UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-4032739 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
501 Seventh Avenue
New York, New York 10018
(Address of registrants principal executive offices)
Registrants telephone number, including area code: (212) 287-8000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No.
The number of outstanding shares of the registrants common stock, par value $0.01 per share, as of April 27, 2012 is as follows: 41,040,875.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
FINANCIAL INFORMATION
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, excluding per share data)
(Unaudited)
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 224,227 | $ | 232,531 | $ | 174,095 | ||||||
Accounts receivable, net of reserves of $97,461, $94,739 and $87,648 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively |
346,941 | 322,976 | 396,035 | |||||||||
Inventories |
380,074 | 350,835 | 364,320 | |||||||||
Assets of discontinued operations |
| | 108 | |||||||||
Prepaid expenses and other current assets (including deferred income taxes of $59,436, $58,602, and $62,362 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively) |
159,514 | 158,288 | 161,115 | |||||||||
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Total current assets |
1,110,756 | 1,064,630 | 1,095,673 | |||||||||
Property, plant and equipment, net |
131,651 | 133,022 | 132,829 | |||||||||
Other assets: |
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Licenses, trademarks and other intangible assets, net |
322,870 | 320,880 | 380,708 | |||||||||
Goodwill |
144,026 | 139,948 | 120,880 | |||||||||
Other assets (including deferred income taxes of $24,136, $21,885, and $14,792 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively) |
92,859 | 89,370 | 61,480 | |||||||||
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Total assets |
$ | 1,802,162 | $ | 1,747,850 | $ | 1,791,570 | ||||||
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LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Short-term debt |
$ | 79,443 | $ | 47,513 | $ | 146,423 | ||||||
Accounts payable |
143,798 | 141,797 | 164,721 | |||||||||
Accrued liabilities |
174,813 | 212,655 | 193,675 | |||||||||
Liabilities of discontinued operations |
3,973 | 6,797 | 3,660 | |||||||||
Accrued income taxes payable (including deferred income taxes of $1,253, $1,476 and $1,105 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively) |
31,284 | 43,238 | 31,975 | |||||||||
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Total current liabilities |
433,311 | 452,000 | 540,454 | |||||||||
Long-term debt |
207,407 | 208,477 | | |||||||||
Other long-term liabilities (including deferred income taxes of $38,712, $37,000, and $79,694 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively) |
174,619 | 174,973 | 221,890 | |||||||||
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Total liabilities |
815,337 | 835,450 | 762,344 | |||||||||
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Commitments and contingencies |
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Redeemable non-controlling interest |
15,849 | 15,200 | | |||||||||
Stockholders equity: |
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Preferred stock |
| | | |||||||||
Common stock: $0.01 par value, 112,500,000 shares authorized, 52,923,949, 52,184,730 and 52,038,223 shares issued as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively |
529 | 522 | 520 | |||||||||
Additional paid-in capital |
746,897 | 721,356 | 691,670 | |||||||||
Accumulated other comprehensive income |
34,179 | 16,242 | 69,618 | |||||||||
Retained earnings |
661,676 | 625,760 | 545,425 | |||||||||
Treasury stock, at cost 11,887,658, 11,790,428 and 8,041,540 shares as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively |
(472,305 | ) | (466,680 | ) | (278,007 | ) | ||||||
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Total stockholders equity |
970,976 | 897,200 | 1,029,226 | |||||||||
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Total liabilities, redeemable non-controlling interest and stockholders equity |
$ | 1,802,162 | $ | 1,747,850 | $ | 1,791,570 | ||||||
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See Notes to Consolidated Condensed Financial Statements.
1
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Net revenues |
$ | 615,541 | $ | 662,161 | ||||
Cost of goods sold |
348,056 | 367,023 | ||||||
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Gross profit |
267,485 | 295,138 | ||||||
Selling, general and administrative expenses |
212,621 | 222,637 | ||||||
Amortization of intangible assets |
2,699 | 3,159 | ||||||
Pension income |
(54 | ) | (312 | ) | ||||
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Operating income |
52,219 | 69,654 | ||||||
Other income |
(269 | ) | (644 | ) | ||||
Interest expense |
4,449 | 2,696 | ||||||
Interest income |
(873 | ) | (746 | ) | ||||
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Income from continuing operations before provision for income taxes and redeemable non-controlling interest |
48,912 | 68,348 | ||||||
Provision for income taxes |
15,991 | 23,816 | ||||||
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Income from continuing operations before redeemable non-controlling interest |
32,921 | 44,532 | ||||||
Income (Loss) from discontinued operations, net of taxes |
3,034 | (501 | ) | |||||
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Net income |
35,955 | 44,031 | ||||||
Less: income attributable to redeemable non-controlling interest |
39 | | ||||||
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Net income attributable to Warnaco Group |
$ | 35,916 | $ | 44,031 | ||||
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Amounts attributable to Warnaco Group common shareholders: |
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Income from continuing operations, net of taxes |
$ | 32,882 | $ | 44,532 | ||||
Income (Loss) from discontinued operations, net of taxes |
3,034 | (501 | ) | |||||
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Net Income |
$ | 35,916 | $ | 44,031 | ||||
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Basic income per common share (see Note 17): |
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Income from continuing operations |
$ | 0.80 | $ | 1.00 | ||||
Income (Loss) from discontinued operations |
0.07 | (0.01 | ) | |||||
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Net income |
$ | 0.87 | $ | 0.99 | ||||
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Diluted income per common share (see Note 17): |
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Income from continuing operations |
$ | 0.78 | $ | 0.98 | ||||
Income (Loss) from discontinued operations |
0.08 | (0.01 | ) | |||||
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Net income |
$ | 0.86 | $ | 0.97 | ||||
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Weighted average number of shares outstanding used in computing income per common share (see Note 17): |
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Basic |
40,530,667 | 43,891,868 | ||||||
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Diluted |
41,417,952 | 44,790,731 | ||||||
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See Notes to Consolidated Condensed Financial Statements.
2
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE NON-CONTROLLING INTEREST
AND STOCKHOLDERS EQUITY
(Dollars in thousands)
(Unaudited)
Warnaco Group Stockholders Equity | ||||||||||||||||||||||||||||
Redeemable Non-controlling |
Common Stock |
Additional Paid-in Capital |
Accumulated Other |
Retained Earnings |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance at January 1, 2011 |
$ | | $ | 517 | $ | 674,508 | $ | 43,048 | $ | 501,394 | $ | (246,861 | ) | $ | 972,606 | |||||||||||||
Net income |
44,031 | 44,031 | ||||||||||||||||||||||||||
Other comprehensive income |
26,570 | 26,570 | ||||||||||||||||||||||||||
Stock issued in connection with stock compensation plans |
3 | 5,815 | 5,818 | |||||||||||||||||||||||||
Compensation expense in connection with employee stock compensation plans |
11,347 | 11,347 | ||||||||||||||||||||||||||
Purchase of treasury stock related to stock compensation plans |
(1,996 | ) | (1,996 | ) | ||||||||||||||||||||||||
Repurchases of common stock |
(29,150 | ) | (29,150 | ) | ||||||||||||||||||||||||
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Balance at April 2, 2011 |
$ | | $ | 520 | $ | 691,670 | $ | 69,618 | $ | 545,425 | $ | (278,007 | ) | $ | 1,029,226 | |||||||||||||
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Warnaco Group Stockholders Equity | |||||||||||||||||||||||||||
Redeemable Non-controlling Interest |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income |
Retained Earnings |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance at December 31, 2011 |
$ | 15,200 | $ | 522 | $ | 721,356 | $ | 16,242 | $ | 625,760 | $ | (466,680 | ) | $ | 897,200 | |||||||||||||
Net income |
39 | 35,916 | 35,916 | |||||||||||||||||||||||||
Other comprehensive income |
610 | 17,937 | 17,937 | |||||||||||||||||||||||||
Tax benefit related to exercise of equity awards |
6,993 | 6,993 | ||||||||||||||||||||||||||
Stock issued in connection with stock compensation plans |
7 | 13,125 | 13,132 | |||||||||||||||||||||||||
Compensation expense in connection with employee stock compensation plans |
5,423 | 5,423 | ||||||||||||||||||||||||||
Purchase of treasury stock related to stock compensation plans |
(5,625 | ) | (5,625 | ) | ||||||||||||||||||||||||
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Balance at March 31, 2012 |
$ | 15,849 | $ | 529 | $ | 746,897 | $ | 34,179 | $ | 661,676 | $ | (472,305 | ) | $ | 970,976 | |||||||||||||
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See Notes to Consolidated Condensed Financial Statements.
3
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Net income |
$ | 35,955 | $ | 44,031 | ||||
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Other comprehensive income, net of tax: |
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Foreign currency translation adjustments |
20,266 | 28,254 | ||||||
Change in cash flow hedges |
(1,708 | ) | (1,683 | ) | ||||
Other |
(11 | ) | (1 | ) | ||||
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Other comprehensive income |
18,547 | 26,570 | ||||||
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Total comprehensive income |
54,502 | 70,601 | ||||||
Less: comprehensive income attributable to redeemable non-controlling interest |
(649 | ) | | |||||
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Total comprehensive income attributable to Warnaco Group |
$ | 53,853 | $ | 70,601 | ||||
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See Notes to Consolidated Condensed Financial Statements.
4
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Cash flows from operating activities: |
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Net income |
$ | 35,955 | $ | 44,031 | ||||
Adjustments to reconcile net income to net cash (used in) operating activities: |
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Foreign exchange gain |
(2,860 | ) | (3,400 | ) | ||||
(Income) Loss from discontinued operations |
(3,034 | ) | 501 | |||||
Depreciation and amortization |
14,922 | 14,447 | ||||||
Stock compensation |
5,423 | 11,347 | ||||||
Provision for trade and other bad debts |
130 | 1,377 | ||||||
Inventory writedown |
5,119 | 3,157 | ||||||
Other |
(11 | ) | (39 | ) | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(17,894 | ) | (70,428 | ) | ||||
Inventories |
(26,855 | ) | (46,574 | ) | ||||
Prepaid expenses and other assets |
(868 | ) | 3,296 | |||||
Accounts payable, accrued expenses and other liabilities |
(38,493 | ) | (28,409 | ) | ||||
Accrued income taxes |
(9,335 | ) | 3,197 | |||||
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Net cash (used in) operating activities from continuing operations |
(37,801 | ) | (67,497 | ) | ||||
Net cash (used in) operating activities from discontinued operations |
| (16,284 | ) | |||||
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Net cash (used in) operating activities |
(37,801 | ) | (83,781 | ) | ||||
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Cash flows from investing activities: |
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Proceeds on disposal of assets |
410 | 56 | ||||||
Purchases of property, plant & equipment |
(10,327 | ) | (12,258 | ) | ||||
Business acquisitions, net of cash acquired |
(1,362 | ) | (1,083 | ) | ||||
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Net cash (used in) investing activities from continuing operations |
(11,279 | ) | (13,285 | ) | ||||
Net cash (used in) investing activities from discontinued operations |
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Net cash (used in) investing activities |
(11,279 | ) | (13,285 | ) | ||||
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Cash flows from financing activities: |
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Change in short-term notes payable |
14,973 | 15,340 | ||||||
Change in revolving credit loans |
16,171 | 96,707 | ||||||
Payments on 2011 Term Loan |
(500 | ) | | |||||
Payment of deferred premium on Interest Rate Cap Agreement |
(489 | ) | | |||||
Proceeds from the exercise of employee stock options |
13,132 | 5,818 | ||||||
Tax benefit related to exercise of equity awards |
6,993 | | ||||||
Purchase of treasury stock |
(5,625 | ) | (31,146 | ) | ||||
Contingent payment related to acquisition of non-controlling interest in |
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Brazilian subsidiary |
(7,592 | ) | (11,467 | ) | ||||
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Net cash provided by financing activities from continuing operations |
37,063 | 75,252 | ||||||
Net cash provided by financing activities from discontinued operations |
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Net cash provided by financing activities |
37,063 | 75,252 | ||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
3,713 | 4,682 | ||||||
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(Decrease) in cash and cash equivalents |
(8,304 | ) | (17,132 | ) | ||||
Cash and cash equivalents at beginning of period |
232,531 | 191,227 | ||||||
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Cash and cash equivalents at end of period |
$ | 224,227 | $ | 174,095 | ||||
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See Notes to Consolidated Condensed Financial Statements.
5
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Note 1Organization
The Warnaco Group, Inc. (Warnaco Group and, collectively with its subsidiaries, the Company) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all of the outstanding shares of Warnaco Inc. (Warnaco). Warnaco is the principal operating subsidiary of Warnaco Group.
Note 2 Basis of Consolidation and Presentation
The Consolidated Condensed Financial Statements include the accounts of Warnaco Group and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
The accompanying unaudited Consolidated Condensed Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all information and disclosures necessary for a presentation of the Companys financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (GAAP). In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Companys Annual Report on Form 10-K for Fiscal 2011 (as defined below). The year-end Consolidated Condensed Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Periods Covered: The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period from January 1, 2012 to December 29, 2012 (Fiscal 2012), the period from January 2, 2011 to December 31, 2011 (Fiscal 2011) and the period from January 3, 2010 to January 1, 2011 (Fiscal 2010) each contained 52 weeks of operations. Additionally, the period from January 1, 2012 to March 31, 2012 (the Three Months Ended March 31, 2012) and the period from January 2, 2011 to April 2, 2011 (the Three Months Ended April 2, 2011) each contained 13 weeks of operations.
Recent Accounting Pronouncements
There were no accounting pronouncements that were issued through the Three Months Ended March 31, 2012 that were not yet adopted that are expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows in future periods.
Note 3Acquisitions
Acquisition of Remaining Non-Controlling Interest in Brazil
During the fourth quarter of the fiscal year ended January 2, 2010 (Fiscal 2009), the Company acquired the remaining non-controlling interest in a Brazilian subsidiary (WBR) and eight retail stores in Brazil, collectively, the Brazilian Acquisition. As part of the consideration for the Brazilian Acquisition, the Company was required to make three payments through March 31, 2012, which were contingent on the level of operating income achieved (as specified in the acquisition agreement) by WBR during the fourth quarter of Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively. The Company made the second contingent payment of 18,500 Brazilian real (approximately $11,470 as of March 31, 2011), based on the operating results of WBR for Fiscal 2010, on March 31, 2011. The Company made the third contingent payment of 18,500 Brazilian real (approximately $10,123 as of March 31, 2012), based on the operating results of WBR for Fiscal 2011, in two separate payments: (i) $7,592 on March 30, 2012 and (ii) $2,531 on April 2, 2012. As of March 31, 2012, the amount of the payment that was made on April 2, 2012 was recorded as a current liability in Accrued Liabilities on the Companys Consolidated Condensed Balance Sheet.
6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Note 4Discontinued Operations
As disclosed in its Annual Report on Form 10-K for Fiscal 2011, the Company discontinued certain operations in prior periods. Summarized operating results for the discontinued operations are presented in the Consolidated Condensed Statements of Operations as follows:
Three Months Ended | ||||||||
March 31, 2012 |
April 2, 2011 |
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Net revenues |
$ | | $ | | ||||
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Income (Loss) before income tax (benefit) (a) |
$ | 3,034 | $ | (776 | ) | |||
Income tax (benefit) |
| (275 | ) | |||||
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Income (Loss) from discontinued operations |
$ | 3,034 | $ | (501 | ) | |||
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Summarized assets and liabilities of the discontinued operations are presented in the Consolidated Condensed Balance Sheets as follows:
March 31, 2012 | December 31, 2011 |
April 2, 2011 |
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Prepaid expenses and other current assets |
$ | | $ | | $ | 108 | ||||||
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Assets of discontinued operations |
$ | | $ | | $ | 108 | ||||||
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Accounts payable |
$ | 4 | $ | 5 | $ | 15 | ||||||
Accrued liabilities (a) |
3,969 | 6,792 | 3,645 | |||||||||
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Liabilities of discontinued operations |
$ | 3,973 | $ | 6,797 | $ | 3,660 | ||||||
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(a) | The increase in income (loss) before income tax (benefit) and the decrease in accrued liabilities between December 31, 2011 and March 31, 2012 is primarily due to the reversal of a reserve related to a French tax liability associated with the Companys Lejaby discontinued business. |
See Note 18 of Notes to Consolidated Condensed Financial Statements Legal Matters regarding the Companys Lejaby business.
Note 5Restructuring Expenses and Other Exit Costs
During the Three Months Ended March 31, 2012, the Company incurred restructuring charges and other exit costs of $6,590, related to (i) the rationalization and consolidation of the Companys international operations ($2,333); (ii) charges in connection with employee termination and reorganization of management structure ($877); (iii) non-cash impairment charges associated with store closures, including those related to its CK/Calvin Klein bridge business ($1,002 ); (iv) severance, lease contract termination and related costs in connection with retail store, office and warehouse closures ($2,210); and (v) legal, professional and other exit costs ($168).
The Companys license agreement to operate the bridge apparel business in Europe (the CK/Calvin Klein bridge Apparel License) requires the Company to, among other things, meet certain minimum sales thresholds for the two consecutive annual periods of 2010 and 2011. During Fiscal 2010 and Fiscal 2011, the Company did not achieve the aforementioned minimum sales thresholds required under the CK/Calvin Klein bridge Apparel License. As a result, the Company and CKI no longer intend for the Company to continue to operate all or part of the bridge business. The impairment charge associated with the Companys CK/Calvin Klein bridge business that was recorded during the Three Months Ended March 31, 2012, was the result of the Companys ongoing discussions with CKI regarding the Companys transition of its bridge business back to CKI and the Companys decision, as a result of those discussions, to close certain bridge retail stores in Europe.
7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
During the Three Months Ended April 2, 2011, the Company incurred restructuring charges and other exit costs of $6,489 related to (i) the rationalization and consolidation of the Companys international operations ($3,065); (ii) job eliminations in the U.S. ($1,167); (iii) lease contract termination costs in connection with retail store, office and warehouse closures ($2,224); and (iv) other exit costs ($33).
Restructuring charges and other exit costs have been recorded in the Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, as follows:
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Cost of goods sold |
$ | 434 | $ | 667 | ||||
Selling, general and administrative expenses |
6,156 | 5,822 | ||||||
|
|
|
|
|||||
$ | 6,590 | $ | 6,489 | |||||
|
|
|
|
|||||
Cash portion of restructuring items |
$ | 6,006 | $ | 6,463 | ||||
Non-cash portion of restructuring items |
584 | 26 |
Changes in liabilities related to restructuring expenses and other exit costs for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 are summarized below:
Balance at January 1, 2011 |
$ | 3,582 | ||
Charges for the Three Months Ended April 2, 2011 |
6,463 | |||
Cash reductions for the Three Months Ended April 2, 2011 |
(1,665 | ) | ||
Non-cash changes and foreign currency effects |
88 | |||
|
|
|||
Balance at April 2, 2011 |
$ | 8,468 | ||
|
|
|||
Balance at December 31, 2011 |
$ | 9,160 | ||
Charges for the Three Months Ended March 31, 2012 |
6,006 | |||
Cash reductions for the Three Months Ended March 31, 2012 |
(4,206 | ) | ||
Non-cash changes and foreign currency effects |
65 | |||
|
|
|||
Balance at March 31, 2012 (a) |
$ | 11,025 | ||
|
|
(a) | The balance at March 31, 2012 includes approximately $9,393 recorded in accrued liabilities (part of current liabilities) which amounts are expected to be settled over the next 12 months and approximately $1,632 recorded in other long term liabilities which amounts are expected to be settled over the next two years. |
Note 6Business Segments and Geographic Information
Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group, which groupings reflect the manner in which the Companys business is managed and the manner in which the Companys Chief Executive Officer, who is the chief operating decision maker, reviews the Companys business.
The Sportswear Group designs, sources and markets moderate to premium priced mens and womens sportswear under the Calvin Klein and Chaps® brands. As of March 31, 2012, the Sportswear Group operated 702 Calvin Klein retail stores worldwide (consisting of 163 full-price free-standing stores, 59 outlet free-standing stores, 479 concession /shop-in-shop stores and, in the U.S., one on-line store). As of March 31, 2012, there were also 392 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.
8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
The Intimate Apparel Group designs, sources and markets moderate to premium priced intimate apparel and other products for women and better to premium priced mens underwear, sleepwear and loungewear under the Calvin Klein, Warners®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names. As of March 31, 2012, the Intimate Apparel Group operated 881 Calvin Klein retail stores worldwide (consisting of 100 full-price free-standing stores, 57 outlet free-standing stores and 723 concession /shop-in-shop stores and, in the U.S., one on-line store). As of March 31, 2012, there were also 211 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.
The Swimwear Group designs, licenses, sources and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under the Speedo®, Lifeguard® and Calvin Klein brand names. As of March 31, 2012, the Swimwear Group operated 193 Calvin Klein retail concession /shop-in-shop stores in Europe and one on-line store in the U.S.
Information by business segment is set forth below:
Sportswear Group |
Intimate Apparel Group |
Swimwear Group |
Group Total | Unallocated Corporate / Other |
Total | |||||||||||||||||||
Three Months Ended March 31, 2012 |
||||||||||||||||||||||||
Net revenues |
$ | 300,803 | $ | 222,877 | $ | 91,861 | $ | 615,541 | $ | | $ | 615,541 | ||||||||||||
Operating income (loss) |
13,583 | 29,954 | 14,837 | 58,374 | (6,155 | ) | 52,219 | |||||||||||||||||
Depreciation and amortization |
9,302 | 4,537 | 694 | 14,533 | 389 | 14,922 | ||||||||||||||||||
Restructuring expense |
3,691 | 3,029 | 21 | 6,741 | (151 | ) | 6,590 | |||||||||||||||||
Capital expenditures |
4,512 | 2,779 | 122 | 7,413 | 1,237 | 8,650 | ||||||||||||||||||
Three Months Ended April 2, 2011 |
||||||||||||||||||||||||
Net revenues |
$ | 339,471 | $ | 220,994 | $ | 101,696 | $ | 662,161 | $ | | $ | 662,161 | ||||||||||||
Operating income (loss) |
38,600 | 30,537 | 14,068 | 83,205 | (13,551 | ) | 69,654 | |||||||||||||||||
Depreciation and amortization |
9,080 | 4,439 | 617 | 14,136 | 311 | 14,447 | ||||||||||||||||||
Restructuring expense |
1,650 | 1,443 | 3,078 | 6,170 | 318 | 6,489 | ||||||||||||||||||
Capital expenditures |
4,891 | 6,131 | 56 | 11,078 | 304 | 11,382 | ||||||||||||||||||
Balance Sheet |
||||||||||||||||||||||||
Total Assets: |
||||||||||||||||||||||||
March 31, 2012 |
$ | 1,029,013 | $ | 480,944 | $ | 179,174 | $ | 1,689,131 | $ | 113,031 | $ | 1,802,162 | ||||||||||||
December 31, 2011 |
994,425 | 486,636 | 148,982 | 1,630,043 | 117,807 | 1,747,850 | ||||||||||||||||||
April 2, 2011 |
1,072,131 | 410,607 | 190,672 | 1,673,410 | 118,160 | 1,791,570 | ||||||||||||||||||
Property, Plant and Equipment: |
||||||||||||||||||||||||
March 31, 2012 |
$ | 65,026 | $ | 43,142 | $ | 2,176 | $ | 110,344 | $ | 21,307 | $ | 131,651 | ||||||||||||
December 31, 2011 |
64,149 | 43,966 | 2,220 | 110,335 | 22,687 | 133,022 | ||||||||||||||||||
April 2, 2011 |
64,446 | 33,380 | 2,739 | 100,565 | 32,264 | 132,829 |
All inter-company revenues and expenses are eliminated in consolidation. Management does not include inter-company sales when evaluating segment performance. Each segments operating income is presented in the table above including restructuring charges and allocations of corporate expenses but does not include unallocated corporate/other expenses. The decrease for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 in the amount of unallocated corporate expenses that reconciles total business segment operating income to the Companys total operating income is related primarily to a reduction in amounts of stock-based employee compensation and in amounts accrued for performance-based employee cash compensation.
9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
A reconciliation of operating income from business segments to income from continuing operations before provision for income taxes and redeemable non-controlling interest is as follows:
Three Months Ended | ||||||||
March 31, 2012 |
April 2, 2011 |
|||||||
Operating income by business segments |
$ | 58,374 | $ | 83,205 | ||||
Unallocated corporate/other expenses |
(6,155 | ) | (13,551 | ) | ||||
|
|
|
|
|||||
Operating income |
52,219 | 69,654 | ||||||
Other income |
(269 | ) | (644 | ) | ||||
Interest expense |
4,449 | 2,696 | ||||||
Interest income |
(873 | ) | (746 | ) | ||||
|
|
|
|
|||||
Income from continuing operations before provision for income taxes and redeemable non-controlling interest |
$ | 48,912 | $ | 68,348 | ||||
|
|
|
|
Geographic Information: Net revenues summarized by geographic region are as follows:
Three Months Ended | ||||||||||||||||
March 31, 2012 |
% | April 2, 2011 |
% | |||||||||||||
Net revenues: |
||||||||||||||||
United States |
$ | 248,409 | 40.3 | % | $ | 285,143 | 43.1 | % | ||||||||
Europe |
146,312 | 23.8 | % | 168,469 | 25.5 | % | ||||||||||
Asia |
137,763 | 22.4 | % | 126,776 | 19.1 | % | ||||||||||
Mexico and Central and South America |
53,103 | 8.6 | % | 51,718 | 7.8 | % | ||||||||||
Canada |
29,954 | 4.9 | % | 30,055 | 4.5 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 615,541 | 100.0 | % | $ | 662,161 | 100.0 | % | |||||||||
|
|
|
|
|
|
|
|
Note 7Income Taxes
The effective tax rates for the Three Months Ended March 31, 2012 and April 2, 2011 were 32.7% and 34.8% respectively. The reduction in the effective tax rate for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 primarily reflects the effect of establishing uncertain tax positions in certain foreign jurisdictions. The provision for income taxes for the Three Months Ended April 2, 2011 included amounts associated with the aforementioned uncertain tax positions whereas similar tax provisions were not required during the Three Months Ended March 31, 2012.
As of March 31, 2012, the Company remains under audit in various taxing jurisdictions. It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Companys assessment of many factors, including past experience and future events, it is reasonably possible that within the next 12 months the reserve for uncertain tax positions may decrease between $10,000 and $14,000 due to (i) tax positions the Company expects to take during the next 12 months, (ii) the reevaluation of current uncertain tax positions arising from developments in examinations, (iii) the finalization of tax examinations, or (iv) the closure of tax statutes.
Note 8Employee Benefit and Retirement Plans
Defined Benefit Pension Plans
The Company has a defined benefit pension plan covering certain full-time non-union domestic employees and certain domestic employees covered by a collective bargaining agreement who have completed service prior to January 1, 2003 (the Pension Plan). Participants in the Pension Plan have not earned any additional pension benefits after December 31, 2002. The Company also sponsors defined benefit plans for certain former employees of its United Kingdom and other European entities (the Foreign Plans). The Foreign Plans were not considered to be material for any period presented in this Form 10-Q. These pension plans are noncontributory and benefits are based upon years of service. The Company also has health care and life insurance plans that provide post-retirement benefits to certain retired domestic employees (the Postretirement Plans). The Postretirement Plans are, in most cases, contributory with retiree contributions adjusted annually.
10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Each quarter the Company recognizes interest cost of the Pension Plans projected benefit obligation offset by the expected return on Pension Plan assets. The Company records pension expense (income) as the effect of actual gains and losses exceeding the expected return on Pension Plan assets (including changes in actuarial assumptions) less changes in the Pension Plans projected benefit obligation (including changes in actuarial assumptions) in the fourth quarter of each year. This accounting results in volatility in pension expense or income; therefore, the Company reports pension expense (income) on a separate line of its Statements of Operations in each period.
The Company made contributions of $17,230 and $3,850 to the Pension Plan during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. The Companys contributions to the Pension Plan are expected to be $20,550 in total for Fiscal 2012 (see Note 7 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for Fiscal 2011).
The following table includes only the Pension Plan. The Foreign Plans were not considered to be material for any period presented below. The components of net periodic benefit cost are as follows:
Pension Plan | Postretirement Plans | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||
Service cost |
$ | | $ | | $ | 55 | $ | 62 | ||||||||
Interest cost |
2,221 | 2,334 | 64 | 70 | ||||||||||||
Expected return on plan assets |
(2,350 | ) | (2,703 | ) | | | ||||||||||
Amortization of actuarial (gain) |
| | (24 | ) | (25 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net benefit (income) cost (a) |
$ | (129 | ) | $ | (369 | ) | $ | 95 | $ | 107 | ||||||
|
|
|
|
|
|
|
|
(a) | net benefit (income) cost does not include costs related to the Foreign Plans of $75 and $57 for the Three Months Ended March 31, 2012 and April 2, 2011, respectively. |
Deferred Compensation Plans
The Companys liability under the employee deferred compensation plan was $4,812, $4,602 and $4,828 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively. This liability is included in other long-term liabilities. The Companys cash liability under the director deferred compensation plan was $1,329, $1,237 and $1,132 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively. This liability is included in other long-term liabilities.
11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Note 9Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income as of March 31, 2012, December 31, 2011 and April 2, 2011 are summarized below:
March 31, | December 31, | April 2, | ||||||||||
2012 | 2011 | 2011 | ||||||||||
Foreign currency translation adjustments (a) |
$ | 41,012 | $ | 21,356 | $ | 74,236 | ||||||
Actuarial losses related to post retirement medical plans, net of tax of $1,232 as of March 31, 2012, December 31, 2011 and April 2, 2011 |
(1,299 | ) | (1,299 | ) | (1,099 | ) | ||||||
(Loss) on cash flow hedges, net of taxes of $3,577, $2,930 and $1,340 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively |
(5,645 | ) | (3,937 | ) | (3,530 | ) | ||||||
Other |
111 | 122 | 11 | |||||||||
|
|
|
|
|
|
|||||||
Total accumulated other comprehensive income |
$ | 34,179 | $ | 16,242 | $ | 69,618 | ||||||
|
|
|
|
|
|
(a) | Foreign currency translation adjustments related to the Companys assets and liabilities reflect the change in the U.S. dollar relative to functional currencies in countries where the Company conducts certain of its operations and the fact that the majority of the Companys assets are related to the Companys business outside of the U.S. |
Note 10Fair Value Measurement
The Company utilizes the market approach to measure fair value for financial assets and liabilities, which primarily include derivative contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company uses the income approach to measure fair value of the Interest Rate Cap Agreement (see Note 14 of Notes to Consolidated Condensed Financial Statements). The Company classifies its financial instruments in a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities. |
Level 2 | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
Level 3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
Valuation Techniques
The fair value of foreign currency exchange forward contracts was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts settlement dates and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward or spot exchange rate, as applicable. The fair value of these foreign currency exchange contracts is based on quoted prices that include the effects of U.S. and foreign interest rate yield curves and, therefore, meets the definition of Level 2 fair value, as defined above.
The fair value of the Interest Rate Cap Agreement (as defined below) was determined using broker quotes, which use discounted cash flows, an income approach, and the then-applicable forward LIBOR rates and, therefore, meets the definition of Level 2 fair value, as defined above.
The fair value of long-lived assets was based on the Companys best estimates of future cash flows and, therefore, meets the definition of Level 3 fair value, as defined above.
12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
The following table represents the Companys assets and liabilities measured at fair value on a recurring basis, as of March 31, 2012, December 31, 2011 and April 2, 2011:
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||||||||||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Foreign currency exchange contracts |
$ | | $ | 1,287 | $ | | $ | | $ | 5,587 | $ | | $ | | $ | 376 | $ | | ||||||||||||||||||
Interest rate cap |
| 6,047 | | | 6,276 | | | | | |||||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||
Foreign currency exchange contracts |
$ | | $ | 1,148 | $ | | $ | | $ | 532 | $ | | $ | | $ | 7,133 | $ | |
During the Three Months Ended March 31, 2012, the Company recorded non-cash impairment charges totaling $1,002 related to the long-lived assets, consisting of leasehold improvements and furniture and fixtures, of certain retail stores in the Sportswear Group, including its CK/Calvin Klein bridge business, which were scheduled to close as part of a restructuring plan (see Note 5 of Notes to Consolidated Condensed Financial Statements Restructuring Expenses and Other Exit Costs). As of March 31, 2012, those assets, measured on a non-recurring basis, had a fair value of $210, based upon projected future cash flows of those retail stores through the expected dates of closure. There were no assets or liabilities measured on a non-recurring basis for the Three Months Ended April 2, 2011. See Note 1 of Notes to Consolidated Financial Statements Nature of Operations and Summary of Significant Accounting Policies Long-Lived Assets in the Companys Annual Report on Form 10-K for Fiscal 2011 for a description of the testing of retail stores for impairment.
Note 11 Financial Instruments
The carrying amounts and fair values of the Companys financial instruments as of March 31, 2012, December 31, 2011 and April 2, 2011 are as follows:
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||||||||||||||||||||
Balance Sheet Location |
Carrying Amount |
Fair Value | Level in Fair Value Hierarchy |
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||
Accounts receivable |
Accounts receivable, net of reserves | $ | 346,941 | $ | 346,941 | $ | 322,976 | $ | 322,976 | $ | 396,035 | $ | 396,035 | |||||||||||||||||
Open foreign currency exchange contracts |
Prepaid expenses and other current assets | 1,287 | 1,287 | 2 | 5,587 | 5,587 | 376 | 376 | ||||||||||||||||||||||
Interest rate cap |
Other assets | 6,047 | 6,047 | 2 | 6,276 | 6,276 | | | ||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Accounts payable |
Accounts payable | $ | 143,798 | $ | 143,798 | $ | 141,797 | $ | 141,797 | $ | 164,721 | $ | 164,721 | |||||||||||||||||
Short-term debt |
Short-term debt | 74,872 | 74,872 | 1 | 43,021 | 43,021 | 146,423 | 146,423 | ||||||||||||||||||||||
Open foreign currency exchange contracts |
Accrued liabilities | 1,148 | 1,148 | 2 | 532 | 532 | 7,133 | 7,133 | ||||||||||||||||||||||
2011 Term Loan, current portion |
Short-term debt | 2,000 | 1,985 | 2 | 2,000 | 1,980 | | | ||||||||||||||||||||||
2011 Term Loan |
Long-term debt | 196,500 | 195,026 | 2 | 197,000 | 195,030 | | |
See Note 17 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for Fiscal 2011 for the methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments.
Derivative Financial Instruments
Foreign Currency Exchange Forward Contracts
During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, the Companys Korean, European, Canadian and Mexican subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed to satisfy either up to the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period or payment of 100% of certain minimum royalty and advertising expenses. In addition, during the Three Months Ended March 31, 2012, one of the Companys Mexican subsidiaries began a program, using foreign exchange forward contracts, to hedge up to 75% of the royalty payments due on net sales of Calvin Klein Jeans and Calvin Klein Underwear apparel. All of the foregoing forward contracts were designated as cash flow hedges, with gains and losses accumulated on the Consolidated Condensed Balance Sheets in Accumulated Other Comprehensive Income (AOCI) and recognized in Cost of Goods Sold, with the exception of the Mexican royalty forward contracts, for which gains and losses released from AOCI are recognized in Selling, general and administrative expense, in the Consolidated Condensed Statement of Operations during the periods in which the underlying transactions occur.
13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, the Company also continued hedging programs, which were accounted for as economic hedges, with gains and losses recorded directly in Other loss (income) in the Consolidated Condensed Statements of Operations in the period in which they are incurred. Those hedging programs included foreign currency exchange forward contracts that were designed to fix the number of Euros, Korean won, Canadian dollars, Mexican pesos or Singaporean dollars required to satisfy either (i) the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period; (ii) 50% of intercompany sales of inventory by a Euro functional currency subsidiary to a British subsidiary, whose functional currency is the British pound; or (iii) U.S. dollar denominated intercompany loans and payables.
Interest Rate Cap Agreement
On July 1, 2011, the Company entered into the Interest Rate Cap Agreement, which is intended 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 (as defined below) that equals the notional amount of the Interest Rate Cap Agreement. 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%. See Note 14 of Notes to Consolidated Condensed Financial StatementsInterest Rate Cap Agreement.
The following table summarizes the Companys derivative instruments as of March 31, 2012, December 31, 2011 and April 2, 2011:
Asset Derivatives |
Liability Derivatives |
|||||||||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||||||||
Type |
Balance Sheet |
March 31, 2012 |
December 31, 2011 |
April 2, 2011 |
Balance Sheet |
March 31, 2012 |
December 31, 2011 |
April 2, 2011 |
||||||||||||||||||||||
Derivatives designated as hedging instruments under FASB ASC 815-20 |
||||||||||||||||||||||||||||||
Foreign exchange contracts |
CF | Prepaid expenses and other current assets | $ | 75 | $ | 1,308 | $ | | Accrued liabilities | $ | 802 | $ | | $ | 4,191 | |||||||||||||||
Interest rate cap |
CF | Other assets | 6,047 | 6,276 | | | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
$ | 6,122 | $ | 7,584 | $ | | $ | 802 | $ | | $ | 4,191 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Derivatives not designated as hedging instruments under FASB ASC 815-20 |
||||||||||||||||||||||||||||||
Foreign exchange contracts |
Prepaid expenses and other current assets | $ | 1,212 | $ | 4,279 | $ | 376 | Accrued liabilities | $ | 346 | $ | 532 | $ | 2,942 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total derivatives |
$ | 7,334 | $ | 11,863 | $ | 376 | $ | 1,148 | $ | 532 | $ | 7,133 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | CF = cash flow hedge |
14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
The following tables summarize the effect of the Companys derivative instruments on the Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011:
Derivatives in |
Nature of Hedged Transaction |
Amount of (Loss) Recognized |
Location of Gain |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain |
Amount of (Loss) Recognized in Income on Derivative (Ineffective Portion) |
||||||||||||||||||||||
Three Months Ended |
Three Months Ended |
Three Months Ended |
Three Months Ended |
Three Months Ended |
Three Months Ended |
|||||||||||||||||||||||
March 31, 2012 |
April 2, 2011 | March 31, 2012 |
April 2, 2011 | March 31, 2012 |
April 2, 2011 | |||||||||||||||||||||||
Foreign exchange contracts |
Minimum royalty and advertising costs (a) |
$(516) | $ | (700 | ) | cost of goods sold | $ | 176 | $ | (337 | ) | other loss/income | $ | (15 | ) | $ | (22 | ) | ||||||||||
Foreign exchange contracts |
Purchases of inventory (b) |
(1,561) | (2,538 | ) | cost of goods sold | (120 | ) | (749 | ) | other loss/income | (20 | ) | (58 | ) | ||||||||||||||
Interest rate cap |
Interest expense on 2011 Term Loan |
(229) | | interest expense | (7 | ) | | other loss/income | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Total |
$(2,306) | $ | (3,238 | ) | $ | 49 | $ | (1,086 | ) | $ | (35 | ) | $ | (80 | ) | |||||||||||||
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|
|
(a) | At March 31, 2012, the amount of minimum royalty costs hedged was $16,918; contracts expire through March 2013. At April 2, 2011, the amount of minimum royalty costs hedged was $13,366; contracts expire through March 2012. |
(b) | At March 31, 2012, the amount of inventory purchases hedged was $48,850; contracts expire through March 2013. At April 2, 2011, the amount of inventory purchases hedged was $66,800; contracts expire through August 2012. |
(c) | No amounts were excluded from effectiveness testing. |
Derivatives not |
Nature of Hedged |
Instrument |
Amount Hedged | Maturity Date | Location of Gain |
Amount of Gain (Loss) Recognized in Income on Derivative |
||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended |
||||||||||||||||||||||||||||
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||||||||||||
Foreign exchange contracts (d) |
Intercompany sales of inventory | Forward contracts | 10,794 | 10,152 | |
March 2013 |
|
|
April 2012 |
|
other loss/income | (20 | ) | 268 | ||||||||||||||||
Foreign exchange contracts (e) |
Minimum royalty and advertising costs | Forward contracts | 10,000 | 10,000 | |
January 2013 |
|
|
January 2012 |
|
other loss/income | (251 | ) | (671 | ) | |||||||||||||||
Foreign exchange contracts |
Intercompany payables | Forward contracts | 24,500 | 26,000 | |
October 2012 |
|
|
November 2011 |
|
other loss/income | (769 | ) | (1,798 | ) | |||||||||||||||
Foreign exchange contracts |
Intercompany loans | Forward contracts | 34,500 | 20,000 | |
September 2012 |
|
|
November 2011 |
|
other loss/income | (939 | ) | (1,156 | ) | |||||||||||||||
Foreign exchange contracts |
Intercompany loans | Forward contracts | 6,000 | July 2012 | other loss/income | 171 | | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||
Total |
$ | (1,808 | ) | $ | (3,357 | ) | ||||||||||||||||||||||||
|
|
|
|
(d) | Forward contracts used to offset 50% of British Pounds-denominated intercompany sales by a subsidiary whose functional currency is the Euro. |
(e) | Forward contracts used to offset payment of minimum royalty and advertising costs related to sales of inventory by the Company's foreign subsidiary whose functional currency was the Euro, entered into by Warnaco on behalf of a foreign subsidiary. |
A reconciliation of the balance of AOCI during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 related to cash flow hedges is as follows:
Balance January 1, 2011 |
$ | (2,331 | ) | |
Derivative losses recognized |
(3,238 | ) | ||
Losses amortized to earnings |
1,086 | |||
|
|
|||
Balance before tax effect |
(4,483 | ) | ||
Tax effect |
953 | |||
|
|
|||
Balance April 2, 2011, net of tax |
$ | (3,530 | ) | |
|
|
|||
Balance December 31, 2011 |
$ | (3,937 | ) | |
Derivative losses recognized |
(2,306 | ) | ||
Gain amortized to earnings |
(49 | ) | ||
|
|
|||
Balance before tax effect |
(6,292 | ) | ||
Tax effect |
647 | |||
|
|
|||
Balance March 31, 2012, net of tax |
$ | (5,645 | ) | |
|
|
See Note 14 of Notes to Consolidated Condensed Financial StatementsInterest Rate Cap Agreement for a reconciliation of the balance of AOCI related to the Interest Rate Cap Agreement, which is included in the reconciliation above.
15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
During the 12 months following March 31, 2012, the net amount of losses recorded in Other Comprehensive Income as of March 31, 2012 that are estimated to be amortized into earnings is $1,153 on a pre-tax basis. During the Three Months Ended March 31, 2012, the Company expected that all originally forecasted purchases of inventory, payment of minimum royalty and advertising costs, or payment of interest on the 2011 Term Loan, which were covered by cash flow hedges, would occur by the end of the respective originally specified time periods or within two months after that time. Therefore, no amount of gains or losses was reclassified into earnings during the Three Months Ended March 31, 2012 as a result of the discontinuance of those cash flow hedges.
Note 12Inventories
Inventories are valued at the lower of cost to the Company (using the first-in-first-out method) or market and are summarized as follows:
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||
Finished goods |
$ | 379,854 | $ | 350,010 | $ | 362,924 | ||||||
Raw materials |
220 | 825 | 1,396 | |||||||||
|
|
|
|
|
|
|||||||
$ | 380,074 | $ | 350,835 | $ | 364,320 | |||||||
|
|
|
|
|
|
In addition to the amounts of inventory noted above, the Company records deposits related to advance payments to certain third-party suppliers for the future purchase of finished goods. Such deposits are recorded in Prepaid and other current assets on the Companys Consolidated Condensed Balance Sheets. As of March 31, 2012, December 31, 2011 and April 2, 2011, the amount of such deposits was $1,537, $4,385 and $5,660, respectively.
See Note 11 of Notes to Consolidated Condensed Financial Statements for details on the Companys hedging programs related to purchases of inventory.
Note 13Intangible Assets and Goodwill
The following tables set forth intangible assets as of March 31, 2012, December 31, 2011 and April 2, 2011 and the activity in the intangible asset accounts for the Three Months Ended March 31, 2012:
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||||||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||||||||||||||||||||||
Finite-lived intangible assets: |
||||||||||||||||||||||||||||||||||||
Licenses for a term (Company as licensee) |
$ | 327,523 | $ | 101,103 | $ | 226,420 | $ | 323,950 | $ | 99,229 | $ | 224,721 | $ | 336,652 | $ | 57,213 | $ | 279,439 | ||||||||||||||||||
Other |
34,995 | 15,757 | 19,238 | 34,459 | 14,932 | 19,527 | 35,591 | 12,150 | 23,441 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
362,518 | 116,860 | 245,658 | 358,409 | 114,161 | 244,248 | 372,243 | 69,363 | 302,880 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||||||||||||||||||
Trademarks |
54,415 | | 54,415 | 53,519 | | 53,519 | 54,715 | | 54,715 | |||||||||||||||||||||||||||
Licenses in perpetuity |
22,797 | | 22,797 | 23,113 | | 23,113 | 23,113 | | 23,113 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
77,212 | | 77,212 | 76,632 | | 76,632 | 77,828 | | 77,828 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Intangible Assets |
$ | 439,730 | $ | 116,860 | $ | 322,870 | $ | 435,041 | $ | 114,161 | $ | 320,880 | $ | 450,071 | $ | 69,363 | $ | 380,708 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Trademarks | Licenses in Perpetuity |
Licenses for a Term |
Other Finite-lived Intangible Assets |
Total | ||||||||||||||||
Balance at December 31, 2011 |
$ | 53,519 | $ | 23,113 | $ | 224,721 | $ | 19,527 | $ | 320,880 | ||||||||||
Amortization expense |
| | (1,874 | ) | (825 | ) | (2,699 | ) | ||||||||||||
Translation adjustments |
| | 4,153 | 536 | 4,689 | |||||||||||||||
Tax benefit (a) |
896 | (316 | ) | (580 | ) | | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 31, 2012 |
$ | 54,415 | $ | 22,797 | $ | 226,420 | $ | 19,238 | $ | 322,870 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Relates to the allocation of a tax benefit realized for the excess of tax deductible goodwill over book goodwill in certain jurisdictions. |
The following table summarizes the Companys estimated amortization expense for intangible assets for the next five years:
2013 |
$ | 10,331 | ||
2014 |
9,154 | |||
2015 |
9,152 | |||
2016 |
9,130 | |||
2017 |
8,873 |
The following table summarizes the changes in the carrying amount of goodwill for the Three Months Ended March 31, 2012:
Sportswear Group |
Intimate Apparel Group |
Swimwear Group |
Total | |||||||||||||
Goodwill balance at December 31, 2011 |
$ | 134,395 | $ | 4,911 | $ | 642 | $ | 139,948 | ||||||||
Translation adjustments |
3,881 | 197 | | 4,078 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Goodwill balance at March 31, 2012 |
$ | 138,276 | $ | 5,108 | $ | 642 | $ | 144,026 | ||||||||
|
|
|
|
|
|
|
|
17
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Note 14Debt
Debt was as follows:
March 31, 2012 |
December 31, 2011 |
April 2, 2011 |
||||||||||
Short-term debt: |
||||||||||||
Current portion of 2011 Term Loan |
$ | 2,000 | $ | 2,000 | $ | | ||||||
CKJEA Notes payable and Other |
58,701 | 43,021 | 38,309 | |||||||||
2008 Credit Agreements |
16,171 | | 96,707 | |||||||||
Premium on interest rate capcurrent |
2,571 | 2,492 | | |||||||||
Italian Note |
| | 11,407 | |||||||||
|
|
|
|
|
|
|||||||
79,443 | 47,513 | 146,423 | ||||||||||
|
|
|
|
|
|
|||||||
Long-term debt: |
||||||||||||
2011 Term Loan |
196,500 | 197,000 | | |||||||||
Premium on interest rate cap |
10,907 | 11,477 | | |||||||||
|
|
|
|
|
|
|||||||
207,407 | 208,477 | | ||||||||||
|
|
|
|
|
|
|||||||
Total Debt |
$ | 286,850 | $ | 255,990 | $ | 146,423 | ||||||
|
|
|
|
|
|
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) and the term loan thereunder (the 2011 Term Loan) 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 matures on June 17, 2018. As of March 31, 2012, there was $198,500 in term loans outstanding under the 2011 Term Loan Agreement.
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. At March 31, 2012 and 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%.
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), which is a series of 27 individual caplets that reset and settle quarterly over the period from October 31, 2011 to April 30, 2018. The effect of the Interest Rate Cap 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 Agreement.
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 Agreement of $14,395 was allocated to the respective caplets within the Interest Rate Cap Agreement 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 Agreements fair value will be recorded in AOCI in the Companys Consolidated Condensed Balance Sheets and subsequently recognized in interest expense in the Consolidated Condensed Statements of Operations as the underlying interest expense is recognized on the 2011 Term Loan.
On March 31, 2012 and December 31, 2011, the fair value of the Interest Rate Cap Agreement was $6,047 and $6,276, respectively, which was recorded in Other assets. On March 31, 2012, Deferred premium on the Interest Rate Cap Agreement was $13,478, of which $2,571 was recorded in Short-term debt and $10,907 was recorded in Long-term debt. On December 31, 2011, Deferred premium on the Interest Rate Cap Agreement was $13,969, of which $2,492 was recorded in Short-term debt and $11,477 was recorded in Long-term debt.
18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
A reconciliation of the balance of AOCI during the Three Months Ended March 31, 2012 related to the Interest Rate Cap Agreement is as follows:
Balance December 31, 2011, net of tax |
$ | (4,848 | ) | |
Change in fair value of interest rate cap |
(229 | ) | ||
Initial fair value of maturing caplets |
7 | |||
|
|
|||
Balance March 31, 2012, pre-tax |
(5,070 | ) | ||
Tax effect |
90 | |||
|
|
|||
Balance March 31, 2012, net of tax |
$ | (4,980 | ) | |
|
|
Interest expense recognized on the Interest Rate Cap Agreement during the Three Months Ended March 31, 2012 is as follows:
Interest Expense |
||||
Initial fair value of maturing caplets |
$ | 7 | ||
Accretion of deferred premium |
106 | |||
|
|
|||
Total |
$ | 113 | ||
|
|
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, 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. On June 17, 2011 and November 8, 2011, the 2008 Credit Agreements were amended (see Note 12 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for Fiscal 2011).
As of March 31, 2012, the 2008 Credit Agreement had 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) 1.97%, based on LIBOR plus 1.50%. 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) 2.67%, based on the BA Rate (as defined below), in each case, on a per annum basis. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) 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.
As of March 31, 2012, the Company had $16,171 of loans and approximately $32,205 in letters of credit outstanding under the 2008 Credit Agreement, leaving approximately $179,651 of availability. As of March 31, 2012, there were no loans and $3,462 in letters of credit outstanding under the 2008 Canadian Credit Agreement and the available line of credit was approximately $19,204.
CKJEA Notes and Other Short-Term Debt
One of the Companys European businesses holds short-term notes payable (the CKJEA Notes). The total amounts of CKJEA Notes payable of $44,190 at March 31, 2012, $36,648 at December 31, 2011 and $29,236 at April 2, 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 3.49% as of March 31, 2012, 4.00% as of December 31, 2011 and 2.24% as of April 2, 2011. All of the CKJEA Notes payable are short-term and were renewed during the Three Months Ended March 31, 2012 for additional terms of no more than 12 months.
19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
In addition, as of March 31, 2012, December 31, 2011 and April 2, 2011, the Companys Brazilian subsidiary, WBR, had lines of credit with several banks, with total outstanding balances of $557, $6,373 and $9,073, respectively, recorded in Short-term debt in the Companys Consolidated Condensed Balance Sheets or Consolidated Balance Sheets, which were secured by approximately equal amounts of WBRs trade accounts receivable. In addition, as of March 31, 2012, WBR has outstanding short-term loans with several Brazilian banks totaling $13,954, with a weighted average interest rate of 11.69%.
During September 2011, one of the Companys 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 of 1.75% over one-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 one-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 as of December 31, 2011 or March 31, 2012 or during the Three Months Ended March 31, 2012.
Italian Note
On September 30, 2010, one of the Companys Italian subsidiaries entered into a 10,000 loan (the Italian Note). As of April 2, 2011, the principal balance of the Italian Note was 8,020 (equal to approximately $11,407 on that date) with an annual interest rate of 3.72%. On June 30, 2011, the Company repaid the full outstanding balance of 6,040 (equal to approximately $8,600 on that date) on the Italian Note with a portion of the proceeds of the 2011 Term Loan (see above).
Note 15Stockholders Equity
Preferred Stock
The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value $0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value $0.01 per share. There were no shares of preferred stock issued and outstanding as of March 31, 2012, December 31, 2011 and April 2, 2011.
Share Repurchase Programs
During September 2011, the Companys Board of Directors approved a multi-year share repurchase program (the 2011 Share Repurchase Program) for up to $200,000 of the Companys outstanding common stock. During the Three Months Ended March 31, 2012, the Company did not repurchase any shares under the 2011 Share Repurchase Program, leaving $188,674 of common stock to be repurchased.
On May 12, 2010, the Companys Board of Directors authorized a share repurchase program (the 2010 Share Repurchase Program) for the repurchase of up to 5,000,000 shares of the Companys common stock. During the Three Months Ended April 2, 2011, the Company repurchased 560,842 shares of its common stock under the 2010 Share Repurchase Program for $29,150 (based on an average of $51.97 per share). There are no shares of the Companys common stock available for repurchase under the 2010 Share Repurchase Program.
Stock Incentive Plans
The Company granted 295,449 and 342,600 stock options during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. The fair values of stock options granted during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 were estimated as of the dates of grant using the Black-Scholes-Merton option pricing model with the following assumptions:
20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Weighted average risk free rate of return (a) |
0.62 | % | 1.66 | % | ||||
Dividend yield |
| | ||||||
Expected volatility of the market price of the Companys common stock |
56.0 | % | 57.7 | % | ||||
Expected option life (years) |
4.1 | 4.1 |
(a) | based on the quoted yield for U.S. five-year treasury bonds as of the date of grant. |
A summary of stock-based compensation expense is as follows:
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Stock-based compensation expense before income taxes: |
||||||||
Stock options |
$ | 2,028 | $ | 3,821 | ||||
Restricted stock grants |
3,395 | 7,526 | ||||||
|
|
|
|
|||||
Total |
5,423 | 11,347 | ||||||
|
|
|
|
|||||
Income tax benefit: |
||||||||
Stock options |
682 | 1,366 | ||||||
Restricted stock grants |
453 | 2,263 | ||||||
|
|
|
|
|||||
Total |
1,135 | 3,629 | ||||||
|
|
|
|
|||||
Stock-based compensation expense after income taxes: |
||||||||
Stock options |
1,346 | 2,455 | ||||||
Restricted stock grants |
2,942 | 5,263 | ||||||
|
|
|
|
|||||
Total |
$ | 4,288 | $ | 7,718 | ||||
|
|
|
|
A summary of stock option award activity under the Companys stock incentive plans as of and for the Three Months Ended March 31, 2012 is presented below:
Options | Weighted Average Exercise Price |
|||||||
Outstanding as of December 31, 2011 |
1,886,925 | $ | 38.35 | |||||
Granted |
295,449 | 56.53 | ||||||
Exercised |
(479,112 | ) | 27.39 | |||||
Forfeited / Expired |
(21,335 | ) | 49.63 | |||||
|
|
|||||||
Outstanding as of March 31, 2012 |
1,681,927 | $ | 44.52 | |||||
|
|
|
|
|||||
Options Exercisable as of March 31, 2012 |
1,009,827 | $ | 38.82 | |||||
|
|
|
|
21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
A summary of the activity for unvested restricted share/unit awards under the Companys stock incentive plans (excluding Performance Awards, defined below) as of and for the Three Months Ended March 31, 2012 is presented below:
Restricted shares/units |
Weighted Average Grant Date Fair Value |
|||||||
Unvested as of December 31, 2011 |
859,766 | $ | 39.77 | |||||
Granted |
176,847 | 56.58 | ||||||
Vested |
(258,101 | ) | 29.58 | |||||
Forfeited |
(17,614 | ) | 46.80 | |||||
|
|
|||||||
Unvested as of March 31, 2012 |
760,898 | $ | 46.96 | |||||
|
|
During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, share-based compensation awards granted to certain of the Companys officers under Warnaco Groups 2005 Stock Incentive Plan included 55,557 and 80,050 performance-based restricted stock/restricted unit awards, respectively, (Performance Awards) in addition to the service-based stock options and restricted stock awards, included in the preceding tables. The Performance Awards include both a performance condition and a market condition (see Note 1 of Notes to Consolidated Financial StatementsNature of Operations and Summary of Significant Accounting Policies Stock-Based Compensation in the Companys Annual Report on Form 10-K for Fiscal 2011 for further details on the Performance Awards).
Under the performance condition, the estimated compensation expense is based on the grant date fair value (the closing price of the Companys common stock on the date of grant) and the Companys current expectations of the probable number of Performance Awards that will ultimately be earned. The fair value of the Performance Awards under the market condition on the respective grant dates ($1,893 as of March 6, 2012 and $3,245 as of March 1, 2011) is based upon a Monte Carlo simulation model, which encompasses the Companys relative total shareholder return (TSR) (change in closing price of the Companys common stock on the New York Stock Exchange compared to that of a peer group of companies (Peer Companies)) during the Measurement Period. The Measurement Period includes both:
(i) | the period from the beginning of Fiscal 2012 to March 6, 2012 (the grant date) for Performance Awards granted on March 6, 2012, and the period from the beginning of Fiscal 2011 to March 1, 2011 (the grant date) for Performance Awards granted on March 1, 2011, for which actual TSRs are calculated; and |
(ii) | the periods from the respective grant dates to the end of the fiscal years ending 2013 or 2014, respectively, a total of 2.82 years and 2.83 years, respectively,(the Remaining Measurement Period), for which simulated TSRs are calculated. |
The calculation of simulated TSRs under the Monte Carlo model for the Remaining Measurement Period for Performance Awards granted on March 6, 2012 and on March 1, 2011 included the following assumptions:
March 6, 2012 | March 1, 2011 | |||
Weighted average risk free rate of return |
0.38% | 1.07% | ||
Dividend yield |
| | ||
Expected volatility - Company (a) |
38.26% | 61.50% | ||
Expected volatility - Peer Companies |
28.3% - 74.8% | 38.2% - 113.4% | ||
Remaining measurement period (years) |
2.82 | 2.83 |
(a) | Expected volatilityCompany for Performance Awards granted on March 6, 2012 and on March 1, 2011 is based on a Remaining Measurement Period of 2.82 years and 2.83 years, respectively. |
The Company recorded compensation expense for the Performance Awards during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 based on the performance condition.
22
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Performance Award activity for the Three Months Ended March 31, 2012 was as follows:
Performance Shares | Weighted Average Grant Date Fair Value |
|||||||
Unvested as of December 31, 2011 |
154,500 | $ | 49.65 | |||||
Granted |
55,557 | 56.54 | ||||||
Vested |
| | ||||||
Forfeited |
(1,450 | ) | 55.57 | |||||
|
|
|||||||
Unvested as of March 31, 2012 |
208,607 | $ | 51.44 | |||||
|
|
|
|
Note 16Supplemental Cash Flow Information
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Cash paid (received) during the period for: |
||||||||
Interest expense |
$ | 3,769 | $ | 2,034 | ||||
Interest income |
(368 | ) | (455 | ) | ||||
Income taxes, net of refunds received |
18,334 | 20,619 | ||||||
Supplemental non-cash investing and financing activities: |
||||||||
Accounts payable for purchase of fixed assets |
5,993 | 6,130 |
Note 17Income per Common Share
The following table presents the calculation of both basic and diluted income per common share attributable to Warnaco Group common shareholders, giving effect to participating securities. The Company has determined that based on a review of its share-based awards, only its restricted stock awards are deemed participating securities, which participate equally with common shareholders. The weighted average restricted stock outstanding was 545,523 shares and 651,791 shares for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. Undistributed income allocated to participating securities is based on the proportion of restricted stock outstanding to the sum of weighted average number of common shares outstanding attributable to Warnaco Group common shareholders and restricted stock outstanding for each period presented below.
23
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Numerator for basic and diluted income per common share: |
||||||||
Income from continuing operations attributable to Warnaco Group common shareholders and participating securities |
$ | 32,882 | $ | 44,532 | ||||
Less: allocation to participating securities |
(437 | ) | (652 | ) | ||||
|
|
|
|
|||||
Income from continuing operations attributable to Warnaco Group common shareholders |
$ | 32,445 | $ | 43,880 | ||||
|
|
|
|
|||||
Income (Loss) from discontinued operations, net of tax, attributable to Warnaco Group common shareholders and participating securities |
$ | 3,034 | $ | (501 | ) | |||
Less: allocation to participating securities |
(40 | ) | 7 | |||||
|
|
|
|
|||||
Income (Loss) from discontinued operations attributable to Warnaco Group common shareholders |
$ | 2,994 | $ | (494 | ) | |||
|
|
|
|
|||||
Net income attributable to Warnaco Group common shareholders and participating securities |
$ | 35,916 | $ | 44,031 | ||||
Less: allocation to participating securities |
(477 | ) | (645 | ) | ||||
|
|
|
|
|||||
Net income attributable to Warnaco Group common shareholders |
$ | 35,439 | $ | 43,386 | ||||
|
|
|
|
|||||
Basic income per common share attributable to Warnaco Group common shareholders: |
||||||||
Weighted average number of common shares outstanding used in computing income per common share |
40,530,667 | 43,891,868 | ||||||
|
|
|
|
|||||
Income per common share from continuing operations |
$ | 0.80 | $ | 1.00 | ||||
Income (Loss) per common share from discontinued operations |
0.07 | (0.01 | ) | |||||
|
|
|
|
|||||
Net income per common share |
$ | 0.87 | $ | 0.99 | ||||
|
|
|
|
|||||
Diluted income per share attributable to Warnaco Group common shareholders: |
||||||||
Weighted average number of common shares outstanding used in computing basic income per common share |
40,530,667 | 43,891,868 | ||||||
Effect of dilutive securities: |
||||||||
Stock options and restricted stock units |
887,285 | 898,863 | ||||||
|
|
|
|
|||||
Weighted average number of shares and share equivalents used in computing income per common share |
41,417,952 | 44,790,731 | ||||||
|
|
|
|
|||||
Income per common share from continuing operations |
$ | 0.78 | $ | 0.98 | ||||
Income (Loss) per common share from discontinued operations |
0.08 | (0.01 | ) | |||||
|
|
|
|
|||||
Net income per common share |
$ | 0.86 | $ | 0.97 | ||||
|
|
|
|
|||||
Number of anti-dilutive out-of-the-money stock options outstanding (a) |
8,450 | 331,150 | ||||||
|
|
|
|
(a) | options to purchase shares of common stock at an exercise price greater than the average market price of the underlying shares are anti-dilutive and therefore not included in the computation of diluted income per common share from continuing operations. |
Note 18Legal Matters
Lejaby Claims: On August 18, 2009, Palmers Textil AG (Palmers) filed an action against the Company in Le Tribunal de Commerce de Paris (The Paris Commercial Court), alleging that the Company made certain misrepresentations in the sale agreement, and seeking to declare the sale null and void, monetary damages in an unspecified amount and other relief (the Palmers Suit). On February 13, 2012, Le Tribunal de Commerce de Paris dismissed the Palmers Suit and awarded the Company €100 in costs. On March 12, 2012, Palmers appealed the judgment. In addition, the Company and Palmers have been unable to agree on certain post-closing adjustments to the purchase price, including adjustments for working capital. The dispute regarding the amount of post-closing adjustments is not a subject of the Palmers Suit. As of March 31, 2012, the Company had a reserve of approximately $4,000 in connection with these legal matters.
Lejaby Receivables: As of March 31, 2012, the Company had a loan receivable recorded in Other assets on the Companys Consolidated Condensed Balance Sheets of $14,300 from Palmers related to the Companys sale of its Lejaby business to Palmers on March 10, 2008. The Company also had a receivable of $4,000 recorded in Other assets on the Companys Consolidated Condensed Balance Sheet as of March 31, 2012 related to working capital adjustments associated with such sale. During April 2012, the Company received certain information which indicates the potential that all or a portion of the receivables from Palmers might not be collectible. However, since the Company has not been able to verify the accuracy of the information received, the Company believes that it cannot reliably estimate a probable range of amounts that it may ultimately collect with respect to its receivables from Palmers. Accordingly, as of March 31, 2012, no provision has been recorded against the receivables from Palmers in the Companys Consolidated Condensed Financial Statements.
24
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Currencies in thousands, excluding per share amounts)
(Unaudited)
Other: In addition, from time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or cash flows.
Note 19Commitments and Contingencies
The contractual obligations and commitments in existence as of March 31, 2012 did not differ materially from those disclosed as of December 31, 2011 in the Companys Annual Report on Form 10-K for Fiscal 2011, except for the following changes, which occurred during the Three Months Ended March 31, 2012:
2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||||||||||
Operating leases |
$ | 3,171 | $ | 2,442 | $ | 1,857 | $ | 1,834 | $ | 1,152 | $ | 7,888 | $ | 18,344 | ||||||||||||||
Other contractual obligations |
1,014 | 544 | 279 | 108 | 163 | 996 | 3,104 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 4,185 | $ | 2,986 | $ | 2,136 | $ | 1,942 | $ | 1,315 | $ | 8,884 | $ | 21,448 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012, in the ordinary course of business, the Company had open purchase orders with suppliers of approximately $318,535, all of which are payable in Fiscal 2012.
As of March 31, 2012, the Company was also party to outstanding hedging instruments (see Note 11 of Notes to the Consolidated Condensed Financial Statements).
As of March 31, 2012, the Company remains under audit in various taxing jurisdictions (see Note 7 of Notes to Consolidated Condensed Financial Statements for a discussion related to the Companys reserve for uncertain tax positions).
25
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The Warnaco Group, Inc. (Warnaco Group and, collectively with its subsidiaries, the Company) is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and that could affect the market value of the Companys common stock. This Quarterly Report on Form 10-Q, including the following discussion, but except for the historical information contained herein, contains forward-looking statements that involve risks and uncertainties. See Statement Regarding Forward-Looking Disclosure.
The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the Consolidated Condensed Financial Statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Companys Annual Report on Form 10-K for Fiscal 2011.
The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period from January 1, 2012 to December 29, 2012 (Fiscal 2012), the period from January 2, 2011 to December 31, 2011 (Fiscal 2011) and the period from January 3, 2010 to January 1, 2011 (Fiscal 2010) each contained 52 weeks of operations. Additionally, the period from January 1, 2012 to March 31, 2012 (the Three Months Ended March 31, 2012) and the period from January 2, 2011 to April 2, 2011 (the Three Months Ended April 2, 2011) each contained 13 weeks of operations.
The Company has three operating segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group. These groupings reflect the manner in which the Companys business is managed and the manner in which the Companys Chief Executive Officer, who is the chief operating decision maker, reviews the Companys business.
References to Calvin Klein Jeans refer to jeans, accessories and bridge products. References to Core Intimates refer to the Intimate Apparel Groups Warners®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names and intimate apparel private labels. References to Retail within each operating Group refer to the Companys owned full-price free-standing stores, owned outlet stores, concession / shop-in-shop stores and on-line stores. Results related to stores operated by third parties under retail licenses or distributor agreements are included in Wholesale within each operating Group. References to sales mix refer to the channels of distribution in which the Companys products are sold. For example, an unfavorable sales mix in a current period relative to a prior period refers to an increase in the percentage of sales of products in low margin channels of distribution (such as the off-price channel) to total sales. References to allowances refer to discounts given to wholesale customers based upon the expected rate of retail sales and general economic and retail forecasts.
References to the effects of fluctuations in foreign currencies are reflective of all of the following factors:
(i) | the translation of operating results for the current year period for entities reporting in currencies other than the U.S. dollar into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period); |
(ii) | a transaction effect related to entities which purchase inventory in currencies other than that entitys reporting currency. The transaction effect represents the effect of the following differences in the foreign currency exchange rates on cost of goods sold: (a) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the current period and (b) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the comparable prior year period; and |
(iii) | gains and losses recorded by the Company as a result of fluctuations in foreign currencies and gains and losses related to the Companys foreign currency hedge programs (see Note 11 of Notes to Consolidated Condensed Financial Statements). |
Overview
Introduction
The Company designs, sources, markets, licenses and distributes sportswear, intimate apparel, and swimwear worldwide through highly recognized brand names. The Companys products are distributed domestically and internationally in over 100 countries, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty, off-price, mass merchandisers and other stores, and to retail customers, through the Companys owned full-price free standing retail stores, outlet stores, concession/shop-in-shop stores and the internet.
The Companys mission is to become the premier global, branded apparel company. To accomplish its mission, the Company has identified the following key strategic objectives, which it intends to focus on over the next five years:
| Optimize and grow the international Calvin Klein businesses. The Company intends to continue the global expansion of its Calvin Klein Jeans and Calvin Klein Underwear businesses, particularly in Latin America, Asia and Northern and Eastern Europe. The key driver for this expansion is expected to be achieved via growth in the Companys retail business through a combination of new store openings and the selective acquisition of stores operated by distributors of the Companys products. The Company expects to concentrate its investment in new store openings in the faster growing regions of Asia, with a continued focus on the Peoples Republic of China, and Latin America. In Europe, the focus will be on improving productivity in existing stores and encouraging development of stores operated by distributors. |
During the Three Months Ended March 31, 2012, the Company increased the number of Calvin Klein retail stores in Europe, Asia and South America, net of store closures, by 17 retail stores (consisting of an addition of 19 concession /shop-in-shop stores and a decrease of 2 outlet stores). As of March 31, 2012, the Company operated (i) 1,776 Calvin Klein retail stores worldwide (consisting of 379 free-standing stores (including 263 full price and 116 outlet stores), 1,395 concession /shop-in-shop stores, one Calvin Klein Underwear on-line store and one Calvin Klein Jeans on-line store) and (ii) one Speedo® on-line store.
26
| Retail net revenues increased 6.5% to $179.0 million for the Three Months Ended March 31, 2012 compared to $168.1 million for the Three Months Ended April 2, 2011, and represented 29.1% and 25.4% of the Companys net revenues for those respective periods. |
| Gain market share in heritage businesses. The Companys heritage businesses include Chaps®, Warners and Olga (both of which are included in Core Intimates) and Speedo® brands. During the past five years, the Company has focused on managing the existing product lines of the heritage businesses for profitability. The Companys strategy over the next five years is to achieve growth of the heritage businesses through gains in market share, while maintaining operating margins. The Company believes it can achieve gains in market share through expansion of the number and style of product lines, channels and the customer base in which the heritage brands are sold. |
| Better alignment of organization with strategies. The Company believes that in order to achieve its strategic objectives it must build a more consumer-centric culture, with strong customer relationships and an increased focus on product quality and style. To that end, the Company has recently made key organizational changes. Specifically, the Company created the positions of Chief Merchandising Officer and Chief Commercial Officer for its Calvin Klein businesses. In addition, the Company is in the process of centralizing its design and merchandising functions and streamlining its planning and production operations. |
Net Revenues
The Companys net revenues decreased $46.7 million, or 7.0%, to $615.5 million for the Three Months Ended March 31, 2012 compared to $662.2 million for the Three Months Ended April 2, 2011. The decrease in net revenues includes the unfavorable effect of foreign currency fluctuations, which resulted in a decrease in net revenues of $7.6 million.
On a business segment basis, the decrease in net revenues was due to:
| a decrease of $38.7 million in the Companys Sportswear Group (which primarily reflects continued weakness in the Companys U.S and European operations, partially offset by increases in other regions (primarily Asia)); and |
| a decrease of $9.8 million in the Swimwear Group (which primarily reflects the Companys strategy of reducing sales of certain swimwear lines to lower margin customers); |
| partially offset by a $1.9 million increase in the Intimate Apparel Group. |
On a channel basis, the decline in net revenues includes decreases in:
| the wholesale channel of $57.6 million, primarily in the Sportswear Group and the Swimwear Group in the U.S. and Europe; and |
| the retail channel of $2.5 million (1.6%) in comparable store sales, primarily as a result of decreases in Korea due to the effect of warmer weather on winter offerings and, the Company believes, a general decline in the retail apparel industry; |
| partially offset by an increase in retail net revenues of $13.4 million due to the addition of 192,000 net square feet of retail space in the period subsequent to April 2, 2011 through March, 31, 2012, bringing the total of the Companys retail space to 1.1 million square feet worldwide as of March 31, 2012. The increase in retail space includes space for both the Sportswear Group and the Intimate Apparel Group and includes the opening of additional Calvin Klein international retail stores and the acquisition of a controlling interest in the business of the Companys distributor in India during the third quarter of Fiscal 2011. |
Operating Income
The Companys operating income decreased $17.5 million, or 25.1%, to $52.2 million for the Three Months Ended March 31, 2012 compared to $69.7 million for the Three Months Ended April 2, 2011, reflecting declines in the Sportswear Group ($25.0 million) and in the Intimate Apparel Group ($0.6 million), partially offset by an increase in the Swimwear Group ($0.7 million) and expense reductions (primarily associated with reductions in equity and incentive based compensation expenses) in Corporate/other ($7.4 million). Operating income includes restructuring charges and other exit costs of $6.6 million for the Three Months Ended March 31, 2012 and $6.5 million for the Three Months Ended April 2, 2011 (see Liquidity and Capital Resources Restructuring and Note 5 of Notes to Consolidated Condensed Financial Statements).
27
During the Three Months Ended March 31, 2012, although the decline in operating income was primarily related to a decrease in net revenues, certain of the Companys businesses, particularly in the U.S., Asia and Europe, continued to experience an increase in product and freight costs, which adversely affected the operating margins of the Companys businesses. The Company expects that product costs will stabilize or decline during Fiscal 2012. During the Three Months Ended March 31, 2012, the Company was able to partially mitigate the cost increases described above in certain geographic markets in Asia by selectively increasing the selling prices of its goods, making early purchases of product and implementing other sourcing initiatives.
Earnings per Share
For the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, income from continuing operations per diluted share decreased 20.4% to $0.78 per diluted share (from $0.98 per diluted share), including an increase of $0.03 per diluted share due to the fluctuations in foreign currencies.
Balance Sheet
As of March 31, 2012, the Companys balance sheet included cash and cash equivalents of $224.2 million and total debt of $286.9 million compared to $174.1 million and $146.4 million, respectively, as of April 2, 2011.
Non-GAAP Measures
The Companys reported financial results are presented in accordance with GAAP. The reported operating income, income from continuing operations and diluted earnings per share from continuing operations reflect certain items which affect the comparability of those reported results. Those financial results are also presented on a non-GAAP basis, as defined by Regulation S-K section 10(e) of the Securities and Exchange Commission (SEC), to exclude the effect of these items. The Companys computation of these non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measure to which they are reconciled, as presented in the following table:
28
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Operating income, as reported (GAAP) |
$ | 52,219 | $ | 69,654 | ||||
Restructuring charges and pension income (a) |
6,536 | 6,177 | ||||||
|
|
|
|
|||||
Operating income, as adjusted (non-GAAP) |
$ | 58,755 | $ | 75,831 | ||||
|
|
|
|
|||||
Income from continuing operations attributable to Warnaco Group common shareholders, as reported (GAAP) |
$ | 32,882 | $ | 44,532 | ||||
Restructuring charges and pension, net of income tax (a) |
4,648 | 4,121 | ||||||
Taxation adjustment (b) |
357 | 1,130 | ||||||
|
|
|
|
|||||
Income from continuing operations attributable to Warnaco Group common shareholders, as adjusted (non-GAAP) |
$ | 37,887 | $ | 49,783 | ||||
|
|
|
|
|||||
Diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders, as reported (GAAP) |
$ | 0.78 | $ | 0.98 | ||||
Restructuring charges and pension , net of income tax (a) |
0.11 | 0.09 | ||||||
Taxation adjustment (b) |
0.01 | 0.03 | ||||||
|
|
|
|
|||||
Diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders, as adjusted (non-GAAP) |
$ | 0.90 | $ | 1.10 | ||||
|
|
|
|
a) | For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of restructuring charges and pension income. Restructuring charges (on a pre-tax basis) were $6,590 and $6,489 for the Three Months Ended March 31, 2012 and Three Months Ended April 2, 2011, respectively. Pension income (on a pre-tax basis) was $(54) and $(312) for the Three Months Ended March 31, 2012 and Three Months Ended April 2, 2011, respectively. The income tax rates used to compute the income tax effect related to this adjustment correspond to the local statutory tax rates of the reporting entities that incurred restructuring charges or recognized pension income. |
b) | For the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, this adjustment reflects an additional amount required in order to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders at the Companys forecasted normalized tax rates for Fiscal 2012 (31.6%) and Fiscal 2011 (33.2%), respectively. The Companys forecasted normalized tax rates for both Fiscal 2012 and Fiscal 2011 exclude the effects of restructuring charges, pension income and certain tax adjustments related to either changes in estimates in prior period tax provisions or adjustments for certain discrete tax items. Adjustments for discrete items reflect the federal, state and foreign tax effects related to: 1) income taxes associated with legal entity reorganizations and restructurings; 2) tax provision or benefit resulting from statute expirations or the finalization of income tax examinations; and 3) other adjustments not considered part of the Companys core business activities. |
The Company believes it is valuable for users of its financial statements to be made aware of the non-GAAP financial information, as such measures are used by management to evaluate the operating performance of the Companys continuing businesses on a comparable basis and to make operating and strategic decisions. Such non-GAAP measures will also enhance users ability to analyze trends in the Companys business. In addition, the Company uses performance targets based on non-GAAP operating income and diluted earnings per share from continuing operations as a component of the measurement of incentive compensation.
Earnings per Share As Adjusted
On an adjusted (non-GAAP) basis, for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, income from continuing operations per diluted share decreased 18.2% to $0.90 per diluted share (from $1.10 per diluted share).
Net Revenues on a Constant Currency Basis
The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company when the Company translates its foreign revenues into U.S. dollars. These rate fluctuations can have a significant effect on reported net revenues. As a supplement to its reported net revenues, the Company presents net revenues on a constant currency basis, which is a non-GAAP financial measure. The Company uses constant currency information to provide a framework to assess net revenue performance excluding the effects of changes in foreign currency exchange rates. Management believes this information is useful to investors to facilitate comparisons of net revenues and better identify trends in the Companys businesses.
To calculate the increase in net revenues on a constant currency basis, net revenues for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).
These constant currency net revenues should be viewed in addition to, and not in isolation from, or as a substitute to, the Companys net revenues calculated in accordance with GAAP. The constant currency information presented in the following table for net revenues may not be comparable to similarly titled measures reported by other companies.
29
NET REVENUES ON A CONSTANT CURRENCY BASIS
(Dollars in thousands)
Three Months Ended March 31, 2012 | ||||||||||||
GAAP As Reported |
Impact of
Foreign Currency Exchange |
Non-GAAP Constant Currency |
||||||||||
By Segment: |
||||||||||||
Sportswear Group |
$ | 300,803 | $ | (4,601 | ) | $ | 305,404 | |||||
Intimate Apparel Group |
222,877 | (2,364 | ) | 225,241 | ||||||||
Swimwear Group |
91,861 | (674 | ) | 92,535 | ||||||||
|
|
|
|
|
|
|||||||
Net revenues |
$ | 615,541 | $ | (7,639 | ) | $ | 623,180 | |||||
|
|
|
|
|
|
|||||||
By Region: |
||||||||||||
United States |
$ | 248,409 | $ | | $ | 248,409 | ||||||
Europe |
146,312 | (4,418 | ) | 150,730 | ||||||||
Asia |
137,763 | 1,079 | 136,684 | |||||||||
Mexico and Central and South America |
53,103 | (3,771 | ) | 56,874 | ||||||||
Canada |
29,954 | (529 | ) | 30,483 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 615,541 | $ | (7,639 | ) | $ | 623,180 | |||||
|
|
|
|
|
|
Discussion of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the Company to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in its consolidated condensed financial statements and accompanying notes. Critical accounting policies are those that are most important to the portrayal of the Companys financial condition and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. During the Three Months Ended March 31, 2012, there were no significant changes to the Companys critical accounting policies from those described in the Companys Annual Report on Form 10-K for Fiscal 2011.
Recent Accounting Pronouncements
There were no accounting pronouncements that were issued through the Three Months Ended March 31, 2012 that were not yet adopted that are expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows in future periods.
30
Results of Operations
Statement of Operations (Selected Data)
The following tables summarize the historical results of operations of the Company for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011. The results of the Companys discontinued operations are included in Income (Loss) from discontinued operations, net of taxes for all periods presented.
Three Months Ended March 31, 2012 |
% of Net Revenues |
Three Months Ended April 2, 2011 |
% of Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Net revenues |
$ | 615,541 | 100.0 | % | $ | 662,161 | 100.0 | % | ||||||||
Cost of goods sold |
348,056 | 56.5 | % | 367,023 | 55.4 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
267,485 | 43.5 | % | 295,138 | 44.6 | % | ||||||||||
Selling, general and administrative expenses |
212,621 | 34.5 | % | 222,637 | 33.6 | % | ||||||||||
Amortization of intangible assets |
2,699 | 0.4 | % | 3,159 | 0.5 | % | ||||||||||
Pension income |
(54 | ) | 0.0 | % | (312 | ) | 0.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
52,219 | 8.5 | % | 69,654 | 10.5 | % | ||||||||||
Other (income) |
(269 | ) | (644 | ) | ||||||||||||
Interest expense |
4,449 | 2,696 | ||||||||||||||
Interest income |
(873 | ) | (746 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Income from continuing operations before provision for income taxes and redeemable non-controlling interest |
48,912 | 68,348 | ||||||||||||||
Provision for income taxes |
15,991 | 23,816 | ||||||||||||||
|
|
|
|
|||||||||||||
Income from continuing operations before redeemable non-controlling interest |
32,921 | 44,532 | ||||||||||||||
Income (Loss) from discontinued operations, net of taxes |
3,034 | (501 | ) | |||||||||||||
|
|
|
|
|||||||||||||
Net income |
35,955 | 44,031 | ||||||||||||||
Less: income attributable to redeemable non-controlling interest |
39 | | ||||||||||||||
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|
|
|
|||||||||||||
Net income attributable to Warnaco Group |
$ | 35,916 | $ | 44,031 | ||||||||||||
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|
|
|
Net Revenues
Net revenues by segment were as follows:
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase (Decrease) |
% Change |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Sportswear Group |
$ | 300,803 | $ | 339,471 | $ | (38,668 | ) | -11.4 | % | |||||||
Intimate Apparel Group |
222,877 | 220,994 | 1,883 | 0.9 | % | |||||||||||
Swimwear Group |
91,861 | 101,696 | (9,835 | ) | -9.7 | % | ||||||||||
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|
|
|
|
|
|||||||||||
Net revenues |
$ | 615,541 | $ | 662,161 | $ | (46,620 | ) | -7.0 | % | |||||||
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|
|
|
|
31
Net revenues by channel of distribution were as follows:
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
|||||||
United Stateswholesale |
||||||||
Department stores and independent retailers |
8% | 9% | ||||||
Specialty stores |
8% | 8% | ||||||
Chain stores |
7% | 7% | ||||||
Mass merchandisers |
2% | 1% | ||||||
Membership clubs |
7% | 8% | ||||||
Off price and other |
8% | 10% | ||||||
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|
|
|
|||||
Total United Stateswholesale |
40% | 43% | ||||||
Internationalwholesale |
31% | 32% | ||||||
Retail (a) |
29% | 25% | ||||||
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|
|
|
|||||
Net revenuesconsolidated |
100% | 100% | ||||||
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|
|
|
(a) | for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, 98.4% and 98.2%, respectively, of retail net revenues were derived from the Companys international operations. |
Net Revenues | ||||||||||||||||
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase / (Decrease) |
% Change | |||||||||||||
(in thousands of dollars) | ||||||||||||||||
Wholesale |
$ | 436,518 | $ | 494,084 | $ | (57,566 | ) | -11.7 | % | |||||||
Retail |
179,023 | 168,077 | 10,946 | 6.5 | % | |||||||||||
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|||||||||||
Total |
$ | 615,541 | $ | 662,161 | $ | (46,620 | ) | -7.0 | % | |||||||
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|
|
|
Net revenues by geography were as follows:
Net Revenues | ||||||||||||||||||||
Three
Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase / (Decrease) |
% Change | Constant $ % Change (a) |
||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||
United States |
$ | 248,409 | $ | 285,143 | $ | (36,734 | ) | -12.9 | % | -12.9 | % | |||||||||
Europe |
146,312 | 168,469 | (22,157 | ) | -13.2 | % | -10.5 | % | ||||||||||||
Asia |
137,763 | 126,776 | 10,987 | 8.7 | % | 7.8 | % | |||||||||||||
Mexico and Central and South America |
53,103 | 51,718 | 1,385 | 2.7 | % | 10.0 | % | |||||||||||||
Canada |
29,954 | 30,055 | (101 | ) | -0.3 | % | 1.4 | % | ||||||||||||
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|
|
|
|||||||||||||||
$ | 615,541 | $ | 662,161 | $ | (46,620 | ) | -7.0 | % | -5.9 | % | ||||||||||
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|
|
|
(a) | constant dollar percentage change is a non-GAAP measure. See Non-GAAP Measures, above. |
32
The number of retail stores operated by the Company at March 31, 2012, December 31, 2011 and April 2, 2011 was as follows:
March 31, 2012 | December 31, 2011 | April 2, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||
Segments / Brands | Asia | Europe | Americas | Total | Asia | Europe | Americas | Total | Asia | Europe | Americas | Total | ||||||||||||||||||||||||||||||||||||
Sportswear - Calvin Klein Jeans |
||||||||||||||||||||||||||||||||||||||||||||||||
Number of Owned Full Price Stores |
86 | 54 | 23 | 163 | 80 | 55 | 23 | 158 | 49 | 44 | 16 | 109 | ||||||||||||||||||||||||||||||||||||
Number of Owned Outlet Stores |
11 | 45 | 3 | 59 | 11 | 44 | 2 | 57 | 10 | 43 | 1 | 54 | ||||||||||||||||||||||||||||||||||||
Number of Concession / Shop-in-shop Stores |
275 | 134 | 70 | 479 | 280 | 123 | 62 | 465 | 250 | 86 | | 336 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total Number of Stores |
372 | 233 | 96 | 701 | 371 | 222 | 87 | 680 | 309 | 173 | 17 | 499 | ||||||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||
Intimate Apparel - Calvin Klein Underwear |
||||||||||||||||||||||||||||||||||||||||||||||||
Number of Owned Full Price Stores |
53 | 24 | 23 | 100 | 50 | 25 | 30 | 105 | 40 | 19 | 31 | 90 | ||||||||||||||||||||||||||||||||||||
Number of Owned Outlet Stores |
8 | 43 | 6 | 57 | 8 | 42 | 11 | 61 | 6 | 41 | 18 | 65 | ||||||||||||||||||||||||||||||||||||
Number of Concession / Shop-in-shop Stores |
254 | 469 | | 723 | 259 | 459 | | 718 | 73 | 390 | | 463 | ||||||||||||||||||||||||||||||||||||
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|
|
|||||||||||||||||||||||||
Total Number of Stores |
315 | 536 | 29 | 880 | 317 | 526 | 41 | 884 | 119 | 450 | 49 | 618 | ||||||||||||||||||||||||||||||||||||
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|
|
|||||||||||||||||||||||||
Swimwear - Calvin Klein Swimwear |
||||||||||||||||||||||||||||||||||||||||||||||||
Number of Owned Full Price Stores |
| | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Number of Owned Outlet Stores |
| | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Number of Concession / Shop-in-shop Stores |
| 193 | | 193 | | 193 | | 193 | 133 | 191 | | 324 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||||||||
Total Number of Stores |
| 193 | | 193 | | 193 | | 193 | 133 | 191 | | 324 | ||||||||||||||||||||||||||||||||||||
|
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|
|||||||||||||||||||||||||
Total Company* |
||||||||||||||||||||||||||||||||||||||||||||||||
Number of Owned Full Price Stores |
139 | 78 | 46 | 263 | 130 | 80 | 53 | 263 | 89 | 63 | 47 | 199 | ||||||||||||||||||||||||||||||||||||
Number of Owned Outlet Stores |
19 | 88 | 9 | 116 | 19 | 86 | 13 | 118 | 16 | 84 | 19 | 119 | ||||||||||||||||||||||||||||||||||||
Number of Concession / Shop-in-shop Stores |
529 | 796 | 70 | 1,395 | 539 | 775 | 62 | 1,376 | 456 | 667 | | 1,123 | ||||||||||||||||||||||||||||||||||||
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|
|
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|
|
|||||||||||||||||||||||||
Total Number of Stores |
687 | 962 | 125 | 1,774 | 688 | 941 | 128 | 1,757 | 561 | 814 | 66 | 1,441 | ||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||
Total Square Footage (thousands) |
485.6 | 515.3 | 95 | 1095.9 | 449.2 | 516.4 | 121.4 | 1087.0 | 319.0 | 466.9 | 122.4 | 908.3 |
* | In addition to the stores above, the Company operated one Calvin Klein Jeans on-line store, one Calvin Klein Underwear on-line store and one Speedo on-line store as of March 31, 2012, December 31, 2011 and April 2, 2011. |
The effect of fluctuations in foreign currency exchange rates on net revenues was a decrease of $7.6 million for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011. See Overview, above.
During the Three Months Ended March 31, 2012, the Companys top five customers accounted for $124.9 million (20.3% of Company net revenue) as compared to $136.1 million (20.5% of Company net revenue) for the Three Months Ended April 2, 2011. During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, no one customer accounted for 10% or more of the Companys net revenues.
Sportswear Group
Sportswear Group net revenues were as follows:
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase (Decrease) |
% Change |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Calvin Klein Jeans |
$ | 141,972 | $ | 184,146 | $ | (42,174 | ) | -22.9 | % | |||||||
Chaps |
48,714 | 54,879 | (6,165 | ) | -11.2 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Sportswear wholesale |
190,686 | 239,025 | (48,339 | ) | -20.2 | % | ||||||||||
Calvin Klein Jeans retail |
110,117 | 100,446 | 9,671 | 9.6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Sportswear Group (a) |
$ | 300,803 | $ | 339,471 | $ | (38,668 | ) | -11.4 | % | |||||||
|
|
|
|
|
|
(a) | Includes net revenues of $41.3 million and $42.0 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively, related to the Calvin Klein accessories business in Europe, Asia, Canada and in Mexico and Central and South America. Those amounts include net revenues of Calvin Klein bridge accessories of $19.2 million and $23.6 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. See Note 5 of Notes to Consolidated Condensed Financial Statements Restructuring and Other Exit Costs for a discussion of the Companys and CKIs intention for the Company to discontinue operation of the bridge business. |
33
Sportswear Group net revenues decreased $38.6 million to $300.8 million for the Three Months Ended March 31, 2012 from $339.4 million for the Three Months Ended April 2, 2011. Sportswear Group net revenues from international operations decreased $3.3 million and from domestic operations decreased $35.3 million. The decrease in international net revenues includes a $4.6 million decrease due to the unfavorable effect of fluctuations in certain foreign currency exchange rates. See Overview, above.
Net revenues from Calvin Klein Jeans decreased $32.5 million overall. Wholesale sales of Calvin Klein Jeans decreased $42.2 million (including a decrease of $15.7 million from international operations and a $26.5 million decline in the U.S.). The decrease in international wholesale net revenues was primarily driven by decreases of $14.9 million in Europe and $1.7 million in Mexico and Central and South America, partially offset by an increase of $0.9 million in Asia and was primarily due (in constant currency) to the following:
(i) | a decrease in Europe primarily due to decreased sales of Calvin Klein Jeans apparel and accessories, including bridge apparel and accessories, to department, specialty and independent stores and distributors and to the off-price channel, which the Company believes is reflective of deteriorating macroeconomic conditions, particularly in southern Europe combined with a less than favorable reception of the Companys product offerings at retail; and |
(ii) | a decrease in sales in Mexico and Central and South America primarily to membership clubs, partially offset by an increase in sales to specialty stores, including new customers; |
partially offset by an increase
(iii) | in Asia primarily due to an increase in net revenues in the Peoples Republic of China, primarily related to the expansion of the distribution network in that country, partially offset by a decline in sales in Korea and other regions of Asia. Wholesale net revenues in Korea are generated mainly by sales of off-season merchandise, the available quantity of which was intentionally reduced during the first quarter of Fiscal 2012 compared to the first quarter of Fiscal 2011. In addition, the Company believes that warmer weather reduced sales of winter product offerings in Korea. |
The decrease in the U.S. was primarily due to decreased sales (as a result of both reduced volumes and reduced selling prices) to department stores, membership clubs and the off-price channel, which is primarily reflective of continuing weakness in the Companys mens and womens businesses. In addition, declines in the off-price channel are also reflective of (i) a shift in timing of shipments (where shipments occurred in the fourth quarter of Fiscal 2011 rather than the first quarter of Fiscal 2012 when comparable shipments occurred in the first quarter of Fiscal 2011) and (ii) a strategic decision by the Company to reduce sales in order to reduce royalty penalties during Fiscal 2012 associated with sales in the off-price channel.
Net revenues from Calvin Klein Jeans retail sales increased $9.7 million (including increases of $5.4 million in Asia, $2.5 million in Europe and $2.7 million in Mexico and Central and South America, partially offset by a decrease of $0.9 million in Canada). The increase in retail net revenues was primarily due (in constant currency) to the addition of new stores opened and acquired by the Company, partially offset by the effect of an overall 0.9% decrease in comparable store sales ($86.7 million for the Three Months Ended March 31, 2012 and $87.5 million for the Three Months Ended April 2, 2011), predominantly in Asia, where warmer weather reduced sales of winter offerings and, the Company believes, there was a general decline in the retail apparel industry in that region.
Net revenues from Chaps decreased $6.1 million, primarily reflecting a decrease of $8.7 million in the U.S., partially offset by an increase of $2.6 million in international businesses. The decline in the U.S. was mainly due to lower sales to the off-price channel and chain stores and an increase in the level of customer allowances to clear Fall and Holiday goods, partially offset by increased sales to department stores. The decrease in sales to the off-price channel primarily reflects lower sales volume and lower selling prices, which the Company believes are required due to the weak U.S. economy. The decrease in chain stores was primarily due to timing of shipments (where shipments are expected to occur in the second quarter of Fiscal 2012 when comparable shipments occurred in the first quarter of Fiscal 2011). Sales to department stores increased primarily due to an increase in sales to existing customers and additional new product offerings. The decrease in the U.S. was partially offset by increases in net revenues in Canada and Mexico and Central and South America due primarily to increased sales to membership clubs and specialty stores.
34
Intimate Apparel Group
Intimate Apparel Group net revenues were as follows:
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase (Decrease) |
% Change |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Calvin Klein Underwear |
$ | 114,876 | $ | 110,457 | $ | 4,419 | 4.0 | % | ||||||||
Core Intimates |
41,616 | 45,220 | (3,604 | ) | -8.0 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Intimate Apparel wholesale |
156,492 | 155,677 | 815 | 0.5 | % | |||||||||||
Calvin Klein Underwear retail |
66,385 | 65,317 | 1,068 | 1.6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Intimate Apparel Group |
$ | 222,877 | $ | 220,994 | $ | 1,883 | 0.9 | % | ||||||||
|
|
|
|
|
|
Intimate Apparel Group net revenues increased $1.9 million to $222.9 million for the Three Months Ended March 31, 2012 from $221.0 million for the Three Months Ended April 2, 2011. Intimate Apparel Group net revenues from domestic operations increased $7.1 million and from international operations decreased $5.2 million. The decrease in international net revenues includes a $2.4 million decrease due to the unfavorable effect of fluctuations in foreign currency exchange rates. See Overview, above.
Net revenues from Calvin Klein Underwear increased $5.5 million overall. Calvin Klein Underwear wholesale sales increased $4.4 million, reflecting an increase of $10.9 million in the U.S., partially offset by a decrease of $6.5 million from international operations.
The increase in the U.S. was primarily due to increased sales of mens products in the off-price and membership club channels and increased sales of womens products in membership clubs, all primarily due to timing of shipments (sales occurred in the first quarter of Fiscal 2012 when comparable sales occurred in the second quarter of Fiscal 2011), partially offset by an increase in customer allowances. The increase in net revenues was also attributable to continued strong sales of the ck one line of mens and womens products, which was launched in the first quarter of Fiscal 2011, and to the introduction of the Calvin Klein Bold mens product line, which was launched in March 2012.
The decrease in international wholesale net revenue was primarily driven by decreases of $5.8 million in Europe and $2.3 million in Mexico and Central and South America, partially offset by an increase of $2.1 million in Asia and was primarily due (in constant currency) to the following:
(i) | in Europe, primarily due to (i) decreased sales to customers in department, specialty and independent stores, which the Company believes is mainly due to deteriorating macroeconomic conditions, particularly in southern Europe and (ii) the timing of certain product launches (the launch of ck one mens and womens products occurred in the first quarter of Fiscal 2011,while the launch of Calvin Klein Bold mens underwear products is scheduled for the second quarter of Fiscal 2012); and |
(ii) | in Mexico and Central and South America, primarily due to a shift in timing of shipments (where shipments occurred in the first quarter of Fiscal 2011 when comparable shipments will not occur until the second quarter of Fiscal 2012), and a decrease in sales to distributors; |
partially offset by an increase
(iii) | in Asia primarily due to the expansion of the distribution network in the Peoples Republic of China and other regions of Asia. |
Net revenues from Calvin Klein Underwear retail sales increased $1.1 million (primarily related to an increase of $2.5 million in Asia, partially offset by a decrease of $1.4 million in Europe). The increase in net revenues was primarily due (in constant currency) to the effect of new stores opened and acquired by the Company in Fiscal 2011 and the first quarter of Fiscal 2012. Those increases were partially offset by a decline in net revenues primarily due to store closings in Europe during Fiscal 2011 and the first quarter of Fiscal 2012 and by an overall decline of 2.8% in comparable store sales ($54.2 million for the Three Months Ended March 31, 2012 and $55.8 million for the Three Months Ended April 2, 2011). The Company believes the decline in comparable store sales is primarily reflective of deteriorating macroeconomic conditions in Europe and a general decline in the retail apparel industry in Korea.
Net revenues from Core Intimates decreased $3.6 million, primarily reflecting a decrease in sales volume in the U.S. in the department store, chain store and off- price channels, which was primarily related to a shift in timing of shipments (where sales occurred in the fourth quarter of Fiscal 2011, instead of the first quarter of Fiscal 2012, when comparable sales occurred in the first quarter of Fiscal 2011).
35
Swimwear Group
Swimwear Group net revenues were as follows:
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
Increase (Decrease) |
% Change |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Speedo |
$ | 79,041 | $ | 83,520 | $ | (4,479 | ) | -5.4 | % | |||||||
Calvin Klein |
10,299 | 15,862 | (5,563 | ) | -35.1 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Swimwear wholesale |
89,340 | 99,382 | (10,042 | ) | -10.1 | % | ||||||||||
Swimwear retail (a) |
2,521 | 2,314 | 207 | 8.9 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Swimwear Group |
$ | 91,861 | $ | 101,696 | $ | (9,835 | ) | -9.7 | % | |||||||
|
|
|
|
|
|
(a) | includes $0.4 million and $0.3 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively, related to Calvin Klein retail swimwear. |
Swimwear Group net revenues decreased $9.8 million to $91.9 million for the Three Months Ended March 31, 2012 from $101.7 million for the Three Months Ended April 2, 2011. Swimwear Group net revenues from domestic operations decreased $8.5 million and from international operations decreased $1.3 million. The decrease in international net revenues includes a $0.7 million decrease due to the unfavorable effect of fluctuations in foreign currency exchange rates. See Overview, above.
Net revenues from Speedo wholesale decreased $4.5 million, including a decrease of $5.5 million in the U.S., partially offset by an increase of $1.0 million in Mexico and Central and South America. During the Three Months Ended March 31, 2012, the U.S. business adopted a strategy of increasing sales volume to team dealers, specialty stores and sporting goods stores, which yield higher gross margins, and decreasing sales volume to membership clubs, discounters and the off-price channel, which carry lower gross margins. The transition to this new strategy resulted in a decrease in overall net revenues of Speedo wholesale during the Three Months Ended March 31, 2012. However, net revenues of Speedo products are expected to increase throughout the remainder of Fiscal 2012 due to market demand in connection with the 2012 Olympic Games and the launch of new products. The increase in Mexico and Central and South America was primarily due to increased sales to specialty stores and membership clubs.
Net revenues from Calvin Klein swimwear wholesale decreased $5.6 million, primarily due to decreases of $3.1 million in the U.S. and $2.5 million in Europe. The decline in the U.S. reflects a decrease in sales to department stores and membership clubs. In addition, poor macroeconomic conditions in southern Europe and the U.S. contributed to the decline in net revenues.
The $0.2 million increase in net revenues from Swimwear retail included a 15.9% increase in comparable store sales ($0.36 million for the Three Months Ended March 31, 2012 and $0.31 million for the Three Months Ended April 2, 2011).
Gross Profit
Gross profit was as follows:
Three Months Ended March 31, 2012 |
% of Brand Net Revenues |
Three Months Ended April 2, 2011 |
% of Brand Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Sportswear Group |
$ | 126,813 | 42.2 | % | $ | 151,400 | 44.6 | % | ||||||||
Intimate Apparel Group |
106,279 | 47.7 | % | 107,789 | 48.8 | % | ||||||||||
Swimwear Group |
34,393 | 37.4 | % | 35,949 | 35.3 | % | ||||||||||
|
|
|
|
|||||||||||||
Total gross profit |
$ | 267,485 | 43.5 | % | $ | 295,138 | 44.6 | % | ||||||||
|
|
|
|
36
Gross profit was $267.5 million, or 43.5% of net revenues, for the Three Months Ended March 31, 2012 compared to $295.1 million, or 44.6% of net revenues, for the Three Months Ended April 2, 2011. Declines in gross margin are primarily reflective of an increase in customer allowances coupled with an increase in product and freight costs and an unfavorable sales mix. The Company was able to partially mitigate the cost increases in certain Asian markets by selectively increasing the selling prices of its goods. Gross profit for the Three Months Ended March 31, 2012 includes a decrease of $1.7 million due to the unfavorable effects of foreign currency fluctuations.
Sportswear Group gross profit decreased $24.6 million, and gross margin decreased 240 basis points, for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, reflecting a $17.2 million decrease in the domestic business and a $7.4 million decrease in international operations. The decrease in the domestic business primarily reflects a reduction in both Calvin Klein Jeans and Chaps net revenues coupled with an increase in product costs and an unfavorable sales mix. The decrease in international operations primarily reflects a net reduction in net revenues coupled with an unfavorable wholesale sales mix and an increase in product costs.
Intimate Apparel Group gross profit decreased $1.5 million and gross margin decreased 110 basis points for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, reflecting a $3.2 million decrease in international operations, partially offset by a $1.7 million increase in the domestic business. Gross margin declined in all geographies except Europe, primarily reflecting (i) an unfavorable sales mix in the businesses in all geographies; (ii) an increase in product costs and (iii) an increase in customer allowances and discounts in the Companys businesses in Asia, the U.S. and in Mexico and Central and South America. In Europe, the increase in gross margin was the result of an overall decrease in product costs, despite an increase in the cost of raw materials and freight, which more than offset the effects of an unfavorable sales mix.
Swimwear Group gross profit decreased $1.5 million and gross margin increased 210 basis points for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, reflecting a $0.9 million decrease in the domestic business and a $0.6 million decrease in international operations. The 210 basis point increase in gross margin primarily relates to the domestic business and reflects increased pricing, a favorable sales mix and a favorable product mix, as a result the Companys strategy, as described above.
Selling, General and Administrative Expenses
Three Months Ended March 31, 2012 |
% of Brand
Net Revenues |
Three Months Ended April 2, 2011 |
% of Brand Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Sportswear Group |
$ | 110,862 | 36.9 | % | $ | 109,922 | 32.4 | % | ||||||||
Intimate Apparel Group |
75,920 | 34.1 | % | 76,915 | 34.8 | % | ||||||||||
Swimwear Group |
19,555 | 21.3 | % | 21,881 | 21.5 | % | ||||||||||
Corporate |
6,284 | na | 13,919 | na | ||||||||||||
|
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|
|
|||||||||||||
Total SG&A |
$ | 212,621 | 34.5 | % | $ | 222,637 | 33.6 | % | ||||||||
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|
|
Selling, General and Administrative (SG&A) expenses decreased $10.0 million to $212.6 million (34.5% of net revenues) for the Three Months Ended March 31, 2012 compared to $222.6 million (33.6% of net revenues) for the Three Months Ended April 2, 2011. SG&A for the Three Months Ended March 31, 2012 includes a decrease of $3.5 million due to the favorable effects of foreign currency fluctuations.
The $0.9 million increase in Sportswear Group SG&A for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 includes:
(i) | an increase of $2.0 million in selling and distribution expenses primarily associated with the opening and acquisition of additional retail stores in Europe, Asia and in Mexico and Central and South America and costs associated with additional warehouses in Asia; |
(ii) | a decrease of $2.7 million in marketing expenses, primarily related to a contractual decrease in advertising costs due to decreased sales; and |
37
(iii) | an increase in administrative expenses of $1.6 million, primarily related to an increase in restructuring charges of $2.3 million (see Note 5 of Notes to Consolidated Condensed Financial Statements) and other general administrative expenses ($0.9 million), partially offset by decreases in expense due to foreign exchange gains ($0.5 million) and employee compensation ($1.1 million). |
The $1.0 million decrease in Intimate Apparel Group SG&A for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 includes:
(i) | a decrease of $3.5 million in marketing expenses, primarily related to the global launch of the ck one product line of mens and womens underwear during the first quarter of Fiscal 2011 with no comparable launch in the first quarter of Fiscal 2012; and |
(ii) | an increase in administrative expenses of $2.5 million, primarily related to increases in restructuring charges of $1.3 million (see Note 5 of Notes to Consolidated Condensed Financial Statements) and employee compensation ($1.2 million). |
The $2.3 million decrease in Swimwear Group SG&A for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 includes:
(i) | a decrease in administrative expenses of $2.3 million, primarily related to a decrease in restructuring charges of $2.8 million (see Note 5 of Notes to Consolidated Condensed Financial Statements), partially offset by an increase in other general administrative expenses ($0.5 million). |
The $7.6 million decrease in SG&A related to corporate activities that are not allocated to the three segments for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 primarily includes decreases in restructuring charges of $0.5 million (see Note 5 of Notes to Consolidated Condensed Financial Statements), employee compensation ($4.9 million), other general administrative and professional fees ($1.5 million) and expense due to foreign exchange gains ($0.7 million).
Amortization of Intangible Assets
Amortization of intangible assets was $2.7 million for the Three Months Ended March 31, 2012 compared to $3.2 million for the Three Months Ended April 2, 2011, (see Note 13 of Notes to Consolidated Condensed Financial Statements Intangible Assets and Goodwill).
Pension Income
Pension income was $0.05 million for the Three Months Ended March 31, 2012 compared to $0.3 million for the Three Months Ended April 2, 2011. See Note 8 of Notes to Consolidated Condensed Financial Statements and Liquidity and Capital Resources Pension Plan, below.
Operating Income
The following table presents operating income by Group (segment):
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
|||||||
(in thousands of dollars) | ||||||||
Sportswear Group |
$ | 13,583 | $ | 38,600 | ||||
Intimate Apparel Group |
29,954 | 30,537 | ||||||
Swimwear Group |
14,837 | 14,068 | ||||||
Corporate/other expenses |
(6,155 | ) | (13,551 | ) | ||||
|
|
|
|
|||||
Operating income (a) |
$ | 52,219 | $ | 69,654 | ||||
|
|
|
|
|||||
Operating income as a percentage of net revenue |
8.5 | % | 10.5 | % |
(a) | includes approximately $6.6 million and $6.5 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively, related to restructuring expenses. See Note 5 of Notes to Consolidated Condensed Financial Statements. |
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The effect of fluctuations in the U.S. dollar relative to certain functional currencies where the Company conducts certain of its operations for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 resulted in a $1.8 million increase in operating income (see Overview, above).
Sportswear Group
Sportswear Group operating income was as follows:
Three Months Ended March 31, 2012 (b) |
% of Brand Net Revenues |
Three Months Ended April 2, 2011 (b) |
% of Brand Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Calvin Klein Jeans |
$ | 12,751 | 9.0 | % | $ | 30,181 | 16.4 | % | ||||||||
Chaps |
318 | 0.7 | % | 7,370 | 13.4 | % | ||||||||||
|
|
|
|
|||||||||||||
Sportswear wholesale |
13,069 | 6.9 | % | 37,551 | 15.7 | % | ||||||||||
Calvin Klein Jeans retail |
514 | 0.5 | % | 1,049 | 1.0 | % | ||||||||||
|
|
|
|
|||||||||||||
Sportswear Group (a) |
$ | 13,583 | 4.5 | % | $ | 38,600 | 11.4 | % | ||||||||
|
|
|
|
(a) | includes restructuring charges of $3.7 million and $1.6 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. |
(b) | includes an allocation of shared services expenses by brand as detailed below: |
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
|||||||
(in thousands of dollars) | ||||||||
Calvin Klein Jeans |
$ | 4,317 | $ | 4,381 | ||||
Chaps |
2,152 | 1,959 | ||||||
|
|
|
|
|||||
Sportswear wholesale |
6,469 | 6,340 | ||||||
Calvin Klein Jeans retail |
564 | 533 | ||||||
|
|
|
|
|||||
Sportswear Group |
$ | 7,033 | $ | 6,873 | ||||
|
|
|
|
Sportswear Group operating income decreased $25.0 million, or 64.8%, as reflected in the table above. Sportswear Group operating income for the Three Months Ended March 31, 2012 includes an increase of $1.6 million related to fluctuations in foreign currency exchange rates. The decrease in Sportswear Group operating income reflects the changes in gross profit and SG&A described above.
Intimate Apparel Group
Intimate Apparel Group operating income was as follows:
Three Months Ended March 31, 2012 (b) |
% of Brand Net Revenues |
Three Months Ended April 2, 2011 (b) |
% of Brand Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Calvin Klein Underwear |
$ | 22,259 | 19.4 | % | $ | 19,418 | 17.6 | % | ||||||||
Core Intimates |
4,810 | 11.6 | % | 4,878 | 10.8 | % | ||||||||||
|
|
|
|
|||||||||||||
Intimate Apparel wholesale |
27,069 | 17.3 | % | 24,296 | 15.6 | % | ||||||||||
Calvin Klein Underwear retail |
2,885 | 4.3 | % | 6,241 | 9.6 | % | ||||||||||
|
|
|
|
|||||||||||||
Intimate Apparel Group (a) |
$ | 29,954 | 13.4 | % | $ | 30,537 | 13.8 | % | ||||||||
|
|
|
|
(a) | includes restructuring charges of $3.1 million and $1.4 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. |
(b) | includes an allocation of shared services expenses by brand as detailed below: |
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Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
|||||||
(in thousands of dollars) | ||||||||
Calvin Klein Underwear |
$ | 3,163 | $ | 2,835 | ||||
Core Intimates |
1,651 | 1,528 | ||||||
|
|
|
|
|||||
Intimate Apparel wholesale |
4,814 | 4,363 | ||||||
Calvin Klein Underwear retail |
353 | 346 | ||||||
|
|
|
|
|||||
Intimate Apparel Group |
$ | 5,167 | $ | 4,709 | ||||
|
|
|
|
Intimate Apparel Group operating income for the Three Months Ended March 31, 2012 decreased $0.6 million, or 1.9%, as reflected in the table above. Intimate Apparel Group operating income for the Three Months Ended March 31, 2012 includes an increase of $0.6 million related to fluctuations in foreign currency exchange rates. The decrease in Intimate Apparel Group operating income reflects the changes in gross profit and SG&A described above.
Swimwear Group
Swimwear Group operating income was as follows:
Three Months Ended March 31, 2012 (c) |
% of Brand Net Revenues |
Three Months Ended April 2, 2011 (c) |
% of Brand Net Revenues |
|||||||||||||
(in thousands of dollars) | ||||||||||||||||
Speedo |
$ | 15,602 | 19.7 | % | $ | 12,696 | 15.2 | % | ||||||||
Calvin Klein |
(844 | ) | -8.2 | % | 1,128 | 7.1 | % | |||||||||
|
|
|
|
|||||||||||||
Swimwear wholesale |
14,758 | 16.5 | % | 13,824 | 13.9 | % | ||||||||||
Swimwear retail (a) |
79 | 3.1 | % | 244 | 10.5 | % | ||||||||||
|
|
|
|
|||||||||||||
Swimwear Group (b) |
$ | 14,837 | 16.2 | % | $ | 14,068 | 13.8 | % | ||||||||
|
|
|
|
(a) | includes $(0.2) million and $0 for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively related to Calvin Klein retail swimwear. |
(b) | includes restructuring charges of $0 and $3.1 million for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. |
(c) | Includes an allocation of shared services expenses by brand in the following table: |
Three Months Ended March 31, 2012 |
Three Months Ended April 2, 2011 |
|||||||
(in thousands of dollars) | ||||||||
Speedo |
$ | 2,265 | $ | 2,224 | ||||
Calvin Klein |
338 | 468 | ||||||
|
|
|
|
|||||
Swimwear wholesale |
2,603 | 2,692 | ||||||
Swimwear retail |
104 | 98 | ||||||
|
|
|
|
|||||
Swimwear Group |
$ | 2,707 | $ | 2,790 | ||||
|
|
|
|
Swimwear Group operating income for the Three Months Ended March 31, 2012 increased $0.7 million, or 5.5%, as reflected in the table above. The effect of fluctuations in foreign currency exchange rates on Swimwear Group operating income was negligible. The increase in Swimwear Group operating income reflects the changes in gross profit and SG&A described above.
Other Income
Other income of $0.3 million for the Three Months Ended March 31, 2012 reflects a gain on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries functional currency that are not hedged with foreign exchange forward contracts, net of losses on foreign currency exchange contracts designed as economic hedges (see Note 11 of Notes to Consolidated Condensed Financial Statements). Other income of $0.6 million for the Three Months Ended April 2, 2011 reflects a gain on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries functional currency, net of losses on foreign currency exchange contracts designed as economic hedges (see Note 11 of Notes to Consolidated Condensed Financial Statements).
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Interest Expense
Interest expense increased $1.7 million to $4.4 million for the Three Months Ended March 31, 2012 from $2.7 million for the Three Months Ended April 2, 2011. The change primarily relates to fluctuations in the balances and interest rates on the Companys debt facilities including (i) the 2011 Term Loan Agreement, which was entered into in June 2011; (ii) the CKJEA Notes payable; (iii) the 2008 Credit Agreements; (iv) the Italian Note, which was entered into in the third quarter of Fiscal 2010 and repaid in June 2011 (items (i) through (iv) as defined in Note 14 of Notes to Consolidated Condensed Financial Statements); (v) the Brazilian lines of credit; and (vi) increases in interest expense arising from maturity of caplets and accretion of the deferred premium under the Interest Rate Cap Agreement entered into on July 1, 2011.
Interest Income
Interest income increased $0.2 million to $0.9 million for the Three Months Ended March 31, 2012 from $0.7 million for the Three Months Ended April 2, 2011 due primarily to an increase in the average of the Companys cash balance during the respective comparative periods.
Income Taxes
The effective tax rates for the Three Months Ended March 31, 2012 and April 2, 2011 were 32.7% and 34.8% respectively. The reduction in the effective tax rate for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 primarily reflects the effect of establishing uncertain tax positions in certain foreign jurisdictions. The provision for income taxes for the Three Months Ended April 2, 2011 included amounts associated with the aforementioned uncertain tax positions whereas similar tax provisions were not required during the Three Months Ended March 31, 2012.
Discontinued Operations
Income from discontinued operations, net of taxes, was $3.0 million for the Three Months Ended March 31, 2012 compared to a loss of $0.5 million for the Three Months Ended April 2, 2011. The income for the Three Months Ended March 31, 2012 was primarily associated with the reversal of a reserve related to the Companys Lejaby discontinued business (see Note 4 of Notes to Consolidated Condensed Financial Statements). Loss for the Three Months Ended April 2, 2011 was primarily related to the Companys Ocean Pacific Apparel and Lejaby discontinued businesses. See Note 4 of Notes to Consolidated Condensed Financial Statements.
Liquidity and Capital Resources
Liquidity
The Companys principal source of operating cash flows is from sales of its products to customers. On a consolidated basis in constant currencies, net revenues decreased for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 (see Overview, Non-GAAP Measures and Results of Operations Net Revenues, above). The Companys principal operating outflows of cash relate to purchases of inventory and related costs, SG&A expenses and capital expenditures, primarily related to store fixtures and retail store openings.
During Fiscal 2010 and Fiscal 2011, the Company did not achieve the minimum sales thresholds required under the CK/Calvin Klein bridge apparel license. As a result, the Company and CKI no longer intend for the Company to continue to operate all or part of the Companys bridge business. During the Three Months Ended March 31, 2012, the Company began discussions with CKI regarding the terms and conditions of the transition of all or part of the Companys bridge businesses to CKI. Based on those ongoing discussions with CKI, the Company has decided to close certain bridge apparel retail stores in Europe, for which a non-cash impairment charge of $0.9 million was recorded as a restructuring expense during the Three Months Ended March 31, 2012 (see Note 5 of Notes to Consolidated Condensed Financial Statements). Although combined net revenues of the bridge businesses were $100 million during Fiscal 2011, those businesses incurred net operating losses during Fiscal 2011. During the Three Months Ended March 31, 2012, combined net revenues and operating income of the bridge businesses were $30.6 million and $0.7 million, respectively. Therefore, the Company believes that the future discontinuance of all or part of the bridge businesses will not have a material effect on its future results of operations or cash flows.
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During the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, cash outflows decreased primarily due to a decline related to changes in working capital (see Accounts Receivable and Inventories and Cash Flows, below), coupled with a decrease in SG&A expenses (see Selling, General and Administrative Expenses, above). The decrease in SG&A expenses primarily reflects a decline in marketing expense, related to the decline in net revenues, and a decrease in administrative expenses, partially offset by an increase in selling and distribution costs associated with newly opened and acquired retail stores. Those decreases in cash outflows were partially offset by an increase in cash outflows, which resulted from an increase in costs for raw material, labor and freight, particularly in the Companys businesses in the U.S., Mexico and Central and South America, Asia and Europe. These cost increases adversely affected the operating margins of the Companys businesses. The Company expects that product costs will stabilize or decline during Fiscal 2012. The Company was able to partially mitigate the cost increases during the Three Months Ended March 31, 2012 in certain geographic markets in Asia by selectively increasing the selling prices of its goods, making early purchases of product and by implementing other sourcing initiatives.
As of March 31, 2012, the Company had $224.2 million in cash and cash equivalents, of which $216.4 million was held by foreign subsidiaries. The Company currently intends that cash and cash equivalents held by foreign subsidiaries will be indefinitely reinvested in foreign jurisdictions in order to fund strategic initiatives (such as investment, expansion and acquisitions), fund working capital requirements and repay debt (both third-party and inter-company) of its foreign subsidiaries in the normal course of business. Moreover, the Company does not currently intend to repatriate cash and cash equivalents held by foreign subsidiaries to the United States because cash generated from the Companys domestic businesses and credit available under its domestic financing facilities are currently sufficient (and are expected to continue to be sufficient for the foreseeable future) to fund the cash needs of its operations in the United States. However, if, in the future, cash and cash equivalents held by foreign subsidiaries are needed to fund the Companys operations in the United States, the repatriation of such amounts to the United States would result in a significant incremental tax liability in the period in which the decision to repatriate occurs. Payment of any incremental tax liability would reduce the cash available to the Company to fund its operations by the amount of taxes paid.
The Company believes that, at March 31, 2012, cash on hand, cash expected to be generated from future operating activities and cash available under the 2011 Term Loan Agreement, 2008 Credit Agreements, the CKJEA Notes and other short-term debt (see Note 14 of Notes to Consolidated Condensed Financial Statements and below) will be sufficient to fund its operations, including contractual obligations (see Note 19 of Notes to Consolidated Condensed Financial Statements, above) and capital expenditures (see below) for the next 12 months.
As of March 31, 2012, the Company had working capital (current assets less current liabilities) of $677.4 million. Included in working capital as of March 31, 2012 were (among other items) cash and cash equivalents of $224.2 million and short-term debt of $79.4 million, including $2.0 million under the 2011 Term Loan Agreement, $44.2 million under the CKJEA Notes and $33.2 million of other short-term debt.
Short-Term Borrowings
The Company considers all of its short-term borrowings to be highly important to fund seasonal working capital needs and discretionary transactions. See Note 14 of Notes to Consolidated Condensed Financial Statements for additional information regarding the Companys short-term borrowings. As of March 31, 2012 and for the Three Months Ended March 31, 2012, the Companys short-term borrowings were as follows:
Borrowings from banks
March 31, 2012 | Three Months Ended March 31, 2012 | |||||||||||||||||||||
(in thousands of dollars) |
||||||||||||||||||||||
Average Amount | Maximum Amount |
|||||||||||||||||||||
Instrument | Currency | Amount (U.S. Dollar |
Weighted Interest |
Outstanding (U.S. Dollar |
Weighted Interest |
Outstanding (U.S. Dollar |
||||||||||||||||
2008 Credit Agreement |
U.S. dollars | $ | 16,171 | 2.10 | % | $ | 5,390 | 2.10 | % | $ | 16,171 | |||||||||||
CKJEA Notes |
Euro | 44,190 | 3.49 | % | 38,693 | 3.57 | % | 44,190 | ||||||||||||||
Lines of credit |
Brazilian real | 14,511 | 11.73 | % | 9,047 | 11.20 | % | 14,511 |
(a) | ending exchange rates at March 31, 2012 were: 1.3343 U.S. dollars/Euro, and 0.5472 U.S. dollars/Brazilian real; average exchange rates for the Three Months Ended March 31, 2012 were: 1.3396 U.S. dollars/Euro and 0.5661 U.S. dollars/Brazilian real. |
42
2008 Credit Agreements
The revolving credit facilities under the 2008 Credit Agreements (see Note 14 of Notes to Consolidated Condensed Financial Statements) reflect funding commitments by a syndicate of banks. The ability of any one or more of those banks to meet its commitment to provide the Company with funding up to the maximum of available credit is dependent on the fair value of the banks assets and its legal lending ratio relative to those assets (amount the bank is allowed to lend). The Company believes that, during the Three Months Ended March 31, 2012, those banks had the ability to make loans up to their respective funding commitments under the 2008 Credit Agreements and that they will continue to be able to make such loans in the future. However, the Company continues to monitor the creditworthiness of the syndicated banks. As of March 31, 2012, the Company was in compliance with all financial covenants contained in the 2008 Credit Agreements.
During the Three Months Ended March 31, 2012, the Company was able to borrow funds, from time to time, under the 2008 Credit Agreement for seasonal and other cash flow requirements, including funding of the Companys pension plan and payment of employee incentive-based compensation. As of March 31, 2012, the Company expects that it will continue to be able to obtain needed funds under the 2008 Credit Agreements when requested. However, in the event that such funds are not available, the Company may have to delay certain capital expenditures or plans to expand its business, scale back operations and/or raise capital through the sale of its equity or debt securities. There can be no assurance that the Company would be able to sell its equity or debt securities on terms that are satisfactory.
As of March 31, 2012, under the 2008 Credit Agreement, the Company had $16.2 million of loans and $32.2 million in letters of credit outstanding, leaving approximately $179.7 million of availability, and, under the 2008 Canadian Credit Agreement, no loans and $3.5 million of letters of credit, leaving approximately $19.2 million of availability. During the Three Months Ended March 31, 2012, the maximum outstanding loan balance under the 2008 Credit Agreement was $16.2 million, at which time the funds were needed for funding of the Companys pension plan and payment of employee incentive-based compensation. The difference between the average balance and the ending balance was due primarily to timing of monthly borrowings and repayments. There were no outstanding loan balances under the 2008 Canadian Credit Agreement during the Three Months Ended March 31, 2012. Cash interest paid on the 2008 Credit Agreements was $0.2 million during the Three Months Ended March 31, 2012.
CKJEA Notes
The CKJEA Notes consist of short-term revolving notes placed with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%) issued by one of the Companys European subsidiaries. The outstanding balance under the CKJEA Notes was $44.2 million, $36.6 million and $29.2 million as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively. During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, the Company was able to borrow funds under the CKJEA Notes, as needed, to fund operations. The Company will continue to renew the CKJEA Notes for additional terms of no more than 12 months and expects that it will continue to be able to borrow funds under the CKJEA Notes in the future. The Company monitors its positions with, and the credit quality of, the counterparty financial institutions that hold the CKJEA Notes and does not currently anticipate non-performance by those counterparties. Management believes that the Company would not suffer a material loss in the event of non-performance by those counterparties. The Company uses the CKJEA Notes to meet working capital needs, primarily inventory purchases, which increase or decrease from month to month during the year. During the Three Months Ended March 31, 2012, the maximum outstanding balance under the CKJEA Notes of $44.2 million reflected the increased working capital requirements during that month. Similarly, the difference between the ending balance of $44.2 million at March 31, 2012 and the average outstanding balance of $38.7 million during the Three Months Ended March 31, 2012 was due to changes in working capital requirements. Cash interest paid on the CKJEA Notes was $1.0 million during the Three Months Ended March 31, 2012.
Lines of Credit
The Companys Brazilian subsidiary, WBR, has established lines of credit with several banks in order to improve cash flows and fund operations as needed. The lines of credit, when drawn, are offset by approximately equal amounts of WBRs trade accounts receivable. In addition, during the Three Months Ended March 31, 2012, WBR entered into short-term loans with several banks. As of March 31, 2012, December 31, 2011 and April 2, 2011, the total outstanding balances of the lines of credit were approximately $0.6 million, $6.4 million and $9.1 million, respectively, and, as of March 31, 2012, the outstanding loan balance was approximately $13.9 million. During the Three Months Ended March 31, 2012, WBR was able to borrow funds under the lines of credit and loans, as needed, to fund operations. During the Three Months Ended March 31, 2012, the maximum outstanding balance under the Brazilian lines of credit and loans was $14.5 million, when the funds were needed to make the third contingent payment to the sellers of WBR (see Note 3 of Notes to Consolidated Condensed Financial Statements Acquisitions Acquisition of Remaining Non-Controlling Interest in Brazil). The reason for the difference between the ending balance of $14.5 million as of March 31, 2012 and the average outstanding balance of $9.0 million during the Three Months Ended March 31, 2012 was due to monthly variances in operational cash requirements, particularly the cash required in March 2012 to make the third contingent payment. Cash interest paid on the Brazilian lines of credit was $0.4 million during the Three Months Ended March 31, 2012.
43
During September 2011, one of the Companys Asian subsidiaries entered into a short-term $25 million revolving credit facility with one lender (the Asian Credit Facility) to be used for working capital and general corporate purposes. There were no borrowings during the Three Months Ended March 31, 2012 under the Asian Credit Facility.
Long-Term Borrowing
2011 Term Loan Agreement
The 2011 Term Loan Agreement (see Note 14 of Notes to Consolidated Condensed Financial Statements) provides for a $200 million 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 (as defined therein) may request additional credit commitments for incremental term loan facilities in an aggregate amount not to exceed $100 million 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. As of March 31, 2012, there was $198.5 million in term loans outstanding under the 2011 Term Loan.
On the last day of each of the Companys fiscal quarters, beginning on October 1, 2011, $500,000 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. As of March 31, 2012, the annual interest rate on the entire outstanding 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%. During the Three Months Ended March 31, 2012, the Company paid cash interest of approximately $1.9 million on the 2011 Term Loan. In order to match the interest rate on the hedged portion of the 2011 Term Loan with that on the Interest Rate Cap Agreement (see below), the Company intends to use successive interest periods of three months and adjusted three-month LIBOR rates (with a LIBOR floor of 1.00%) plus 2.75% on a per annum basis through the maturity date of the Interest Rate Cap Agreement.
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, with a notional amount $120 million (see Note 14 of Notes to Consolidated Condensed Financial Statements), which matures on April 30, 2018 (the Interest Rate Cap Agreement). The total amount of deferred premium payments that the Company is obligated to make over the term of the Interest Rate Cap Agreement is approximately $16.0 million, based on an annual rate of 1.9475% on the notional amount of the Interest Rate Cap Agreement. During the Three Months Ended March 31, 2012, the Company made a deferred premium cash payment of $0.6 million to the Counterparty.
Corporate Credit Ratings
The Companys corporate or family credit ratings and outlooks as of March 31, 2012 are summarized below:
Rating Agency |
Corporate/Family Rating (a) |
Outlook | ||
Standard & Poors |
BBB- | stable | ||
Moodys |
Ba1 | stable |
(a) | ratings on individual debt instruments can be different from the Companys corporate or family credit ratings depending on the priority position of creditors holding such debt, collateral related to such debt and other factors. Standard & Poors has assigned a rating of BBB- and Moodys has assigned a rating of Ba1 to the 2011 Term Loan. |
The Companys credit ratings contribute to its ability to access the credit markets. Factors that can affect the Companys credit ratings include changes in its operating performance, the economic environment, conditions in the apparel industry, the Companys financial position, and changes in the Companys business or financial strategy. If a downgrade of the Companys credit ratings were to occur, it could adversely affect, among other things, the Companys future borrowing costs and access to capital markets. Given the Companys capital structure and its projections for future profitability and cash flow, the Company believes it is well positioned to obtain additional financing, if necessary, to refinance its debt, or, if opportunities present themselves, to make future acquisitions. However, there can be no assurance that such financing, if needed, can be obtained on terms satisfactory to the Company or at such time as a specific need may arise.
44
Capital Expenditures
During the Three Months Ended March 31, 2012, the Company leased approximately 32,000 square feet of additional retail store space worldwide from newly opened stores, which resulted in capital expenditures of approximately $6.0 million. In addition, the Company incurred costs of approximately $3 million for capital expenditures not related to new stores. For the remainder of Fiscal 2012, the Company expects to lease an additional 176,000 square feet of new retail space, not including acquisition of retail stores, for which it expects to incur additional costs for capital expenditures of approximately $35 million. The Company expects to spend an additional $10 million on capital expenditures not related to new retail stores for the remainder of Fiscal 2012.
Restructuring and Other Exit Activities
During the Three Months Ended March 31, 2012, the Company incurred restructuring and other exit costs of $6.6 million, primarily related to impairment of certain bridge retail stores in Europe in connection with the disposition of its CK/Calvin Klein bridge businesses, the consolidation and restructuring of certain international operations, employee termination charges related primarily to reorganization of management structure, and severance, lease contract termination and related costs related to retail store, office and warehouse closures. See Note 5 of Notes to Consolidated Condensed Financial Statements for additional information on restructuring and other exit activities. During the Three Months Ended March 31, 2012, the Company made cash payments related to restructuring and other exit activities of $4.2 million. The Company expects to incur additional costs of approximately $33 million to $43 million, on a pre-tax basis during the remainder of Fiscal 2012, primarily related to the consolidation of certain international operations and the disposition of its CK/Calvin Klein bridge businesses.
Business Acquisitions
During the fourth quarter of the fiscal year ended January 2, 2010 (Fiscal 2009), the Company acquired the remaining 49% equity interest in WBR, its subsidiary in Brazil (see Note 2 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for Fiscal 2011). The Company made the second contingent payment of 18.5 million Brazilian real (approximately $11.5 million as of March 31, 2011), based on the operating results of WBR for Fiscal 2010, on March 31, 2011. The Company made the third and final contingent payment of 18.5 million Brazilian real (approximately $10.1 million as of March 31, 2012), based on the operating results of WBR for Fiscal 2011, in two separate payments: (i) $7.6 million on March 30, 2012 and (ii) $2.5 million on April 2, 2012.
Derivative Financial Instruments
During the Three Months Ended March 31, 2012, some of the Companys foreign subsidiaries with functional currencies other than the U.S. dollar made purchases of inventory, paid minimum royalty and advertising costs and /or had inter-company payables, receivables or loans denominated in U.S. dollars or British pounds. In order to minimize the effects of fluctuations in foreign currency exchange rates of those transactions, the Company uses derivative financial instruments, primarily foreign currency exchange forward contracts. In addition, during July 2011, the Company entered into the Interest Rate Cap Agreement to offset fluctuations in LIBOR related to $120.0 million of its 2011 Term Loan (see Notes 11 and 14 of Notes to Consolidated Condensed Financial Statements).
The Company carries its derivative financial instruments at fair value on the Consolidated Condensed Balance Sheets. The Company utilizes the market approach to measure fair value of financial assets and liabilities related to foreign currency exchange forward contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company uses the income approach to measure the fair value of the Interest Rate Cap Agreement. As of March 31, 2012, the Companys foreign currency hedging programs included $59.6 million of future inventory purchases, $26.9 million of future minimum royalty and advertising payments and $65.0 million of inter-company payables and loans denominated in non-functional currencies, primarily the U.S. dollar (see Notes 10 and 11 of Notes to Consolidated Condensed Financial Statements for further information on fair value measurement of the Companys derivative financial instruments).
Pension and Post-Retirement Plans
The Pension Protection Act of 2006 (the PPA) revised the basis and methodology for determining defined benefit plan minimum funding requirements as well as maximum contributions to, and benefits paid from, tax-qualified plans. The PPA may ultimately require the Company to make additional contributions to its Pension Plan (see Note 8 of Notes to Consolidated Condensed Financial Statements). During the Three Months Ended March 31, 2012, the Company contributed $17.2 million to the Pension Plan. Contributions for Fiscal 2012 are expected to total $20.6 million and for the following four years are expected to be in the range of $1.4 million to $9.5 million. Actual future year contributions could exceed or fall short of the Companys current projections, and may be influenced by future changes in government requirements. Additionally, the Companys projections concerning timing of the PPA funding requirements are subject to change and may be influenced by factors such as general market conditions affecting trust asset performance, interest rates, and the Companys future decisions regarding certain elective provisions of the PPA.
45
The fair value of the Pension Plans assets, net of current period expenses, increased to approximately $146.0 million as of March 31, 2012 compared to $121.4 million as of December 31, 2011. That increase reflects an actual annualized rate of return on the Pension Plans assets, net of current period expenses, of 32% for the Three Months Ended March 31, 2012. That rate of return was in excess of the assumed rate of return of 7% (gain) per year on Pension Plan assets which the Company has been using to estimate pension income on an interim basis, based upon historical results. Assuming that the fair value of the investment portfolio increases at the assumed rate of 7% per annum for the remainder of Fiscal 2012 and that the discount rate does not change in the fourth quarter of Fiscal 2012, the Company expects to recognize additional pension income of between $8 million and $9 million in the fourth quarter of Fiscal 2012. The Companys pension income is also affected by the discount rate used to calculate Pension Plan liabilities, by Pension Plan amendments and by Pension Plan benefit experience compared to assumed experience and other factors. These factors could increase or decrease the amount of pension income or expense ultimately recorded by the Company for Fiscal 2012. Based upon results for Fiscal 2011, and assuming no other changes, a 0.1% increase (decrease) in the discount rate would decrease (increase) pension expense by approximately $1.76 million. See Note 8 of Notes to Consolidated Condensed Financial Statements for additional information on the Companys pension and post-retirement plans.
Accounts Receivable and Inventories
Accounts receivable increased $23.9 million to $346.9 million as of March 31, 2012 from $323.0 million as of December 31, 2011 and decreased $49.1 million to $346.9 million as of March 31, 2012 from $396.0 million at April 2, 2011. The balance of accounts receivable as of March 31, 2012 compared to the balances as of December 31, 2011 and April 2, 2011 includes an increase of $6.0 million and a decrease of $12.8 million, respectively, due to fluctuations in exchange rates in the U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian dollar, Brazilian real, Chinese yuan, Indian rupee, British pound and Mexican peso). Thus, on a constant currency basis, accounts receivable as of March 31, 2012 increased $17.9 million compared to December 31, 2011 and decreased $36.3 million compared to April 2, 2011. Those changes in accounts receivable on a constant currency basis between March 31, 2012 and each of December 31, 2011 and April 2, 2011 were related to the amount of net revenues recorded during the last two months before each of those respective dates.
Inventories increased $29.3 million to $380.1 million as of March 31, 2012 from $350.8 million as of December 31, 2011 and increased $15.8 million to $380.1 million as of March 31, 2012 from $364.3 million as of April 2, 2011. The balance of inventories as of March 31, 2012 compared to the balances as of December 31, 2011 and April 2, 2011 includes an increase of $7.1 million and a decrease of $12.2 million, respectively, due to fluctuations in exchange rates in the U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian dollar, Brazilian real, Chinese yuan, Indian rupee, British pound and Mexican peso). Thus, on a constant currency basis, inventories as of March 31, 2012 increased $22.2 million compared to December 31, 2011 and increased $28.0 million compared to April 2, 2011. The inventory increase from April 2, 2011 to March 31, 2012 primarily reflects increased costs of raw material and other product costs, lower than anticipated net revenues during the Three Months Ended March 31, 2012, and the expansion of the Companys retail business (including retail openings and acquisitions during the Three Months Ended March 31, 2012 and those anticipated for the second quarter of Fiscal 2012). The Company is comfortable with the quality of its inventory and anticipates that inventory levels will decline during the remainder of Fiscal 2012.
Cash Flows
The following table summarizes the cash flows from the Companys operating, investing and financing activities for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011.
46
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
(in thousands of dollars) | ||||||||
Net cash (used in) operating activities: |
||||||||
Continuing operations |
$ | (37,801 | ) | $ | (67,497 | ) | ||
Discontinued operations |
| (16,284 | ) | |||||
Net cash (used in) investing activities: |
||||||||
Continuing operations |
(11,279 | ) | (13,285 | ) | ||||
Discontinued operations |
| | ||||||
Net cash provided by financing activities: |
||||||||
Continuing operations |
37,063 | 75,252 | ||||||
Discontinued operations |
| | ||||||
Translation adjustments |
3,713 | 4,682 | ||||||
|
|
|
|
|||||
(Decrease) in cash and cash equivalents |
$ | (8,304 | ) | $ | (17,132 | ) | ||
|
|
|
|
For the Three Months Ended March 31, 2012, cash used in operating activities from continuing operations was $37.8 million compared to cash used in operating activities of $67.5 million for the Three Months Ended April 2, 2011. The $29.7 million decrease in cash used in operating activities was due to a decrease in net income, net of non-cash charges, coupled with a decrease in outflows related to changes in working capital.
Working capital changes for the Three Months Ended March 31, 2012 included cash outflows of $17.9 million related to accounts receivable (due to timing of payments on similar sales in March 2012 and December 2011), $26.9 million related to inventory (primarily to support the Companys growth expectations for the second fiscal quarter of Fiscal 2012), $38.5 million related to accounts payable, accrued expenses and other liabilities (primarily due to timing of accruals for employee compensation and pension costs), $9.3 million related to accrued income taxes and $0.9 million related to prepaid expenses and other assets (primarily related to prepaid advertising and prepaid taxes, other than income taxes).
Working capital changes for the Three Months Ended April 2, 2011 included cash outflows of $70.4 million related to accounts receivable (due to increased sales in March 2011 compared to December 2010 and the timing of payments), $46.6 million related to inventory (primarily to support the Companys growth expectations for the remainder of Fiscal 2011 and for certain early purchases of product) and $28.4 million related to accounts payable, accrued expenses and other liabilities (due to the timing of payments for purchases of inventory), partially offset by cash inflows of $3.3 million related to prepaid expenses and other assets (primarily related to prepaid advertising, prepaid rent and prepaid taxes, other than income taxes) and $3.2 million related to accrued income taxes.
For the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, cash used in operating activities from discontinued operations decreased $16.3 million primarily related to settlement of the OP litigation during the Three Months Ended April 2, 2011 (see Note 19 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for Fiscal 2011).
For the Three Months Ended March 31, 2012, net cash used in investing activities from continuing operations was $11.3 million, mainly attributable to purchases of property, plant and equipment associated with the Companys retail stores. For the Three Months Ended April 2, 2011, net cash used in investing activities from continuing operations was $13.3 million, mainly attributable to purchases of property, plant and equipment associated with the Companys retail stores.
Net cash provided by financing activities for the Three Months Ended March 31, 2012 was $37.1 million, which primarily reflects net cash provided of $16.2 million related to borrowings under the 2008 Credit Agreements, $15.0 million related to short-term notes payable, $13.1 million from the exercise of employee stock options and $7.0 million of tax benefit related to exercise of equity awards, partially offset by cash used of $5.6 million related to the repurchase of treasury stock (in connection with the surrender of shares for the payment of minimum income tax due upon vesting of certain restricted stock awarded by the Company to its employees), $7.6 million related to a contingent payment made during the Three Months Ended March 31, 2012 in connection with the acquisition of the equity interest in WBR (such acquisition occurred in the fourth quarter of Fiscal 2009 and was accounted for as an equity transaction) and a $1.0 million repayment of a portion of the 2011 Term Loan and the Interest Rate Cap Agreement.
Net cash provided by financing activities for the Three Months Ended April 2, 2011 was $75.3 million, which primarily reflects net cash provided of $96.7 million related to borrowings under the 2008 Credit Agreements, $15.3 million related to short-term notes payable and $5.8 million from the exercise of employee stock options, partially offset by cash used of $31.1 million related to the repurchase of treasury stock (in connection with the 2010 Share Repurchase Program and the surrender of shares for the payment of minimum income tax due upon vesting of certain restricted stock awarded by the Company to its employees) and $11.5 million related to a contingent payment made during the Three Months Ended April 2, 2011 in connection with the acquisition of the equity interest in WBR (such acquisition occurred in the fourth quarter of Fiscal 2009 and was accounted for as an equity transaction).
47
Significant Contractual Obligations and Commitments
Contractual obligations and commitments as of March 31, 2012 were not materially different from those disclosed in the Companys Annual Report on Form 10-K for Fiscal 2011, with the exception of changes related to operating leases and other contractual obligations which occurred during the Three Months Ended March 31, 2012 (see Note 19 of Notes to Consolidated Condensed Financial Statements).
Off-Balance Sheet Arrangements
None.
Statement Regarding Forward-Looking Disclosure
This Quarterly Report on Form 10-Q, as well as certain other written, electronic and oral disclosures made by the Company from time to time, contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and reflect, when made, the Companys estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions, opportunities and expectations. Actual results may differ materially from anticipated results, targets or expectations and investors are cautioned not to place undue reliance on any forward-looking statements. Statements other than statements of historical fact, including, without limitation, future financial targets, are forward-looking statements. These forward-looking statements may be identified by, among other things, the use of forward-looking language, such as the words believe, anticipate, estimate, expect, intend, may, project, scheduled to, seek, should, will be, will continue, will likely result, targeted, or the negative of those terms, or other similar words and phrases or by discussions of intentions or strategies.
The following factors, among others, including those described in this Quarterly Report on Form 10-Q under the heading Item 1A. Risk Factors (as such disclosure may be modified or supplemented from time to time), could cause the Companys actual results to differ materially from those expressed in any forward-looking statements made by it: the Companys ability to execute its repositioning and sale initiatives (including achieving enhanced productivity and profitability) previously announced; deterioration in global or regional or other macroeconomic conditions that affect the apparel industry, including turmoil in the financial and credit markets; the Companys failure to anticipate, identify or promptly react to changing trends, styles, or brand preferences; the Companys failure to use the most recent and effective advertising media to reach customers; further declines in prices in the apparel industry and other pricing pressures; declining sales resulting from increased competition in the Companys markets; increases in the prices of raw materials or costs to produce or transport products; events which result in difficulty in procuring or producing the Companys products on a cost-effective basis; the effect of laws and regulations, including those relating to labor, workplace and the environment; possible additional tax liabilities; changing international trade regulation, including as it relates to the imposition or elimination of quotas on imports of textiles and apparel; the Companys ability to protect its intellectual property or the costs incurred by the Company related thereto; the risk of product safety issues, defects or other production problems associated with the Companys products; the Companys dependence on a limited number of customers; the effects of consolidation in the retail sector; the Companys dependence on license agreements with third parties including, in particular, its license agreement with CKI, the licensor of the Companys Calvin Klein brand name; the Companys dependence on the reputation of its brand names, including, in particular, Calvin Klein; the Companys exposure to conditions in overseas markets in connection with the Companys foreign operations and the sourcing of products from foreign third-party vendors; the Companys foreign currency exposure; unanticipated future internal control deficiencies or weaknesses or ineffective disclosure controls and procedures; the effects of fluctuations in the value of investments of the Companys pension plan; the sufficiency of cash to fund operations, including capital expenditures; the Company recognizing impairment charges for its long-lived assets; uncertainty over the outcome of litigation matters and other proceedings; the Companys ability to service its indebtedness, the effect of changes in interest rates on the Companys indebtedness that is subject to floating interest rates and the limitations imposed on the Companys operating and financial flexibility by the agreements governing the Companys indebtedness; the Companys dependence on its senior management team and other key personnel; the Companys reliance on information technology; the limitations on purchases under the Companys share repurchase program contained in the Companys debt instruments, the number of shares that the Company purchases under such program and the prices paid for such shares; the Companys inability to achieve its financial targets and strategic objectives, as a result of one or more of the factors described above, changes in the assumptions underlying the targets or goals, or otherwise; the inability to successfully implement restructuring and disposition activities; the failure of acquired businesses to generate expected levels of revenues; the failure of the Company to successfully integrate such businesses with its existing businesses (and as a result, not achieving all or a substantial portion of the anticipated benefits of such acquisitions); and such acquired businesses being adversely affected, including by one or more of the factors described above, and thereby failing to achieve anticipated revenues and earnings growth.
48
The Company encourages investors to read the section entitled Item 1A. Risk Factors and the discussion of the Companys critical accounting policies in Discussion of Critical Accounting Policies included in the Companys Annual Report on Form 10-K for Fiscal 2011, as such discussions may be modified or supplemented by subsequent reports that the Company files with the SEC. The foregoing discussion is not exhaustive but is designed to highlight important factors that may affect actual results. Forward-looking statements speak only as of the date on which they are made, and, except for the Companys ongoing obligation under the U.S. federal securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company is exposed to market risk primarily related to changes in hypothetical investment values under certain of the Companys employee benefit plans, interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculation or for trading purposes. During the Three Months Ended March 31, 2012, there were no material changes in the qualitative or quantitative aspects of these risks from those disclosed in the Companys Annual Report on Form 10-K for Fiscal 2011.
Item 4. | Controls and Procedures. |
(a) Disclosure Controls and Procedures.
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Three Months Ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
49
OTHER INFORMATION
Item 1. | Legal Proceedings. |
The information required by this Item 1 of Part II is incorporated herein by reference to Note 18 of Notes to Consolidated Condensed Financial StatementsLegal Matters.
Item 1A. | Risk Factors. |
Please refer to Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for Fiscal 2011, filed with the SEC on February 29, 2012 for a description of certain significant risks and uncertainties to which the Companys business, operations and financial condition are subject. There have been no material changes to these risk factors during the Three Months Ended March 31, 2012.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
During September 2011, the Companys Board of Directors authorized a multi-year share repurchase program (the 2011 Share Repurchase Program) for up to $200 million of the Companys outstanding common stock. During the Three Months Ended March 31, 2012, the Company did not repurchase any shares of common stock under the 2011 Share Repurchase Program. All repurchases of shares under the 2011 Share Repurchase Program will be made consistent with the terms of the Companys applicable debt instruments.
An aggregate of 97,230 shares included below as repurchased during the Three Months Ended March 31, 2012 reflect the surrender of shares in connection with the vesting of certain restricted stock awarded by the Company to its employees. At the election of an employee, a number of shares having an aggregate value on the vesting date equal to the employees withholding tax obligation may be surrendered to the Company in satisfaction thereof. The repurchase of these shares is not a part of the 2011 Share Repurchase Program.
The following table summarizes repurchases of the Companys common stock during the Three Months Ended March 31, 2012.
Period |
Total Number of Shares Repurchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Repurchased Under the Announced Programs |
||||||||||||
January 1, 2012January 28, 2012 |
| $ | | | $ | 188,674,026 | ||||||||||
January 29, 2012February 25, 2012 |
692 | $ | 58.64 | | $ | 188,674,026 | ||||||||||
February 26, 2012March 31, 2012 |
96,538 | $ | 57.84 | | $ | 188,674,026 |
In the event that available credit under the 2008 Credit Agreements, as amended, is (i) less than 17.5% of the aggregate borrowing limit under the 2008 Credit Agreements, or (ii) the available credit is less than 35% but greater than or equal to 17.5% of the aggregate borrowing limit under the 2008 Credit Agreements and the fixed charge coverage ratio is less than 1.1 to 1.0, the 2008 Credit Agreements place restrictions on the Companys ability to pay dividends on its common stock and to repurchase shares of its common stock. In addition, if an event of default, as defined in the 2011 Term Loan Agreement, has occurred and is continuing or if the consolidated interest coverage ratio, as defined in the 2011 Term Loan Agreement, for the Companys most recent four fiscal quarters is less than 2.25 to 1.00, the 2011 Term Loan Agreement places restrictions on the payment of dividends and repurchases of shares of the Companys common stock that are otherwise allowed to be paid or repurchased up to the cap set forth in the 2011 Term Loan Agreement. As of March 31, 2012, the triggering events for restriction on the payment of dividends and repurchase of shares under the 2008 Credit Agreements and under the 2011 Term Loan Agreement have not been met (see Note 14 of Notes to Consolidated Condensed Financial Statements). The Company has not paid any dividends on its common stock.
Item 3. | Defaults Upon Senior Securities. |
None.
50
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and:
| were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
| may have been qualified in such agreements by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; |
| may apply contract standards of materiality that are different from materiality under the applicable securities laws; and |
| were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. |
The Company acknowledges that notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-Q not misleading.
Exhibit No. |
Description of Exhibit | |
3.1 | Amended and Restated Certificate of Incorporation of The Warnaco Group, Inc. (incorporated by reference to Exhibit 1 to the Form 8-A/A filed by The Warnaco Group, Inc. on February 4, 2003). * | |
3.2 | Third Amended and Restated Bylaws of The Warnaco Group, Inc. (incorporated by reference to Exhibit 3.2 to the Form 8-K filed by The Warnaco Group, Inc. on July 13, 2010). * | |
10.1 | First Amendment, dated as of March 8, 2012, to the Employment Agreement, dated as of October 31, 2011, by and between The Warnaco Group, Inc. and Martha J. Olson. | |
10.2 | Employment Agreement, dated as of March 15, 2012, by and between The Warnaco Group, Inc. and Karyn Hillman. | |
10.3 | Retirement Agreement, dated as of April 25, 2012, by and between The Warnaco Group, Inc. and Frank Tworecke (incorporated by reference to Exhibit 10.1 to The Warnaco Group, Inc.s Form 8-K filed May 1, 2012). * | |
31.1 | Certification of Chief Executive Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
31.2 | Certification of Chief Financial Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
32 | Certifications of Chief Executive Officer and Chief Financial Officer of The Warnaco Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.INS | XBRL Instance Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
101.SCH | XBRL Taxonomy Extension Schema Linkbase. | |
101.DEF | XBRL Definition Linkbase Document. |
* | Previously filed. |
| Filed herewith. |
51
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE WARNACO GROUP, INC. | ||||
Date: May 4, 2012 | /s/ Helen McCluskey | |||
Helen McCluskey President and Chief Executive Officer |
Date: May 4, 2012 | /s/ Lawrence R. Rutkowski | |||
Lawrence R. Rutkowski | ||||
Executive Vice President and Chief Financial Officer |
52
Exhibit 10.1
First Amendment to Employment Agreement
This First Amendment to the employment agreement by and between THE WARNACO GROUP, INC., a Delaware corporation (together with its successors and assigns, the Company), and MARTHA J. OLSON (the Executive), dated as of October 31, 2011 (the Agreement), is made and entered into on the date written below. All definitions not defined herein have the meaning ascribed to such terms in the Agreement.
WHEREAS, the Company and the Executive desire to amend the Agreement to ensure that Section 3(d) of the Agreement relating to the Supplemental Awards conforms with the same provision for other executive officers;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive agree as follows:
1. | Section 3(d) of the Agreement is amended by replacing such provision in its entirety with the following: |
(d) Supplemental Award. During the Term beginning with fiscal year 2011, provided the Executive is employed by the Company on the applicable grant date, the Executive shall be entitled to an annual award with an aggregate grant date value equal to 10% of the sum of Base Salary plus Annual Bonus as defined in this paragraph 3(d) if the Executive will be less than less than age 60 at the end of the applicable fiscal year and 13% of such amount if the Executive will be age 60 or older by the end of the applicable fiscal year (Supplemental Award). For this purpose, Base Salary shall be the Base Salary paid to the Executive for the fiscal year prior to the award year and Annual Bonus shall be the annual bonus awarded to the Executive by the Board for such fiscal year. The Supplemental Award shall not be awarded to the Executive until after the determination by the Board of the Executives annual bonus for the prior fiscal year and 50% of the value of the Supplemental Award shall be awarded in the form of restricted shares pursuant to the applicable Stock Incentive Plan (Career Shares) and 50% shall be awarded in the form of a credit to a bookkeeping account maintained by the Company for the Executives account (the Notional Account). Any Career Shares awarded hereunder shall be governed by the applicable Stock Incentive Plan and, if applicable, any award agreement. For purposes of this Section 3(d), each Career Share shall be valued at the closing price of a share of the Companys common stock (Share) on the date that the Supplemental Award is made. For the Notional Account, the Company shall select the investment alternatives available to the Executive under the Companys 401(k) plan. The balance in the Notional Account shall periodically be credited (or debited) with the deemed positive (or negative) return based on returns of the permissible investment alternative or alternatives under the Companys 401(k) plan as selected in advance by the Executive (and in accordance with the applicable rules of such plan or investment alternative) to apply to such Notional Account, with such deemed returns calculated in the same manner and at the same times as the return on such investment alternative(s). The Companys obligation to pay the amount credited to the Notional Account, including any return thereon provided for in this Section 3(d), shall be an unfunded obligation to be satisfied from the general funds of the Company. Except as otherwise provided in Section 5
below or the applicable Stock Incentive Plan and provided that the Executive is employed by the Company on such vesting date, any Supplemental Award granted in the form of Career Shares will vest as follows: 50% of the Career Shares will vest on the earlier of the Executives 62nd birthday or upon the Executives obtaining 15 years of Vesting Service and 100% of the Career Shares will vest on the earliest of (i) the Executives 65th birthday, (ii) upon the Executive obtaining 20 years of Vesting Service or (iii) 10th anniversary of the date of grant. Except as otherwise provided in Section 5 below, and provided that the Executive is employed by the Company on such vesting date, any Supplemental Award granted as a credit to the Notional Account (as adjusted for any returns thereon) (Adjusted Notional Account)) shall vest as follows: 50% on the earlier of the Executives 62nd birthday or upon the Executive obtaining 5 years of Vesting Service and 100% on the earlier of the Executives 65th birthday and upon the Executive obtaining 10 years of Vesting Service. In addition, any unvested Adjusted Notional Account shall vest upon a Change in Control as defined in Section 1(d)(i) or (ii) hereof which also qualifies as a change in control event under Section 409A (409A Change in Control Event). For purposes of this Section 3(d), Vesting Service shall mean the period of time that the Executive is employed by the Company as an executive officer. Subject to Section 15(b) hereof, upon vesting the Career Shares will be delivered to the Executive in the form of Shares. The vested balance in the Adjusted Notional Account, if any, shall not be distributed to the Executive until there has been a Separation From Service or, if earlier, there has been a 409A Change in Control Event and, at such time, shall only be distributed at the earliest time that satisfies the requirements of this Section 3(d). Upon a 409A Change in Control Event, the vested Adjusted Notional Account, subject to Section 15(b) hereof, shall be paid to the Executive in a lump-sum cash payment. In addition, if the Executives employment is terminated for any reason, after taking into account Section 5 hereof, any unvested Supplemental Awards (whether in the form of Career Shares or the Adjusted Notional Account) shall be forfeited and any vested balance in the Adjusted Notional Account, subject to Section 15(b) hereof, shall be paid to the Executive in a cash lump-sum payment immediately following the Executives Separation From Service; provided, however, that if the Executive is a specified employee as determined pursuant to Section 409A of the Internal Revenue Code of 1986, as amended from time to time (the Code), and the regulations promulgated thereunder (Section 409A) as of the date of the Executives Separation From Service, such distribution shall not be made until the first business day of the seventh calendar month following the month in which the Executives Separation From Service occurs. The Executive can elect to delay the time and/or form of payment of the Adjusted Notional Account under this Section 3(d), provided such election is delivered to the Company in writing at least 12 months before the scheduled payment date for such payment and the new payment date for such payment is consistent with the applicable deferral rules under Section 409A. Upon the expiration or termination of the Term, the vesting and payment dates in this Section 3(d) (without regard to Section 5, except as otherwise expressly provided in Section 5(d) of this Agreement) and the election right in this Section 3(d) shall continue to apply to any outstanding Supplemental Award.
2. | Except as otherwise set forth herein, the Agreement continues in full force and effect. |
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date written below.
THE WARNACO GROUP, INC. | ||||||
By: | /s/ Helen McCluskey | |||||
Name: | Helen McCluskey | |||||
Title: | Chief Executive Officer | |||||
THE EXECUTIVE | ||||||
/s/ Martha J. Olson | ||||||
Martha J. Olson |
Date: March 8, 2012
Exhibit 10.2
EMPLOYMENT AGREEMENT
This AGREEMENT (Agreement) is made and entered into as of March 15, 2012 (the Effective Date) by and between THE WARNACO GROUP, INC., a Delaware corporation (together with its successors and assigns, the Company), and KARYN HILLMAN (the Executive).
WITNESSETH:
WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a Party and together the Parties) agree as follows:
1. Certain Definitions.
(a) Affiliate of a specified person or entity shall mean a person or entity that directly or indirectly controls, is controlled by, or is under common control with, the person or entity specified.
(b) Board shall mean the Board of Directors of The Warnaco Group, Inc.
(c) Cause shall mean:
(i) willful misconduct by the Executive which causes material harm to the interests of the Company or any of its Affiliates;
(ii) willful and material breach of duty by the Executive in the course of her employment, which, if curable, is not cured within 10 days after Executives receipt of written notice from the Company;
(iii) willful failure by the Executive, after having been given written notice from the Company, to perform her duties other than a failure resulting from Executives incapacity due to physical or mental illness;
(iv) indictment of the Executive for a felony, a crime involving moral turpitude or any crime involving the business of the Company or any of its Affiliates which, in the case of such crime involving the business of the Company or any of its Affiliates, is injurious to such business; or
(v) failure of the Executive to give 90 days prior written notice of a voluntary resignation (other than for Good Reason or Disability), unless such failure is waived in writing by an authorized officer of the Company or the Company shortens the notice period in accordance with Section 5(e) hereof.
For purposes of this Cause definition, no act or failure to act, on the part of the Executive, shall be considered willful unless it is done, or omitted to be done, by her in bad faith and without reasonable belief that her action was in the best interests of the Company. The determination to terminate the Executives employment for Cause shall be made by the full Board by no less than majority vote and prior to such determination the Executive and her legal representatives shall have the right to appear before the Board or a committee designated by the Board.
(d) Change in Control shall mean any of the following:
(i) any person (as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, as amended) or group of persons acting jointly or in concert, but excluding a person who owns more than 5% of the outstanding shares of the Company as of the Effective Date, becomes a beneficial owner (as such term is used in Rule 13d-3 promulgated under that Act), of more than 50% of the Voting Stock of the Company;
(ii) all or substantially all of the assets of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company); or
(iii) approval by the shareholders of the Company of a complete liquidation or dissolution of all or substantially all of the assets of the Company.
For purposes of this Change in Control definition, Voting Stock shall mean the capital stock of any class or classes having general voting power, in the absence of specified contingencies, to elect the directors of the Company.
(e) Date of Termination shall mean:
(i) if the Executives employment is terminated by the Company, the date specified in the notice by the Company to the Executive that her employment is so terminated; provided that for a termination for Cause such notice is delivered after the Board determination as set forth in Section l(c) hereof;
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(ii) if the Executive voluntarily resigns her employment, 90 days after receipt by the Company of written notice from the Executive that the Executive is terminating her employment or, if the Company shortens the required notice period in accordance with Section 5(e), the date of termination specified in such notice;
(iii) if the Executives employment is terminated by reason of death, the date of death;
(iv) if the Executives employment is terminated for Disability, 30 days after written notice is given as specified in Section 1(f) below; or
(v) if the Executive resigns her employment for Good Reason, 30 days after receipt by the Company of timely written notice from the Executive in accordance with Section l(g) below unless the Company cures the event or events giving rise to Good Reason within 30 days after receipt of such written notice.
(f) Disability shall mean the Executives inability, due to physical or mental incapacity, to substantially perform her duties and responsibilities for a period of 120 consecutive days as determined by a medical doctor selected by the Company and reasonably acceptable to the Executive. In no event shall any termination of the Executives employment for Disability occur until the Party terminating her employment gives written notice to the other Party in accordance with Section 14 below.
(g) Good Reason shall mean the occurrence of any of the following without the Executives prior written consent:
(i) a material diminution by the Company in the Executives authority, duties or responsibilities as Chief Merchandising Officer - Calvin Klein Jeans;
(ii) a reduction in (A) Base Salary or (B) Target Bonus opportunity as a percentage of Base Salary;
(iii) a change in reporting structure such that the Executive no longer reports to the Companys Chief Executive Officer;
(iv) the removal by the Company of the Executive as the Companys Chief Merchandising Officer Calvin Klein Jeans or the failure by the Board to elect or reelect the Executive as an executive officer of the Company;
(v) requiring the Executive to be principally based at any office or location more than 50 miles from her current place of employment; or
(vi) the failure of a successor to all or substantially all of the assets of the Company to assume the Companys obligations under this Agreement either in writing or as a matter of law within 15 days after a merger, consolidation, sale or similar transaction.
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Anything herein to the contrary notwithstanding, the Executive shall not be entitled to resign for Good Reason (i) if the occurrence of the event otherwise constituting Good Reason is the result of Disability, a termination by the Company for which notification has been given or a voluntary resignation by the Executive other than for Good Reason and (ii) unless the Executive gives the Company written notice of the event constituting Good Reason within 90 days of the occurrence of such event and the Company fails to cure such event within 30 days after receipt of such notice.
(h) Notice Period means the period from the date of a notice of termination as set forth in Section l(e)(ii) (for a voluntary resignation by the Executive) through the Date of Termination.
(i) Retirement shall mean any termination of the Executives employment (whether by the Executive or the Company) on or after the Executive reaches age 65.
(j) Separation From Service shall mean a termination of the Executives employment in a manner consistent with Final Treasury Regulations 1.409A-l(h).
2. Position; Term.
During the Term, the Executive shall be employed by the Company as Executive Vice President and Chief Merchandising Officer - Calvin Klein Jeans and shall perform such duties and responsibilities as determined by the Companys Chief Executive Officer or such other executive officer position which the Executive reports to, in all cases consistent with such position. The Executive shall devote her full business time and attention to the satisfactory performance of such duties. Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from (i) subject to reasonable approval of the Board, serving on the boards of directors of trade associations and/or charitable organizations or other business corporations (provided such service is not prohibited under Section 7(a)(i) below), (ii) engaging in charitable activities and community affairs and (iii) managing her personal investments and affairs, provided that the activities described in the preceding clauses (i) through (iii) do not materially interfere with the proper performance of the Executives duties and responsibilities hereunder. The term of the Executives employment hereunder shall begin on April 2, 2012 (the Commencement Date) and end at the Date of Termination (the Term).
3. Compensation.
(a) Base Salary. During the Term, the Executive shall be paid an annualized Base Salary of $650,000 (Base Salary), payable in accordance with the regular payroll practices of the Company, subject to annual review by the Board (or the Compensation Committee of the Board) in its sole discretion. During the Term, the Base Salary may not be decreased without the Executives prior written consent. The Executive shall not be entitled to any compensation for service as an officer or member of any board of directors of any Affiliate. After any increase in base salary approved by the Board (or the Compensation Committee of the Board), the term Base Salary as used in this Agreement shall thereafter refer to the increased amount.
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(b) Annual Incentive Awards. During the Term (including fiscal year 2012 and thereafter), the Executive shall be eligible to receive an annual incentive award (provided the Executive was employed continuously during the applicable fiscal year) pursuant to the Companys Incentive Compensation Plan, as amended (or such other annual incentive plan as may be approved by its shareholders), in effect for the applicable fiscal year (Bonus Plan). During the Term, the Executives annual incentive award for fiscal year 2012 and thereafter shall have a target of 85% of Base Salary (Target Bonus), with a potential maximum award as set forth in the Bonus Plan; provided that the actual bonus for fiscal year 2012 shall be pro-rated from the Commencement Date, but in all events, shall be subject to the Executives continued employment with the Company through the payment date. Notwithstanding the foregoing and provided the Executive is employed on the payment date, the annual incentive for fiscal year 2012 shall be no less than 50% of the Target Bonus. Any bonus shall, in all events, be based on the Executives achievement of annual performance and other targets approved by the committee administering the Bonus Plan. The amount and payment of any annual incentive award shall be determined in accordance with the Bonus Plan and shall be payable to the Executive when bonuses for the applicable performance period are paid to other senior executives of the Company, but in all events in the fiscal year immediately following the fiscal year for which the annual incentive award was earned. After any increase in the Executives target annual bonus opportunity as a percentage of Base Salary as approved by the Board (or the Compensation Committee of the Board), the term Target Bonus as used in this Agreement shall thereafter refer to the increased target opportunity.
(c) Long-Term Incentive Awards. On the Commencement Date or as soon as practicable thereafter, subject to Compensation Committee approval, the Executive will be granted an equity award (representing an award for fiscal year 2012 and 2013) equal in value to $1,370,850 with: (i) 50% of such amount awarded in restricted stock based on the fair market value (as determined in accordance with the applicable Stock Incentive Plan (as defined below)) of the Companys stock on the grant date (Restricted Stock) and (ii) 50% of such amount awarded in the form of an option to purchase shares of the Companys common stock, with the value and exercise price determined in accordance with the Companys customary practices for awarding stock options (the Option). Except as otherwise provided in Section 5 hereof or in any applicable award agreement, the Restricted Stock will cliff vest on the third anniversary of the Commencement Date and the Option shall vest (and become exercisable) in three equal installments on the first, second and third anniversaries of the Commencement Date, provided in both cases that the Executive is employed by the Company through the applicable vesting date and has not given notice to the Company that Executive is voluntarily resigning without Good Reason prior to such applicable vesting date. Thereafter, commencing in fiscal year 2014 and provided the Term is in effect and the Executive continues to be employed by the Company, the Executive shall be eligible to participate in the Companys equity incentive plans (Stock Incentive Plan). Except as otherwise provided herein, all equity grants (including the sign-on grant) shall be governed by the applicable equity plan and/or award agreement. The Executive shall be subject to the equity ownership, retention and other requirements applicable to senior executives of the Company and the Executive expressly acknowledges that she is not eligible for a long-term incentive award for fiscal year 2013.
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(d) Supplemental Award. During the Term beginning with fiscal year 2013, provided the Executive is employed by the Company on the applicable grant date, the Executive shall be entitled to an annual award with an aggregate grant date value equal to 6% of the sum of Base Salary plus Annual Bonus as defined in this paragraph 3(d) if the Executive will be less than age 40 by the end of the applicable fiscal year, 8% of such amount if the Executive will be age 40 and over and less than 50 by the end of the applicable fiscal year, 10% of such amount if the Executive will be age 50 and over and less than age 60 at the end of the applicable fiscal year and 13% of such amount if the Executive will be age 60 or older by the end of the applicable fiscal year (Supplemental Award). For this purpose, Base Salary shall be the base salary paid to the Executive for the fiscal year prior to the award year and Annual Bonus shall be the annual bonus awarded to the Executive by the Board for such fiscal year. The Supplemental Award shall not be awarded to the Executive until after the determination by the Board of the Executives annual bonus for the prior fiscal year and 50% of the value of the Supplemental Award shall be awarded in the form of restricted shares pursuant to the applicable Stock Incentive Plan (Career Shares) and 50% shall be awarded in the form of a credit to a bookkeeping account maintained by the Company for the Executives account (the Notional Account). Any Career Shares awarded hereunder shall be governed by the applicable Stock Incentive Plan and, if applicable, any award agreement. For purposes of this Section 3(d), each Career Share shall be valued at the closing price of a share of the Companys common stock (Share) on the date that the Supplemental Award is made. For the Notional Account, the Company shall select the investment alternatives available to the Executive under the Companys 401(k) plan. The balance in the Notional Account shall periodically be credited (or debited) with the deemed positive (or negative) return based on returns of the permissible investment alternative or alternatives under the Companys 401(k) plan as selected in advance by the Executive (and in accordance with the applicable rules of such plan or investment alternative) to apply to such Notional Account, with such deemed returns calculated in the same manner and at the same times as the return on such investment alternative(s). The Companys obligation to pay the amount credited to the Notional Account, including any return thereon provided for in this Section 3(d), shall be an unfunded obligation to be satisfied from the general funds of the Company. Except as otherwise provided in Section 5 below or the applicable Stock Incentive Plan and provided that the Executive is employed by the Company on such vesting date, any Supplemental Award granted in the form of Career Shares will vest as follows: 50% of the Career Shares will vest on the earlier of the Executives 62nd birthday or upon the Executives obtaining 15 years of Vesting Service and 100% of the Career Shares will vest on the earliest of (i) the Executives 65th birthday, (ii) upon the Executive obtaining 20 years of Vesting Service or (iii) 10th anniversary of the date of grant. Except as otherwise provided in Section 5 below, and provided that the Executive is employed by the Company on such vesting date, any Supplemental Award granted as a credit to the Notional Account (as adjusted for any returns thereon) (Adjusted Notional Account)) shall vest as follows: 50% on the earlier of the Executives 62nd birthday or upon the Executive obtaining 5 years of Vesting Service and 100% on the earlier of the Executives 65th birthday and upon the Executive obtaining 10 years of Vesting Service. In addition, any unvested Adjusted Notional Account shall vest upon a Change in Control as defined in Section l(d)(i) or (ii) hereof which also qualifies as a change in control event under Section 409A (as defined below) (409A Change in Control Event). For purposes of this Section 3(d), Vesting Service shall mean the period of time that the Executive is employed by the Company as an executive officer. Subject to Section 15(b) hereof, upon vesting the Career Shares will be delivered to the Executive in the form of Shares. The vested balance in the Adjusted Notional Account, if any, shall not be distributed to the Executive until there has been a Separation From Service or, if earlier, there has been a 409A Change in Control Event as defined in Section l(d)(i) or (ii) hereof and, at such time, shall only be distributed at the earliest time that satisfies the requirements of this Section 3(d). Upon a 409A Change in Control Event as defined in Section l(d)(i) or (ii), the vested Adjusted Notional Account, subject to Section 15(b) hereof, shall be paid to the Executive in a lump-sum cash payment. In addition, if the Executives employment is terminated for any reason, after taking into account Section 5 hereof, any unvested Supplemental Awards (whether in the form of Career Shares or the Adjusted Notional Account) shall be forfeited and any vested balance in the Adjusted Notional Account, subject to Section 15(b) hereof, shall be paid to the Executive in a cash lump-sum payment immediately following the Executives Separation From Service; provided, however, that if the Executive is a specified employee as determined pursuant to Section 409A of the Internal Revenue Code of 1986, as amended from time to time (the Code), and the regulations promulgated thereunder (Section 409 A) as of the date of the Executives Separation From Service, such distribution shall not be made until the first business day of the seventh calendar month following the month in which the Executives Separation From Service occurs. The Executive can elect to delay the time and/or form of payment of the Adjusted Notional Account under this Section 3(d), provided such election is delivered to the Company in writing at least 12 months before the scheduled payment date for such payment and the new payment date for such payment is consistent with the applicable deferral rules under Section 409 A, Upon the expiration or termination of the Term, the vesting and payment dates in this Section 3(d) (without regard to Section 5, except as otherwise expressly provided in Section 5(d) of this Agreement) and the election right in this Section 3(d) shall continue to apply to any outstanding Supplemental Award. At any time during the Term, the Company may elect to provide the same benefits described in this Section 3(d) to the Executive per the terms of a supplemental retirement plan to be established by the Company. Any such benefits provided to Executive pursuant to a supplemental retirement plan shall replace the Supplemental Award described herein in its entirety.
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4. Employee Benefits.
(a) Employee Benefit Programs. During the Term, subject to the Companys right to amend, modify or terminate any benefit plan or program, the Executive shall be entitled to participate in all employee savings and welfare benefit plans and programs generally made available to the Companys senior-level executives as such plans or programs may be in effect from time to time. During the Term, the Executive shall also be entitled to a paid annual physical medical exam as approved by the Company and Company-paid term life insurance with a benefit equal to $1 million, provided the Company can obtain such insurance at commercially reasonable premium levels and the Executive complies with any underwriting requirements by the insurance provider. During the Term, the Executive shall be entitled to four weeks paid vacation per calendar year.
(b) Business Expenses. During the Term, the Company shall reimburse the Executive for all reasonable business expenses incurred by her in performance of her duties hereunder in accordance with Company policy, including, but not limited to, the proper documentation of such expenses. The Companys business travel policy shall apply to the Executive.
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(c) Perquisites. During the Term, the Executive shall be entitled to perquisites provided to other senior-level executives, including a monthly car allowance of up to a maximum of $1,000.
(d) Relocation Assistance. The Executive shall be entitled to relocation assistance as previously outlined to her by the Company, including, without limitation, two housing hunting trips for the Executive and her spouse, shipment of household goods and up to 2 automobiles and up to 60 days of temporary housing and temporary storage; provided that in all events the $60,000 relocation allowance (net of applicable income taxes) shall be paid to the Executive as soon as practicable following the Commencement Date with any required gross-up payment on such allowance being paid no event later than the time period required by Treasury Regulation 1.409A-3(i)(l)(v). Notwithstanding the foregoing, if the Executives employment is terminated for Cause or the Executive terminates her employment other than for Good Reason, in each case on or prior to the first anniversary of the Commencement Date, she will be required to repay the full amount of any relocation assistance paid to her or provided on her behalf (including any gross-up payments) within 20 days of her notice of termination and, to the extent it does not violate Section 409A or applicable law, the Company shall have a right of offset against any amounts due or payable to the Executive if she fails to repay such amount in the time period required hereunder.
(d) General Limitation. Notwithstanding anything elsewhere to the contrary, except to the extent any reimbursement, payment or entitlement pursuant to this Section 4 or any other provision of this Agreement does not constitute a deferral of compensation within the meaning of Section 409A, (i) the amount of expenses eligible for reimbursement or the provision of any in-kind benefit (as defined in Section 409A) to the Executive during any calendar year will not affect the amount of expenses eligible for reimbursement or provided as in-kind benefits to the Executive in any other calendar year, (ii) the payments or reimbursements for expenses for which the Executive is entitled shall be made on or before the last day of the calendar year following the calendar year in which the applicable expense is incurred and (iii) the right to payment or reimbursement or in-kind benefits may not be liquidated or exchanged for any other benefit.
5. Termination of Employment. The Term of this Agreement and the Executives employment hereunder shall terminate as of the Date of Termination in the following circumstances:
(a) Termination Without Cause by the Company or Resignation for Good Reason by the Executive. In the event that the Executives employment is terminated without Cause by the Company (other than due to Disability or Retirement) or the Executive resigns for Good Reason and Section 5(d) below does not apply, subject to Section 15(c) hereof and delivering a valid Release as required in Section 5(f) hereof, the Executive shall be entitled to:
(i) payment of Base Salary through the Date of Termination, payable on the first regularly scheduled payroll date following the Date of Termination;
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(ii) payment of an amount equal to one times Base Salary, payable in a cash lump sum to the Executive on the 60th day following the Date of Termination;
(iii) a pro-rata annual bonus determined by multiplying the amount of the annual bonus the Executive would have received had her employment continued through the end of the fiscal year in which the Date of Termination occurs by a fraction, the numerator of which is the number of days during such fiscal year that the Executive was employed by the Company and the denominator of which is 365, payable when bonuses for such fiscal year are paid to other Company executives (but in all events in the fiscal year following the fiscal year in which the Date of Termination occurs and no later than 60 days after the end of fiscal year in which the Date of Termination occurs);
(iv) immediate vesting as of the Date of Termination of 50% of any restricted stock (other than the Career Shares) that remains unvested as of the Date of Termination;
(v) with respect to any stock options granted on or after the Effective Date and which are vested and outstanding as of the Date of Termination, continued exercisability for 12 months following the Date of Termination or the remainder of the option term, if shorter;
(vi) continued participation on the same terms as immediately prior to the Date of Termination for the Executive and her eligible dependents in the Companys medical and dental plans in which she and her eligible dependents were participating immediately prior to the Date of Termination until the earlier of (a) 12 months following the Date of Termination, and (b) the date, or dates, the Executive receives coverage under the plans or programs of a subsequent employer provided that in no event shall there be any gross-up provided by the Company for any income tax liabilities or otherwise; and
(vii) any amount due the Executive as of the Date of Termination that remains unpaid by the Company (without duplication of any payment or entitlement hereunder), payable on the first regularly scheduled payroll date following the Date of Termination or, if later, in accordance with the applicable plan or policy.
(b) Termination upon Death or due to Disability. In the event that during the Executives employment is terminated upon death or due to Disability, subject to Section 15(c) hereof, the Executive (or her estate or legal representative, as the case may be) shall be entitled to:
(i) payment of Base Salary through the Date of Termination, payable on the first regularly scheduled payroll date following the Date of Termination;
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(ii) a pro-rata annual bonus determined by multiplying the amount of the annual bonus the Executive would have received had her employment continued through the end of the fiscal year in which the Date of Termination occurs by a fraction, the numerator of which is the number of days during such fiscal year that the Executive was employed by the Company and the denominator of which is 365, payable when bonuses for such fiscal year are paid to other Company executives (but in all events in the fiscal year following the fiscal year in which the Date of Termination occurs and no later than 60 days after the end of fiscal year in which the Date of Termination occurs);
(iii) immediate vesting as of the Date of Termination of 50% of any restricted stock (other than Career Shares) that remains unvested as of the Date of Termination;
(iv) immediate vesting as of the Date of Termination of 50% of any previously granted Supplemental Award that remains unvested as of the Date of Termination, payable in accordance with Section 3(d) above; and
(v) any amount due the Executive as of the Date of Termination that remains unpaid by the Company (without duplication of any payment or entitlement hereunder), payable on the first regularly scheduled payroll date following the Date of Termination or, if later, in accordance with the applicable plan or policy.
(c) Termination by the Company for Cause or a Voluntary Resignation by the Executive. In the event that the Company terminates the Executives employment for Cause or the Executive voluntarily resigns, the Executive shall be entitled to her Base Salary and employee benefits through the Date of Termination. A voluntary resignation by the Executive of her employment shall be effective upon 90 days prior written notice by the Executive to the Company and failure by the Executive to provide such notice shall be deemed to be a breach of this Agreement. For the avoidance of doubt, the provisions of Section 5(e) shall also apply.
(d) Termination without Cause by the Company or Resignation for Good Reason by the Executive Upon or Following a Change in Control. In the event that the Executives employment is terminated without Cause by the Company (other than due to Disability or Retirement) or the Executive resigns for Good Reason, in both cases upon or within one year following a Change in Control, subject to Section 15(c) hereof and delivering a valid Release as required in Section 5(f) hereof, the Executive shall be entitled to:
(i) payment of Base Salary through the Date of Termination, payable on the first regularly scheduled payroll date following the Date of Termination;
(ii) an amount equal to 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a cash lump sum on the 60th day following the Date of Termination;
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(iii) a pro-rata Target Bonus for the year of termination, determined by multiplying the Target Bonus by a fraction, the numerator of which is the number of days the Executive was employed by the Company during the year in which the Date of Termination occurs and the denominator of which is 365, payable in a cash lump sum on the 60th day following the Date of Termination;
(iv) immediate vesting as of the Date of Termination of all outstanding equity awards (other than Career Shares), with any vested and outstanding stock options granted on or after the Effective Date remaining exercisable for 24 months following the Date of Termination or the remainder of the option term, if shorter;
(v) immediate vesting as of the Date of Termination of any previously granted Supplemental Award, payable in accordance with Section 3(d) above;
(vi) continued participation on the same terms as immediately prior to the Date of Termination for the Executive and her eligible dependents in the Companys welfare benefit plans in which she and her eligible dependents were participating immediately prior to the Date of Termination until the earlier of (a) 24 months following the Date of Termination, and (b) the date, or dates, the Executive receives substantially equivalent coverage under the plans or programs of a subsequent employer; provided that in no event shall there be any gross up provided by the Company for any tax liabilities or otherwise; and
(vii) any amount due the Executive as of the Date of Termination that remains unpaid by the Company (without duplication of any payment or entitlement hereunder), payable on the first regularly scheduled payroll date following the Date of Termination or, if later, in accordance with the applicable plan or policy.
(e) Obligations During Notice Period. In the event that the Executive voluntarily resigns her employment (other than for Good Reason), the Executive shall continue to be an employee of the Company during the Notice Period. As such, her fiduciary duties and other obligations as an employee of the Company shall continue during the Notice Period and the Executive agrees to cooperate in the transition of her responsibilities during such period. The Company shall have the right to direct the Executive to no longer come to work, or not to perform any work for the Company, during the Notice Period and, if the Company so directs, in addition to her fiduciary duties and other obligations as an employee and her commitments pursuant to Sections 6,7, 8 and 9 hereof, the Executive agrees to refrain during the Notice Period from contacting any customers, clients, advertisers, suppliers, agents, professional advisors or employees of the Company or any of its Affiliates. In the case of a voluntary resignation by the Executive, the Company may shorten the Notice Period by providing written notice to the Executive, in which event the Executives employment shall terminate on the date stated in such notice; provided that the Company shall continue to pay the Executive her Base Salary through the end of the original Notice Period.
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(f) Exclusivity of Benefits; Releases of Claims. Any payments provided pursuant to Section 5(a) or Section 5(d) above shall be in lieu of any salary continuation arrangements under any other severance program of the Company or any Affiliate and, in all events, the Executive shall not be entitled to duplication of any benefit or entitlement (whether pursuant to this Agreement, any other plan, policy, arrangement of, or other agreement with, the Company or any Affiliate or pursuant to law). In order to be entitled to any payments, rights and other entitlements pursuant to this Agreement or otherwise, the Executive must comply with the covenants and/or acknowledgements contained in Sections 6, 7, 8 and 9 of this Agreement. As a condition of receiving the severance and benefits pursuant to Section 5(a) or 5(d), as the case may be (except for those payments or benefits required to be paid or provided by applicable law), the Executive shall be required to execute and deliver to the Company a general release of claims in the form attached hereto as Exhibit A (the Release) no later than 45 days following the Date of Termination and not revoke such release within the applicable revocation period. In the event the Executive revokes the Release, the Executive shall not be entitled to the payments, rights or other entitlements hereunder other than as required by applicable law.
(g) Nature of Payments; No Mitigation. Any amounts due under this Section 5 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. In the event of termination of her employment for any reason in compliance with this Agreement, the Executive shall be under no obligation to seek other employment and, except as specifically provided for in this Section 5 (including, without limitation, Section 5(f) hereof), there shall be no offset against amounts due to her on account of any remuneration or benefits provided by any subsequent employment she may obtain.
(h) Resignation. Notwithstanding any other provision of this Agreement, upon the termination of the Executives employment for any reason or, if earlier, upon commencement of the Notice Period, unless otherwise requested by the Company, the Executive shall immediately resign, if applicable, from all boards of directors of the Company and of any Affiliate of the Company of which she may be a member, and as a trustee of, or fiduciary to, any employee benefit plans of the Company or any Affiliate. The Executive hereby agrees to execute any and all documentation of such resignations upon request by the Company, but she shall be treated for all purposes as having so resigned upon termination of her employment or commencement of the Notice Period, as the case may be, regardless of when or whether she executes any such documentation.
(i) Section 409A. Notwithstanding anything to the contrary in this Agreement or elsewhere (except for Section 3(d) of this Agreement), if the Executive is a specified employee as determined pursuant to Section 409A as of the date of the Separation From Service and if any payment, benefit or entitlement provided for in this Agreement or otherwise both (x) constitutes a deferral of compensation within the meaning of Section 409A and (y) cannot be paid or provided in a manner otherwise provided herein or otherwise without subjecting the Executive to additional tax, interest or penalties under Section 409A, then any such payment, benefit or entitlement that is payable during the first six months following the Executives Separation From Service shall be paid or provided to the Executive in a cash lump-sum on the earlier of the Executives death or the first business day of the seventh calendar month following the month in which the Executives Separation From Service occurs. In addition, any payment, benefit or entitlement due upon a termination of the Executives employment that represents a deferral of compensation within the meaning of Section 409A (other than any payment due pursuant to Section 3(d) of this Agreement) shall only be paid or provided to Executive upon a Separation From Service, in which case any reference to Date of Termination in connection with such payment, benefit or entitlement shall be deemed to be a reference to Separation From Service, and the actual payment date within the time specified in the applicable provision of Section 5 shall be within the Companys sole discretion. In addition, if any payments are paid in installments, each installment shall be treated as a separate payment for purposes of Section 409A. Notwithstanding anything to the contrary in this Section 5 or otherwise, any payment or benefit under this Section 5 or otherwise which is exempt from Section 409A pursuant to Final Treasury Regulation 1.409A-l(b)(9)(v)(A) or (C) shall be paid or provided to the Executive only to the extent the expenses are not incurred or the benefits are not provided beyond the last day of the second taxable year of the Executive following the taxable year of the Executive in which the Separation From Service occurs; and provided further that the Company reimburses such expenses no later than the last day of the third taxable year following the taxable year of the Executive in which the Separation From Service occurs. Finally, to the extent that the provision of any benefit pursuant to Section 5(a)(vi) or Section 5(d)(vi) hereof is taxable to the Executive, any such reimbursement shall be paid to the Executive on or before the last day of the Executives taxable year following the taxable year in which the expense is incurred and such reimbursement shall not be subject to liquidation or exchange for any other benefit.
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6. Protection of Confidential Information and Company Property.
(a) During the Term and thereafter, other than in the ordinary course of performing the Executives duties for the Company or as required in connection with providing any cooperation to the Company pursuant to Section 9 below, the Executive agrees that the Executive shall not disclose to anyone or make use of any trade secret or proprietary or confidential information of the Company or any Affiliate of the Company, including such trade secret or proprietary or confidential information of any customer or other entity to which the Company owes an obligation not to disclose such information, which the Executive acquires during the course of the Executives employment (Confidential Information), including, but not limited to, records kept in the ordinary course of business, except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent or actual jurisdiction to order the Executive to divulge, disclose or make accessible such information. Confidential Information shall not include information that (i) was known to the public prior to its disclosure by the Executive; or (ii) becomes known to the public through no wrongful disclosure by or act of the Executive or any representative of the Executive. In the event the Executive is requested by subpoena, court order, investigative demand, search warrant or other legal process to disclose any Confidential Information, the Executive agrees, unless prohibited by law or Securities and Exchange Commission regulation, to give the Companys General Counsel prompt written notice of any request for disclosure in advance of the Executives making such disclosure and the Executive agrees not to disclose such information unless and until the Company has expressly authorized the Executive to do so in writing or the Company has had a reasonable opportunity to object to such request or to litigate the matter (of which the Company agrees to keep the Executive reasonably informed) and has failed to do so.
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(b) The Executive hereby sells, assigns and transfers to the Company all of the Executives right, title and interest in and to all inventions, discoveries, improvements and copyrightable subject matter (the Rights) which during the period of the Executives employment are made or conceived by the Executive, alone or with others, and which are within or arise out of any general field of the Companys business or arise out of any work the Executive performs, or information the Executive receives regarding the business of the Company, while employed by the Company. The Executive shall fully disclose to the Company as promptly as available all information known or possessed by the Executive concerning any Rights, and upon request by the Company and without any further remuneration in any form to the Executive by the Company, but at the expense of the Company, execute all applications for patents and for copyright registration, assignments thereof and other instruments and do all things which the Company may deem necessary to vest and maintain in it the entire right, title and interest in and to all such Rights.
(c) The Executive agrees upon termination of employment (whether during or after the expiration of the Term and whether such termination is at the instance of the Executive or the Company), and regardless of the reasons therefor, or at any time as the Company may request, the Executive will promptly deliver to the Companys General Counsel, and not keep or deliver to anyone else, any and all of the following which is in the Executives possession or control: (i) Company property (including, without limitation, credit cards, computers, communication devices, home office equipment and other Company tangible property) and (ii) notes, files, memoranda, papers and, in general, any and all physical matter and computer files containing confidential or proprietary information of the Company or any of its Affiliates, including any and all documents relating to the conduct of the business of the Company or any of its Affiliates and any and all documents containing confidential or proprietary information of the customers of the Company or any of its Affiliates, except for (x) any documents for which the Companys General Counsel has given written consent to removal at the time of termination of the Executives employment and (y) any information necessary for the Executive to retain for the Executives tax purposes (provided the Executive maintains the confidentiality of such information in accordance with Section 6(a) above).
7. Additional Covenants.
(a) The Executive acknowledges that in the Executives capacity in management the Executive has had or will have a great deal of exposure and access to the trade secrets of the Company or its Affiliates and other Confidential Information. Therefore, to protect such trade secrets and other Confidential Information, the Executive agrees as follows:
(i) during the Executives employment with the Company or any Affiliate, including during any Notice Period, and, unless the Executives employment has been terminated without Cause or she has resigned for Good Reason, for 12 months following termination of such employment, the Executive shall not, other than in the ordinary course of performing the Executives duties hereunder or as agreed by the Company in writing, engage in a Competitive Business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any relationship or capacity, in any geographic location in which the Company or any of its Affiliates is engaged in business. The Executive shall not be deemed to be in violation of this Section 7(a) by reason of the fact that the Executive owns or acquires, solely as an investment, up to two percent (2%) of the outstanding equity securities (measured by value) of any entity. Competitive Business shall mean a business engaged in apparel design and/or apparel wholesaling in competition with any business that the Company or any of its Affiliates is conducting at the time of the alleged violation; and
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(ii) during the Executives employment with the Company or any Affiliate and for 18 months following termination of such employment for any reason, including, without limitation, during any Notice Period, the Executive shall not, other than in the ordinary course of the Companys business or with the Companys prior written consent, directly or indirectly, solicit or encourage any wholesale customer of the Company or any of its Affiliates to reduce or cease its business with the Company or any such Affiliate or otherwise interfere with the relationship of the Company or any Affiliate with any wholesale customer.
Notwithstanding the foregoing, if the Executive voluntarily resigns her employment (other than for Good Reason) because a member of her immediate family has a medical condition which requires the Executive to be located outside of New York City and the Company is unable, or unwilling, to accommodate the Executives need to work outside New York City, then the non-compete in Section 7(a)(i) following her termination of employment for such reasons shall be reduced from 12 months to 3 months.
(b) The Executive agrees that during the Executives employment with the Company or any Affiliate and for 18 months following termination of such employment for any reason, including, without limitation, during any Notice Period, the Executive shall not, other than in the ordinary course of the Companys business or with the Companys prior written consent, directly or indirectly, hire any employee of the Company or any of its Affiliates, or solicit or encourage any such employee to leave the employ of the Company or its Affiliates, as the case may be. The foregoing shall not be violated solely by the placement of a general advertisement for employment not specifically targeted at employees of the Company or its Affiliates.
(c) Upon commencement of the Notice Period and following the termination of the Executives employment for any reason, the Executive agrees to refrain from making any statements or comments, whether oral or written, of a defamatory or disparaging nature to third parties regarding the Company (which for purposes of this provision shall include an Affiliate of the Company and the Companys officers, directors, personnel and products). The Executive, however, shall be entitled to respond truthfully and accurately (x) to statements about her made publicly by the Company, provided that such response is consistent with the Executives obligation not to make any statements or comments of a defamatory or disparaging nature as set forth herein, or (y) to the extent necessary in connection with any judicial process, or governmental or regulatory investigation, related to the Company or any of its Affiliates.
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8. Injunctive and Other Relief.
(a) The Executive acknowledges that the restrictions and commitments set forth in Sections 6, 7 and 9 of this Agreement are necessary to prevent the improper use and disclosure of Confidential Information and to otherwise protect the legitimate business interests of the Company and any of its Affiliates. The Executive further acknowledges that the restrictions set forth in Sections 6, 7 and 9 of this Agreement are reasonable in all respects, including, without limitation, duration, territory and scope of activity. The Executive expressly agrees and acknowledges that any breach or threatened breach by the Executive or any third party of any obligation by the Executive under this Agreement, including, without limitation, any breach or threatened breach of Section 6, 7 or 9 of this Agreement will cause the Company immediate, immeasurable and irreparable harm for which there is no adequate remedy at law, and as a result of this, in addition to its other remedies, the Company shall be entitled to the issuance by a court of competent jurisdiction of an injunction, restraining order, specific performance or other equitable relief in favor of itself, without the necessity of posting a bond, restraining the Executive or any third party from committing or continuing to commit any such violation.
(b) If any restriction set forth in Section 6, 7 or 9 of this Agreement is found by any arbitrator or court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it will be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If any provision of Section 6, 7 or 9 of this Agreement is declared to be invalid or unenforceable, in whole or in part, for any reason, such invalidity will not affect the remaining provisions of such Section which will remain in full force and effect.
9. Cooperation.
Following the Executives termination of employment for any reason, upon reasonable request by the Company, the Executive shall cooperate with the Company or any of its Affiliates with respect to any legal or investigatory proceeding, including any government or regulatory investigation, or any litigation or other dispute relating to any matter in which the Executive was involved or had knowledge during the Executives employment with the Company, subject to the Executives reasonable personal and business schedules. The Company shall reimburse the Executive for all reasonable out-of-pocket costs, such as travel, hotel and meal expenses and reasonable attorneys fees, incurred by the Executive in providing any cooperation pursuant to this Section 9; provided such expenses shall be paid to the Executive as soon as practicable but in no event later than the end of the calendar year following the calendar year in which the expenses are incurred, subject in all cases to the Executive providing appropriate documentation to the Company. The Company shall also pay the Executive a reasonable per diem amount for the Executives time (other than for time spent preparing for or providing testimony) which shall be based upon the Executives Base Salary at the Date of Termination, with such per diem paid to the Executive in the calendar month following the month in which she provides such assistance. Any reimbursement or payment under this Section 9 shall not affect the amount of the reimbursement or payment to the Executive in any other taxable year. The right to payment or reimbursement pursuant to this Section 9 shall not be liquidated or exchanged for any other benefit.
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10. Tax Matters.
(a) If any amount, entitlement, or benefit paid or payable to the Executive or provided for her benefit under this Agreement and under any other agreement, plan or program of the Company or any Affiliate (such payments, entitlements and benefits referred to as a Payment) is subject to the excise tax imposed under Code Section 4999, or any similar federal or state law (an Excise Tax), then notwithstanding anything contained in this Agreement to the contrary, to the extent that any or all Payments would be subject to the imposition of an Excise Tax, the Payments shall be reduced (but not below zero) if and to the extent that such reduction would result in the Executive retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the imposition of the Excise Tax), than if the Executive received all of the Payments (such reduced amount is hereinafter referred to as the Limited Payment Amount). The Company shall reduce or eliminate the Payments by first reducing or eliminating the payments or benefits payable in cash and then by reducing or eliminating the non-cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as defined below).
(b) All calculations under this Section 10 shall be made by a nationally recognized accounting firm designated by the Company and reasonably acceptable to the Executive (other than the accounting firm that is regularly engaged by any party who has effectuated a Change in Control) (the Accounting Firm). The Company shall pay all fees and expenses of such Accounting Firm. The Accounting Firm shall provide its calculations, together with detailed supporting documentation, both to the Company and the Executive within 45 days after the Change in Control or the Date of Termination, whichever is later (or such earlier time as is requested by the Company) and, with respect to the Limited Payment Amount, shall deliver its opinion to the Executive that she is not required to report any Excise Tax on her federal income tax return with respect to the Limited Payment Amount (collectively, the Determination). Within 5 days of the Executives receipt of the Determination, the Executive shall have the right to dispute the Determination (the Dispute). The existence of the Dispute shall not in any way affect the right of the Executive to receive the Payments in accordance with the Determination. If there is no Dispute, the Determination by the Accounting Firm shall be final binding and conclusive upon the Company and the Executive (except as provided in subsection (c) below).
(c) If, after the Payments have been made to the Executive, it is established that the Payments made to, or provided for the benefit of, the Executive exceed the limitations provided in subsection (a) above (an Excess Payment) or are less than such limitations (an Underpayment), as the case may be, then the provisions of this subsection (c) shall apply. If it is established pursuant to a final determination of a court or an Internal Revenue Service (the IRS) proceeding which has been finally and conclusively resolved, that an Excess Payment has been made, the Executive shall repay the Excess Payment to the Company within 20 days following the determination of such Excess Payment. In the event that it is determined by (i) the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS, (ii) pursuant to a determination by a court, or (iii) upon the resolution to the satisfaction of the Executive of the Dispute, that an Underpayment has occurred, the Company shall pay an amount equal to the Underpayment to the Executive within 10 days of such determination or resolution together with interest on such amount at the applicable federal short-term rate, as defined under Section 1274(d) of the Code and as in effect on the first date that such amount should have been paid to the Executive under this Agreement, from such date until the date that such Underpayment is made to the Executive.
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11. Representations.
The Executive represents and warrants that she has the free and unfettered right to enter into this Agreement and to perform her obligations under it and that she knows of no agreement between her and any other person, firm or organization, or any law or regulation, that would be violated by the performance of her obligations under this Agreement. The Executive agrees that she will not use or disclose any confidential or proprietary information of any prior employer in the course of performing her duties for the Company or any of its Affiliates.
12. Indemnification and Liability Insurance.
The Company hereby agrees during, and after termination of, her employment to indemnify the Executive and hold her harmless, both during the Term and thereafter, to the fullest extent permitted by law and under the certificate of incorporation and by-laws of the Company against and in respect of any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorneys fees), losses, amounts paid in settlement to the extent approved by the Company, and damages resulting from the Executives good faith performance of her duties as an officer or director of the Company or any Affiliate of the Company. The Company shall reimburse the Executive for expenses incurred by her in connection with any proceeding hereunder upon written request from the Executive for such reimbursement and the submission by the Executive of the appropriate documentation associated with these expenses. Such request shall include an undertaking by the Executive to repay the amount of such advance or reimbursement if it shall ultimately be determined that she is not entitled to be indemnified hereunder against such costs and expenses. The Company shall use commercially reasonable efforts to obtain and maintain directors and officers liability insurance covering the Executive to the same extent as the Company covers its other officers and directors.
13. Resolution of Disputes.
Except as otherwise provided in Section 8 above, any controversy, dispute or claim arising under or relating to this Agreement, the Executives employment with the Company or any Affiliate or the termination thereof shall, at the election of the Executive or the Company (unless otherwise provided in an applicable Company plan, program or agreement), be resolved by confidential, binding and final arbitration, to be held in the borough of Manhattan in New York City in accordance with the rules and procedures of the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof and shall be binding upon the Parties. The Executive consents to the personal and exclusive jurisdiction of the courts of the State of New York (including the United States District Court for the Southern District of New York) in any proceedings hereunder, including, without limitation, any proceeding for equitable relief. The Executive further agrees not to interpose any objection for improper venue in any such proceeding. Each Party shall be responsible for its own costs and expenses, including attorneys fees, and neither Party shall be liable for punitive or exemplary damages, provided that if the Executive substantially prevails with respect to all claims that are the subject matter of the dispute, her costs, including attorneys fees, shall be borne by the Company and if such costs are not reimbursed by the Company in a dispute exempt pursuant to Treasury Regulation 1.409A-l(b)(l1) then such payment shall be made by the Company to the Executive in the year following the year in which the dispute is resolved.
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14. Notices.
Any notice given to a Party shall be in writing and shall be deemed to have been given (i) when delivered personally, (ii) three days after being sent by certified or registered mail, postage prepaid, return receipt requested or (iii) two days after being sent by overnight courier (provided that a written acknowledgement of receipt is obtained by the overnight courier), with any such notice duly addressed to the Party concerned at the address indicated below or to such other address as such Party may subsequently designate by written notice in accordance with this Section 14:
If to the Company: |
The Warnaco Group, Inc. |
501 Seventh Avenue
New York, New York 10018
Attention: General Counsel
If to the Executive: |
The most recent address in the Companys records. |
15. Miscellaneous Provisions.
(a) This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York without reference to principles of conflicts of law; provided, however, that Federal law shall apply to the interpretation or enforcement of the arbitration provisions of Section 13 hereof.
(b) This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and, as of the Effective Date, shall supersede all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto (including, without limitation, any term sheet or summary on compensation provided to the Executive). This Agreement may not be terminated and no provision of this Agreement may be amended unless such termination or amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. The respective rights and obligations of the Parties hereunder, including, without limitation, Section 6 (protection of confidential information and company property), Section 7 (additional covenants), Section 8 (injunctive and other relief), Section 9 (cooperation) and Section 13 (resolution of disputes) shall survive any termination of the Executives employment for whatever reason, to the extent necessary to the intended preservation of such rights and obligations.
(c) The Company may withhold from any amounts, payments or benefits under this Agreement such Federal, state, local or other taxes as shall be required to be withheld pursuant to any applicable law or regulation.
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(d) This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than her rights to compensation and benefits, which may be transferred only by will, operation of law or in accordance with any applicable Company plan, program or agreement.
(e) In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable by an arbitrator or court of competent jurisdiction for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
(f) The headings and subheadings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
(g) The effectiveness of this Agreement is conditioned upon (i) there being no agreement as of the Commencement Date between the Executive and any prior employer or other entity that interferes, or could interfere with, the Executives employment with the Company unless such agreement is to the satisfaction of the Company waived by such prior employer or other entity, (ii) the Executives successful completion, prior to the Commencement Date, of the Companys standard pre-employment checks; and (iii) the Executive commencing employment with the Company no later man the Commencement Date.
(h) This Agreement may be executed in two or more counterparts.
[Signatures on next page.]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
THE WARNACO GROUP, INC. | ||
By: | /s/ Helen McCluskey | |
Name: | Helen McCluskey | |
Title: | Chief Executive Officer | |
THE EXECUTIVE | ||
/s/ Karyn Hillman | ||
Karyn Hillman |
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EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Helen McCluskey, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Warnaco Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 4, 2012 | /s/ Helen McCluskey | |||||
By: | Helen McCluskey | |||||
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Lawrence R. Rutkowski, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Warnaco Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 4, 2012 | /s/ Lawrence R. Rutkowski | |||||
By: | Lawrence R. Rutkowski | |||||
Chief Financial Officer |
EXHIBIT 32
CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF THE WARNACO GROUP, INC.
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Warnaco Group, Inc. (the Company) for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), Helen McCluskey, as Chief Executive Officer of the Company, and Lawrence R. Rutkowski, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge, based upon a review of the Report:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Helen McCluskey | /s/ Lawrence R. Rutkowski | |||||
Name: Helen McCluskey | Name: Lawrence R. Rutkowski | |||||
Title: Chief Executive Officer | Title: Chief Financial Officer | |||||
Date: May 4, 2012 | Date: May 4, 2012 |
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Supplemental Cash Flow Information (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2012
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Supplemental Cash Flow Information [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Supplemental Cash Flow Information |
|
Employee Benefit and Retirement Plans (Details Textual) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 3 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
Mar. 31, 2012
Employee [Member]
|
Dec. 31, 2011
Employee [Member]
|
Apr. 02, 2011
Employee [Member]
|
Mar. 31, 2012
Director [Member]
|
Dec. 31, 2011
Director [Member]
|
Apr. 02, 2011
Director [Member]
|
Mar. 31, 2012
Pension Plans [Member]
|
Apr. 02, 2011
Pension Plans [Member]
|
Mar. 31, 2012
Pension Plans [Member]
Scenario, Forecast [Member]
|
Mar. 31, 2012
Foreign Plans [Member]
|
Apr. 02, 2011
Foreign Plans [Member]
|
|
Employee Benefit and Retirement Plans (Textual) [Abstract] | |||||||||||||
Company contributions to the Pension Plan | $ 17,230 | $ 3,850 | $ 20,550 | ||||||||||
Costs related to the Foreign Plans | (54) | (312) | (129) | (369) | 75 | 57 | |||||||
Deferred Compensation Plans Liability for contributions and investment activity included in other long-term liabilities | $ 4,812 | $ 4,602 | $ 4,828 | $ 1,329 | $ 1,237 | $ 1,132 |
Business Segments and Geographic Information (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
Dec. 31, 2011
|
|
Profit (Loss) | |||
Net revenues | $ 615,541 | $ 662,161 | |
Operating income (loss) | 52,219 | 69,654 | |
Depreciation and amortization | 14,922 | 14,447 | |
Restructuring expense | 6,590 | 6,489 | |
Capital expenditures | 8,650 | 11,382 | |
Assets | |||
Total Assets | 1,802,162 | 1,791,570 | 1,747,850 |
Property, Plant and Equipment: | 131,651 | 132,829 | 133,022 |
Sportswear Group [Member]
|
|||
Profit (Loss) | |||
Net revenues | 300,803 | 339,471 | |
Operating income (loss) | 13,583 | 38,600 | |
Depreciation and amortization | 9,302 | 9,080 | |
Restructuring expense | 3,691 | 1,650 | |
Capital expenditures | 4,512 | 4,891 | |
Assets | |||
Total Assets | 1,029,013 | 1,072,131 | 994,425 |
Property, Plant and Equipment: | 65,026 | 64,446 | 64,149 |
Intimate Apparel Group [Member]
|
|||
Profit (Loss) | |||
Net revenues | 222,877 | 220,994 | |
Operating income (loss) | 29,954 | 30,537 | |
Depreciation and amortization | 4,537 | 4,439 | |
Restructuring expense | 3,029 | 1,443 | |
Capital expenditures | 2,779 | 6,131 | |
Assets | |||
Total Assets | 480,944 | 410,607 | 486,636 |
Property, Plant and Equipment: | 43,142 | 33,380 | 43,966 |
Swimwear Group [Member]
|
|||
Profit (Loss) | |||
Net revenues | 91,861 | 101,696 | |
Operating income (loss) | 14,837 | 14,068 | |
Depreciation and amortization | 694 | 617 | |
Restructuring expense | 21 | 3,078 | |
Capital expenditures | 122 | 56 | |
Assets | |||
Total Assets | 179,174 | 190,672 | 148,982 |
Property, Plant and Equipment: | 2,176 | 2,739 | 2,220 |
Group Segment [Member]
|
|||
Profit (Loss) | |||
Net revenues | 615,541 | 662,161 | |
Operating income (loss) | 58,374 | 83,205 | |
Depreciation and amortization | 14,533 | 14,136 | |
Restructuring expense | 6,741 | 6,170 | |
Capital expenditures | 7,413 | 11,078 | |
Assets | |||
Total Assets | 1,689,131 | 1,673,410 | 1,630,043 |
Property, Plant and Equipment: | 110,344 | 100,565 | 110,335 |
Unallocated Corporate/Other [Member]
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|||
Profit (Loss) | |||
Operating income (loss) | (6,155) | (13,551) | |
Depreciation and amortization | 389 | 311 | |
Restructuring expense | (151) | 318 | |
Capital expenditures | 1,237 | 304 | |
Assets | |||
Total Assets | 113,031 | 118,160 | 117,807 |
Property, Plant and Equipment: | $ 21,307 | $ 32,264 | $ 22,687 |
Intangible Assets and Goodwill (Details 3) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 3 Months Ended | ||||
---|---|---|---|---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
Mar. 31, 2012
Sportswear Group [Member]
|
Mar. 31, 2012
Intimate Apparel Group [Member]
|
Mar. 31, 2012
Swimwear Group [Member]
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Dec. 31, 2011
Swimwear Group [Member]
|
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Summary of changes in the carrying amount of goodwill | ||||||
Goodwill balance, Beginning | $ 139,948 | $ 120,880 | $ 134,395 | $ 4,911 | $ 642 | $ 642 |
Adjustment: | ||||||
Translation adjustments | 4,078 | 3,881 | 197 | |||
Goodwill balance, Ending | $ 144,026 | $ 120,880 | $ 138,276 | $ 5,108 | $ 642 | $ 642 |
Accumulated Other Comprehensive Income (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2012
|
Dec. 31, 2011
|
Apr. 02, 2011
|
Jan. 01, 2011
|
---|---|---|---|---|
Components of accumulated other comprehensive income | ||||
Foreign currency translation adjustments | $ 41,012 | $ 21,356 | $ 74,236 | |
Actuarial losses related to post retirement medical plans, net of tax of $1,232 as of March 31, 2012, December 31, 2011 and April 2, 2011 | (1,299) | (1,299) | (1,099) | |
(Loss) on cash flow hedges, net of taxes of $3,577, $2,930 and $1,340 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively | (5,645) | (3,937) | (3,530) | (2,331) |
Other | 111 | 122 | 11 | |
Total accumulated other comprehensive income | $ 34,179 | $ 16,242 | $ 69,618 |
Stockholders' Equity (Details) (Black-Scholes-Merton [Member])
|
3 Months Ended | |
---|---|---|
Mar. 31, 2012
Y
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Apr. 02, 2011
Y
|
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Black-Scholes-Merton [Member]
|
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Fair value of stock option granted | ||
Weighted average risk free rate of return (a) | 0.62% | 1.66% |
Dividend yield | ||
Expected volatility of the market price of the Company's common stock | 56.00% | 57.70% |
Expected option life (years) | 4.1 | 4.1 |
Restructuring Expenses and Other Exit Costs (Details 1) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
|
Changes in liabilities related to restructuring expenses and other exit costs | ||
Beginning Balance | $ 9,160 | $ 3,582 |
Restructuring charges for the period | 6,006 | 6,463 |
Cash reductions Settled with cash | (4,206) | (1,665) |
Non-cash changes and foreign currency effects | 65 | 88 |
Ending Balance | $ 11,025 | $ 8,468 |
Fair Value Measurement (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2012
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Fair Value Measurement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets and liabilities measured at fair value on a recurring basis |
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis, as of March 31, 2012, December 31, 2011 and April 2, 2011:
|
Stockholders' Equity (Details 1) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
|
Stock-based compensation expense | ||
Stock-based compensation expense before income taxes | $ 5,423 | $ 11,347 |
Income tax benefit | 1,135 | 3,629 |
Stock-based compensation expense after income taxes | 4,288 | 7,718 |
Stock options [Member]
|
||
Stock-based compensation expense | ||
Stock-based compensation expense before income taxes | 2,028 | 3,821 |
Income tax benefit | 682 | 1,366 |
Stock-based compensation expense after income taxes | 1,346 | 2,455 |
Restricted stock grants [Member]
|
||
Stock-based compensation expense | ||
Stock-based compensation expense before income taxes | 3,395 | 7,526 |
Income tax benefit | 453 | 2,263 |
Stock-based compensation expense after income taxes | $ 2,942 | $ 5,263 |
Debts (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended |
---|---|
Mar. 31, 2012
|
|
Interest expense recognized on interest rate cap | |
Initial fair value of maturing caplets | $ 7 |
Accretion of deferred premium | 106 |
Total | $ 113 |
Commitments and Contingencies (Details Textual) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2012
|
---|---|
Commitments and Contingencies (Textual) [Abstract] | |
Open purchase order | $ 318,535 |
Open purchase order payable | $ 318,535 |
Fair Value Measurement (Details) (Fair Value, Measurements, Recurring [Member], USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2012
|
Dec. 31, 2011
|
Apr. 02, 2011
|
---|---|---|---|
Level 1 [Member]
|
|||
Assets and liabilities measured at fair value on a recurring basis | |||
Foreign currency exchange contracts, assets fair value | |||
Interest rate cap | |||
Foreign currency exchange contracts, liabilities fair value | |||
Level 2 [Member]
|
|||
Assets and liabilities measured at fair value on a recurring basis | |||
Foreign currency exchange contracts, assets fair value | 1,287 | 5,587 | 376 |
Interest rate cap | 6,047 | 6,276 | |
Foreign currency exchange contracts, liabilities fair value | 1,148 | 532 | 7,133 |
Level 3 [Member]
|
|||
Assets and liabilities measured at fair value on a recurring basis | |||
Foreign currency exchange contracts, assets fair value | |||
Interest rate cap | |||
Foreign currency exchange contracts, liabilities fair value |
Stockholders Equity (Details 3) (USD $)
|
3 Months Ended |
---|---|
Mar. 31, 2012
|
|
Unvested restricted share/unit awards under the Company's stock incentive plans excluding Performance Awards | |
Restricted shares/units, Vested | |
Weighted Average Grant Date Fair Value, Vested | |
Restricted stock grants [Member]
|
|
Unvested restricted share/unit awards under the Company's stock incentive plans excluding Performance Awards | |
Unvested as of December 31, 2011 | 859,766 |
Restricted shares/units, Granted | 176,847 |
Restricted shares/units, Vested | (258,101) |
Performance Shares, Forfeited | (17,614) |
Unvested as of March 31, 2012 (a) | 760,898 |
Weighted Average Grant Date Fair Value, Unvested as of December 31, 2011 | $ 39.77 |
Weighted Average Grant Date Fair Value, Granted | $ 56.58 |
Weighted Average Grant Date Fair Value, Vested | $ 29.58 |
Weighted Average Grant Date Fair Value, Forfeited | $ 46.80 |
Weighted Average Grant Date Fair Value, Unvested as of March 31, 2012 | $ 46.96 |
Legal Matters (Details)
In Thousands, unless otherwise specified |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2012
USD ($)
|
Mar. 31, 2012
EUR (€)
|
Mar. 31, 2012
Palmers Textile Ag [Member]
USD ($)
|
|
Legal Matters (Textual) [Abstract] | |||
Total receivables included in other assets | $ 14,300 | ||
Reserve for Lejaby matters | 4,000 | ||
Costs awarded to the Company for Lejaby | € 100 |
Debt (Details Textual 3)
In Thousands, unless otherwise specified |
3 Months Ended | 3 Months Ended | 1 Months Ended | 3 Months Ended | 12 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2012
CKJEA Notes Payable [Member]
USD ($)
|
Dec. 31, 2011
CKJEA Notes Payable [Member]
USD ($)
|
Apr. 02, 2011
CKJEA Notes Payable [Member]
USD ($)
|
Mar. 31, 2012
Italian Note [Member]
USD ($)
|
Mar. 31, 2012
Italian Note [Member]
EUR (€)
|
Apr. 02, 2011
Italian Note [Member]
USD ($)
|
Apr. 02, 2011
Italian Note [Member]
EUR (€)
|
Sep. 30, 2010
Italian Note [Member]
EUR (€)
|
Sep. 30, 2011
Asian subsidiaries [Member]
USD ($)
|
Mar. 31, 2012
Asian subsidiaries [Member]
USD ($)
|
Dec. 31, 2011
Asian subsidiaries [Member]
USD ($)
|
|
Debt (Textual) [Abstract] | |||||||||||
2011 Term Loan | $ 44,190 | $ 36,648 | $ 29,236 | ||||||||
Weighted average effective interest rate | 3.49% | 4.00% | 2.24% | ||||||||
Short term notes renewed for additional term | no more than 12 months | ||||||||||
Principal balance of loan | 11,407 | 8,020 | 10,000 | ||||||||
Repayments of notes | 8,600 | 6,040 | |||||||||
Short-term revolving credit facility with one lender | 25,000 | ||||||||||
Interest rate | 3.72% | 3.72% | |||||||||
Borrowings during the period | $ 0 | $ 0 | |||||||||
Credit facility bears interest | 1.75% over 1-month LIBOR | ||||||||||
Percentage of credit facility bears interest over LIBOR | 1.75% |
Debt (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2012
|
Dec. 31, 2011
|
Apr. 02, 2011
|
---|---|---|---|
Short-term debt: | |||
Short-term debt | $ 79,443 | $ 47,513 | $ 146,423 |
Long-term debt: | |||
Long-term debt | 207,407 | 208,477 | |
Total Debt | 286,850 | 255,990 | 146,423 |
Current portion of 2011 Term Loan [Member]
|
|||
Short-term debt: | |||
Short-term debt | 2,000 | 2,000 | |
CKJEA Notes and other [Member]
|
|||
Short-term debt: | |||
Short-term debt | 58,701 | 43,021 | 38,309 |
2008 Credit Agreements [Member]
|
|||
Short-term debt: | |||
Short-term debt | 16,171 | 96,707 | |
Premium on interest rate cap [Member]
|
|||
Short-term debt: | |||
Short-term debt | 2,571 | 2,492 | |
Long-term debt: | |||
Long-term debt | 10,907 | 11,477 | |
Italian Note [Member]
|
|||
Short-term debt: | |||
Short-term debt | 11,407 | ||
2011 Term B Loan [Member]
|
|||
Long-term debt: | |||
Long-term debt | $ 196,500 | $ 197,000 |
Legal Matters
|
3 Months Ended |
---|---|
Mar. 31, 2012
|
|
Legal Matters And Commitments and Contingencies [Abstract] | |
Legal Matters |
Note 18—Legal Matters Lejaby Claims: On August 18, 2009, Palmers Textil AG (“Palmers”) filed an action against the Company in Le Tribunal de Commerce de Paris (The Paris Commercial Court), alleging that the Company made certain misrepresentations in the sale agreement, and seeking to declare the sale null and void, monetary damages in an unspecified amount and other relief (the “Palmers Suit”). On February 13, 2012, Le Tribunal de Commerce de Paris dismissed the Palmers Suit and awarded the Company €100 in costs. On March 12, 2012, Palmers appealed the judgment. In addition, the Company and Palmers have been unable to agree on certain post-closing adjustments to the purchase price, including adjustments for working capital. The dispute regarding the amount of post-closing adjustments is not a subject of the Palmers Suit. As of March 31, 2012, the Company had a reserve of approximately $4,000 in connection with these legal matters. Lejaby Receivables: As of March 31, 2012, the Company had a loan receivable recorded in Other assets on the Company’s Consolidated Condensed Balance Sheets of $14,300 from Palmers related to the Company’s sale of its Lejaby business to Palmers on March 10, 2008. The Company also had a receivable of $4,000 recorded in Other assets on the Company’s Consolidated Condensed Balance Sheet as of March 31, 2012 related to working capital adjustments associated with such sale. During April 2012, the Company received certain information which indicates the potential that all or a portion of the receivables from Palmers might not be collectible. However, since the Company has not been able to verify the accuracy of the information received, the Company believes that it cannot reliably estimate a probable range of amounts that it may ultimately collect with respect to its receivables from Palmers. Accordingly, as of March 31, 2012, no provision has been recorded against the receivables from Palmers in the Company’s Consolidated Condensed Financial Statements.
Other: In addition, from time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or cash flows. |
Business Segments and Geographic Information (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2012
|
Apr. 02, 2011
|
|
Net revenues: | ||
Net revenues | $ 615,541 | $ 662,161 |
Percentage of net revenues by geographic region | 100.00% | 100.00% |
United States [Member]
|
||
Net revenues: | ||
Net revenues | 248,409 | 285,143 |
Percentage of net revenues by geographic region | 40.30% | 43.10% |
Europe [Member]
|
||
Net revenues: | ||
Net revenues | 146,312 | 168,469 |
Percentage of net revenues by geographic region | 23.80% | 25.50% |
Asia [Member]
|
||
Net revenues: | ||
Net revenues | 137,763 | 126,776 |
Percentage of net revenues by geographic region | 22.40% | 19.10% |
Mexico, Central and South America [Member]
|
||
Net revenues: | ||
Net revenues | 53,103 | 51,718 |
Percentage of net revenues by geographic region | 8.60% | 7.80% |
Canada [Member]
|
||
Net revenues: | ||
Net revenues | $ 29,954 | $ 30,055 |
Percentage of net revenues by geographic region | 4.90% | 4.50% |
Acquisitions (Details) (Brazilian Acquisition [Member])
In Thousands, unless otherwise specified |
3 Months Ended | ||||||
---|---|---|---|---|---|---|---|
Mar. 31, 2012
USD ($)
Payments
|
Mar. 31, 2012
BRL
Payments
|
Jan. 02, 2010
Stores
|
Apr. 02, 2012
USD ($)
|
Mar. 30, 2012
USD ($)
|
Mar. 31, 2011
USD ($)
|
Mar. 31, 2011
BRL
|
|
Acquisition (Textual) [Abstract] | |||||||
Cash consideration paid | $ 10,123 | 18,500 | $ 2,531 | $ 7,592 | $ 11,470 | 18,500 | |
Number of retail stores acquired in Brazil | 8 | ||||||
Number of future annual payments | 3 | 3 |
Debt (Details Textual 1) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 3 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2012
|
Dec. 31, 2011
|
Apr. 02, 2011
|
Mar. 31, 2012
Interest Rate Cap [Member]
|
Dec. 31, 2011
Interest Rate Cap [Member]
|
Jul. 01, 2011
Interest Rate Cap [Member]
|
Mar. 31, 2012
Interest Rate Cap Agreement [Member]
Caplet
|
Mar. 30, 2012
Interest Rate Cap Agreement [Member]
|
Dec. 31, 2011
Interest Rate Cap Agreement [Member]
|
|
Derivative [Line Items] | |||||||||
Notional Amount | $ 120,000 | ||||||||
Number of individual caplets that reset and settle quarterly over period | 27 | ||||||||
Percentage of LIBOR beyond strike price | 1.00% | ||||||||
Percentage equal to interest rate payable on average over the term of the cap agreement on the portion of the 2011 Term Loan that equals the notional amount of the cap | 5.6975% | ||||||||
Fair value of cap | 14,395 | 6,047 | 6,276 | ||||||
Short-term debt | 79,443 | 47,513 | 146,423 | 2,571 | 2,492 | ||||
Long-term debt | 207,407 | 208,477 | 10,907 | 11,477 | |||||
Deferred premium on interest rate cap agreement | $ 13,478 | $ 13,969 |
Debt (Tables)
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2012
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Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt |
Debt was as follows:
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Reconciliation of AOCI for interest rate cap agreement |
A reconciliation of the balance of AOCI during the Three Months Ended March 31, 2012 related to the Interest Rate Cap Agreement is as follows:
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Schedule of interest expense recognized on interest rate cap agreement |
Interest expense recognized on the Interest Rate Cap Agreement during the Three Months Ended March 31, 2012 is as follows:
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