in AOCL on foreign currency forward exchange contracts at
May 5, 2019
of $
45.0
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 loss in AOCL for interest rate swap agreements at
May 5, 2019
of $
0.8
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 Recognized in Expense
|
Thirteen Weeks Ended
|
|
5/5/19
|
|
5/6/18
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
(0.1
|
)
|
|
$
|
(0.5
|
)
|
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of
May 5, 2019
.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/5/19
|
|
2/3/19
|
|
5/6/18
|
(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
|
|
$
|
37.8
|
|
|
N/A
|
|
$
|
37.8
|
|
|
N/A
|
|
$
|
24.8
|
|
|
N/A
|
|
$
|
24.8
|
|
|
N/A
|
|
$
|
10.4
|
|
|
N/A
|
|
$
|
10.4
|
|
Interest rate swap agreements
|
N/A
|
|
0.9
|
|
|
N/A
|
|
0.9
|
|
|
N/A
|
|
1.4
|
|
|
N/A
|
|
1.4
|
|
|
N/A
|
|
2.8
|
|
|
N/A
|
|
2.8
|
|
Total Assets
|
N/A
|
|
$
|
38.7
|
|
|
N/A
|
|
$
|
38.7
|
|
|
N/A
|
|
$
|
26.2
|
|
|
N/A
|
|
$
|
26.2
|
|
|
N/A
|
|
$
|
13.2
|
|
|
N/A
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
N/A
|
|
$
|
2.2
|
|
|
N/A
|
|
$
|
2.2
|
|
|
N/A
|
|
$
|
6.2
|
|
|
N/A
|
|
$
|
6.2
|
|
|
N/A
|
|
$
|
16.6
|
|
|
N/A
|
|
$
|
16.6
|
|
Interest rate swap agreements
|
N/A
|
|
3.6
|
|
|
N/A
|
|
3.6
|
|
|
N/A
|
|
2.8
|
|
|
N/A
|
|
2.8
|
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Total Liabilities
|
N/A
|
|
$
|
5.8
|
|
|
N/A
|
|
$
|
5.8
|
|
|
N/A
|
|
$
|
9.0
|
|
|
N/A
|
|
$
|
9.0
|
|
|
N/A
|
|
$
|
16.6
|
|
|
N/A
|
|
$
|
16.6
|
|
The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair value of the interest rate swap agreements is based on observable interest rate yield curves and represents the expected discounted cash flows underlying the financial instruments.
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 non-recurring basis (consisting of operating lease right-of-use assets and property, plant and equipment) during the
thirteen weeks ended
May 5, 2019
, and the total impairments recorded as a result of the remeasurement process:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Fair Value Measurement Using
|
|
Fair Value
As Of
Impairment Date
|
|
Total
Impairments
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Operating lease right-of-use assets
|
N/A
|
|
N/A
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
|
$
|
77.0
|
|
Property, plant and equipment, net
|
N/A
|
|
N/A
|
|
—
|
|
|
—
|
|
|
6.7
|
|
Operating lease right-of-use assets with a carrying amount of $
93.8
million were written down to a fair value of $
16.8
million during the
thirteen weeks ended
May 5, 2019
as a result of the closure during the first quarter of 2019 of the Company’s
TOMMY HILFIGER
flagship and anchor stores in the United States (the “TH U.S. store closures”) and the closure during the first quarter of 2019 of the Company’s
CALVIN KLEIN
flagship store on Madison Avenue in New York, New York in connection with the Calvin Klein restructuring (as defined in
Note 17
, “Exit Activity Costs”). Please see
Note 17
for further discussion of the Calvin Klein restructuring costs. Fair value of the operating lease right-of-use assets was determined based on the discounted cash flows of estimated sublease income using market participant assumptions.
Property, plant and equipment with a carrying amount of $
6.7
million was written down to a fair value of zero during the
thirteen weeks ended
May 5, 2019
primarily in connection with the TH U.S. store closures and the closure of the Company’s
CALVIN KLEIN 205 W39 NYC
brand
(formerly
Calvin Klein Collection
) in connection with the Calvin Klein restructuring. Please see
Note 17
, “Exit Activity Costs,” for further discussion of the Calvin Klein restructuring costs. Fair value of the Company’s property plant and equipment was determined based on the estimated discounted future cash flows associated with the assets using sales trends and market participant assumptions.
The $
83.7
million of impairment charges were included in SG&A expenses, of which $
48.6
million was recorded in the Tommy Hilfiger North America segment, $
32.2
million was recorded in the Calvin Klein North America segment and $
2.9
million was recorded in the Calvin Klein International 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/5/19
|
|
2/3/19
|
|
5/6/18
|
(In millions)
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
494.3
|
|
|
$
|
494.3
|
|
|
$
|
452.0
|
|
|
$
|
452.0
|
|
|
$
|
434.5
|
|
|
$
|
434.5
|
|
Short-term borrowings
|
299.7
|
|
|
299.7
|
|
|
12.8
|
|
|
12.8
|
|
|
254.5
|
|
|
254.5
|
|
Long-term debt (including portion classified as current)
|
2,790.4
|
|
|
2,907.7
|
|
|
2,819.4
|
|
|
2,853.7
|
|
|
3,013.2
|
|
|
3,076.6
|
|
The fair values of cash and cash equivalents and short-term borrowings approximate their carrying amounts due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable quarter. The Company classifies the measurement of its long-term debt as a Level 1 measurement. The carrying amounts of long-term debt reflect the unamortized portions of debt issuance costs and the original issue discounts.
13. STOCK-BASED COMPENSATION
The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). 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
May 5, 2019
, 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 an RSU or PSU award reduces the number available by
two
shares.
Net income for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
included $
13.9
million and $
11.6
million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $
1.9
million and $
2.3
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
thirteen weeks ended
May 5, 2019
and
May 6, 2018
were $
7.8
million and $
11.7
million, respectively. The tax benefits realized included discrete net excess tax benefits of $
1.3
million and $
4.5
million recognized in the Company’s provision for income taxes during the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
, respectively.
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
thirteen weeks ended
May 5, 2019
and
May 6, 2018
and the resulting weighted average grant date fair value per stock option:
|
|
|
|
|
|
|
|
|
|
5/5/19
|
|
5/6/18
|
Weighted average risk-free interest rate
|
2.34
|
%
|
|
2.78
|
%
|
Weighted average expected stock option term (in years)
|
6.25
|
|
|
6.25
|
|
Weighted average Company volatility
|
28.03
|
%
|
|
26.92
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per stock option
|
$
|
41.15
|
|
|
$
|
51.66
|
|
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
thirteen weeks ended
May 5, 2019
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per stock option data)
|
Stock Options
|
|
Weighted Average Exercise Price
Per Stock Option
|
Outstanding at February 3, 2019
|
791
|
|
|
$
|
107.81
|
|
Granted
|
101
|
|
|
127.26
|
|
Exercised
|
24
|
|
|
78.96
|
|
Cancelled
|
1
|
|
|
96.42
|
|
Outstanding at May 5, 2019
|
867
|
|
|
$
|
110.88
|
|
Exercisable at May 5, 2019
|
584
|
|
|
$
|
105.19
|
|
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
thirteen weeks ended
May 5, 2019
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per RSU data)
|
RSUs
|
|
Weighted Average Grant Date Fair Value Per RSU
|
Non-vested at February 3, 2019
|
847
|
|
|
$
|
122.97
|
|
Granted
|
324
|
|
|
129.29
|
|
Vested
|
283
|
|
|
114.20
|
|
Cancelled
|
25
|
|
|
123.78
|
|
Non-vested at May 5, 2019
|
863
|
|
|
$
|
128.19
|
|
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 2016, the three-year performance period ended during the first quarter of 2019 and holders of the awards earned an aggregate of
67,000
shares, which was between the threshold and target 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
thirteen weeks ended
May 5, 2019
and
May 6, 2018
and the resulting weighted average grant date fair value per PSU:
|
|
|
|
|
|
|
|
|
|
5/5/19
|
|
5/6/18
|
Risk-free interest rate
|
2.26
|
%
|
|
2.62
|
%
|
Expected Company volatility
|
29.88
|
%
|
|
29.78
|
%
|
Expected annual dividends per share
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average grant date fair value per PSU
|
$
|
129.46
|
|
|
$
|
159.53
|
|
For certain of the awards granted, the after-tax portion of the award is subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted
6.20
% in 2019 and
7.09%
in 2018 for the restriction of liquidity, which was calculated using the Chaffe model.
PSU activity for the
thirteen weeks ended
May 5, 2019
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per PSU data)
|
PSUs
|
|
Weighted Average Grant Date Fair Value Per PSU
|
Non-vested at February 3, 2019
|
194
|
|
|
$
|
106.76
|
|
Granted at target
|
52
|
|
|
129.46
|
|
Reduction due to market condition achieved below target
|
10
|
|
|
87.16
|
|
Vested
|
67
|
|
|
87.16
|
|
Cancelled
|
5
|
|
|
105.59
|
|
Non-vested at May 5, 2019
|
164
|
|
|
$
|
123.11
|
|
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the changes in AOCL, net of related taxes, by component for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign currency translation adjustments
|
|
Net unrealized and realized gain on effective cash flow hedges
|
|
Total
|
Balance, February 3, 2019
|
$
|
(537.6
|
)
|
|
$
|
29.7
|
|
|
$
|
(507.9
|
)
|
Other comprehensive (loss) income before reclassifications
|
(89.2
|
)
|
(1)(2)
|
27.7
|
|
|
(61.5
|
)
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
14.3
|
|
|
14.3
|
|
Other comprehensive (loss) income
|
(89.2
|
)
|
|
13.4
|
|
|
(75.8
|
)
|
Balance, May 5, 2019
|
$
|
(626.8
|
)
|
|
$
|
43.1
|
|
|
$
|
(583.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
(135.2
|
)
|
(1)(2)
|
28.0
|
|
|
(107.2
|
)
|
Less: Amounts reclassified from AOCL
|
—
|
|
|
(22.1
|
)
|
|
(22.1
|
)
|
Other comprehensive (loss) income
|
(135.2
|
)
|
|
50.1
|
|
|
(85.1
|
)
|
Balance, May 6, 2018
|
$
|
(384.6
|
)
|
|
$
|
(22.0
|
)
|
|
$
|
(406.6
|
)
|
(1)
Foreign currency translation adjustments included a net gain on net investment hedges of $
22.4
million and $
37.0
million during the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
, respectively.
(2)
Unfavorable foreign currency translation adjustments were principally driven by a strengthening of the United States dollar against the euro.
The following table presents reclassifications out of AOCL to earnings for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCL
|
|
Affected Line Item in the Company’s Consolidated Income Statements
|
|
Thirteen Weeks Ended
|
|
|
(In millions)
|
5/5/19
|
|
5/6/18
|
|
|
Realized gain (loss) on effective cash flow hedges:
|
|
|
|
|
|
Foreign currency forward exchange contracts (inventory purchases)
|
$
|
15.0
|
|
|
$
|
(22.9
|
)
|
|
Cost of goods sold
|
Interest rate swap agreements
|
0.2
|
|
|
—
|
|
|
Interest expense
|
Less: Tax effect
|
0.9
|
|
|
(0.8
|
)
|
|
Income tax expense
|
Total, net of tax
|
$
|
14.3
|
|
|
$
|
(22.1
|
)
|
|
|
15. STOCKHOLDERS’ EQUITY
The Company’s Board of Directors authorized a $
2,000.0
million stock repurchase program through June 3, 2023. 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, 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
thirteen weeks ended
May 5, 2019
and
May 6, 2018
, the Company purchased
0.5
million shares and
0.4
million shares, respectively, of its common stock under the program in open market transactions for $
61.2
million and $
53.7
million, respectively. As of
May 5, 2019
, the repurchased shares were held as treasury stock and $
947.1
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 RSUs and PSUs to satisfy tax withholding requirements.
16. LEASES
The Company leases approximately
1,750
Company-operated freestanding retail store locations across more than
35
countries, generally with initial lease terms of
3
to
10
years. The Company also leases warehouses, distribution centers, showrooms, office space, and a factory in Ethiopia, generally with initial lease terms of
10
to
20
years, as well as certain equipment and other assets, generally with initial lease terms of
1
to
5
years.
Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of fixed lease payments over the expected lease term. The Company uses its incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable for the Company's leases. The Company's incremental borrowing rates are based on the term of the lease, the economic environment of the lease, and the effect of collateralization. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. Certain leases also contain termination options with an associated penalty. Generally, the Company is reasonably certain not to exercise these options and as such, they are not included in the determination of the expected lease term. The Company recognizes operating lease expense on a straight-line basis over the lease term.
Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Leases generally provide for payments of nonlease components, such as common area maintenance, real estate taxes and other costs associated with the leased property. For lease agreements entered into or modified after
February 3, 2019
, the Company accounts for lease components and nonlease components together as a single lease component and, as such, includes fixed payments of nonlease components in the measurement of the right-of-use assets and lease liabilities. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred as variable lease costs and are not recorded on the balance sheet.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The components of the net lease cost for the
thirteen weeks ended
May 5, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(In millions)
|
|
Line Item in the Company’s Consolidated Income Statement
|
|
5/5/19
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use-assets
|
|
SG&A expenses (depreciation and amortization)
|
|
$
|
1.3
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
0.1
|
|
Total finance lease cost
|
|
|
|
1.4
|
|
Operating lease cost
|
|
SG&A expenses
|
|
112.9
|
|
Short-term lease cost
|
|
SG&A expenses
|
|
3.5
|
|
Variable lease cost
|
|
SG&A expenses
|
|
30.3
|
|
Less: sublease income
|
|
SG&A expenses
|
|
(0.1
|
)
|
Total net lease cost
|
|
|
|
$
|
148.0
|
|
Supplemental balance sheet information related to leases as of
May 5, 2019
was as follows:
|
|
|
|
|
|
|
|
(In millions)
|
|
Line Item in the Company’s Consolidated Balance Sheet
|
|
5/5/19
|
Right-of-use assets:
|
|
|
|
|
Operating lease
|
|
Operating lease right-of-use assets
|
|
$
|
1,606.0
|
|
Finance lease
|
|
Property, plant and equipment, net
|
|
14.6
|
|
|
|
|
|
$
|
1,620.6
|
|
Current lease liabilities:
|
|
|
|
|
Operating lease
|
|
Current portion of operating lease liabilities
|
|
$
|
334.3
|
|
Finance lease
|
|
Accrued expenses
|
|
4.7
|
|
|
|
|
|
$
|
339.0
|
|
Other lease liabilities:
|
|
|
|
|
Operating lease
|
|
Long-term portion of operating lease liabilities
|
|
$
|
1,499.4
|
|
Finance lease
|
|
Other liabilities
|
|
11.0
|
|
|
|
|
|
$
|
1,510.4
|
|
Supplemental cash flow information related to leases for the
thirteen weeks ended
May 5, 2019
was as follows:
|
|
|
|
|
|
Thirteen Weeks Ended
|
(In millions)
|
5/5/19
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
116.0
|
|
Operating cash flows from finance leases
|
0.1
|
|
Financing cash flows from finance leases
|
1.5
|
|
Non-cash transactions:
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
85.1
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
0.9
|
|
The following summarizes the weighted average remaining lease term and weighted average discount rate related to the Company’s right-of-use assets and lease liabilities recorded on the balance sheet as of
May 5, 2019
:
|
|
|
|
|
5/5/19
|
Weighted average remaining lease term (years):
|
|
Operating leases
|
7.12
|
|
Finance leases
|
4.60
|
|
Weighted average discount rate:
|
|
Operating leases
|
5.48
|
%
|
Finance leases
|
3.89
|
%
|
At
May 5, 2019
, the maturities of the Company’s lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Finance
Leases
|
|
Operating
Leases
|
|
Total
|
Remainder of 2019
|
$
|
3.9
|
|
|
$
|
301.7
|
|
|
$
|
305.6
|
|
2020
|
4.5
|
|
|
386.7
|
|
|
391.2
|
|
2021
|
3.9
|
|
|
332.1
|
|
|
336.0
|
|
2022
|
1.9
|
|
|
267.2
|
|
|
269.1
|
|
2023
|
0.6
|
|
|
200.1
|
|
|
200.7
|
|
Thereafter
|
2.5
|
|
|
684.5
|
|
|
687.0
|
|
Total lease payments
|
$
|
17.3
|
|
|
$
|
2,172.3
|
|
|
$
|
2,189.6
|
|
Less: Interest
|
(1.6
|
)
|
|
(338.6
|
)
|
|
(340.2
|
)
|
Total lease liabilities
|
$
|
15.7
|
|
|
$
|
1,833.7
|
|
|
$
|
1,849.4
|
|
The Company’s future lease payment obligations related to leases that were entered into, but did not commence as of May 5, 2019, were immaterial.
17. EXIT ACTIVITY COSTS
Calvin Klein Restructuring Costs
The Company announced on January 10, 2019 a restructuring in connection with strategic changes for its
Calvin Klein business (the “Calvin Klein restructuring”). The strategic changes include (i) the closure of the
CALVIN KLEIN 205 W39 NYC
brand (formerly
Calvin Klein Collection
), (ii) the closure of the flagship store on Madison Avenue in New York, New York, (iii) the restructuring of the Calvin Klein creative and design teams globally, and (iv) the consolidation of operations for the men’s Calvin Klein Sportswear and Calvin Klein Jeans businesses. In connection with the Calvin Klein restructuring, the Company recorded pre-tax costs during 2018 and the first quarter of 2019 and expects to incur total costs as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Total Costs Expected to be Incurred
|
|
Costs Incurred During the Thirteen Weeks Ended 5/5/19
|
|
Cumulative Costs Incurred To Date
|
Severance, termination benefits and other employee costs
|
$
|
51.0
|
|
|
$
|
18.7
|
|
|
$
|
46.0
|
|
Long-lived asset impairments
(1)
|
57.0
|
|
|
35.1
|
|
|
42.0
|
|
Contract termination and other costs
|
33.0
|
|
|
14.8
|
|
|
19.1
|
|
Inventory markdowns
|
5.0
|
|
|
1.7
|
|
|
3.9
|
|
Total
|
$
|
146.0
|
|
|
$
|
70.3
|
|
|
$
|
111.0
|
|
(1)
Includes the impact of the closure of the flagship store on Madison Avenue in New York, New York in the first quarter of 2019.
Of the charges for severance, termination benefits and other employee costs, long-lived asset impairments and contract termination and other costs incurred during the
thirteen weeks ended
May 5, 2019
, $
50.1 million
relate to SG&A expenses of the Calvin Klein North America segment and $
18.5 million
relate to SG&A expenses of the Calvin Klein International segment. Of the charges for inventory markdowns incurred during the
thirteen weeks ended
May 5, 2019
,
$0.8 million
relate to cost of goods sold of the Calvin Klein North America segment and
$0.9 million
relate to cost of goods sold of the Calvin Klein International segment. Of the $
111.0 million
cumulative costs incurred to date in connection with the restructuring activities,$
69.8 million
related to the Calvin Klein North America segment and $
41.2 million
related to the Calvin Klein International segment. The Company expects to incur total costs of approximately $
146 million
through the end of 2019 in connection with the restructuring activities, of which approximately $
87 million
is estimated to relate to the Calvin Klein North America segment and approximately $
59 million
is estimated to relate to the Calvin Klein International segment. Please see
Note 20
, “
Segment Data
,” for further discussion of the Company’s reportable segments.
Please see
Note 12
, “
Fair Value Measurements
,” for further discussion of the long-lived asset impairments recorded during the
thirteen weeks ended
May 5, 2019
.
The liabilities at
May 5, 2019
related to these costs were principally recorded in accrued expenses in the Company’s Consolidated Balance Sheets and were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Liability at 2/3/19
|
|
Costs Incurred During the Thirteen Weeks Ended 5/5/19
|
|
Costs Paid During the Thirteen Weeks Ended 5/5/19
|
|
Liability at 5/5/19
|
Severance, termination benefits and other employee costs
|
$
|
25.8
|
|
|
$
|
18.7
|
|
|
$
|
9.0
|
|
|
$
|
35.5
|
|
Contract termination and other costs
|
2.3
|
|
|
14.8
|
|
|
13.7
|
|
|
3.4
|
|
Total
|
$
|
28.1
|
|
|
$
|
33.5
|
|
|
$
|
22.7
|
|
|
$
|
38.9
|
|
18. NET INCOME PER COMMON SHARE
The Company computed its basic and diluted net income per common share as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(In millions, except per share data)
|
5/5/19
|
|
5/6/18
|
|
|
|
|
Net income attributable to PVH Corp.
|
$
|
82.0
|
|
|
$
|
179.4
|
|
|
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
75.2
|
|
|
77.1
|
|
Weighted average impact of dilutive securities
|
0.7
|
|
|
1.1
|
|
Total shares for diluted net income per common share
|
75.9
|
|
|
78.2
|
|
|
|
|
|
Basic net income per common share attributable to PVH Corp.
|
$
|
1.09
|
|
|
$
|
2.33
|
|
|
|
|
|
Diluted net income per common share attributable to PVH Corp.
|
$
|
1.08
|
|
|
$
|
2.29
|
|
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
|
(In millions)
|
5/5/19
|
|
5/6/18
|
|
|
|
|
Weighted average potentially dilutive securities
|
$
|
0.5
|
|
|
$
|
0.1
|
|
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
May 5, 2019
and
May 6, 2018
and, therefore, were excluded from the calculation of diluted net income per common share for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
. 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
May 5, 2019
and
May 6, 2018
, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.
19. NONCASH INVESTING AND FINANCING TRANSACTIONS
Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statement of Cash Flows for the
thirteen weeks ended
May 6, 2018
were $
1.2
million of assets acquired through finance leases. Please see
Note 16
, “
Leases
,” for supplemental noncash transactions information related to finance leases during the
thirteen weeks ended
May 5, 2019
.
Omitted from acquisition of treasury shares in the Company’s Consolidated Statements of Cash Flows for the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
were $
2.0
million and $
1.5
million, respectively, of shares repurchased under the stock repurchase program for which the trades occurred but remained unsettled as of the end of the respective period.
Omitted from proceeds from 2019 facilities, net of related fees in the Company’s Consolidated Statement of Cash Flows for the
thirteen weeks ended
May 5, 2019
were $
4.0
million of debt issuance costs incurred in connection with the refinancing of its senior credit facilities that were accrued as of
May 5, 2019
.
The Company recorded a loss of $
1.7
million during the
thirteen weeks ended
May 5, 2019
to write-off previously capitalized debt issuance costs in connection with the refinancing of its senior credit facilities.
The Company completed the acquisition of the
Geoffrey Beene
tradename during the
thirteen weeks ended
May 6, 2018
. Omitted from acquisitions, net of cash acquired in the Company’s Consolidated Statement of Cash Flows for the
thirteen weeks ended
May 6, 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.
20. SEGMENT DATA
The Company manages its operations through its operating divisions, which are presented as
six
reportable segments: (i) Tommy Hilfiger North America; (ii) Tommy Hilfiger International; (iii) Calvin Klein North America; (iv) Calvin Klein International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.
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, warehouse clubs, and off-price and independent retailers, as well as digital commerce sites operated by the 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, China and Japan, primarily to department and specialty stores, and digital commerce sites operated by department store customers and pure play digital commerce retailers, as well as through 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.
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 warehouse clubs, department and specialty stores, and off-price and independent retailers, as well as digital commerce sites operated by 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, and digital commerce sites operated by department store customers and pure play digital commerce retailers
,
as well as through
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.
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, off-price and independent retailers, as well as digital commerce sites operated by select wholesale partners and pure play digital commerce retailers in North America of (i) men’s 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
,
ARROW
and
DKNY
; (iii) men’s, women’s and children’s swimwear, pool and deck footwear, and swim-related products and accessories under the
Speedo
trademark; and (iv) women’s intimate apparel under the
Warner’s
,
Olga
, and
True&Co.
brands. Additionally, this segment derives revenue from Company operated digital commerce sites in the United States through
SpeedoUSA
.com,
TrueAndCo
.com,
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
.
All of the Company’s Heritage Brands stores offer a broad selection of
Van Heusen
men’s and women’s apparel, along with various of the Company’s dress shirt and neckwear offerings, and
IZOD
and
Warner’s
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
|
|
(In millions)
|
5/5/19
|
(1)
|
5/6/18
|
(1)
|
Revenue – Tommy Hilfiger North America
|
|
|
|
|
Net sales
|
$
|
347.8
|
|
|
$
|
338.9
|
|
|
Royalty revenue
|
18.7
|
|
|
18.4
|
|
|
Advertising and other revenue
|
5.3
|
|
|
3.9
|
|
|
Total
|
371.8
|
|
|
361.2
|
|
|
|
|
|
|
|
Revenue – Tommy Hilfiger International
|
|
|
|
|
Net sales
|
662.7
|
|
|
637.2
|
|
|
Royalty revenue
|
13.2
|
|
|
12.0
|
|
|
Advertising and other revenue
|
4.4
|
|
|
5.4
|
|
|
Total
|
680.3
|
|
|
654.6
|
|
|
|
|
|
|
|
Revenue – Calvin Klein North America
|
|
|
|
|
Net sales
|
378.4
|
|
|
367.3
|
|
|
Royalty revenue
|
33.4
|
|
|
34.0
|
|
|
Advertising and other revenue
|
12.2
|
|
|
13.2
|
|
|
Total
|
424.0
|
|
|
414.5
|
|
|
|
|
|
|
|
Revenue – Calvin Klein International
|
|
|
|
|
Net sales
|
441.1
|
|
|
448.8
|
|
|
Royalty revenue
|
17.9
|
|
|
18.5
|
|
|
Advertising and other revenue
|
6.6
|
|
|
8.2
|
|
|
Total
|
465.6
|
|
|
475.5
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Wholesale
|
|
|
|
|
Net sales
|
350.3
|
|
|
340.8
|
|
|
Royalty revenue
|
5.1
|
|
|
5.4
|
|
|
Advertising and other revenue
|
1.0
|
|
|
0.9
|
|
|
Total
|
356.4
|
|
|
347.1
|
|
|
|
|
|
|
|
Revenue – Heritage Brands Retail
|
|
|
|
|
Net sales
|
57.0
|
|
|
60.5
|
|
|
Royalty revenue
|
1.1
|
|
|
1.1
|
|
|
Advertising and other revenue
|
0.1
|
|
|
0.1
|
|
|
Total
|
58.2
|
|
|
61.7
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
Net sales
|
2,237.3
|
|
|
2,193.5
|
|
|
Royalty revenue
|
89.4
|
|
|
89.4
|
|
|
Advertising and other revenue
|
29.6
|
|
|
31.7
|
|
|
Total
|
$
|
2,356.3
|
|
|
$
|
2,314.6
|
|
|
|
|
(1)
|
Revenue was impacted by fluctuations of the United States dollar against foreign currencies in which the Company transacts significant levels of business.
|
The Company’s revenue by distribution channel was as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
(In millions)
|
5/5/19
|
|
5/6/18
|
Wholesale net sales
|
$
|
1,360.7
|
|
|
$
|
1,284.1
|
|
Retail net sales
|
876.6
|
|
|
909.4
|
|
Net sales
|
2,237.3
|
|
|
2,193.5
|
|
|
|
|
|
Royalty revenue
|
89.4
|
|
|
89.4
|
|
Advertising and other revenue
|
29.6
|
|
|
31.7
|
|
Total
|
$
|
2,356.3
|
|
|
$
|
2,314.6
|
|
The Company’s income before interest and taxes by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
(In millions)
|
5/5/19
|
(1)
|
|
5/6/18
|
(1)
|
(Loss) income before interest and taxes – Tommy Hilfiger North America
|
$
|
(14.7
|
)
|
(3)
|
|
$
|
40.8
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Tommy Hilfiger International
|
106.8
|
|
|
|
91.2
|
|
(6)
|
|
|
|
|
|
|
Income before interest and taxes – Calvin Klein North America
|
1.4
|
|
(4)
|
|
43.5
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Calvin Klein International
|
46.9
|
|
(4)
|
|
65.1
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Wholesale
|
39.0
|
|
|
|
39.8
|
|
|
|
|
|
|
|
|
Income before interest and taxes – Heritage Brands Retail
|
1.0
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
Loss before interest and taxes – Corporate
(2)
|
(45.3
|
)
|
(5)
|
|
(37.9
|
)
|
|
|
|
|
|
|
|
Income before interest and taxes
|
$
|
135.1
|
|
|
|
$
|
244.3
|
|
|
|
|
(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.
|
|
|
(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 (“Gazal”) 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 on 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)
|
Loss before interest and taxes for the
thirteen weeks ended
May 5, 2019
included costs of $
54.9
million incurred in connection with the TH U.S. store closures, primarily consisting of noncash lease asset impairments. Please see
Note 12
, “
Fair Value Measurements
,” for further discussion.
|
|
|
(4)
|
Income before interest and taxes for the
thirteen weeks ended
May 5, 2019
included costs of $
70.3
million incurred in connection with the Calvin Klein restructuring. Such costs were included in the Company’s segments as follows: $
50.9
million in Calvin Klein North America and $
19.4
million in Calvin Klein International. Please see
Note 17
, “
Exit Activity Costs
,” for further discussion.
|
|
|
(5)
|
Loss before interest and taxes for the
thirteen weeks ended
May 5, 2019
included costs of $
6.2
million related to the refinancing of the Company’s senior credit facilities. Please see
Note 9
, “
Debt
,” for further discussion.
|
|
|
(6)
|
Income before interest and taxes for the
thirteen weeks ended
May 6, 2018
included costs of $
6.9
million associated with the acquisition of the 55% ownership interests in TH Asia, Ltd., the Company’s former joint venture for
TOMMY HILFIGER
in China, that the Company did not already own, consisting of noncash amortization of short-lived assets.
|
Intersegment transactions primarily consist of transfers of inventory principally from the Heritage Brands Wholesale segment to the Heritage Brands Retail segment, the Tommy Hilfiger North America segment and the Calvin Klein 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 Tommy Hilfiger North America segment and the Calvin Klein North America segment.
21. GUARANTEES
The Company is deemed to have guaranteed lease payments for substantially all G. H. Bass & Co. (“Bass”) retail stores included in the 2013 sale of substantially all of the assets of the Company’s Bass business 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
May 5, 2019
was $
8.3
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
May 5, 2019
,
February 3, 2019
and
May 6, 2018
.
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
May 5, 2019
was approximately $
11.1
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
May 5, 2019
,
February 3, 2019
and
May 6, 2018
.
The Company has 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
May 5, 2019
was approximately $
4.5
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
May 5, 2019
and February 3, 2019.
The Company has guaranteed the payment of amounts on behalf of certain other parties, none of which are material individually or in the aggregate.
22. RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
The Financial Accounting Standards Board (“FASB”) issued in February 2016 new guidance on leases. The new guidance, among other changes, requires 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 previous guidance. The lease liability is measured at the present value of the fixed lease payments over the lease term and the right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. The guidance also requires additional quantitative and qualitative disclosures. The Company adopted the guidance in the first quarter of 2019 using the modified retrospective approach applied as of the period of adoption with a cumulative-effect adjustment to opening retained earnings and as such, prior periods have not been restated. Upon adoption, the Company (i) recognized operating lease right-of-use assets of $
1.7
billion and lease liabilities of $
1.9
billion, (ii) recorded a cumulative-effect adjustment to retained earnings of $
3.1
million and (iii) recorded other reclassification adjustments within its Consolidated Balance Sheet related to, among other things, deferred rent.
The effects of the adoption on the Company’s Consolidated Balance Sheet as of February 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As Reported 2/3/19
|
|
Adjustments
|
|
Adjusted 2/3/19
|
Assets
|
|
|
|
|
|
Prepaid expenses
|
$
|
168.7
|
|
|
$
|
(21.3
|
)
|
|
$
|
147.4
|
|
Operating lease right-of-use assets
|
—
|
|
|
1,708.2
|
|
|
1,708.2
|
|
Other Assets
|
400.9
|
|
|
(10.3
|
)
|
|
390.6
|
|
Liabilities
|
|
|
|
|
|
Accrued expenses
|
891.6
|
|
|
(17.0
|
)
|
|
874.6
|
|
Current portion of operating lease liabilities
|
—
|
|
|
350.5
|
|
|
350.5
|
|
Long-Term portion of operating lease liabilities
|
—
|
|
|
1,514.1
|
|
|
1,514.1
|
|
Other Liabilities
|
1,322.4
|
|
|
(167.9
|
)
|
|
1,154.5
|
|
Stockholders’ Equity:
|
|
|
|
|
|
Retained earnings
|
4,350.1
|
|
|
(3.1
|
)
|
|
4,347.0
|
|
The Company also elected the package of practical expedients permitted under the transition guidance, which allows the Company not to reassess whether any existing contracts are or contain a lease, the lease classification for any existing leases, and the capitalization of initial direct costs for any existing leases, as of the adoption date. The Company’s accounting for finance leases (formerly called capital leases) remains substantially unchanged. The adoption of the guidance did not have a material impact on the Company’s results of operations or cash flows. Please see
Note 16
, “
Leases
,” for additional disclosures required by the guidance.
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 Company adopted this update in the first quarter of 2019 using a modified retrospective approach, except for the presentation and disclosure guidance, which is being applied on a prospective basis, as required. The adoption of this update did not have any impact on the Company’s consolidated financial statements.
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. Under previous accounting guidance, the Company generally expensed the implementation costs incurred in connection with a cloud computing arrangement that is a service contract. The Company early adopted this update in the first quarter of 2019 using a prospective approach. As a result of the adoption, the Company capitalized $
1.9
million of costs incurred in the first quarter of 2019 to implement cloud computing arrangements, primarily related to digital and consumer data platforms. Such costs were included in prepaid expenses and other assets in the Company’s Consolidated Balance Sheet. The Company expects to incur additional costs to implement cloud computing arrangements during the remainder of 2019 and expects the implementation costs capitalized in its Consolidated Balance Sheet will increase accordingly.
23. 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 and $
0.1
million during the
thirteen weeks ended
May 5, 2019
and
May 6, 2018
, respectively. The outstanding balance, including accrued interest, was $
13.4
million, $
13.8
million and
$
13.7
million as of
May 5, 2019
,
February 3, 2019
, and
May 6, 2018
, 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 weeks ended
May 5, 2019
and
May 6, 2018
totaled $
77.1
million and $
70.0
million, respectively.
24. SUBSEQUENT EVENTS
The Company acquired on May 31, 2019 the approximately
78%
interest in Gazal that it did not already own. Prior to the acquisition closing, the Company, along with Gazal, jointly owned and managed PVH Brands Australia Pty. Limited (“PVH Australia”), which licenses and operates businesses under the
TOMMY HILFIGER
,
CALVIN KLEIN
and
Van Heusen
brands, along with other licensed and owned brands. PVH Australia came under the Company’s full control as a result of the acquisition. The aggregate net purchase price for the shares acquired is expected to be approximately A$
124
million (approximately $
86
million based on the exchange rate in effect on the date of the acquisition), after taking into account the pending divestiture to a third party of an office building and warehouse owned by Gazal.