Debt

12 Months Ended

Dec. 31, 2011

Debt [Abstract]

Debt

Note 12—Debt

Debt was as follows:

	December 31,		January 1,
	2011		2011
Short-term debt:
Current portion of 2011 Term Loan	$	2,000	$	—
CKJEA notes payable and other		43,021		18,802
2008 Credit Agreements		—		—
Premium on interest rate cap — current		2,492		—
Italian note		—		13,370
		47,513		32,172
Long-term debt:
2011 Term Loan		197,000		—
Premium on interest rate cap		11,477		—
		208,477		—
Total Debt	$	255,990	$	32,172

Financing Agreements

2011 Term Loan Agreement

On June 17, 2011, Warnaco Group, Warnaco, Calvin Klein Jeanswear Company (“CK Jeans”), an indirect wholly-owned subsidiary of Warnaco Group, and Warnaco Swimwear Products Inc. (“Warnaco Swimwear”), an indirect wholly-owned subsidiary of Warnaco Group, entered into a term loan agreement (the “2011 Term Loan Agreement”) with the financial institutions which are the lenders thereunder (the “Lenders”). Warnaco, CK Jeans and Warnaco Swimwear are co-borrowers on a joint and several basis under the 2011 Term Loan Agreement (the “Borrowers”).

The 2011 Term Loan Agreement provides for a $200,000 senior secured term loan facility, maturing on June 17, 2018 (the “2011 Term Loan”). In addition, during the term of the 2011 Term Loan Agreement, the Borrowers may request additional credit commitments for incremental term loan facilities in an aggregate amount not to exceed $100,000 plus the aggregate principal amount of the term loans that the Borrowers have voluntarily prepaid prior to the date of such request. The Borrowers may request a greater amount to the extent that Warnaco Group meets certain financial tests set forth in the 2011 Term Loan Agreement. At December 31, 2011, there was $199,000 in term loans outstanding under the 2011 Term Loan Agreement. During June 2011, the Company repaid the outstanding loan balances of the 2008 Credit Agreements and the Italian Note (as defined below) from the proceeds of the 2011 Term Loan (see below). The Company paid $4,941 in deferred financing costs in connection with the 2011 Term Loan, which are being amortized to interest expense over the term of the loan using the effective interest method. The deferred financing costs were recorded in Other assets on the Consolidated Balance Sheets.

On the last day of each of the Company’s fiscal quarters, beginning on October 1, 2011, $500 of the outstanding principal amount of the 2011 Term Loan must be repaid. Such amount will be reduced if a portion of the principal amount is prepaid. The remaining principal amount is due on June 17, 2018.

The 2011 Term Loan Agreement provides interest rate options, at the Borrowers’ election, including a base rate (as defined in the 2011 Term Loan Agreement) plus a margin of 1.75% or at LIBOR (with a floor of 1.00%) plus a margin of 2.75%, in each case, on a per annum basis. Accrued interest will be paid in arrears on the last day of each interest period through the maturity date. Payment dates are the last calendar day (or business day if the last calendar day is not a business day) of each of January, April, July and October, beginning on October 31, 2011. Reset dates, which determine the three-month LIBOR variable leg for the following three month period occur two business days prior to a payment date beginning on October 29, 2011. At December 31, 2011, the interest rate on the entire balance of the 2011 Term Loan was 3.75%, based on three-month LIBOR (with a floor of 1.00%) plus a margin of 2.75%. In order to match the interest rate on the hedged portion of the 2011 Term Loan with that on the interest rate cap (see below), the Company expects to continue to use successive interest periods of three months and adjusted three-month LIBOR rates (with a LIBOR floor of 1.00% per annum) plus 2.75% on a per annum basis through the maturity date of the 2011 Term Loan.

In addition, the 2011 Term Loan Agreement is subject to a 1.00% prepayment fee in the event it is refinanced with term loans with lower pricing on or before June 17, 2012, subject to certain conditions. The Borrowers must make mandatory prepayments of the term loans with the proceeds of asset dispositions and insurance proceeds from casualty events (subject to certain limitations), with a portion of any excess cash flow (as defined in the 2011 Term Loan Agreement) generated by Warnaco Group and with the proceeds of certain issuances of debt (subject to certain exceptions).

The 2011 Term Loan Agreement does not require the Borrowers to comply with any financial maintenance covenants. The 2011 Term Loan Agreement contains customary representations, warranties and affirmative covenants. The 2011 Term Loan Agreement also contains customary negative covenants providing limitations, subject to negotiated carve-outs, with respect to (i) incurrence of indebtedness and liens, (ii) significant corporate changes including mergers and acquisitions with third parties, (iii) investments, (iv) loans, (v) hedge agreements, (vi) certain restricted payments and (vii) transactions with affiliates and certain other restrictive agreements, among others.

The 2011 Term Loan Agreement contains customary events of default, such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a “Change of Control” (as defined in the 2011 Term Loan Agreement), or the failure to observe the certain covenants therein. Upon an event of default, the Lenders may, among other things, immediately declare any then outstanding loans due and payable.

The obligations of the Borrowers under the 2011 Term Loan Agreement are guaranteed by Warnaco Group and its indirect domestic subsidiaries (collectively, the “U.S. Guarantors”) pursuant to a Guaranty dated as of June 17, 2011 (the “Guaranty”).

The obligations under the 2011 Term Loan Agreement and the guarantees thereof, are secured by Warnaco Group, the Borrowers and each of the U.S. Guarantors, for the benefit of the Lenders, with a first priority lien on all fixed asset collateral (including, without limitation, pledges of their equity ownership in domestic subsidiaries and up to 66% of their equity ownership in first-tier foreign subsidiaries), intellectual property, and substantially all other personal property of the Borrowers and the U.S. Guarantors not constituting 2008 Credit Agreement Priority Collateral (as defined below), and, in each case, proceeds thereof. In addition, Warnaco Group, the Borrowers and each of the U.S. Guarantors have granted to the Lenders a second priority security interest in accounts receivable, inventory, deposit accounts and cash, checks and certain related assets (the “2008 Credit Agreement Priority Collateral”).

In connection with entering into the 2011 Term Loan Agreement on June 17, 2011, Warnaco Group, the Borrowers and the U.S. Guarantors executed an Intercreditor Agreement (the “Intercreditor Agreement”), establishing certain priorities with respect to the collateral that secures the Borrowers’ obligations under the 2008 Credit Agreements and the 2011 Term Loan Agreement. Pursuant to the Intercreditor Agreement, the secured parties under the existing 2008 Credit Agreements retain a first priority security interest in all 2008 Credit Agreement Priority Collateral and a second priority security interest in all fixed asset collateral, intellectual property and substantially all other personal property of Warnaco Group, the Borrowers and the U.S. Guarantors not constituting 2008 Credit Agreement Priority Collateral.

Interest Rate Cap Agreement

On July 1, 2011, the Company entered into a deferred premium interest rate cap agreement with HSBC Bank USA (the “Counterparty”), effective July 29, 2011, on a notional amount of $120,000. The interest rate cap agreement is a series of 27 individual caplets that reset and settle quarterly over the period from October 31, 2011 to April 30, 2018. Under the terms of the interest rate cap agreement, if three-month LIBOR resets above a strike price of 1.00%, the Company will receive the net difference between the reset rate and the strike price. In addition, on the quarterly settlement dates, the Company will remit the deferred premium payment to the Counterparty. If LIBOR resets below the strike price no payment is made by the Counterparty. However, the Company would still be responsible for payment of the deferred premium. The Company is obligated to make premium payments totaling approximately $16,015, based on an annual rate of 1.9475% on the notional amount of the interest rate cap, over the term of the agreement. The effect of the agreement is to limit the interest rate payable on average over the term of the interest rate cap agreement to 5.6975% per annum with respect to the portion of the 2011 Term Loan that equals the notional amount of the interest rate cap.

The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%. At the inception of the hedging relationship, the fair value of the interest rate cap of $14,395 was allocated to the respective caplets within the interest rate cap on a fair value basis. To the extent that the interest rate cap contracts are effective in offsetting that variability, changes in the interest rate cap’s fair value will be recorded in AOCI in the Company’s Consolidated Balance Sheets and subsequently recognized in interest expense in the Consolidated Statements of Operations as the underlying interest expense is recognized on the 2011 Term Loan.

On December 31, 2011, the fair value of the interest rate cap was $6,276, which was recorded in Other assets on the Company’s Consolidated Balance Sheet and the decrease in fair value of $8,119 from July 1, 2011 was recorded in AOCI. On December 31, 2011, Deferred premium on the interest rate cap was $13,969, of which $2,492 was recorded in Short-term debt and $11,477 was recorded in Long-term debt. The accretion of Deferred premium on the interest rate cap of $184 from July 1, 2011 to December 31, 2011 was recorded as an increase in interest expense.

2008 Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “2008 Credit Agreement”) and Warnaco of Canada Company (“Warnaco Canada”), an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “2008 Canadian Credit Agreement” and, together with the 2008 Credit Agreement, the “2008 Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit (the “Lenders and Issuers”). The 2008 Credit Agreements are used to issue standby and commercial letters of credit, to finance ongoing working capital and capital expenditure needs and for other general corporate purposes.

In connection with entering into the 2011 Term Loan Agreement, on June 17, 2011, (i) Warnaco Group, Warnaco and the U.S. Guarantors entered into an amendment to the 2008 Credit Agreement (the “2008 Credit Agreement Amendment”) and (ii) Warnaco Canada, Warnaco Group, Warnaco and the U.S. Guarantors entered into an amendment to the 2008 Canadian Credit Agreement (the “2008 Canadian Credit Agreement Amendment”) and, together with the 2008 Credit Agreement Amendment, the “2008 Credit Agreements Amendment”, in each case, permitting the Borrowers and Guarantors to incur the indebtedness and grant the liens under and in connection with the 2011 Term Loan Agreement, and providing, among other things, for modifications to the definitions of “Change of Control”, the eligibility criteria for receivables and certain covenants relating to asset sales, prepayments of debt, permitted liens and permitted indebtedness.

On November 8, 2011, Warnaco Group, Warnaco and the U.S. Guarantors entered into Amendment No. 2 to the 2008 Credit Agreement (the “2008 Credit Agreement Amendment No. 2”) and, Warnaco Canada, Warnaco and the U.S. Guarantors entered into Amendment No. 2 to the 2008 Canadian Credit Agreement (the “2008 Canadian Credit Agreement Amendment No. 2” and, together with the 2008 Credit Agreement Amendment No. 2, the “2008 Credit Agreements Amendment No. 2”).

The 2008 Credit Agreements Amendment No. 2 provide, among other things, for (i) extension of the maturity date under each of the 2008 Credit Agreements from August 26, 2013 to November 8, 2016, (ii) reductions in interest rate margins under each of the 2008 Credit Agreements by 25 basis points, (iii) a reduction in the current amount available under the 2008 Credit Agreement to $250,000 from $270,000 and under the 2008 Canadian Credit Agreement, to $25,000 from $30,000; (iv) reductions in commitment fees under each of the 2008 Credit Agreements by 12.5 basis points and (v) reductions in the minimum fixed charge coverage ratio test from 1.1:1.0 to 1.0:1.0 under each of the 2008 Credit Agreements (which ratio is tested only when the Available Credit (as defined in each of the 2008 Credit Agreements) falls below certain agreed upon levels). In addition, the 2008 Credit Agreements Amendment No. 2 revise certain covenants and levels under each of the 2008 Credit Agreements, including, without limitation, covenants relating to restricted payments, prepayments of debt, permitted acquisitions and permitted indebtedness. During the term of the 2008 Credit Agreement, Warnaco may also make up to three requests for additional credit commitments in an aggregate amount not to exceed $200,000.

The Company recorded approximately $4,200 of deferred financing costs in connection with entering into the 2008 Credit Agreements in August 2008, which is being amortized using the straight-line method through August 26, 2013. The Company recorded approximately $2,526 of deferred financing costs in connection with the 2008 Credit Agreements Amendment and the 2008 Credit Agreements Amendment No. 2, which is being amortized using the straight-line method through November 8, 2016.

At December 31, 2011, the 2008 Credit Agreement has interest rate options (dependent on the amount borrowed and the repayment period) of (i) 3.75%, based on a Base Rate plus 0.50%, or (ii) 2.08%, based on LIBOR plus 1.50%, in each case, on a per annum basis. The interest rate payable on outstanding borrowings is subject to adjustments based on changes in the Company’s credit rating and usage of the 2008 Credit Agreements. The 2008 Canadian Credit Agreement had interest rate options of (i) 3.50%, based on the prime rate announced by Bank of America (acting through its Canada branch) plus 0.50%, or (ii) 2.66%, based on the BA Rate (defined below) plus 1.50%, in each case, on a per annum basis and subject to adjustments based on changes in the Company’s credit rating and usage of the 2008 Credit Agreements. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) as its rate of interest rate for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

The 2008 Credit Agreements contain covenants limiting the Company’s ability to (i) incur additional indebtedness and liens, (ii) make significant corporate changes including mergers and acquisitions with third parties, (iii) make investments, (iv) make loans, (v) enter into hedge agreements, (vi) make restricted payments (including dividends and stock repurchases), and (vii) enter into transactions with affiliates. The 2008 Credit Agreements also include certain other restrictive covenants. In addition, if Available Credit (as defined in the 2008 Credit Agreements) is less than a threshold amount (as specified in the 2008 Credit Agreements) the Company’s Fixed Charge Coverage ratio (as defined in the 2008 Credit Agreements) must be at least 1.0 to 1.0. As noted above, on June 17, 2011, the 2008 Credit Agreements were amended in connection with the 2011 Term Loan Agreement to revise certain covenants and restrictions.

The covenants under the 2008 Credit Agreements contain negotiated exceptions and carve-outs, including the ability to repay indebtedness, make restricted payments and make investments so long as after giving pro forma effect to such actions the Company has a minimum level of Available Credit (as defined in the 2008 Credit Agreements), the Company’s Fixed Charge Coverage Ratio (as defined in the 2008 Credit Agreements) for the last four quarters was at a specified level and certain other requirements are met.

The 2008 Credit Agreements contain events of default, such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change of control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the Company’s business. Upon an event of default, the Lenders and Issuers will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments and declare any then outstanding loans due and payable immediately.

The obligations of Warnaco under the 2008 Credit Agreement are guaranteed by Warnaco Group and its indirect domestic subsidiaries (other than Warnaco) (collectively, the “U.S. Guarantors”). The obligations of Warnaco Canada under the 2008 Canadian Credit Agreement are guaranteed by Warnaco Group, Warnaco and the U.S. Guarantors, as well as by a Canadian subsidiary of Warnaco Canada. As security for the obligations under the 2008 Credit Agreements and the guarantees thereof, Warnaco Group, Warnaco and each of the U.S. Guarantors has granted pursuant to a Pledge and Security Agreement to the collateral agent, for the benefit of the lenders and issuing banks, a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, pledges of their equity ownership in domestic subsidiaries and up to 66% of their equity ownership in first-tier foreign subsidiaries, as well as liens on intellectual property rights. As security for the obligations under the 2008 Canadian Credit Agreement and the guarantee thereof by a Warnaco Canadian subsidiary, Warnaco Canada and its subsidiary have each granted pursuant to General Security Agreements, a Securities Pledge Agreement and Deeds of Hypothec to the collateral agent, for the benefit of the lenders and issuing banks under the 2008 Canadian Credit Agreement, a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, pledges of their equity ownership in subsidiaries, as well as liens on intellectual property rights. As noted above, on June 17, 2011, in connection with the 2011 Term Loan Agreement, an Intercreditor Agreement was entered into which establishes certain priorities with respect to the collateral that secures the borrowers’ obligations under the 2008 Credit Agreements and the 2011 Term Loan Agreement.

As of December 31, 2011, the Company had no loans and approximately $32,966 in letters of credit outstanding under the 2008 Credit Agreement, leaving approximately $161,320 of availability under the 2008 Credit Agreement. As of December 31, 2011, there were no loans and approximately $2,746 in letters of credit outstanding under the 2008 Canadian Credit Agreement leaving approximately $17,525 of availability under the 2008 Canadian Credit Agreement.

Euro-Denominated CKJEA Notes and Other Short-Term Debt

One of the Company’s European businesses hasshort-term notes payable (the “CKJEA Notes”). The total amounts of CKJEA Notes payable of $36,648 at December 31, 2011 and $18,445 at January 1, 2011 each consist of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA Notes payable was 4.0% as of December 31, 2011 and 4.29% as of January 1, 2011. All of the CKJEA Notes payable are short-term and were renewed during Fiscal 2011 for additional terms of no more than 12 months.

At December 31, 2011 and January 1, 2011, the Company’s Brazilian subsidiary, WBR, had lines of credit with several banks, with total outstanding balances of $6,373 and $357, respectively, recorded in Short-term debt in the Company’s Consolidated Balance Sheets, which were offset by approximately equal amounts of WBR’s trade accounts receivable.

During September 2011, one of the Company’s Asian subsidiaries entered into a short-term $25,000 revolving credit facility with one lender (the “Asian Credit Facility”) to be used for working capital and general corporate purposes. The Asian Credit Facility bears interest at a rate of 1.75% plus 1-month LIBOR, which is due monthly. At the end of each month, amounts outstanding under the Asian Credit Facility may be carried forward for further 1-month periods for up to one year. The Asian Credit Facility may be renewed annually. The Asian Credit Facility is subject to certain terms and conditions customary for a credit facility of this type and may be terminated at any time at the discretion of the lender. There were no borrowings during Fiscal 2011.

Italian Notes

On September 30, 2010, one of the Company’s Italian subsidiaries entered into a €10,000 loan (the “Italian Note”). At January 1, 2011, the principal balance of the Italian Note was €10,000 ($13,370) with an annual interest rate of 3.64%. On June 30, 2011, the Company repaid the full outstanding balance of €6,040 ($8,600) on the Italian Note with a portion of the proceeds of the 2011 Term Loan (see above).

Senior Notes

On June 12, 2003, Warnaco completed the sale of $210,000 aggregate principal amount at par value of Senior Notes, which notes were set to mature on June 15, 2013 and which bore interest at 8⁷/₈% per annum payable semi-annually on December 15 and June 15 of each year (the “Senior Notes”). No principal payments prior to the maturity date were required. On January 5, 2010, the Company redeemed from bondholders $50,000 aggregate principal amount of its outstanding Senior Notes for a total consideration of $51,479 and on June 15, 2010, the Company redeemed from bondholders the remaining $110,890 aggregate principal amount of its outstanding Senior Notes for a total consideration of $112,530. In connection with the redemptions, the Company recognized a loss, in the Other loss (income) line item in the Company’s Consolidated Statement of Operations, of approximately $3,747 for Fiscal 2010, which included $3,119 of premium expense, the write-off of approximately $2,411 of deferred financing costs, partially offset by $1,783 of unamortized gain from the previously terminated 2003 Swap Agreement and 2004 Swap Agreement. The 2003 Swap Agreement and 2004 Swap Agreement were interest rate swap agreements that the Company entered into with respect to the Senior Notes for a total notional amount of $75,000 which provided that the Company would receive interest at 8⁷/₈% and pay variable rates of interest based upon six month LIBOR plus 4.11% and 4.34%, respectively. The Company funded the redemption of the Senior Notes on January 5, 2010 and June 15, 2010 with available cash on hand in the U.S and borrowings under its 2008 Credit Agreement.

Debt Covenants

The Company was in compliance with the covenants of its 2011 Term Loan and 2008 Credit Agreements as of December 31, 2011 and January 1, 2011.