Our trademarks are the subject of registrations and pending applications throughout the world for use on a variety of apparel, footwear and related products, as well as licensed product categories and other trademark classes relevant to how we conduct business. We continue to expand our worldwide usage and registration of new and related trademarks. In general, trademarks remain valid and enforceable as long as the marks continue to be used in connection with the products and services with which they are identified and, as to registered tradenames, the required registration renewals are filed. In markets where products bearing any of our brands are not sold by us or any of our licensees or other authorized users, our rights to the use of trademarks may not be clearly established.
The apparel industry is competitive as a result of its fashion orientation, mix of large and small producers, low barriers to entry, the flow of domestic and imported merchandise and the wide diversity of retailing methods. We compete with numerous domestic and foreign designers, brandsbrand owners, manufacturers and retailers of apparel, accessories and footwear, including, in certain circumstances, the private label brands of our wholesale customers. Additionally, with the shift in consumer shopping preferences driving substantial growth in the digital channel, there are more companies in the apparel sector and an increased level of transparency in pricing and product comparisons, which impacts purchasing decisions. As well, as consumersConsumers also are increasingly focused on circularity with respect to apparel companies that enable consumersand the option from new market players to rent or purchase pre-owned apparel also impactis impacting purchasing decisions.
We believe we are well-positioned to compete in the apparel industry on the basis of style, quality, price and service. Our business depends on our ability to stimulate consumer tastes and demands,demand, as well as on our ability to remain competitive in these areas. Our diversified portfolio of brands are positioned to sell globally at various price points and products and our use ofin multiple channels of distribution have alloweddistribution. This enables us to developoffer differentiated products to a business that produces results that are not dependentbroad range of consumers, reducing our reliance on any one demographic group, merchandise preference,product category, price point, distribution channel or region. We have developed a portfolio ofOur brands that appeals to a broad spectrum of consumers. Our owned brandsgenerally have long histories and enjoy high
The following table sets forth the name, age and position of each of our executive officers:
Mr. Larsson joined us as President in 2019.2019 and became Chief Executive Officer on February 1, 2021 (the first day of the fiscal year). From 2015 until 2017, Mr. Larsson was President and Chief Executive Officer and a director of Ralph Lauren Corporation. From 2012 until 2015, he was the Global President of Old Navy, Inc., a division of The Gap, Inc.
Mr. Duane served as President of our Izod division from 1998 until 2001, was named Vice Chairman, Sportswear in 2001, Vice Chairman, Wholesale Apparel in 2006, Chief Executive Officer, Wholesale Apparel in 2012, Chief Executive Officer, Heritage Brands and North America Wholesale in 2013, and Vice Chairman and Chief Executive Officer, Heritage Brands in 2018. Mr. Duane will relinquish his title and duties as Vice Chairman and Chief Executive Officer, Heritage Brands in June 2020, in advance of his retirement in February 2021.
Ms. Abel-Hodges has been employed byDonnelly joined us since 2006. She served as President of our Izod division from 2009 until 2015, President, The Underwear Group from 2015 until 2018, was named Group President, Calvin Klein North AmericaChief Executive Officer, PVH Americas on February 16, 2021 and The Underwear Group in 2018, andbecame Chief Executive Officer, Calvin Klein Global and PVH Americas effective July 1, 2021. Ms. Donnelly was Chief Executive Officer, Urban Outfitters Group, a division of Urban Outfitters, Inc., from 2016 until January 2021, having served previously as North America Brand President of the division upon joining Urban Outfitters, Inc. in 2019.2014.
Mr. Fischer joined us as Vice President, General Counsel &and Secretary in 1999. He became Senior Vice President in 2007 and Executive Vice President in 2013.
Item 1A. Risk Factors
The following risk factors should be read in conjunction with the other information set forth in this Annual Report on Form 10-K when evaluating our business and the forward-looking statements contained within this report. The occurrence of one or more of the circumstances or events described below could have a material adverse effect on our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may occur or become material and also may also adversely affect our business, financial condition or results of operations.
Business and Operational Risks
The COVID-19 pandemic has had, and continues to have, a significant adverse impact on us.
The COVID-19 pandemic has had, and continues to have, a significant impact on our business, results of operations, financial position and cash flows from operations. The extent of the impact of the pandemic on our business, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration, severity and locations of any surges in infection rates, the imposition or loosening of mask mandates and restrictions on store operations or travel, the effectiveness of the vaccines against new variants, and other factors, none of which can be predicted with certainty.
Virtually all of our retail stores were temporarily closed for varying periods of time during the first quarter and into the second quarter of 2020 due to governmental orders and concern for the health and safety of our associates, consumers and communities. Broad shutdowns under government orders, particularly in Europe and Canada, were put in place again at the end of 2020, resulting in temporary store closures there that remained in place into 2021. Infection rate surges throughout 2021 resulted in temporary store closures for varying periods of time throughout the year, primarily in Europe, Australia and Asia. In addition to temporary store closures under government orders, we have experienced scattered temporary store closings due to increased levels of store associate absenteeism. Also, government orders and absenteeism have led to stores operating on reduced hours and at reduced occupancy rates throughout the time since the initial global shutdown.
Our wholesale customers and franchisees globally generally have experienced temporary store closures and operating restrictions in the same countries and at the same times as us. The impact of the pandemic on some of our brick and mortar wholesale customers has resulted in them closing some of their stores, with several of our wholesale customers in North America filing for bankruptcy in 2020. Certain of our wholesale customers have also been subject to activist shareholder campaigns that can distract management, upset business plans and drain funds that could be invested in business operations.
The pandemic has impacted, and continues to impact, our supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of our licensees. The current vessel, container and other transportation shortages, labor shortages and port congestion globally, as well as slowdowns in factory production in some of our key sourcing countries has delayed and is expected to continue to delay inventory orders and, in turn, deliveries to our wholesale customers and availability in our stores and for our directly operated digital commerce businesses. These supply chain and logistics disruptions have impacted our inventory levels and sales volumes, and could impact our sales volumes in future periods. We have also incurred, and expect to continue to incur, higher freight and other logistics costs, including air freight, to mitigate these delays, which have negatively impacted and are expected to continue to negatively impact our gross margin and could cause our profitability to decline if we are unable to offset these costs with higher prices, sufficient reductions in product costs or operating expenses.
Consumers have also been affected, resulting in additional adverse impacts on us. Consumers have been unable to purchase our products due to illness or unwillingness to shop in stores out of fear of exposure. Store closures, reduced store hours and occupancy levels, travel restrictions and concerns about the health risks in traveling adversely affect traffic in our stores and our wholesale customers’ and franchisees’ stores. Consumer spending has also been negatively impacted by job losses and reduced earnings power, changing needs due to remote working, reduced in-person social interaction, vacation time spent at home and, other factors. This is exemplified by the impact on our dress furnishings business, as not going to the office has resulted in fewer men wearing dress shirts and ties. All these factors have negatively impacted, and might continue to negatively impact, our direct sales to consumers and our sales to our wholesale customers, due to lower sales of our products, and those of our licensees, through their sales channels.
If sales, which are more difficult to plan due to the uncertainties surrounding the pandemic and supply chain and logistics disruptions globally, exceed or do not meet expectations, we may experience a shortage of product required to meet demand or excess inventory levels. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have a material adverse effect on the reputation of our brands and our profitability. Inventory levels below consumer demand could result in lost sales and profitability opportunities, as well as reputational issues.
Any or all of the foregoing could have a material and adverse impact on our results of operations, financial condition and cash flows from operations, as well as placing limitations on our ability to execute on our business strategies and initiatives.
A substantialsignificant portion of our revenue and gross profit is derived from a small number of large wholesale customers and the loss of any of these customers or significant financial difficulties in their businesses could substantially reduce our revenue.
A fewsmall number of our customers account for significant portions of our revenue. Sales to our five largest customers were 15.0%, 16.3% and 18.4% of our revenue in 2021, 2020 and 2019, and 18.9% of our revenue in each of 2018 and 2017.respectively. No single customer accounted for more than 10% of our revenue in 2019, 20182021, 2020 or 2017. Collectively, Macy’s, Inc. (“Macy’s”) and J. C. Penney Corporation, Inc. (“J. C. Penney”), two of our ten largest customers in 2019, have closed approximately 275 stores since 2016 and Macy’s announced plans to close 125 additional stores over the next three years. These store closings have resulted and may continue to result in a decrease in the total amount of purchases made by Macy’s and J. C. Penney. A continued decline in purchases made over the next several years could have a materially adverse effect on our United States wholesale business.
2019.
We had an agreement with Macy’s pursuant to which Macy’s was the exclusive department store distributor in the United States of men’s sportswear under the
TOMMY HILFIGER brand; G-III, a licensee of the TOMMY HILFIGER brand, had a similar arrangement with Macy’s for women’s sportswear under the TOMMY HILFIGER brand. As a result of these strategic alliances, the success of Tommy Hilfiger’s North American men’s wholesale business and its licensed women’s wholesale business with G-III were substantially dependent on these relationships and on the ability of Macy’s to maintain and increase sales of TOMMY HILFIGER products. Both exclusive arrangements were terminated effective for the Spring 2019 selling season. We cannot assure you that Macy’s will continue to order the same volume of TOMMY HILFIGER products from us, G-III or our other TOMMY HILFIGER licensees, or that other department stores will purchase TOMMY HILFIGER products in sufficient volume to offset any reduction in sales to Macy’s in the future. This could result in a decline in overall revenue and have a material adverse effect on our results of operations.
We do not have long-term agreements with any of our customers and purchases generally occur on an order-by-order basis. A decision by any of our major customers, whether motivated by marketing strategy, competitive conditions, financial difficulties, climate impacts or otherwise, to decrease significantly the amount of merchandise purchased from us or our licensing or other partners, or to change their manner of doing business with us or our licensing or other partners for any reason, including due to store closures, reduced traffic and consumer spending trends, or product delivery delays resulting from the COVID-19 pandemic, could reduce substantially reduce our revenue and materially adversely affect our profitability.
Traditional brick and mortar retailers have experienced, and continue to experience, the same significant business disruptions as a result of the COVID-19 pandemic as we have. Several of our customers in North America filed for bankruptcy since the onset of the pandemic, including J.C. Penney Corporation, Inc., which was one of our ten largest customers in 2019.
The retail industry’s recent history has seen a great deal of consolidation, particularly in the United States, and other ownership changes, as well as store closing programs, restructurings, reorganizations, management changes and store closing programs,activist shareholder campaigns, and we expect such changesthese disruptions to be ongoing. Store closing programs, suchongoing, particularly as those described above, decrease the number of stores carrying our products, while the remaining stores may purchase a smaller amount of our productsconsumers continue to transition away from traditional brick and may reduce the retail floor space designated for our brands.mortar retailers to digital commerce. In the future, retailers also may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets or marketing strategies. Any of these types of actions could result in a further decrease in the number of stores thatto which we can sell, to which we want to sell or which want to carry our products or increase the ownership concentration withinand there can be no assurance that these sales can be fully offset by sales into digital channels. Additionally, stores may purchase a smaller amount of our products and reduce the retail industry.floor space designated for our brands. These changes could decrease our opportunities in the market, increase our reliance on a smaller number of large customers andor decrease our negotiating strength with our customers. These factors could have a material adverse effect on our financial condition and results of operations.
We may not be able to continue to develop and grow our Tommy Hilfiger and Calvin Klein businesses.
A significant portion of our business strategy involves growing our Tommy Hilfiger and Calvin Klein businesses. Our achievement of revenue and profitability growth from Tommy Hilfiger and Calvin Klein will depend largely upon our ability to:
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• | •continue to maintain and enhance the distinctive brand identities of the TOMMY HILFIGER and Calvin Klein brands; •TOMMY HILFIGER and CALVIN KLEIN brands; |
continue to maintain good working relationships with Tommy Hilfiger’s and Calvin Klein’s licensees;
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• | •continue to enter into new, or renew or extend existing, licensing agreements for the TOMMY HILFIGER and Calvin Klein brands or successfully transition licensed businesses in house; and •TOMMY HILFIGER and CALVIN KLEIN brands; and |
continue to strengthen and expand the Tommy Hilfiger and Calvin Klein businesses.
We cannot assure you that we can execute successfully execute any of these actions or our growth strategy for these businesses, nor can we assure you that the launch of any additional product lines or businesses by us or our licensees or that the continued offering of these lines will achieve the degree of consistent success necessary to generate profits or positive cash flow. Our ability to successfully carry out our growth strategy successfully may be affected by, among other things, our ability to enhance
our relationships with existing customers to obtain additional selling space or add additional product lines, our ability to develop new relationships with retailers, economic and competitive conditions, changes in consumer spending patterns and changes in consumer tastes and style trends. If we fail to continue to develop and grow the Tommy Hilfiger or Calvin Klein business, our financial condition and results of operations may be materially adversely affected.
The success of our Tommy Hilfiger and Calvin Klein businesses depends on the value of our “TOMMY HILFIGER” and “CALVIN KLEIN”“Calvin Klein” brands and, if the value of either of those brands were to diminish, our business could be adversely affected.
Our success depends on our brands and their value. The TOMMY HILFIGER name is integral to the existing Tommy Hilfiger business, as well as to our strategies for continuing to grow and expand the business. Mr. Hilfiger, who remains active in the business,continues his role of Principal Designer, is closely identified with the TOMMY HILFIGER brand and any negative perception with respect to Mr. Hilfiger could adversely affect the TOMMY HILFIGER brands. In addition, under Mr. Hilfiger’s employment agreement, if his employment is terminated for any reason, his agreement not to compete with the Tommy Hilfiger business will expire two years after such termination. Although Mr. Hilfiger could not use any TOMMY HILFIGER trademark in connection with a competitive business, his association with a competitive business could adversely affect the Tommy Hilfiger business. We also have exposure with respect to the CALVIN KLEINCalvin Klein brands, which are integral to the existing Calvin Klein business and could be adversely affected if Mr. Klein’s public image or reputation were to be tarnished.
In addition, brand value and patronage could diminish significantly due to a number of other factors, including consumer attitudes regarding social and political issues and consumer perceptions of our position on these issues or belief that we or our business partners have acted in an irresponsible or unacceptable manner. Furthermore, if the actions we are taking towards sustainability and social and environmental responsibility as part of our Forward Fashion strategy are not achieved or perceived to be disingenuous, consumer trust in our brand, as well as our brand value, may suffer.Negative claims or publicity regarding the TOMMY HILFIGER or Calvin Klein brands, stores or products, including stores operated by business partners and licensed products, as well as our treatment of employees and customers, particularly when made on social media, which has the potential to rapidly accelerate the timing and reach of negative publicity, also could adversely affect the reputation of the brands and sales even if the subject of such publicity is unverified or inaccurate and we seek to correct it.
Our business is heavily dependent on the ability and desire of consumers to travel and shop.
Reduced consumer traffic and purchasing, whether in our own retail stores, or in the stores of our wholesale customers or in our franchisees’ stores, could have a material adverse effect on our financial condition, and results of operations.operations and cash flows. Reductions could result from economic conditions, fuel shortages, increased fuel prices, travel restrictions, travel concerns and other circumstances, including adverse weather conditions, natural disasters, war, terrorist attacks or the perceived threat of war or terrorist attacks. Disease epidemics and other health-related concerns, such as the current COVID-19 outbreak,pandemic, also could result in (and, in the case of the COVID-19 outbreak,pandemic, has resulted in) closed stores, reduced consumer traffic and purchasing, as consumers become ill or limit or cease shopping in order to avoid exposure, or governments impose mandatory business closures, travel restrictions, vaccine mandates or the like to prevent the spread of disease. War, such as the current war in Ukraine, or the perceived threat of war, also could result in (and, in the case of the war in Ukraine, has resulted in) closed stores (both those operated by us and by our business partners), and reduced consumer traffic and purchasing. Additionally, political or civil unrestsunrest and demonstrations also could affect consumer traffic and purchasing, as was the case with the recent protests in Hong Kong SAR.SAR in 2019.
Our U.S. retail store operations are a material contributor to our revenue and earnings. The majority of our United States retail stores are located away from major residential centers or near vacation destinations, making travel a critical factor in their success. These retail businesses historically also have had a significant portion of their revenue and earnings attributable to sales to international tourists.tourists and, as such, have been, and are expected to continue to be, significantly negatively affected by the lack of international tourism into the United States as a result of the pandemic and resurgences of infections. In addition to the factors discussed above, international tourism to the United States could be reduced, as could the extent to which international tourists shop at our retail stores, during times of a strengthening United States dollar, particularly against the euro, the Brazilian real, the Canadian dollar, the Mexican peso, the Korean won and the Chinese yuan renminbi. A reduction in international tourist traffic or spending therefore could have a material adverse effect on our financial condition and results of operations. In fact in 2019, we did experience a significant decrease in sales to international tourists, which we believe was attributable in part to the strength of the United States dollar and which negatively impacted sales and earnings for our Calvin Klein and Tommy Hilfiger retail businesses in the United States.
Other factors that could affect the success of our stores include:
•the location of the store or mall, including the location of a particular store within the mall;
•the other tenants occupying space at the mall;
•increased competition in areas where the stores are located;
•the amount of advertising and promotional dollars spent on attracting consumers to the store or mall;
•the changing patterns of consumer shopping behavior;
•increased competition from online retailers; and
•the diversion of sales from our retail stores due to our digital commerce sites.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies.
One componentOur inability to execute our digital commerce strategy could materially adversely affect the reputation of our growth strategy has been to make acquisitions, such as the Tommy Hilfiger, Calvin Kleinbrands and Warnaco acquisitions. Prior to completing any acquisition, our management team identifies expected synergies, cost savingsrevenue and growth opportunities but, due to legal and business limitations, we may not have access to all necessary information. The integration processour operating results may be complex, costlyharmed.
Our digital commerce revenue has historically been a relatively small portion of our total revenue, but digital commerce is the fastest growing area of our business both with respect to our direct-to-consumer businesses and time-consuming.the wholesale business (i.e., sales to pure play and digital commerce businesses of traditional retailers) and is now approximately 25% of our total revenue. The potential difficultiessuccess of integratingour digital commerce businesses depends, in part, on third parties and factors over which we have limited control, including changing consumer preferences and buying trends relating to digital commerce usage and promotional or other advertising initiatives employed by our wholesale customers or other third parties on their digital commerce sites. Any failure on our part, or on the operationspart of an acquired businessour third party digital partners, to provide digital commerce platforms that attract consumers, build our brands and realizing our expectations for an acquisition, includingresult in repeat consumer purchases could result in diminished brand image, relevance and loyalty and lost revenue. Additionally, as consumers shift purchasing preferences to online channels, the benefits that may be realized, include, among other things:
failure to implementattract to our business plan for the combined business;
delays or difficultiesdigital commerce channels consumers who previously made purchases in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings or a need to allocate resources to manage unexpected operating difficulties;
unanticipated issues in integrating manufacturing, logistics, information, communicationsour stores and other systems;
unanticipated changes in applicable lawsthose operated by our wholesale partners and regulations affecting the acquired business;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
retaining key customers, suppliers and employees;
retaining and obtaining required regulatory approvals, licenses and permits;
operating risks inherent in the acquired business;
diversion of the attention and resources of management;
consumers’ failure to accept product offerings by us or our licensees;
assumption of liabilities not identified in due diligence;
the impact on our or an acquired business’ internal controls and compliance with the requirements under applicable regulation; and
other unanticipated issues, expenses and liabilities.
We have completed acquisitions that have not performed as well as initially expected and cannot assure you that any acquisitionfranchisees, will not have a material adverse impact onadversely affect our financial condition and results of operations.
Our operation of digital commerce sites pose risks and uncertainties including:
•changes in required technology interfaces;
•website downtime and other technical failures;
•costs and technical issues from website software upgrades;
•data and system security;
•computer viruses; and
•changes in applicable laws and regulations.
Keeping current with technology, competitive trends, security and the like may increase our costs and may not succeed in increasing sales or attracting consumers. Our failure to respond successfully to these risks and uncertainties might adversely affect the reputation of our brands and our revenue and results of operations.
The success of our digital commerce businesses depends, in part, on consumer satisfaction, including timely receipt of orders. Fulfillment of these orders requires different logistics operations than for our retail store and wholesale customer operations. We need adequate capacity, systems and operations to support the anticipated growth in our digital commerce businesses. If we encounter difficulties with our distribution facilities or in our relationships with the third parties who operate the facilities, or if any such facilities were to shut down or be limited in capacity for any reason, including as a result of fire or other casualty, natural disaster, systems disruption (including as a result of attacks on computer systems, such as ransomware attacks), labor shortage or interruption, including as a result of disease epidemics and health related concerns (such as the COVID-19 pandemic), or if there is a significant increase in demand for shipping capacity (as was the case in 2021), we may experience (and, in the case of the pandemic, have experienced, and may continue to experience) disruption or delay in distributing our products to our consumers, which could result in consumer dissatisfaction and lost sales. Additionally, in the event of any of the foregoing, we may incur (and, as a result of the pandemic, have incurred and may continue to incur) higher costs than anticipated to ensure smooth and timely operation. Any of the foregoing could have an adverse effect on the reputation of our brands and our revenue and results of operations.
Future economic conditions, including volatility in the financial and credit markets may adversely affect our business.
Economic conditions in the past have adversely affected, and in the future may adversely affect, our business, our customers and licensees and their businesses, and our financing and other contractual arrangements, including, for example, as a result of, among other factors, the COVID-19 pandemic, current COVID-19 outbreak.inflationary pressures globally and the war in Ukraine. Such conditions, amongamongst other things, have resulted, and in the future may result, in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers and licensees, may cause such customers to reduce or discontinue orders of our products and licensed products sold by our licensees, and may result in customers being unable to pay us for products they have purchased from us and licensees being unable to pay us for royalties owed to us. Financial difficulties of customers and licensees also may also affect the ability of our customers and licensees to access credit markets or lead to higher credit risk relating to receivables from customers and licensees. Our traditional wholesale customers and our licensees have experienced, and continue to experience, significant business disruptions as a result of the pandemic and the resurgences of infections, with several of our wholesale customers in North America filing for bankruptcy in 2020, which has had an adverse impact on our results of operations.
Future volatility in the financial and credit markets, including the recentcurrent volatility due, in part, to the current COVID-19 outbreak,pandemic, inflationary pressures globally and the war in Ukraine, could also make it more difficult or expensive for us to obtain financing or refinance existing debt when the need arises, including upon maturity, which for our senior unsecured credit facilities is currently scheduledApril 2024 and for Aprilour 3 5/8% senior notes is July 2024, or on terms that would be acceptable to us.
Our business is exposed to foreign currency exchange rate fluctuations and control regulations.
Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant to the business. Changes in exchange rates between the United States dollar and other currencies can impact our financial results in two ways: a translational impact and a transactional impact.
The translational impact refers to the impact that changes in exchange rates can have on our results of operations and financial position. The functional currencies of our foreign subsidiaries are generally the applicable local currencies. Our consolidated financial statements are presented in United States dollars. The results of operations in local foreign currencies are translated into United States dollars using an average exchange rate over the representative period and our assets and liabilities in local foreign currencies are translated into United States dollars using the closing exchange rate at the balance sheet date. Foreign exchange differences that arise from the translation of our foreign subsidiaries’ assets and liabilities into United States dollars are recorded as foreign currency translation adjustments in other comprehensive (loss) income. Accordingly, our results of operations and other comprehensive (loss) income will be unfavorably impacted during times of a strengthening United States dollar, particularly against the euro, the Brazilian real, the Australian dollar, the Japanese yen, the Korean won, the British pound sterling, the Canadian dollar and the Chinese yuan renminbi, and favorably impacted during times of a weakening United States dollar against those currencies.
A transactional impact on financial results is common for apparel companies operating outside the United States that purchase goods in United States dollars, as is the case with most of our foreign operations. As with translation, our results of operations will be unfavorably impacted during times of a strengthening United States dollar as the increased local currency value of inventory results in a higher cost of goods in local currency when the goods are sold and favorably impacted during times of a weakening United States dollar as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We also have exposure to changes in foreign currency exchange rates related to certain intercompany transactions and selling, general and administrative (commonly referred to as “SG&A”) expenses. We currently use and plan to continue to use foreign currency forward exchange contracts or other derivative instruments to mitigate the cash flow or market value risks associated with these inventory and intercompany transactions, but we are unable to entirely eliminate these risks.
We are also exposed to foreign exchange risk in connection with our licensing businesses. Most of our licensing agreements require the licensee to report sales to us in the licensee’s local currency but to pay us in United States dollars based on the exchange rate as of the last day of the contractual selling period. Thus, while we are not generally exposed to exchange rate gains and losses between the end of the selling period and the date we collect payment, we are exposed to changes in exchange rates during and up to the last day of the selling period. In addition, certain of our other foreign licensing agreements expose us to changes in exchange rates up to the date we collect payment or convert local currency payments into United States dollars. As a result, during times of a strengthening United States dollar, our foreign royalty revenue will be negatively impacted, and during times of a weakening United States dollar, our foreign royalty revenue will be favorably impacted.
We also have exposure to changes in foreign currency exchange rates related to our €950 million aggregate principal amount of euro-denominated senior notes. During times of a strengthening United States dollar against the euro, we could be required to use a lower amount of our cash flows from operations to pay interest and make long-term debt repayments on our euro-denominated senior notes, whereas during times of a weakening United States dollar against the euro, we could be required to use a greater amount of our cash flows from operations to pay interest and make long-term debt repayments on these notes.
We conduct business, directly or through licensees and other partners, in countries that are or have been subject to exchange rate control regulations and have, as a result, experienced difficulties in receiving payments owed to us when due, with amounts left unpaid for extended periods of time. Although the amounts to date have been immaterial to our results, as our international businesses grow and if controls are enacted or enforced in additional countries, there can be no assurance that such controls would not have a material and adverse effect on our business, financial condition or results of operations.
Our level of debt could impair our financial condition and ability to operate.
We had outstanding as of February 2, 2020 an aggregate principal amount of $2.725 billion of indebtedness under our senior unsecured credit facilities, our senior unsecured notes and our unsecured debentures. In March 2020, we increased our aggregate borrowings outstanding under our senior unsecured revolving credit facilities, other short-term revolving credit facilities and unsecured commercial paper note program from $50 million at February 2, 2020 to approximately $930 million, in order to increase our cash position and preserve financial flexibility in responding to the impacts of the COVID-19 outbreak on our business. Our level of debt could have important consequences to investors, including:
requiring a substantial portion of our cash flows from operations be used for the payment of interest on our debt, thereby reducing the funds available to us for our operations or other capital needs;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate because our available cash flow after paying principal and interest on our debt may not be sufficient to make the capital and other expenditures necessary to address these changes;
increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flow, such as during the current COVID-19 outbreak, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt;
limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions, contributions to our pension plans and general corporate requirements;
placing us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital, capital expenditures, acquisitions, share repurchases, dividend payments, contributions to pension plans and general corporate requirements; and
with respect to any borrowings we make at variable interest rates, including under our senior unsecured credit facilities, leaving us vulnerable to increases in interest rates to the extent the borrowings are not subject to an interest rate swap agreement.
In addition, our interest rate swap agreements as well as a portion of the borrowings under our senior unsecured credit facilities that have variable interest rates are tied to the London Interbank Offered Rate (“LIBOR”). In July 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether different benchmark rates used to price indebtedness will develop. We cannot predict the consequences and timing of these developments, which could include an increase in interest expense and may also require the amendment of contracts that reference LIBOR.
We primarily use foreign suppliers for our products and raw materials, which poses risks to our business operations.
The majority of our apparel, footwear and accessories are produced by and purchased or procured from independent manufacturers in approximately 40 countries, with most being located in countries in Asia, South America, Europe, the Middle East, North America, Africa, Central America and the Caribbean.Asia. Although no single supplier or country is or is expected to become critical to our production needs, any of the following could materially and adversely affect our ability to produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition and results of operations:
•political or labor instability or military conflict involving any of the countries in which we, our contractors, or our suppliers operate, which could cause a delay in the transportation of our products and raw materials to us and an increase in transportation costs;
•heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundments of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;
a significant decrease in availability or increase in cost of raw materials, including commodities (particularly cotton), or the•limitations on our ability to use raw materials or goods produced in a country that is a major provider due to political, human rights, labor, environmental, animal cruelty or other concernsconcerns;
•a significant decrease in factory and shipping capacity or a significant increase in demand for such capacity;
•a significant increase in wage, freight, shipping and shippingother logistics costs, including as a result of disruption at ports of entry, which could result (and in the case of the pandemic, has resulted in) increased freight and other logistics costs;
•natural disasters, such as floods, earthquakes, wildfires, the frequency of some of which may be increasing due to climate change, could result in closed factories and scarcity of raw materials;materials (particularly cotton);
•disease epidemics and health related concerns, such as the current COVID-19 outbreak,pandemic, which could result in (and in the case of the COVID-19 outbreak,pandemic, has resulted in certain of the following) a significant decrease in factory and shipping capacity, closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;
•the migration and development of manufacturers, which could affect where our products are or are planned to be produced;
imposition•the adoption of regulations, quotas and safeguards relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed; and
•the implementation of new or increased duties, tariffs, taxes and other charges on imports.imports; and
•the regulation or prohibition of the transaction of business with specific individuals or entities and their affiliates or goods manufactured in certain regions, such as the listing of a person or entity as a SDN (Specially Designated Nationals and Blocked Persons) by the United States Department of the Treasury’s Office of Foreign Assets Control and the issuance of WROs by the United States Customs and Border Patrol.
The United States government imposed additional tariffs in 2019 and 2018 on a variety of imports from China, into the United States, including certain categories of apparel, footwear and accessories. These additional tariffs, which were included in a trade agreement signed by the United States and China in January 2020, are not expected to be decreased, at least not in the near term, and in the future the United States could impose additional tariffs or increase existing tariffs on goods imported from China into the United States. China is the largest sourcing country of apparel, footwear and accessories, for us globally and for most of our licensees. We imported approximately $215 million of inventory into the United States from China in 2019. Accordingly, any tariffs on apparel, footwear and accessories imported from China into the United States resultresulting in an increase in our cost of goods sold for that product. We are looking atimported approximately $25 million of inventory into the United States from China in 2021. We continuously look for alternative sourcing options, but we may not be able to shift timely, if at all, production of inventoryfrom China or any other country bound for the United States from China toor other countries.applicable country. In addition, higher costs in sourcing from other countries, including because others in the industry are looking to move production for the same reason, may make the move price-prohibitive. We may not be able to pass the entire cost increase resulting from the tariffs, duties, taxes or other expenses onto consumers or could choose not to. Any increase in prices to consumers could have an adverse impact on our direct sales to consumers, as well as sales by our wholesale customers and our licensees. Any adverse impact on such sales or increase in our cost of goods sold could have a material adverse effect on our business and results of operations.
Various actions by the United States Government (including SDN designations and issuances of WROs), have prohibited or limited the business that companies like us and, in many cases, our business partners, can conduct with numerous individuals, companies and entities who operate in Xinjiang Province, China, as well as the use of cotton grown in Xinjiang. These and other actions have affected and could continue to affect the sourcing and availability of raw materials used by our suppliers in the manufacturing of certain of our products. These and related matters also have been subject to significant scrutiny and contention in China, the United States and elsewhere, resulting in criticism against multinational companies, including us. As a consequence, these matters (and matters like them) have the potential to affect our revenue and the reputation of our brands and us. In addition, while we make efforts to confirm that SDNs, people and materials covered by WROs, and other sanctioned people and materials are not present in our supply chain, we could be subject to penalties, fines or sanctions if any of the vendors from which we purchase goods is found to have dealings, directly or indirectly with SDNs or other sanctioned persons or in banned materials.
If our manufacturers,suppliers, licensees, or other business partners, or the manufacturerssuppliers used by our licensees, or our licensees themselves fail to use legal and ethical business practices, our business could suffer.
We require our manufacturers,suppliers, licensees and other business partners, and the manufacturerssuppliers used by our licensees, and the licensees themselves to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. Additionally, we impose upon our business partners operating guidelines that require additional obligations in those areas in order to promote ethical business practices. We audit, or have third parties audit, the operations of these independent parties to determine compliance. We were a member of the Accord on Fire and Building Safety in Bangladesh and are a member of its successor,successors, the mission of each of which is to improve fire and building safety in Bangladesh’s apparel factories. We also collaborate with factories, suppliers, industry participants and other engaged stakeholders to improve the lives of our factorythe workers and others in our sourcing communities. However, we do not control our manufacturers,business partners, or the manufacturerssuppliers used by our licensees, or our licensees themselves, orincluding with respect to their labor, manufacturing and other business practices.
If any of these manufacturerssuppliers or licenseesbusiness partners violates labor, environmental, building and fire safety, or other laws or implements labor, manufacturing or other business practices that are generally regarded as unethical, the shipment of finished products to us or our customers could be interrupted, orders could be canceled and relationships could be terminated. Further, we could be prohibited from importing goods by governmental authorities. In addition, we could be the focus of adverse publicity and our reputation and the reputation of our brands could be damaged. Any of these events could have a material adverse effect on our revenue and, consequently, our results of operations.
We are dependent on third parties to source and manufacture our products and any disruption in our relationships with these parties or in their businesses may materially adversely affect our businesses.business.
We rely upon independent third parties for the manufacturing of the vast majority of our apparel, footwear and accessories. A manufacturer’s failure to ship products to us in a timely manner, whichas has occurred, and may occur in the future, as a result of the current COVID-19 outbreak,pandemic, or to meet required quality standards could cause us to miss the delivery date requirements of our customers for those products. As a result, customers could cancel their orders, refuse to accept deliveries or demand
reduced prices. Any of these actions taken by our customers could have a material adverse effect on our revenue and, consequently, our results of operations.
We use third party buying offices for a portion ofOur business is susceptible to risks associated with climate change and an increased focus by stakeholders on climate change, which may adversely affect our product sourcing. Any interruption in the operations of these buying offices, or the failure of these buying offices to perform effectively their services for us, could result in material delays, reductions of shipments and increased costs. Furthermore, such events could harm our wholesale and retail relationships. Any disruption in our relationships with these buying offices or in their businesses could have a material adverse effect on our cash flows, business financial condition and results of operations.
Our business is susceptible to risks associated with climate change, including potential disruptions to our supply chain and impacts on the availability and costs of raw materials. Increased frequency and severity of adverse weather events (such as storms and floods) due to climate change could also cause increased incidence of disruption to the production and distribution of our products, an adverse impact on consumer demand and spending, and/or more frequent store closures and/or lost sales as customers prioritize basic needs. In addition, certain of our wholesale customers have begun to establish sourcing requirements related to sustainability. As a result, we have received requests for sustainability related information about our products and, in some cases, customers have required that certain of our products include sustainable materials or packaging, which may result in higher raw material and production costs. Our inability to comply with these and other sustainability requirements in the future could adversely affect sales of and demand for our products. Further, certain online sellers of our products have begun to identify to consumers and help consumers limit purchases to product the sellers identify as being more sustainable. Our failure to offer products that meet these sustainability standards could result in decreased demand for our products and lost sales.
There is an increased focus, including by governmental and nongovernmental organizations, investors, customers, consumers, our associates and other stakeholders on climate change matters, including increased pressure to expand our disclosures, make and establish additional goals and take actions to meet them, which could expose us to market, operational and execution costs or risks. There are also efforts to pass legislation that would have the same effect and subject us to legal liability, including private rights of action, for violations. The performance metrics we may disclose, such as greenhouse gas emissions and water usage may influence our reputation and the value of our brand. Our failure to establish targets or targets that are perceived to be appropriate, as well as to achieve progress on those targets on a timely basis, or at all, could adversely affect the reputation of our brands and sales of and demand for our products. We also may incur additional costs or require additional resources to monitor, report and comply with such stakeholder expectations and standards and legislation, and to meet our climate change targets and commitments.
We are dependent on a limited number of distribution facilities. If one becomes inoperable, our business, financial condition and operating results could be negatively impacted.
We operate a limited number of distribution facilities and also engage independently operated distribution facilities around the world to warehouse and ship products to our customers and our retail stores, as well as perform related logistics services. Our ability to meet the needs of our wholesale customers and of our retail stores depends on the proper operation of our primary facilities. If any of our primary facilities were to shut down or otherwise become inoperable or inaccessible, including as a result of disease epidemics and other health-related concerns, such as the current COVID-19 outbreak,pandemic, we could have a substantial loss of inventory or disruptions of deliveries to our customers and our stores, incur significantly higher costs or experience longer lead times associated with the distribution of our products during the time it takes to reopen or replace the facility. This could materially and adversely affect our business, financial condition and operating results.
A portion of our revenue is dependent on royalties and licensing.
The operating profit associated with our royalty, advertising and other revenue is significant because the operating expenses directly associated with administering and monitoring an individual licensing or similar agreement are minimal. Therefore, the loss of a significant licensee, whether due to the termination or expiration of the relationship, the cessation of the licensee’s operations or otherwise (including as a result of financial difficulties of the licensee), without an equivalent replacement, or a significant decline in our licensees’ sales, for example as has occurred as a result of the current COVID-19 outbreak,pandemic, could materially impact our profitability.
While we generally have significant control over our licensees’ products and advertising, we rely on them for, among other things, operational and financial controls over their businesses. Our licensees’ failure to successfully market licensed products or our inability to replace our existing licensees could materially and adversely affect our revenue both directly from reduced royalty, advertising and other revenue received and indirectly from reduced sales of our other products. Risks are also associated with our licensees’ ability to obtain capital, execute their business plans, timely deliver quality products, manage their labor relations, maintain relationships with their suppliers, manage their credit risk effectively and maintain relationships with their customers.
Our licensing business makes us susceptible to the actions of third parties over whom we have limited control.
We rely on our licensees to preserve the value of our brands. Although we attempt to protect our brands through, among other things, approval rights over design, production quality, packaging, merchandising, distribution, advertising and promotion of our products, we cannot assure you that we can control our licensees’ use of our brands. The misuse of our brands by a licensee could have a material adverse effect on our business, financial condition and results of operations.
We face intense competition in the apparel industry.
Competition is intense in the apparel industry. We compete with numerous domestic and foreign designers, brand owners, manufacturers and retailers of apparel, accessories and footwear, some of which have greater resources than we do. We also face increased competition from online retailers in the digital channel, which is characterized by low barriers to entry. In addition, in certain instances, we compete directly with our wholesale customers, as they also sell their own private label products in their stores and online. We compete within the apparel industry primarily on the basis of:
•anticipating and responding to changing consumer tastes, demands and shopping preferences in a timely manner and developing distinctive, attractive, quality products;
•maintaining favorable brand recognition and relevance, including through digital brand engagement and online and social media presence;
•appropriately pricing products and creating an acceptable value proposition for customers, including increasing prices to mitigate inflationary pressures while minimizing the risks of dampening consumer demand;
•providing strong and effective marketing support;
•ensuring product availability and optimizing supply chain efficiencies with third party suppliers and retailers; and
•obtaining sufficient retail floor space and effective presentation of our products at retail locations, on digital commerce sites operated by our department store customers and pure play digital commerce retailers, and on our digital commerce sites.
The failure to compete effectively or to keep pace with rapidly changing consumer preferences and technology and product trends could have a material adverse effect on our business, financial condition and results of operations.
Our profitability may decline as a result of increasing pressure on margins.
The apparel industry, particularly in the United States (our largest market), is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products, retailer demands for allowances, incentives and other forms of economic support, and changes in consumer demand including, for example, as has occurred as a result of the COVID-19 pandemic. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our profitability to decline if we are unable to appropriately manage inventory levels or offset price reductions with sufficient reductions in product costs or operating expenses.
Continued volatility in the availability and prices for commodities and raw materials we use in our products (such as cotton) and inflationary pressures, including the increased freight costs we have experienced in 2021 and the expected increases in costs of labor, raw materials and ocean freight in 2022, have resulted, and are expected to continue to result, in increased pricing pressures and, in turn, pressure on our margins. We may not be able to implement price increases that fully mitigate the impact of these higher costs and/or any such price increases could have an adverse impact on consumer demand for our products. As well, consumer spending may also be negatively impacted by reduced earnings power, which could result in lower sales of our products.
If we are unable to manage our inventory effectively and accurately forecast demand for our products, our results of operations could be materially adversely affected.
We have made and continue to make investments in our supply chain management systems and processes that enable us to respond more rapidly to changes in sales trends and consumer demands and enhance our ability to manage inventory. However, there can be no assurance that we will be able to anticipate and respond successfully to changing consumer tastes and style trends or economic conditions and, as a result, we may not be able to manage inventory levels to meet our future order requirements. If we fail to accurately forecast consumer demand, including, for example, as has occurred as a result of the
COVID-19 pandemic, we may at times experience excess inventory levels or a shortage of product required to meet demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have a material adverse effect on the reputation of our brands and our profitability. If we underestimate consumer demand for our products, we may not have sufficient inventories of product to meet consumer requirements in a timely manner, which could result in lost revenues, as well as damage to our reputation and relationships.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies.
Acquisitions have been a consistent part of our growth. Prior to completing any acquisition, our management team identifies expected synergies, cost savings and growth opportunities but, due to legal and business limitations, we may not have access to all necessary information. The integration process may be complex, costly and time-consuming. The potential difficulties of integrating the operations of an acquired business and realizing our expectations for an acquisition, including the benefits that may be realized, include, among other things:
•failure to implement our business plan for the combined business;
•delays or difficulties in completing the integration of acquired companies or assets;
•higher than expected costs, lower than expected cost savings or a need to allocate resources to manage unexpected operating difficulties;
•unanticipated issues in integrating systems and operations;
•diversion of the attention and resources of management;
•assumption of liabilities not identified in due diligence;
•the impact on our or an acquired business’ internal controls and compliance with the requirements under applicable regulation; and
•other unanticipated issues, expenses and liabilities.
We have completed acquisitions that have not performed initially as well as expected or have not fully achieved expected benefits and we cannot assure you that any acquisition will not have a material adverse impact on our financial condition and results of operations.
The loss of members of our executive management and other key employees could have a material adverse effect on our business.
We depend on the services and management experience of our executive officers, who have substantial experience and expertise in our business. We also depend on other key executives in various areas of our businesses and operations. Competition for qualified personnel in the apparel industry is intense and competitors may use aggressive tactics to recruit our key employees. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us.
Financial Risks
Our level of debt could impair our financial condition and ability to operate.
We had outstanding as of January 30, 2022 an aggregate principal amount of $2.368 billion of indebtedness under our senior unsecured credit facilities, our senior unsecured notes and our unsecured debentures. Our level of debt could have important consequences to investors, including:
•requiring a substantial portion of our cash flows from operations be used for the payment of interest on our debt, thereby reducing the funds available to us for our operations or other capital needs;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate because our available cash flow after paying principal and interest on our debt may not be sufficient to make the capital and other expenditures necessary to address these changes;
•increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flows, such as has occurred during the COVID-19 pandemic, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt;
•limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions, contributions to our pension plans and general corporate requirements;
•placing us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital, capital expenditures, acquisitions, share repurchases, dividend payments, contributions to pension plans and general corporate requirements; and
•leaving us vulnerable to increases in interest rates with respect to borrowings we make at variable interest rates, including under our senior unsecured credit facilities, to the extent they are not subject to an interest rate swap agreement.
Our ability to maintain compliance with the financial covenants under our senior unsecured credit facilities may be adversely affected by future economic conditions.
We are required under the terms of our senior unsecured credit facilities to comply with certain financial covenants, including a minimum interest coverage ratio and a maximum net leverage ratio. A prolonged disruption to our business, including as a result of the COVID-19 pandemic, may impact our ability to comply with such covenants in the future. Non-compliance with our financial covenants would constitute an event of default under the terms of our senior unsecured credit facilities, which may result in an acceleration of payment to the lenders, which in turn could trigger defaults under our other debt facilities.
Our inability to comply with these financial covenants may require us to seek relief in the form of a covenant waiver, as we did in June 2020. Covenant waivers may lead to fees associated with obtaining the waiver, increased costs, increased interest rates, additional restrictive covenants and other lender protections that would be applicable to us under these facilities, and such increased costs, restrictions and modifications may be significant. In addition, our ability to provide additional lender protections under these facilities if necessary, including the granting of security interests in collateral, will be limited by the restrictions under our other debt facilities. There can be no assurance that we would be able to obtain future waivers in a timely manner, on terms acceptable to us, or at all. If we were not able to obtain a covenant waiver in the future under our senior unsecured credit facilities, there can be no assurance that we would be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay such facilities.
Our business is exposed to foreign currency exchange rate fluctuations and control regulations.
Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant to the business. Changes in exchange rates between the United States dollar and other currencies can impact our financial results in two ways: a translational impact and a transactional impact. Please see our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for further discussion of the impacts of foreign currency on our results of operations and cash flows.
Our results of operations will be unfavorably impacted by foreign currency translation during times of a strengthening United States dollar, particularly against the euro, the Brazilian real, the Australian dollar, the Japanese yen, the Korean won, the British pound sterling, the Canadian dollar and the Chinese yuan renminbi, and favorably impacted during times of a weakening United States dollar against those currencies. Our results of operations are similarly affected by the transactional impact of foreign currency, and will be unfavorably impacted during times of a strengthening United States dollar as the increased local currency value of inventory results in a higher cost of goods in local currency when the goods are sold and favorably impacted during times of a weakening United States dollar as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We currently use and plan to continue to use foreign currency forward exchange contracts to mitigate the cash flow or market risks associated with these inventory transactions, but we are unable to eliminate these risks entirely.
We conduct business in countries that have laws and regulations that may restrict the ability of our foreign subsidiaries to pay dividends and remit cash to affiliated companies and, as a result, may limit our ability to utilize cash generated by certain of our foreign subsidiaries to make payments in other countries. Such restrictions could require us to redirect cash that we were otherwise planning to use elsewhere in our business, which may have an adverse impact on our business.
Adverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our results of operations and cash flow.
We have direct operations in many countries and the applicable tax rates vary by jurisdiction. The tax laws and regulations in the countries where we operate may be subject to change. Moreover, there may be changes from time to time in interpretation and enforcement of tax law. As a result, we may pay additional taxes if tax rates increase or if tax laws, regulations or treaties in the jurisdictions where we operate are modified by the authorities in an adverse manner.
In addition, various national and local taxing authorities periodically examine us and our subsidiaries. The resolution of an examination or audit may result in us paying more than the amount that we may have reserved for a particular tax matter, which could have a material adverse effect on our cash flows, business, financial condition and results of operations for any affected reporting period.
We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and conditions may be scrutinized by local tax authorities, which could result in additional tax liabilities.
If we are unable to fully utilize our deferred tax assets, our profitability could be reduced.
Our deferred income tax assets are valuable to us. These assets include tax loss and foreign tax credit carryforwards in various jurisdictions. Realization of deferred tax assets is based on a number of factors, including whether there will be adequate levels of taxable income in future periods to offset the tax loss and foreign tax credit carryforwards in jurisdictions where such assets have arisen. Valuation allowances are recorded in order to reduce the deferred tax assets to the amount expected to be realized in the future. In assessing the adequacy of our valuation allowances, we consider various factors including reversal of deferred tax liabilities, forecasted future taxable income and potential tax planning strategies. These factors could reduce the value of the deferred tax assets, which could have a material effect on our profitability.
Volatility in securities markets, interest rates and other economic factors could increase substantially our defined benefit pension costs and liabilities.
We have significant obligations under our defined benefit pension plans. The funded status of our pension plans is dependent on many factors, including returns on invested plan assets and the discount rate used to measure pension obligations. Unfavorable returns on plan assets, a lower discount rate or unfavorable changes in the applicable laws or regulations could materially change the timing and amount of pension funding requirements, which could reduce cash available for our business.
Our operating performance also may be significantly impacted by the amount of expense recorded for our pension plans. Pension expense recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in pension expense, generally in the fourth quarter of the year. These gains and losses can be significant and can create volatility in our operating results. As a result of the recent volatility in the financial markets due, among other reasons, to the impact of the COVID-19 pandemic and the war in Ukraine, there continues to be significant uncertainty with respect to the actuarial gain or loss we may record on our retirement plans in 2022. We may incur a significant actuarial gain or loss in 2022 if there is a significant increase or decrease in discount rates, respectively, or if there is a difference in the actual and expected return on plan assets.
Our balance sheet includes a significant amount of intangible assets and goodwill, as well as long-lived assets in our retail stores. A decline in the estimated fair value of an intangible asset or of a reporting unit or in the current and projected cash flows in our retail stores could result in impairment charges recorded in our operating results, which could be material.
Goodwill and other indefinite-lived intangible assets are tested for impairment annually and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Long-lived assets, such as operating lease right-of-use assets and property, plant and equipment in our retail stores and intangible assets with finite lives, are tested for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be recoverable. Please see the section entitled “Critical Accounting Policies and Estimates” within Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report for
further discussion of our impairment testing. If any of our goodwill, other indefinite-lived intangible assets or long-lived assets were determined to be impaired, the asset would be written down and an impairment charge would be recognized as a noncash expense in our operating results.
Adverse changes in future market conditions, a shift in consumer buying trends or weaker operating results compared to our expectations, including, for example, as has occurred as a result of the COVID-19 pandemic and may occur as a result of the war in Ukraine, may impact (and, in the case of the pandemic, have impacted) our projected cash flows and estimates of weighted average cost of capital, which could result (and, in the case of the pandemic, has resulted) in a material impairment charge if we are unable to recover the carrying value of our goodwill, other indefinite-lived intangible assets and long-lived assets (as occurred for some of these assets as a result of the impact of the pandemic).
We determined in the first quarter of 2020 that the significant adverse impacts of the COVID-19 pandemic on our business, including an unprecedented material decline in revenue and earnings and an extended decline in our stock price and associated market capitalization, was a triggering event that required us to perform impairment testing of our goodwill and indefinite-lived intangible assets. The interim testing resulted in us recording $926 million of noncash impairment charges in the first quarter of 2020. We also determined that certain finite-lived intangible assets, which had a relatively short remaining useful life, were not recoverable and, therefore, impaired due to the adverse impacts of the pandemic on the current and projected performance of the underlying businesses. No further impairments of our goodwill and other intangible assets were recorded in 2020 or in 2021. As of January 30, 2022, we had $2.829 billion of goodwill and $3.307 billion of other intangible assets on our balance sheet, which together represented 49% of our total assets.
We also recorded $75 million of noncash impairment charges in 2020 related to operating lease right-of-use assets and property, plant and equipment in our retail stores, resulting from the adverse impacts of the COVID-19 pandemic on the financial performance of certain of our retail stores and the shift in consumer buying trends from brick and mortar retail stores to digital channels.
Legal and Regulatory Risks
We may be unable to protect our trademarks and other intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and our competitive position. We are susceptible to others imitating our products and infringing on our intellectual property rights, especially with respect to the TOMMY HILFIGER and CALVIN KLEINCalvin Klein brands, as they enjoy significant worldwide consumer recognition and the generally premium pricing of TOMMY HILFIGER and CALVIN KLEINCalvin Klein brand products creates additional incentive for counterfeiters and infringers. Imitation or counterfeiting of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenue. We cannot assure you that the actions we take to establish and protect our trademarks and other intellectual property rights will be adequate to prevent imitation of our products by others. We cannot assure you that other third parties will not seek to invalidate our trademarks or block sales of our products as a violation of their own trademarks and intellectual property rights. In addition, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in marks that are similar to ours or marks that we license or market or that we will be able to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to our marks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other cases, there may be holders who have
prior rights to similar trademarks. We have in the past been and currently are involved both domestically and internationally in proceedings relating to a company’s claim of prior rights to some of our trademarks or marks similar to some of our brands.
We face intense competitionProvisions in our certificate of incorporation and our by-laws and Delaware General Corporation Law could make it more difficult to acquire us and may reduce the apparel industry.
Competition is intense in the apparel industry. We compete with numerous domestic and foreign designers, brand owners, manufacturers and retailers of apparel, accessories and footwear, some of which have greater resources than we do. We also face increased competition from online retailers in the digital channel, which is characterized by low barriers to entry. In addition, in certain instances, we compete directly with our wholesale customers, as they also sell their own private label products in their stores and online. We compete within the apparel industry primarily on the basis of:
anticipating and responding to changing consumer tastes, demands and shopping preferences in a timely manner and developing attractive, quality products;
maintaining favorable brand recognition and relevance, including through digital brand engagement and online and social media presence;
appropriately pricing products and creating an acceptable value proposition for customers;
providing strong and effective marketing support;
ensuring product availability and optimizing supply chain efficiencies with third party manufacturers and retailers; and
obtaining sufficient retail floor space at retail and effective presentationmarket price of our products at retail, on digital commerce sites operated by our department store customers and pure play digital commerce retailers, and on our digital commerce sites.common stock.
The failure to compete effectively or to keep pace with rapidly changing markets could have a material adverse effect on our business, financial condition and results of operations.
Our profitability may decline ascertificate of incorporation and by-laws contain provisions requiring stockholders who seek to introduce proposals at a result of increasing pressure on margins.
The apparel industry, particularly in the United States (our largest market), is subjectstockholders meeting or nominate a person to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailersbecome a director to provide us with advance notice and changes in consumer demand including, for example, as a result of the current COVID-19 outbreak. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our profitability to decline if we are unable to appropriately manage inventory levels or offset price reductions with sufficient reductions in product costs or operating expenses. This could have a material adverse effect on our results of operations, liquidity and financial condition.
If we are unable to manage our inventory effectively and accurately forecast demand for our products, our results of operations could be materially adversely affected.
We have made and continue to make investments in our supply chain management systems and processes that enable us to respond more rapidly to changes in sales trends and consumer demands and enhance our ability to manage inventory. However, we cannot assure you that we will be able to anticipate and respond successfully to changing consumer tastes and style trends or economic conditions and, as a result, we may not be able to manage inventory levels to meet our future order requirements. If we are unable to or fail to accurately forecast consumer demand, including, for example, as a result of the current COVID-19 outbreak, we may experience excess inventory levels or a shortage of product required to meet demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have a material adverse effect on the reputation of our brands and our profitability. If we underestimate consumer demand for our products, we may not have sufficient inventories of product to meet consumer requirements in a timely manner, which could result in lost revenues,certain information, as well as damagemeet certain ownership criteria; permitting the PVH Board of Directors to fill vacancies on the Board; and authorizing the Board of Directors to issue shares of preferred stock without approval of our reputationstockholders. These provisions could have the effect of deterring changes of control.
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and relationships.other business combinations between us and any holder of 15% or more of our common stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors.
Information Technology and Data Privacy Risks
We rely significantly on information technology. Our business and reputation could be adversely impacted if our computer systems, or systems of our business partners and service providers, are disrupted or cease to operate effectively or if we or they are subject to a data security or privacy breach.
Our ability to manage and operate our business effectively depends significantly on information technology systems, including systems operated by third parties and us and systems that communicate with third parties, including website and mobile applications through which we communicate with our consumers and our employees. We process, transmit, store and maintain information about consumers, employees and other individuals in the ordinary course of business, including through our digital
commerce operations.business. This includes personally identifiable information protected under applicable laws and the collection and processing of customers’ credit and debit card numbers and reliance on systems maintained by third parties with whom we contract to provide payment processing. The failure of any system to operate effectively or disruption in these systems, which may occur as a result of circumstances beyond our control including fire, natural disasters, power outages and systems disruptions, could require significant remediation costs and adversely impact our operations.
We utilize a risk-based, multi-layered information security approach based on the NIST (National Institute of Standards and Technology) Cybersecurity Framework to identify and address cybersecurity risks. We take measures to protect data and ensure those who use our systems are aware of the importance of protecting our systems and data. These include implementation of security standards, network system security tools, associate training programs and security breach procedures. To measure the effectiveness of these, we perform phishing exercises, tabletop breach exercises and penetration tests. Our training provided to all associates who have access to our systems includes regular phishing tests and online courses. Two courses were conducted in 2021, as were 11 tests. We have an escalating schedule of discipline for test failures, which includes additional training and would ultimately lead to loss of access rights. Certain trainings also are administered to the members of the Board of Directors, one of which annually is typically mandatory. In addition, to measure and assess compliance, our information security approach is subject to a bi-annual assessment of its maturity within the NIST Cybersecurity Framework by an independent third party consultant.
We generally require third party providers who have access to our systems or receive personally identifiable information or other confidential data to take measures to protect data but have no control over their efforts and are limited in our ability to assess their systems and processes. Furthermore, whileIn cases where third party service organizations process data that affects our financial statements, System and Organization Controls (SOC) 1 reports are obtained and evaluated annually. While we invest, and believe our service providers invest, considerable resources in protecting systems and information, including through training of the people who have access to systems and information, we all are still subject to security events, including but not limited to cybercrimes and cybersecurity attacks, such as those perpetrated by sophisticated and well-resourced bad actors attempting to disrupt operations or access or steal data. Security events may not be detected for an extended period of time, which could compound the scope and extent of the damages and problems. Such security events could disrupt our business, severely damage our reputation and our relationship with consumers, and expose us to risks of litigation and liability, whichliability. While we maintain insurance coverages, including cybersecurity insurance, it may be unavailable or insufficient to cover all losses or all types of claims. Although we generally require that third party providers with access to our systems and confidential information have insurance coverage for any losses that we may experience as a result of the work they do, the amount that we are able to recover may not be covered by insurance or may result in costs in excess of the insurance coveragefully compensate us for any loss we maintain.experience.
We regularly implement new systems and hardware and are currently undertaking a major multi-year SAP S/4 implementation to upgrade of our platforms and systems worldwide. The implementation of new software and hardware involves risks and uncertainties that could cause disruptions, delays or deficiencies in the design, implementation or application of these systems including:
•adversely impacting our operations;
•increased costs;
•disruptions in our ability to effectively source, sell or ship our products;
•delays in collecting payments from our customers; and
•adversely affecting our ability to timely report our financial results.
Our business, results of operations and financial condition could be materially adversely affected as a result of these implementations. In addition, intended improvements may not be realized. Our business partners and service providers face the same risks, which could also adversely impact our business and operations.
We are subject to data privacy and security laws and regulations globally, the number and complexity of which are increasing globally.increasing. We may be the subject of enforcement or other legal actions despite our compliance efforts.
We collect, use, store, and otherwise process or rely upon access to data, including personally identifiable information, of consumers, employees, and other individuals in the daily conduct of our business, including through our digital commerce operations.business. There have been significant enactments and developments in the area of data privacy and cybersecurity lawlaws and regulation. Significant new laws,regulations, such as the GDPR in the European Union’s General Data Protection Regulation,Union, the Brazilian General Data Protection LawCCPA/CPRA in California, PIPL in China and the California Consumer Privacy Act, are continuously being proposed and enacted around the world.LGPD in Brazil. These laws and regulations have caused and could continue to cause us to change the way we operate, including in a less efficient manner, in order to comply with local requirements.these laws. We have a global data privacy compliance program butand, as discussed above, have guidelines and a training program to ensure our associates understand the laws and how to collect, use and protect our confidential data (including personally identifiable information). However, our compliance efforts are not an assurance that we will not be the subject of regulatory or other legal actions. We could expend significant management and associate time and incur significant cost investigating and defending ourselves against the claims in any such matter, which matters also could result in us being the subject of significant fines, judgments or settlements. In addition, any such claim could give rise to significant reputational damage,damages, whether or not we ultimately are ultimately successful in defending ourselves.
The loss of members of our executive management and other key employees could have a material adverse effect on our business.
We depend on the services and management experience of our executive officers, who have substantial experience and expertise in our business. We also depend on other key executives in various areas of our businesses and operations. Competition for qualified personnel in the apparel industry is intense and competitors may use aggressive tactics to recruit our key employees. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us.
A significant shift in the relative sources of our earnings, adverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our results of operations and cash flow.
We have direct operations in many countries and the applicable tax rates vary by jurisdiction. As a result, our overall effective tax rate could be materially affected by the relative level of earnings in the various taxing jurisdictions to which our earnings are subject. In addition, the tax laws and regulations in the countries where we operate may be subject to change. Moreover, there may be changes from time to time in interpretation and enforcement of tax law. As a result, we may pay additional taxes if tax rates increase or if tax laws, regulations or treaties in the jurisdictions where we operate are modified by the authorities in an adverse manner.
In addition, various national and local taxing authorities periodically examine us and our subsidiaries. The resolution of an examination or audit may result in us paying more than the amount that we may have reserved for a particular tax matter, which could have a material adverse effect on our cash flows, business, financial condition and results of operations for any affected reporting period.
We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and conditions may be scrutinized by local tax authorities, which could result in additional tax liabilities.
If we are unable to fully utilize our deferred tax assets, our profitability could be reduced.
Our deferred income tax assets are valuable to us. These assets include tax loss and foreign tax credit carryforwards in various jurisdictions. Realization of deferred tax assets is based on a number of factors, including whether there will be adequate levels of taxable income in future periods to offset the tax loss and foreign tax credit carryforwards in jurisdictions where such assets have arisen. Valuation allowances are recorded in order to reduce the deferred tax assets to the amount expected to be realized in the future. In assessing the adequacy of our valuation allowances, we consider various factors including reversal of deferred tax liabilities, forecasted future taxable income and potential tax planning strategies. These factors could reduce the value of the deferred tax assets, which could have a material effect on our profitability.
Volatility in securities markets, interest rates and other economic factors could increase substantially our defined benefit pension costs and liabilities.
We have significant obligations under our defined benefit pension plans. The funded status of our pension plans is dependent on many factors, including returns on invested plan assets and the discount rate used to measure pension obligations. Unfavorable returns on plan assets, which, for example, may result from recent market volatility due, in part, to the COVID-19 outbreak, a lower discount rate or unfavorable changes in the applicable laws or regulations could materially change the timing and amount of pension funding requirements, which could reduce cash available for our business.
Our operating performance also may be significantly impacted by the amount of expense recorded for our pension plans. Pension expense recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in pension expense, generally in the fourth quarter of the year. These gains and losses can be significant and can create volatility in our operating results.
Our balance sheet includes a significant amount of intangible assets and goodwill. A decline in the estimated fair value of an intangible asset or of a reporting unit could result in an impairment charge recorded in our operating results, which could be material.
Goodwill and other indefinite-lived intangible assets are tested for impairment annually and between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Also, we review our amortizable intangible assets for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be recoverable. If the carrying amount of our goodwill or another intangible asset were to exceed its fair value, the asset would be written down to its fair value, with the impairment charge recognized as a noncash expense in our operating results. Adverse changes in future market conditions or weaker operating results compared to our expectations, including, for example, as a result of the current COVID-19 outbreak, may impact our projected cash flows and estimates of weighted average cost of capital, which could result in a potentially material impairment charge if we are unable to recover the carrying value of our goodwill and other intangible assets.
As of February 2, 2020, we had approximately $3.678 billion of goodwill and $3.481 billion of other identifiable intangible assets on our balance sheet, which together represented 53% of our total assets. No impairment was recorded in 2019 based on our annual goodwill and other indefinite-lived intangible assets impairment tests. However, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Speedo North America business, which prompted the need for us to perform an interim impairment assessment of our Speedo perpetual license right. As a result of this interim test, the perpetual license right was determined to be impaired and an impairment charge of $116.4 million was recorded. The Speedo transaction was also a triggering event that prompted the need for us to perform an interim goodwill impairment test for the Heritage Brands Wholesale reporting unit, the reporting unit that includes the Speedo North America business. No goodwill impairment resulted from this interim test.
Our balance sheet includes a significant amount of long-lived assets in our retail stores, including operating lease right-of-use assets and property, plant and equipment. A decline in the current and projected cash flows in our retail stores could result in impairment charges, which could be material.
Long-lived assets, such as operating lease right-of-use assets and property, plant and equipment in our retail stores, are tested for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be recoverable. If the carrying amount of a long-lived asset were to exceed its fair value, the asset would be written down to its fair value and an impairment charge recognized as a noncash expense in our operating results. Adverse changes in future market conditions or weaker operating results compared to our expectations, including, for example, as a result of the current COVID-19 outbreak, may impact our projected cash flows and estimates of weighted average cost of capital, which could result in a potentially material impairment charge if we are unable to recover the carrying value of our long-lived assets.
Provisions in our certificate of incorporation and our by-laws and Delaware General Corporation Law could make it more difficult to acquire us and may reduce the market price of our common stock.
Our certificate of incorporation and by-laws contain provisions requiring stockholders who seek to introduce proposals at a stockholders meeting or nominate a person to become a director to provide us with advance notice and certain information, as well as meet certain ownership criteria; permitting the Board of Directors to fill vacancies on the Board; and authorizing the Board to issue shares of preferred stock without approval of our stockholders. These provisions could have the effect of deterring changes of control.
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the Board.
The United Kingdom’s withdrawal from the European Union could harm our business and financial results.
Voters in the United Kingdom approved a referendum to withdraw from the European Union (commonly referred to as “Brexit”). The United Kingdom formally withdrew from the European Union on January 31, 2020 and is now in a period of transition until December 31, 2020. During the transition period, the United Kingdom’s trading relationship with the European Union is expected to remain largely the same while the two parties negotiate a trade agreement as well as other aspects of the United Kingdom’s relationship with the European Union. The uncertainty surrounding the terms of the United Kingdom’s future relationship with the European Union after December 31, 2020 and its consequences could adversely impact consumer and investor confidence and the level of consumer purchases of discretionary items and retail products, including our products. The eventual terms upon which the withdrawal occurs (which could leave the United Kingdom without a trade agreement with the European Union) also could significantly disrupt the free movement of goods, services and people between the United Kingdom and the European Union and may result in increased legal and regulatory complexities and higher costs of conducting business in Europe. Volatility in the value of the British pound sterling, the euro and other European currencies could also result. Any of these effects, among others, could adversely affect our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The general location, use, ownership status and approximate size of the principal properties that we occupied as of February 2, 2020January 30, 2022 are set forth below:
| | | | | | | | | | | | | | | | | | | | | |
Location | | Use | | Ownership Status | | Approximate Area in Square Feet | |
| | | | | | |
Location | Use | Ownership
Status
| | Approximate
Area in
Square Feet
| |
New York, New York | | Corporate and Tommy Hilfiger administrative offices and showrooms | | Leased | | 220,000 | | |
New York, New York | | Calvin Klein and Heritage Brands administrative offices and showrooms | Leased | Leased | 209,000 |
474,000 | | |
New York, New York | Calvin Klein administrative offices and showrooms | Leased | | 474,000 |
| |
New York, New York | Tommy Hilfiger administrative offices and showrooms | Leased | | 220,000 |
| |
Bridgewater, New Jersey | | Corporate and retail administrative offices | Leased | Leased | 285,000 |
285,000 | | |
Banksmeadow, Australia | | Tommy Hilfiger, Calvin Klein and Heritage Brands administrative offices, showrooms, warehouse and distribution center | Leased | Leased | 243,000 |
243,000�� | (1)
| |
Milperra, Australia | Warehouse and distribution center | Leased | | 86,000 |
| (1)
| |
Amsterdam, The Netherlands | Tommy Hilfiger and Calvin Klein administrative offices, warehouse and showrooms | Leased | | 499,000 |
| |
Venlo/Oud Gastel, The Netherlands | Warehouse and distribution centers | Leased | | 2,051,000 |
| |
McDonough, Georgia | Warehouse and distribution center | Leased | | 851,000 |
| |
Palmetto, Georgia | Warehouse and distribution center | Leased | | 983,000 |
| |
Jonesville, North Carolina | Warehouse and distribution center | Owned | | 778,000 |
| |
Montreal, Canada | Administrative offices, warehouse and distribution center | Leased | | 183,000 |
| |
Hong Kong SAR, China | Corporate, Tommy Hilfiger and Calvin Klein administrative offices | Leased | | 163,000 |
| |
Hawassa, Ethiopia | Manufacturing facility | Leased | | 155,000 |
| |
Dusseldorf, Germany | Tommy Hilfiger and Calvin Klein administrative offices and showrooms
| Leased | Leased | 91,000 |
487,000 | | |
Cypress, CaliforniaVenlo/Oud Gastel/Sevenum, The Netherlands | Speedo administrative offices | LeasedWarehouse and distribution centers | | 69,000Leased |
| (2)2,450,000
| | |
Shanghai, | | | | | | | |
McDonough, Georgia | | Warehouse and distribution center | | Leased | | 851,000 | | |
Palmetto, Georgia | | Warehouse and distribution center | | Leased | | 983,000 | | |
Jonesville, North Carolina | | Warehouse and distribution center | | Owned | | 778,000 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Hong Kong SAR, China | | Corporate, Tommy Hilfiger and Calvin Klein administrative offices | Leased | Leased | 74,000 |
163,000 | |
| |
(1)
| We occupy properties in Australia since May 2019 in connection with the Australia acquisition. |
| | | | | |
(2)
| Our Speedo administrative offices in Cypress, California will no longer be occupied by us following the pending sale of our Speedo North America business to Pentland, which is expected to close in the first quarter of 2020, subject to customary conditions. Please see Note 4, “Assets Held For Sale,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion. | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
We consolidated our offices in New York, New York in 2021 and we no longer occupy our offices in 200 Madison Avenue, New York, New York, in connection with actions taken to reduce our real estate footprint, including reductions in office space and select store closures. Please see Note 17, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of these actions.
We closed our manufacturing facility in Hawassa, Ethiopia in the fourth quarter of 2021. Please see Note 6, “Redeemable Non-Controlling Interest,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
In addition, as of February 2, 2020,January 30, 2022, we leased certain other administrative offices and showrooms in various domestic and international locations. We also leased and operated as of February 2, 2020 over 1,800January 30, 2022, approximately 1,600 retail locations in the United States, Canada, Europe, Asia-Pacific and Brazil.
Information with respect to maturities of the Company’s lease liabilities in which we are a lessee is included in Note 17,16, “Leases,” in the Notes to Consolidated Financial Statements included in Item 8 of this report.
Item 3. Legal Proceedings
We are a party to certain litigations which, in management’s judgment based, in part, on the opinions of legal counsel, will not have a material adverse effect on our financial position.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “PVH.” Certain information with respect to the dividends declared on our common stock appear in the Consolidated Statements of Changes in Stockholders’ Equity and Redeemable Non-Controlling Interest included in Item 8 of this report. Please see Note 9,8, “Debt,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for a description of the restrictions to our paying dividends on our common stock. As of March 19, 2020,14, 2022, there were 562519 stockholders of record of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased(1)(2) | | (b) Average Price Paid per Share (or Unit)(1)(2) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) |
November 4, 2019 - | | | | | | | | |
December 1, 2019 | | 333,392 |
| | $ | 97.47 |
| | 332,451 |
| | $ | 752,514,829 |
|
December 2, 2019 - | | | | | | | | |
January 5, 2020 | | 381,889 |
| | 102.92 |
| | 381,441 |
| | 713,255,373 |
|
January 6, 2020 - | | | | | | | | |
February 2, 2020 | | 307,761 |
| | 98.67 |
| | 304,259 |
| | 683,257,019 |
|
Total | | 1,023,042 |
| | $ | 99.87 |
| | 1,018,151 |
| | $ | 683,257,019 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased(1)(2) | | (b) Average Price Paid per Share (or Unit)(1)(2) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) |
November 1, 2021 - | | | | | | | | |
November 28, 2021 | | 324,829 | | | $ | 118.97 | | | 323,521 | | | $ | 385,384,797 | |
November 29, 2021 - | | | | | | | | |
January 2, 2022 | | 802,247 | | | 101.82 | | | 798,608 | | | 304,081,029 | |
January 3, 2022 - | | | | | | | | |
January 30, 2022 | | 797,486 | | | 102.56 | | | 791,500 | | | 222,936,490 | |
Total | | 1,924,562 | | | $ | 105.02 | | | 1,913,629 | | | $ | 222,936,490 | |
___________________
| |
(1)(1)The PVH Corp. Board of Directors has authorized over time since 2015 an aggregate $2.0 billion stock repurchase program through June 3, 2023. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as we deem appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, trading restrictions under our insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice. We suspended share repurchases under our stock repurchase program beginning in March 2020 in response to the impacts of the COVID-19 pandemic on our business. In addition, we entered into an amendment to our senior unsecured credit facilities in June 2020, under which share repurchases were not permitted until after the relief period. However, effective June 10, 2021, the relief period was terminated and we were permitted to resume share repurchases.
(2)Our Stock Incentive Plan provides us with the right to deduct or withhold, or require employees to remit to us, an amount sufficient to satisfy any applicable tax withholding requirements applicable to stock-based compensation awards. To the extent permitted, employees may elect to satisfy all or part of such withholding requirements by tendering previously owned shares or by having us withhold shares having a fair market value equal to the minimum statutory tax withholding rate that could be imposed on the transaction. Included in this table are shares withheld during the fourth quarter of 2021 in connection with the settlement of restricted stock units to satisfy tax withholding requirements.
| Our Board of Directors has authorized over time since 2015 an aggregate $2.0 billion stock repurchase program through June 3, 2023, of which $750 million was authorized on March 26, 2019. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as we deem appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, trading restrictions under our insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice. |
| |
(2)
| Our 2006 Stock Incentive Plan provides us with the right to deduct or withhold, or require employees to remit to us, an amount sufficient to satisfy any applicable tax withholding requirements applicable to stock-based compensation awards. To the extent permitted, employees may elect to satisfy all or part of such withholding requirements by tendering previously owned shares or by having us withhold shares having a fair market value equal to the minimum statutory tax withholding rate that could be imposed on the transaction. Included in this table are shares withheld during the fourth quarter of 2019 principally in connection with the settlement of restricted stock units to satisfy tax withholding requirements, in addition to the shares repurchased as part of the stock repurchase program discussed above. |
The following performance graph and return to stockholders information shown below are provided pursuant to Item 201(e) of Regulation S-K promulgated under the Exchange Act. The graph and information are not deemed to be “filed” under the Exchange Act or otherwise subject to liabilities thereunder, nor are they to be deemed to be incorporated by reference in any filing under the Securities Act or Exchange Act unless we specifically incorporate them by reference.
The performance graph compares the yearly change in the cumulative total stockholder return on our common stock against the cumulative return of the S&P 500 Index and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five fiscal years ended February 2, 2020.January 30, 2022.
| | | | | |
Value of $100.00 invested after 5 years: | |
| |
Our Common Stock | $ | 103.60 | |
S&P 500 Index | $ | 211.72 | |
S&P 500 Apparel, Accessories & Luxury Goods Index | $ | 105.59 | |
Item 6. Selected Financial Data[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis is intended to help you understand us, our operations and our financial performance. It should be read in conjunction with our consolidated financial statements and the accompanying notes, which are included elsewhere in this report.
We are one of the largest global apparel companies in the world, and, inwith a history going back 140 years. In March 2020, we marked our 100-year anniversary as a listed company on the New York Stock Exchange. We manage a diversified brand portfolio of iconic brands, including TOMMY HILFIGER, CALVIN KLEINCalvin Klein,Warner’s, Olga,and True&Co., which are owned, Van Heusen, IZOD, ARROW,Speedo (licensed in perpetuity for North America and the Caribbean), Warner’s, Olga, True&Co. and Geoffrey Beene. Our brand portfolio, which we owned through the second quarter of 2021 and now license back for certain product categories, and other licensed brands. We also consists of various other owned, licensedhad a perpetual license for Speedo in North America and to a lesser extent, private label brands.the Caribbean until April 6, 2020. We entered into a definitive agreement on January 9, 2020during the second quarter of 2021 to sell certain of our Speedo North Americaheritage brands trademarks, including VanHeusen, IZOD, ARROW and Geoffrey Beene, as well as certain related inventories of our Heritage Brands business, to PentlandABG and upon closingother parties. We completed the sale on the first day of the sale, we will no longer license the Speedo trademark. The Speedo transaction is expected to close in the firstthird quarter of 2020. The closing is subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which has been received.2021.
Our business strategy is to positionwin with the consumer by driving brand and product relevance, while strengthening our commitment to sustainability and circularity. We are focused on driving the success of our product by focusing on key growth categories across certain lifestyles, and developing the best hero product that the consumer desires, connecting the products closer to where the consumer is going and driving pricing power. Our brands are positioned to sell globally at various price points and in multiple channels of distribution. This enables us to offer differentiated products to a broad range of consumers, while minimizing competition among our brands and reducing our reliance on any one demographic group, product category, price point, distribution channel or region. We also license the use of our trademarks to third parties and joint ventures for product categories and in regions where we believe our licensees’ expertise can better serve our brands.
OurWe generated revenue wasof $9.2 billion, $7.1 billion and $9.9 billion in 2021, 2020 and 2019 respectively. Over 60% of whichour revenue in 2021 and 2020, and over 50% of our revenue in 2019, was generated outside of the United States. Our global lifestylebusiness was significantly negatively impacted by the COVID-19 pandemic during 2020, resulting in an unprecedented material decline in revenue. Revenue in 2021 continued to be negatively impacted by the pandemic and related supply chain disruptions, although to a much lesser extent than in 2020. Our iconic brands, TOMMY HILFIGER and CALVIN KLEINHILFIGER and CalvinKlein, together generated approximatelyover 90% of our revenue during 2021, and over 85% of our revenue.revenue during 2020 and 2019.
RESULTS OF OPERATIONS
Recent Developments in Ukraine
As a result of the war in Ukraine, we made the decision to temporarily close our stores and pause commercial activities in Russia and Belarus as of March 7, 2022. Additionally, while we have no direct operations in Ukraine, virtually all of our wholesale customers and franchisees in Ukraine have closed their stores, which has resulted in a reduction in shipments to these customers and canceled orders. Approximately 2% of our revenue in 2021 was generated in Russia, Belarus and Ukraine. As such, we expect the war in Ukraine will have a negative impact on our revenue and net income in 2022 of approximately $175 million and $50 million, respectively. The war has also led to, and may lead to further, broader macroeconomic implications, including the recent weakening of the euro against the United States dollar, increases in fuel prices and volatility in the financial markets, as well as a decline in consumer spending. There is significant uncertainty regarding the extent to which the war and its broader macroeconomic implications, including the potential impacts to the broader European market, will impact our business, financial condition and results of operations in 2022.
Inflationary pressures
We currently expect that inflationary pressures, including increased labor, raw materials and freight costs, will negatively impact our earnings in 2022. We currently plan to implement price increases, beginning in the first half of 2022 and to a greater extent in the second half of 2022, to mitigate these higher costs, to the extent possible, while attempting to minimize the risks of decreasing consumer purchasing of our products. The extent of price increases will vary by region and product category. Inflation did not have a significant impact on our results of operations in 2021, 2020 or 2019.
COVID-19 OutbreakPandemic Update
The COVID-19 outbreak is havingpandemic has had, and may continue to have, a significant impact on our business, financial condition, cash flows and results of operations, in 2020.financial condition and cash flows from operations.
Virus-related concerns,Our stores have been, and continue to be, impacted by temporary closures, reduced travel, temporary store closureshours, reduced occupancy levels and government-imposed restrictions have resulted in sharply reduced traffic and consumer spending trends and sales stoppages in our retail stores and in the stores of our wholesale customers in virtually all key markets during the first quarter of 2020. In addition, our supply chain had been disrupted and may experience future disruptionshigh absenteeism as a result of eitherthe pandemic:
•Virtually all of our stores were temporarily closed factories or factories with reduced workforces. Our licensees’ salesfor varying periods of time throughout the first quarter and their supply chain are also being negatively impacted byinto the COVID-19 outbreak, which in turn negatively impacts our royalty revenue.
There is significant uncertainty about the duration and extent of the impact of the COVID-19 outbreak; however, there will be a significant negative impact to our 2020 revenue and net income.
Further, our fourthsecond quarter of 2019 earnings were negatively impacted compared2020. Most stores reopened in June 2020 but operated at significantly reduced capacity. Our stores in Europe and North America continued to the prior year period by $22 million of additional inventory reserves that we recorded in anticipation of the lower sales trends projected inface significant pressure throughout 2020 as a result of the onsetpandemic, with the majority of our stores in Europe and Canada closed during the fourth quarter.
•During the first quarter of 2021, pandemic-related pressures on our stores included temporary closures for a significant percentage of our stores in Europe, Canada and Japan. Pressures on our stores continued throughout 2021, with certain stores in Europe, Japan and Australia temporarily closed for varying periods of time in the second quarter, the majority of our stores in Australia closed temporarily in the third quarter, and the temporary closure of certain stores in Europe and China for varying periods of time in the fourth quarter. Further, a significant percentage of our stores globally were operating on reduced hours during the fourth quarter of 2021 as a result of increased levels of associate absenteeism due to the pandemic, particularly the Omicron variant. Pressures have continued into the first quarter of 2022, with strict lockdowns in China and Hong Kong SAR resulting in temporary store closures and the temporary pause of deliveries from our digital commerce businesses.
•In addition, our North America stores have been, and are expected to continue to be, challenged by the lack of international tourists coming to the United States, although to a lesser extent than in 2021. Stores located in international tourist destinations have historically represented a significant portion of that business.
Our brick and mortar wholesale customers and our licensing partners also have experienced significant business disruptions as a result of the pandemic, with several of our North America wholesale customers filing for bankruptcy in 2020. Our wholesale customers and franchisees globally generally have experienced temporary store closures and operating restrictions and obstacles in the same countries and at the same times as us. Although most of our wholesale customers’ and franchisees’ stores had reopened the majority of their locations across all regions by mid-June 2020, there was a significant level of inventory that remained in their stores. The elevated inventory levels, as well as lower traffic and consumer demand, resulted in a sharp reduction in shipments to these customers in 2020.
Our digital channels, which have historically represented a less significant portion of our overall business, experienced exceptionally strong growth during 2020, both with respect to sales to our traditional and pure play wholesale customers, as well as within our own directly operated digital commerce businesses across all brand businesses and regions. Digital penetration as a percentage of total revenue has remained consistent with 2020 at approximately 25%, despite the exceptionally strong growth in 2020. While our digital growth was less pronounced in 2021 as stores reopened and capacity restrictions lessened, we expect double digit growth in 2022. Digital penetration as a percentage of total revenue in 2022 is expected to remain consistent with 2021 at approximately 25%.
In addition, the pandemic has impacted, and continues to impact, our supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of our licensees. The current vessel, container and other transportation shortages, labor shortages and port congestion globally, as well as production delays in some of our key sourcing countries has delayed and could continue to delay product orders and, in turn, deliveries to our wholesale customers and availability in our stores and for our directly operated digital commerce businesses. These supply chain and logistics disruptions have impacted, and continue to impact, our inventory levels, including in-transit goods, which currently remain elevated as compared to 2021, and our sales volumes. We have incurred in the second half of 2021, and expect to continue to incur in 2022, higher air freight and other logistics costs in connection with these disruptions.We continue to monitor these delays and other potential disruptions in our supply chain and will continue to implement mitigation plans as needed.
Throughout the pandemic, our top priority has been to ensure the health and safety of our associates, consumers and employees of our business partners around the world. Accordingly, we have implemented health and safety measures to support high standards in our stores, offices and distribution centers, including temporary closures, reduced occupancy levels, and social
distancing and sanitization measures, as well as changes to fitting room use in our stores. We incurred in 2020 and 2021 additional costs associated with these measures.
The impacts of the COVID-19 outbreak.pandemic resulted in an unprecedented material decline in our revenue and earnings in 2020, including $1.021 billion of pre-tax noncash impairment charges recognized during the year, primarily related to goodwill, tradenames and other intangible assets, and store assets. We took the following actions, starting in the first quarter of 2020, to reduce operating expenses in response to the pandemic and the evolving retail landscape: (i) reducing payroll costs, including temporary furloughs, salary and incentive compensation reductions, decreased working hours, and hiring freezes, as well as taking advantage of COVID-related government payroll subsidy programs primarily in international jurisdictions, (ii) eliminating or reducing expenses in all discretionary spending categories and (iii) reducing rent expense through rent abatements negotiated with landlords for certain stores affected by temporary closures. We also announced in July 2020 plans to streamline our North American operations to better align our business with the evolving retail landscape, including (i) a reduction in our North America office workforce by approximately 450 positions, or 12%, across all three brand businesses and corporate functions, which has resulted in annual cost savings of approximately $80 million, and (ii) the exit from our Heritage Brands Retail business, which was completed in 2021. In March 2021, we announced plans to reduce our workforce, primarily in certain international markets, and to reduce our real estate footprint, including reductions in office space and select store closures, which are expected to result in annual cost savings of approximately $60 million. All costs related to these actions were incurred by the end of 2021.
We also have taken and continue to take actions to manage our working capital and liquidity. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
There is significant uncertainty due to the current war in Ukraine and its broader macroeconomic implications, inflationary pressures globally, as well as the continued uncertainty due to the COVID-19 pandemic and supply chain and logistics disruptions, which have resulted in and are expected to continue to result in delivery delays to wholesale customers and delayed inventory availability for our stores and digital commerce businesses. Our 2022 outlook assumes no material worsening of current conditions. Our revenue and earnings in 2022 may be subject to significant material change.
Operations Overview
We generate net sales from (i) the wholesale distribution to traditional retailers (both for stores and digital operations), pure play digital commerce retailers, franchisees, licensees and distributors of dress shirts, neckwear,branded sportswear (casual apparel), jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products,dress shirts, neckwear, handbags, accessories, footwear and other related products under owned and licensed trademarks, including through digital commerce sites operated by our wholesale partners and pure play digital commerce retailers, and (ii) the sale of certain of these products through (a) approximately 1,8301,600 Company-operated free-standing retail store locations worldwide under our TOMMY HILFIGER, CALVIN KLEIN and certain of our heritage brands Calvin Klein trademarks, (b) approximately 1,5001,400 Company-operated shop-in-shop/concession locations worldwide under our TOMMY HILFIGER and CALVIN KLEINCalvin Klein trademarks, and (c) digital commerce sites in over 30 countriesworldwide, principally under our TOMMY HILFIGER and CALVIN KLEINCalvin Klein trademarks andtrademarks. We announced in the United States through2020 a plan to exit our Heritage Brands Retail business, which consisted of 162 directly operated digital commerce sites forstores in North America and was completed in 2021. Speedo, True&Co., Van Heusen, and IZOD, as well as our
styleBureau.com site. Additionally, we generate royalty, advertising and other revenue from fees for licensing the use of our trademarks. We manage our operations through our operating divisions, which are presented as sixthe following reportable segments: (i) Tommy Hilfiger North America; (ii) Tommy Hilfiger International; (iii) Calvin Klein North America; (iv) Calvin Klein International; (v) Heritage Brands Wholesale; and, through the second quarter of 2021, (vi) Heritage Brands Retail. Our Heritage Brands Retail segment has ceased operations.
We have entered into theThe following actions and transactions that have impacted our results of operations and the comparability among the years, including our 20202022 expectations, as compared to 2019, as discussed below:
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• | We entered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland for $170 million in cash, subject to a working capital adjustment, as described above. We recorded a pre-tax noncash loss of $142 million in the fourth quarter of 2019 related to the Speedo transaction and expected deconsolidation of the net assets of the•We entered into a definitive agreement in June 2021 to sell certain of our heritage brands trademarks, including VanHeusen, IZOD, ARROW and GeoffreyBeene, as well as certain related inventories of our Heritage Brands business with a net carrying value of $98 million, to ABG and other parties, and subsequently completed the sale on the first day of the third quarter of 2021 for net proceeds of $216 million. We recorded an aggregate net pre-tax gain of $113 million in the third quarter of 2021 in connection with the transaction, consisting of (i) a gain of $119 million, which represented the excess of the amount of consideration received over the carrying value of the net assets, less costs to sell, and a net gain on our retirement plans associated with the transaction, partially offset by (ii) $6 million of pre-tax severance costs. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
•We announced in March 2021 plans to reduce our workforce, primarily in certain international markets, and to reduce
our real estate footprint, including reductions in office space and select store closures, which are expected to result in annual cost savings of approximately $60 million. We recorded pre-tax costs of $48 million during 2021 consisting of (i) $28 million of noncash asset impairments, (ii) $16 million of severance and (iii) $4 million of contract termination and other costs. All costs related to these actions were incurred by the end of 2021. Please see Note 17, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
•We announced in July 2020 plans to streamline our North American operations to better align our business with the evolving retail landscape including (i) a reduction in our office workforce by approximately 450 positions, or 12%, across all three brand businesses and corporate functions (the “North America workforce reduction”), which has resulted in annual cost savings of approximately $80 million, and (ii) the exit from our Heritage Brands Retail business, which was substantially completed in the second quarter of 2021. We recorded pre-tax costs of $21 million during 2021 in connection with the exit from the Heritage Brands Retail business, consisting of (i) $11 million of severance and other termination benefits, (ii) $6 million of accelerated amortization of lease assets and (iii) $4 million of contract termination and other costs. We recorded pre-tax costs of $69 million during 2020, including (i) $40 million related to the North America workforce reduction, primarily consisting of severance, and (ii) $29 million in connection with the exit from the Heritage Brands Retail business, consisting of $15 million of severance, $7 million of noncash asset impairments and $7 million of accelerated amortization of lease assets and other costs. All costs related to the North America workforce reduction were incurred by the end of 2020. All costs related to the exit from the Heritage Brands Retail business were incurred by the end of 2021. Please see Note 17, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
•We licensed Speedo for North America and the Caribbean until April 2020, at which time we sold the Speedo North America business to Pentland, the parent company of the Speedo brand, for net proceeds of $169 million (the “Speedo transaction”). Upon the closing of the transaction, we deconsolidated the net assets of the Speedo North America business and no longer licensed the Speedo trademark. We recorded a pre-tax noncash loss of $142 million in the fourth quarter of 2019, when the Speedo transaction was announced, consisting of (i) a noncash impairment of our perpetual license right for the Speedo trademark and (ii) a noncash loss to reduce the carrying value of the business to its estimated fair value, less costs to sell. We recorded an additional pre-tax noncash net loss of $3 million in the first quarter of 2020 upon the closing of the Speedo transaction, consisting of (i) a $6 million noncash loss resulting from the remeasurement of the loss recorded in the fourth quarter of 2019, primarily due to changes to the net assets of the Speedo North America business subsequent to February 2, 2020, partially offset by (ii) a $3 million gain on our retirement plans. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
•We completed a transaction in 2019 in connection with which we terminated early the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses in order to consolidate the socks and hosiery businesses for all of our brands in the United States and Canada in a newly formed joint venture, PVH Legwear LLC (“PVH Legwear”), and to bring in-house the international Calvin Klein socks and hosiery wholesale businesses. We own a 49% economic interest in PVH Legwear. PVH Legwear was formed with a wholly owned subsidiary of our former heritage brands trademarks socks and hosiery licensee, and licenses from us since December 2019 the rights to distribute and sell TOMMY HILFIGER, Calvin Klein, Warner’s and, through the second quarter of 2021, IZOD and Van Heusensocks and hosiery in the United States and Canada. Following the Heritage Brands transaction, PVH Legwear now licenses from ABG the rights to distribute and sell in these countries IZOD and VanHeusen socks and hosiery. We recorded a pre-tax charge of $60 million in 2019 in connection with these actions.
•We completed the Australia and the TH CSAP acquisitions in the second quarter of 2019. Prior to the closing of the Australia acquisition, we, along with Gazal, jointly owned and managed a joint venture, PVH Australia, which licensed and operated businesses in Australia, New Zealand and other parts of Oceania under the TOMMY HILFIGER, Calvin Klein and Van Heusen brands, along with other owned and licensed brands. PVH Australia came under our full control as a result of the Australia acquisition and we now operate directly those businesses. The aggregate net purchase price for the shares acquired was $59 million, net of cash acquired and after taking into account the proceeds from the divestiture to a third party of an office building and warehouse owned by Gazal in June 2019. Pursuant to the terms of the acquisition agreement, key executives of Gazal and PVH Australia exchanged a portion of their interests in Gazal for approximately 6% of the outstanding shares of our previously wholly owned subsidiary that acquired 100% of the ownership interests in the Australia business, for which we recognized a liability on the date of the acquisition. We settled in June 2020 a portion of the liability for this mandatorily redeemable non-controlling interest for $17 million, and settled in June 2021 the remaining liability for $24 million. We completed the TH CSAP acquisition for $74 million and now operate directly the Tommy Hilfiger retail business in the Central and Southeast Asia market. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Speedo trademark and (ii) a noncash loss to reduce the carrying value of the business to its estimated fair value, less costs to sell.
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• | We entered into agreements on July 3, 2019 to terminate early the licenses for the global Calvin Klein and Tommy Hilfiger North America socks and hosiery businesses in order to consolidate the socks and hosiery businesses for all of our brands in the United States and Canada in a newly formed joint venture, PVH Legwear, in which we own a 49% economic interest, and to bring in-house the international Calvin Klein socks and hosiery wholesale businesses. PVH Legwear was formed with a wholly owned subsidiary of our former Heritage Brands socks and hosiery licensee, and licenses from us the rights to distribute and sell TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s socks and hosiery beginning in December 2019. We recorded a pre-tax charge of $60 million during 2019 in connection with these agreements.
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• | We completed the Australia and TH CSAP acquisitions in the second quarter of 2019. The Australia acquisition closed on May 31, 2019. Prior to the closing, we, along with Gazal, jointly owned and managed a joint venture, PVH Australia, which licensed and operated businesses under the TOMMY HILFIGER, CALVIN KLEIN and Van Heusen brands, along with other owned and licensed brands. PVH Australia came under our full control as a result of the Australia acquisition and we now operate directly those businesses. The aggregate net purchase price for the shares acquired was $59 million, net of cash acquired and after taking into account the proceeds from the divestiture to a third party of an office building and warehouse owned by Gazal in June 2019. We completed the TH CSAP acquisition on July 1, 2019 for $74 million, as a result of which we now operate directly the Tommy Hilfiger retail business in the Central and Southeast Asia market. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
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In connection with the Australia and TH CSAP acquisitions, we recorded an aggregate net pre-tax gain of $83 million during 2019, including (i) a noncash gain of $113 million to write up our existingpreviously held equity investments in Gazal and PVH Australia to fair value, partially offset by (ii) $21 million of pre-tax costs, primarily consisting of noncash valuation adjustments and one-time expenses recorded on our equity investments in Gazal and PVH Australia prior to the Australia acquisition closing, and (iii) a $9 million expense recorded in interest expense net resulting from the remeasurement of ourthe mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition. We recorded a pre-tax expense of $5 million during 2020 in interest expense resulting from the remeasurement of the mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition.
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• | We entered into a licensing agreement on May 30, 2019 with G-III for the design, production and wholesale distribution of CALVIN KLEIN JEANS women’s jeanswear collections in the United States and Canada, which resulted in the discontinuation of our directly operated Calvin Klein North America women’s jeanswear wholesale business in 2019.
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•We refinanced on April 29,closed our TOMMY HILFIGER flagship and anchor stores in the United States (the “TH U.S. store closures”) in the first quarter of 2019 our senior credit facilities and recorded pre-tax debt modification and extinguishment chargescosts of $5 million.$55 million, primarily consisting of noncash lease asset impairments. Please see Note 11, “Fair Value Measurements,” in the section entitled “Liquidity and Capital Resources” belowNotes to Consolidated Financial Statements included in Item 8 of this report for further discussion.discussion of the noncash lease asset impairments.
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• | We closed our TOMMY HILFIGER flagship and anchor stores in the United States (the “TH U.S. store closures”)in the first quarter of 2019 and recorded pre-tax costs of $55 million, primarily consisting of noncash lease asset impairments. Please see Note 12, “Fair Value Measurements,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the noncash lease asset impairments.
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• | We announced on•We announced in January 10, 2019 a restructuring in connection with strategic changes for our Calvin Klein business (the “Calvin Klein restructuring”). The strategic changes included (i) the closure of the CALVIN KLEIN 205 W39 NYC Calvin Klein business (the “Calvin Klein restructuring”). The strategic changes included (i) the closure of the CALVIN KLEIN 205 W39 NYC brand, (formerly Calvin Klein Collection), (ii) the closure of the flagship store on Madison Avenue in New York, New York, New
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York (collectively with (i), the “CK Collection closure”), (iii) the restructuring of the Calvin Klein creative and design teams globally, and (iv) the consolidation of operations for the men’s Calvin Klein Sportswear and Calvin Klein Jeans businesses. All costs related to this restructuring were incurred by the end of 2019. We recorded pre-tax costs of $103 million during 2019 in connection with the Calvin Klein restructuring, consisting of a $30 million noncash lease asset impairment resulting from the closure of the flagship store on Madison Avenue in New York, New York, $26 million of contract termination and other costs, $26 million of severance, $13 million of inventory markdowns and $9 million of other noncash asset impairments and $13 millionimpairments. All costs related to this restructuring were incurred by the end of inventory markdowns. We recorded pre-tax costs of $41 million in the fourth quarter of 2018, consisting of $27 million of severance, $7 million of noncash asset impairments, $4 million of contract termination and other costs and $2 million of inventory markdowns. Please see Note 18, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.2019.
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• | We acquired on April 20, 2018 the Geoffrey Beene tradename from Geoffrey Beene for $17 million, of which $16 million was paid in cash. Prior to the acquisition, we had licensed the rights to design, market and distribute Geoffrey Beene dress shirts and neckwear from Geoffrey Beene.
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We issued on December 21, 2017 €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027. We redeemed on January 5, 2018 our $700 million principal amount of 4 1/2% senior notes due December 15, 2022 (using the proceeds of the senior notes due December 15, 2027) and recorded pre-tax debt extinguishment charges of $24 million. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
We amended on December 20, 2017 Mr. Tommy Hilfiger’s employment agreement, pursuant to which we made a cash buyout of a portion of the future payment obligation (the “Mr. Hilfiger amendment”). We recorded pre-tax charges of $83 million in 2017 in connection with the amendment.
We restructured our supply chain relationship with Li & Fung Trading Limited (“Li & Fung”) in a transaction that closed on September 30, 2017. Our non-exclusive buying agency agreement with Li & Fung was terminated in connection with this transaction (the “Li & Fung termination”). We recorded pre-tax charges of $54 million in 2017 in connection with the termination.
We acquired on September 1, 2017 the Tommy Hilfiger and Calvin Klein wholesale and concessions businesses in Belgium and Luxembourg from a former agent (the “Belgian acquisition”) for $12 million. As a result of this acquisition, we now operate directly our Tommy Hilfiger and Calvin Klein businesses in this region.
We acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital-centric retailer, for $28 million, net of $400,000 of cash acquired. This acquisition enabled us to participate further in the fast-growing online channel and provided a platform to increase innovation, data-driven decisions and speed in the way we serve our consumers across our channels of distribution.
We completed the relocation of our Tommy Hilfiger office in New York in 2017 and recorded related pre-tax charges of $19 million, including noncash depreciation expense.
We purchased a group annuity in 2017 for certain participants of our retirement plans under which certain of our benefit obligations were transferred to an insurer. We recorded a pre-tax loss of $9 million in connection with the noncash settlement of such benefit obligations.
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• | We acquired on April 13, 2016 the 55% ownership interests in our former joint venture for TOMMY HILFIGER in China that we did not already own (the “TH China acquisition”). As a result of the TH China acquisition, we now operate directly our Tommy Hilfiger business in this market. We recorded pre-tax charges of $24 million and $27 million in 2018 and 2017, respectively, primarily consisting of noncash amortization of short-lived assets.
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Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant to the business. Our results of operations in local foreign currencies are translated into United States dollars using an average exchange rate over the representative period. Accordingly, our results of operations are unfavorably impacted during times of a strengthening United States dollar against the foreign currencies in which we generate significant revenue and earnings and favorably impacted during times of a weakening United States dollar against those currencies. Over 50%60% of our 20192021 revenue was subject to foreign currency translation. The United States dollar strengthened against most major currencies
in 2019 and into the first half of 2020, but then weakened against those currencies in the latter parthalf of 2018 and in 2019,2020, particularly the euro, which is the foreign currency in which we transact the most business. As a result, our 2019While the United States dollar continued to weaken against the euro in the first half of 2021, it has strengthened against the euro in the second half of 2021 and into 2022. Our 2021 revenue and net income decreasedincreased by approximately $215$140 million and $25 million, respectively, as compared to 20182020 due to the impact of foreign currency translation. WeHowever, we currently expect a decrease in our 2022 revenue and net income in 2020 as compared to 2019decrease by approximately $355 million and $50 million, respectively, due to the impact of foreign currency translation.
There is also a transactional impact on our financial results because inventory typically is purchased in United States dollars by our foreign subsidiaries. As with translation, ourOur results of operations will be unfavorably impacted during times of a strengthening United States dollar, as the increased local currency value of inventory results in a higher cost of goods in local currency when
the goods are sold, and favorably impacted during times of a weakening United States dollar, as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We use foreign currency forward exchange contracts to hedge against a portion of the exposure related to this transactional impact. The contracts cover at least 70%of the projected inventory purchases in United States dollars by our foreign subsidiaries. These contracts are generally entered into 12 months in advance of the related inventory purchases. Therefore, the impact of fluctuations of the United States dollar on the cost of inventory purchases covered by these contracts may be realized in our results of operations in the year following their inception, as the underlying inventory hedged by the contracts is sold. Our 20192021 net income included a slight benefitincreased by approximately $30 million as compared to 2018 as a result of this transactional impact. However, the unfavorable impact of a strengthening United States dollar against most major currencies in the latter part of 2018 and in 2019, particularly the euro, is expected to negatively impact our gross margin during 2020. Additionally, there is a transactional impact related to changes in SG&A expenses as a result of fluctuations in foreign currency exchange rates. We currently expect a decrease in our net income in 2020 as compared to 2019 due to the transactional impact.impact of foreign currency. We currently expect our 2022 net income to decrease by approximately $10 million due to the transactional impact of foreign currency.
Further, we have exposure to changes in foreign currency exchange rates related to our €950 million€1.125 billion aggregate principal amount of euro-denominated senior notes that we had issuedare held in the United States. The strengthening of the United States dollar against the euro would require us to use a lower amount of our cash flows from operations to pay interest and make long-term debt repayments, whereas the weakening of the United States dollar against the euro would require us to use a greater amount of our cash flows from operations to pay interest and make long-term debt repayments. We designated the carrying amount of these euro-denominated senior notes that we had issued in the United Statesby PVH Corp., a U.S. based entity, as net investment hedges of our investments in certain of our foreign subsidiaries that use the euro as their functional currency. As a result, the remeasurement of these foreign currency borrowings at the end of each period is recorded in equity.
Retail comparable store sales discussed below refer to sales from Company-operated retail stores that have been open and operated by us for at least 12 months, as well as sales from Company-operated digital commerce sites for those businesses and regions that have operated the related digital commerce site for at least 12 months. Sales from retail stores and Company-operated digital commerce sites that are closed or shut down during the year are excluded from the calculation of retail comparable store sales. Sales for retail stores that are relocated, materially altered in size or closed for a prolonged period of time and sales from Company-operated digital commerce sites that are materially altered are also excluded from the calculation of retail comparable store sales until such stores or sites have been in their new location or in their newly renovated state, as applicable, for at least 12 months. Retail comparable store sales are based on local currencies and comparable weeks. As a result of the 53rd week in 2017, the 2018 retail comparable store sales are more appropriately compared with the 52 week period ended February 4, 2018 (which excludes for this purpose the first week of 2017). As such, all 2018 retail comparable store sales are presented on this shifted basis.
The following table summarizes our income statements of operations in 2019, 20182021, 2020 and 2017:2019:
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| 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Net sales | $ | 8,724 | | | $ | 6,799 | | | $ | 9,400 | |
Royalty revenue | 340 | | | 260 | | | 380 | |
Advertising and other revenue | 91 | | | 74 | | | 129 | |
Total revenue | 9,155 | | | 7,133 | | | 9,909 | |
Gross profit | 5,324 | | | 3,777 | | | 5,388 | |
% of total revenue | 58.2 | % | | 53.0 | % | | 54.4 | % |
SG&A | 4,454 | | | 3,983 | | | 4,715 | |
% of total revenue | 48.7 | % | | 55.8 | % | | 47.6 | % |
Goodwill and other intangible asset impairments | — | | | 933 | | | — | |
Non-service related pension and postretirement (income) cost | (64) | | | (76) | | | 90 | |
Debt modification and extinguishment costs | — | | | — | | | 5 | |
Other (gain) loss, net | (119) | | | 3 | | | 29 | |
Equity in net income (loss) of unconsolidated affiliates | 24 | | | (5) | | | 10 | |
Income (loss) before interest and taxes | 1,077 | | | (1,072) | | | 559 | |
Interest expense | 109 | | | 125 | | | 120 | |
Interest income | 4 | | | 4 | | | 5 | |
Income (loss) before taxes | 973 | | | (1,193) | | | 444 | |
Income tax expense (benefit) | 21 | | | (56) | | | 29 | |
Net income (loss) | 952 | | | (1,137) | | | 415 | |
Less: Net loss attributable to redeemable non-controlling interest | (0) | | | (1) | | | (2) | |
Net income (loss) attributable to PVH Corp. | $ | 952 | | | $ | (1,136) | | | $ | 417 | |
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| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Net sales | $ | 9,400 |
| | $ | 9,154 |
| | $ | 8,439 |
|
Royalty revenue | 380 |
| | 376 |
| | 366 |
|
Advertising and other revenue | 129 |
| | 127 |
| | 109 |
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Total revenue | 9,909 |
| | 9,657 |
| | 8,915 |
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Gross profit | 5,388 |
| | 5,308 |
| | 4,894 |
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% of total revenue | 54.4 | % | | 55.0 | % | | 54.9 | % |
SG&A | 4,715 |
| | 4,433 |
| | 4,245 |
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% of total revenue | 47.6 | % | | 45.9 | % | | 47.6 | % |
Non-service related pension and postretirement cost | 90 |
| | 5 |
| | 3 |
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Debt modification and extinguishment costs | 5 |
| | — |
| | 24 |
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Other noncash loss, net | 29 |
| | — |
| | — |
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Equity in net income of unconsolidated affiliates | 10 |
| | 21 |
| | 10 |
|
Income before interest and taxes | 559 |
| | 892 |
| | 632 |
|
Interest expense | 120 |
| | 121 |
| | 128 |
|
Interest income | 5 |
| | 5 |
| | 6 |
|
Income before taxes | 444 |
| | 776 |
| | 510 |
|
Income tax expense (benefit) | 29 |
| | 31 |
| | (26 | ) |
Net income | 415 |
| | 745 |
| | 536 |
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Less: Net loss attributable to redeemable non-controlling interest | (2 | ) | | (2 | ) | | (2 | ) |
Net income attributable to PVH Corp. | $ | 417 |
| | $ | 746 |
| | $ | 538 |
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Total Revenue
Total revenue was $9.155 billion in 2021, $7.133 billion in 2020 and $9.909 billion in 2019, $9.657 billion2019. Virtually all of our stores were temporarily closed for varying periods of time throughout the first quarter and into the second quarter of 2020 but had reopened in 2018June 2020 and $8.915 billionwere operating at significantly reduced hours and capacity for the remainder of 2020. Further, our stores in 2017. RevenueEurope and North America continued to face significant pressure as a result of the pandemic, with the majority of our stores in 2017 includedEurope and Canada closed during the benefitfourth quarter of 2020. Pandemic-related pressures on our stores continued during 2021, although to a 53rd week.much lesser extent than in the prior year period, with a significant percentage of our stores in Europe, Canada and Japan temporarily closed for varying periods of time throughout the first half of 2021, the majority of our
stores in Australia closed temporarily during the third quarter of 2021, and certain stores in Europe and China temporarily closed for varying periods of time during the fourth quarter of 2021. Additionally, a significant percentage of our stores globally continued to operate on reduced hours and capacity in 2021, with additional pressure during the fourth quarter of 2021 as a result of increased levels of associate absenteeism due to the pandemic, particularly the Omicron variant. The increase in revenue of $252 million,$2.022 billion, or 3%28%, in 20192021 as compared to 20182020 reflected:
•The addition of an aggregate $1.067 billion of revenue, or a 29% increase compared to the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included a positive impact of $74 million, or 2%, related to foreign currency translation. Tommy Hilfiger International segment revenue increased 32% (including a 2% positive foreign currency impact). Revenue in our Tommy Hilfiger North America segment increased 22%.
•The addition of an aggregate $1.022 billion of revenue, or a 39% increase compared to the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included a positive impact of $60 million, or 2%, related to foreign currency translation. Calvin Klein International segment revenue increased 39% (including a 3% positive foreign currency impact). Revenue in our Calvin Klein North America segment increased 38%.
•The reduction of an aggregate $67 million of revenue, or an 8% decrease compared to the prior year, attributable to our Heritage Brands Wholesale and Heritage Brands Retail segments, which included a 27% decline resulting from (i) the Heritage Brands transaction that closed on the first day of the third quarter of 2021, (ii) the exit from the Heritage Brands Retail business, which was substantially completed in the second quarter of 2021, and (iii) the April 2020 closing of the Speedo transaction.
Our 2021 revenue reflected a 38% increase in revenue through our wholesale distribution channel, inclusive of a 3% reduction from the Heritage Brands transaction, and an 18% increase in revenue through our direct-to-consumer distribution channel, inclusive of a 3% reduction from the exit of the Heritage Brands Retail business. Sales through our directly operated digital commerce businesses increased 15% as compared to the prior year on top of exceptionally strong growth in 2020. Our sales through digital channels, including the digital businesses of our traditional and pure play wholesale customers and our directly operated digital commerce businesses, as a percentage of total revenue was approximately 25%.
The decrease in revenue of $2.776 billion, or 28%, in 2020 as compared to 2019 was due principally to the netimpacts of the COVID-19 pandemic on our business and included the aggregate effect of the following items:
| |
• | •The net addition of an aggregate $367 million of revenue, or an 8% increase over the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included a negative impact of $129 million, or 3%, related to foreign currency translation. Tommy Hilfiger International segment revenue increased 15% (including a 5% negative foreign currency impact), driven principally by outperformance in Europe and the addition of revenue resulting from the Australia and TH CSAP acquisitions. Tommy Hilfiger International comparable store sales increased 9%, including a benefit of 4% from sales on our digital commerce sites. Revenue in our Tommy Hilfiger North America segment decreased 1%, as growth in the North America wholesale business was more than offset by a 6% decline in Tommy Hilfiger North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations. |
The net reduction of an aggregate $63 million$1.075 billion of revenue, or a 23% decrease compared to the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included a positive impact of $98 million, or 2%, related to foreign currency translation. Tommy Hilfiger International segment revenue decreased 13% (including a 3% positive foreign currency impact). Revenue in our Tommy Hilfiger North America segment decreased 41%.
•The reduction of an aggregate $1.029 billion of revenue, or a 28% decrease compared to the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included a negativepositive impact of $85$40 million, or 2%1%, related to foreign currency translation. Calvin Klein International segment revenue increased 3%decreased 16% (including a 4% negative2% positive foreign currency impact), as continued solid growth in Europe and the addition of revenue resulting from the Australia acquisition were partly offset by the negative impacts of (i) softness experienced in Asia due, in part, to the business disruptions caused by the protests in Hong Kong SAR and the trade tensions between the United States and China and (ii) the reduction of revenue resulting from the CK Collection closure. Calvin Klein International comparable store sales decreased 1%. Revenue in our Calvin Klein North America segment decreased 7%, driven by the effect of the G-III license and a 2% decrease in Calvin Klein North America comparable store sales due to weakness in traffic and consumer spending trends, especially in stores located in international tourist locations.43%.
•The reduction of an aggregate $52$672 million of revenue, or a 3%44% decrease compared to the prior year, attributable to our Heritage Brands RetailWholesale and Heritage Brands WholesaleRetail segments, primarily due to weakness inwhich included a 12% decline resulting from the April 2020 sale of the Speedo North America business.
Our 2020 revenue reflected a 30% decline in revenue through our wholesale businessdistribution channel and a 2%25% decline in comparable store sales.
The increase in revenue of $742 million, or 8%, in 2018through our direct-to-consumer distribution channel. Sales through our directly operated digital commerce businesses increased 69% as compared to 2017 was due principally to the effect of the following items:
The addition of an aggregate $451 million of revenue, or a 12% increase over the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included the addition of $49 million, or 1%, related to the impact of foreign currency translation. Tommy Hilfiger International segment revenue increased 15% (including a 2% positive foreign currency impact),2019 driven by strong performancegrowth across all regionsbrand businesses and channels. Tommy Hilfiger International comparable storeregions. Our sales increased 13%. Revenue in our Tommy Hilfiger North America segment increased 6%, principally attributable to strength inthrough digital channels, including the wholesale business and a 5% increase in Tommy Hilfiger North America comparable store sales.
The addition of an aggregate $270 million of revenue, or an 8% increase over the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included the addition of $12 million related to the impact of foreign currency translation. Calvin Klein International segment revenue increased 10%, driven by growth in Europe and Asia. Calvin Klein International comparable store sales increased 5%. Revenue in our Calvin Klein North America segment increased 5% primarily as a result of growth in the wholesale business and a 1% increase in Calvin Klein North America comparable store sales.
The addition of an aggregate $21 million of revenue, or a 1% increase over the prior year, attributable to our Heritage Brands Retail and Heritage Brands Wholesale segments. Comparable store sales increased 1%.
There is significant uncertainty with respect to the impact of the COVID-19 outbreak on our business and thedigital businesses of our licenseestraditional and other business partners. pure play wholesale customers and our directly operated digital commerce businesses, as a percentage of total revenue doubled in 2020 as compared to 2019.
We currently expect that revenue will decrease significantly in 2020for the full year 2022 to increase approximately 2% to 3% compared to 2019,2021, inclusive of a negative impact of approximately 4% related to foreign currency translation, primarilytranslation. Our 2022 outlook also reflects (i) a 2% reduction
in revenue resulting from the Heritage Brands transaction and the exit from the Heritage Brands Retail business and (ii) a 2% reduction resulting from our decision to temporarily close our stores and pause commercial activities in Russia and Belarus, as well as a reduction in wholesale shipments to Ukraine as a result of the war. We currently expect our sales through digital channels, including the digital businesses of our traditional and pure play wholesale customers and our directly operated digital commerce businesses, as a percentage of total revenue to remain consistent with 2021. There is significant uncertainty due to the negative impacts to our businesses caused bycurrent war in Ukraine and its broader macroeconomic implications, inflationary pressures globally, as well as the COVID-19 outbreak. Revenue in 2020 is also expected to decrease by approximately $150 millioncontinued uncertainty due to the aggregate net effect of reductions resulting from (i) the Speedo transaction,COVID-19 pandemic and supply chain and logistics disruptions, which ishave resulted in and are expected to closecontinue to result in the first quarter of 2020,delivery delays to wholesale customers and (ii) the G-III license, which commenceddelayed inventory availability for our stores and digital commerce businesses. As such, our revenue in 2019, partially offset by an addition of revenue resulting from (iii) the Australia and TH CSAP acquisitions, which closed in the second quarter of 2019.2022 may be subject to significant material change.
Gross Profit
Gross profit is calculated as total revenue less cost of goods sold and gross margin is calculated as gross profit divided by total revenue. Included as cost of goods sold are costs associated with the production and procurement of product, such as inbound freight costs, purchasing and receiving costs and inspection costs. Also included as cost of goods sold are the amounts recognized on foreign currency forward exchange contracts as the underlying inventory hedged by such forward exchange contracts is sold. Warehousing and distribution expenses are included in SG&A expenses. All of our royalty, advertising and other revenue is included in gross profit because there is no cost of goods sold associated with such revenue. As a result, our gross profit may not be comparable to that of other entities.
The following table shows our revenue mix between net sales and royalty, advertising and other revenue, as well as our gross margin for 2019, 20182021, 2020 and 2017:2019:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Components of revenue: | | | | | |
Net sales | 95.3 | % | | 95.3 | % | | 94.9 | % |
Royalty, advertising and other revenue | 4.7 | | | 4.7 | | | 5.1 | |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross margin | 58.2 | % | | 53.0 | % | | 54.4 | % |
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Components of revenue: | | | | | |
Net sales | 94.9 | % | | 94.8 | % | | 94.7 | % |
Royalty, advertising and other revenue | 5.1 |
| | 5.2 |
| | 5.3 |
|
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross margin | 54.4 | % | | 55.0 | % | | 54.9 | % |
Gross profit in 2021 was $5.324 billion, or 58.2% of total revenue, as compared to $3.777 billion, or 53.0% of total revenue, in 2020. The 520 basis point gross margin increase was primarily driven by (i) more full price selling, (ii) the impact of a change in the revenue mix between our International and North America segments as compared to the prior year as our International segments revenue was a larger proportion and generally carry higher gross margins, and (iii) the favorable impact of the weaker United States dollar on our international businesses, particularly our European businesses, that purchase inventory in United States dollars, for which they generally enter into foreign currency forward exchange contracts 12 months in advance of the related inventory purchases, as the decreased local currency value of inventory results in lower cost of goods in local currency when the goods are sold.These improvements were partially offset by higher freight costs in 2021 than in the prior year, including an increase of approximately $35 million in air freight to mitigate ongoing supply chain and logistics delays.
Gross profit in 20192020 was $3.777 billion, or 53.0% of total revenue, as compared to $5.388 billion, or 54.4% of total revenue, as compared to $5.308 billion, or 55.0% of total revenue, in 2018.2019. The 60140 basis point decrease in gross margin was principallyprimarily driven by (i) a gross margin decline in our Tommy Hilfiger North America business due to moreincreased promotional selling as compared to the prior year, (ii) the impact of additional inventory reserves recorded in the fourth quarter of 2019 in anticipation of lower 2020 sales trends as a result of the onsetimpact of the COVID-19 outbreak, (iii) short-lived noncashpandemic on the business, (ii) significant inventory valuation adjustmentsreserves that had been recorded in connection with the Australia and TH CSAP acquisitions, and (iv)first quarter of 2020 as a result of the negative impact of tariffs imposedthe COVID-19 pandemic on goods imported from China into the United States. These decreases were partially offset by the favorable impact of faster growth in our Tommy Hilfiger
International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher gross margins, as well as gross margin improvements realized in our Calvin Klein North America business.
Gross profit in 2018 was $5.308 billion, or 55.0% of total revenue, as compared to $4.894 billion, or 54.9% of total revenue, in 2017. The 10 basis point increase in gross margin was principally driven by (i) a favorable mix of business, due to faster growth in our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments, as our International segments generally carry higher gross margins, and (ii) gross margin improvement in our Tommy Hilfiger business. Partially offsetting these increases were gross margin declines in our Calvin Klein and Heritage Brands businesses principally due to more promotional selling.
We currently expect that gross margin in 2020 will decrease as compared to 2019 primarily due to (i) the need for(iii) increased promotional selling and inventory liquidation as a result ofin conjunction with the COVID-19 outbreakexit from our Heritage Brands Retail business and (ii)(iv) the unfavorable impact of the stronger United States dollar on our international businesses that purchase inventory in United States dollars, particularly our European businesses, as the increased local currency value of inventory resultsresulted in higher cost of goods in local currency when the goods are sold. Therewere sold, partially offset by (v) the impact of a change in the revenue mix between our International and North America segments as compared to the prior year as our International segments revenue was a larger proportion and generally carry higher gross margins.
We currently expect that gross margin in 2022 will be relatively flat as compared to 2021. Our expectation for 2022 includes increases primarily as a result of (i) the impact of a change in the revenue mix between our International and North America segments as compared to 2021, as our International segments revenue is significant uncertainty with respectexpected to be a larger proportion in 2022 than in 2021 and generally carry higher gross margins and (ii) the impact of the COVID-19 outbreak onreduction in revenue from our businessHeritage Brands businesses as a result of the Heritage Brands transaction and the exit from the Heritage Brands Retail business, as the revenue
from our Heritage Brands businesses of our licenseescarried lower gross margins. These increases are expected to be mostly offset by the higher product, freight and other business partners.logistics costs, including ocean freight, we expect to incur in 2022 as a result of the recent inflationary pressures and the continued supply chain and logistics disruptions, which we expect to mitigate, to the extent possible, with planned price increases on select product categories.
SG&A Expenses
Our SG&A expenses were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(In millions) | | | | | |
SG&A expenses | $ | 4,454 | | | $ | 3,983 | | | $ | 4,715 | |
% of total revenue | 48.7 | % | | 55.8 | % | | 47.6 | % |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
(In millions) | | | | | |
SG&A expenses | $ | 4,715 |
| | $ | 4,433 |
| | $ | 4,245 |
|
% of total revenue | 47.6 | % | | 45.9 | % | | 47.6 | % |
SG&A expenses in 20192021 were $4.715$4.454 billion, or 47.6%48.7% of total revenue, as compared to $4.433$3.983 billion, or 45.9%55.8% of total revenue in 2018.2020. The 170710 basis point increase in SG&A expenses as a percentage of total revenuedecrease was principally attributable to (i) anthe leveraging of expenses driven by the increase in costs incurred in connection withrevenue. Also impacting the Calvin Klein restructuring,decrease were (i) cost savings resulting from the North America workforce reduction, (ii) the costs incurredabsence in connection with2021 of accounts receivable losses recorded in 2020 as a result of the Socks and Hosiery transaction,COVID-19 pandemic, and (iii) the costs incurredabsence in connection2021 of noncash store asset impairments recorded in 2020 resulting from the impacts of the pandemic on our business. These decreases were partially offset by (i) a reduction in 2021 of pandemic-related government payroll subsidy programs in international jurisdictions, as well as rent abatements negotiated with certain of our landlords, (ii) the TH U.S. store closures. Also contributingabsence in 2021 of temporary cost savings initiatives we implemented in April 2020 in response to the increase was apandemic, including temporary furloughs, and salary and incentive compensation reductions,and (iii) the impact of the change in the revenue mix of business due to faster growth inbetween our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments as compared to the prior year, as our International segments revenue was a larger proportion and generally carry higher SG&A expenses as percentages of total revenue.
SG&A expenses in 20182020 were $4.433$3.983 billion, or 45.9%55.8% of total revenue, as compared to $4.245$4.715 billion, or 47.6% of total revenue in 2017.2019. The 170820 basis point decrease in SG&A expenses as a percentage of total revenueincrease was principally attributable to (i) the absencedeleveraging of expenses driven by the significant decline in 2018revenue resulting from the COVID-19 pandemic, (ii) the pre-tax noncash impairments of our store assets resulting from the impacts of the pandemic on our business, (iii) costs that were recorded in 2017incurred in connection with (i) the Mr. Hilfiger amendment, (ii)exit from our Heritage Brands Retail business, (iv) additional accounts receivable losses recorded as a result of the Li & Fung termination,pandemic, (v) additional expenses associated with pandemic-related health and (iii)safety measures and (vi) the relocationimpact of our Tommy Hilfiger office in New York, including noncash depreciation expense. Also contributing to the decrease was a leveraging of expenses in the Tommy Hilfiger business. These decreases were partially offset by (i) a change in the revenue mix of business due to faster growth inbetween our Tommy Hilfiger International and Calvin Klein International segments than in our North America segments as compared to the prior year, as our International segments revenue was a larger proportion in 2020 than in 2019, and generally carry higher SG&A expenses as percentages of total revenue,revenue. These increases were partially offset by (i) a reduction in expenses as a result of the temporary cost savings initiatives we implemented in April 2020, including temporary furloughs, salary and incentive compensation reductions, and lower discretionary spending, (ii) pandemic-related government payroll subsidy programs primarily in international jurisdictions, as well as rent abatements, and (iii) the absence in 2020 of costs that were incurred in 2019 in connection with the Calvin Klein restructuring, and (iii) an increase in corporate expenses due, in part, to investments in digital and information technology initiatives.
In light of the negative impacts on our business resulting from the COVID-19 outbreak, we are taking measures to significantly reduce SG&A expenses in 2020. As such, we currently expect our SG&A expenses in 2020 will be significantly lower as compared to 2019, including as a result of the reductions resulting from these measures and the absence in 2020 of costs related to (i) the Calvin Klein restructuring, (ii) the Socks and Hosiery transaction and the TH U.S store closures.
We currently expect that SG&A expenses as a percentage of revenue in 2022 will be relatively flat as compared to 2021. Our expectation for 2022 includes decreases primarily as a result of (i) the absence in 2022 of one-time costs recorded in 2021 associated with reductions in our workforce, primarily in certain international markets, and to reduce our real estate footprint and (ii) the absence in 2022 of costs incurred in 2021 in connection with the exit from our Heritage Brands Retail business. These decreases are expected to be mostly offset by (iii) the TH U.S. store closures. However, we expectimpact of a change in the revenue mix between our International and North America segments as compared to 2021, as our International segments revenue is expected to be a larger proportion in 2022 than in 2021 and generally carry higher SG&A expenses as a percentage of total revenue in 2020 will increase as compared to 2019 primarily due to a deleveraging of expenses driven by the expected decline in revenue resulting from the COVID-19 outbreak. There is significant uncertainty with respect toand (iv) the impact of the COVID-19 outbreak onreduction in revenue from our business and our SG&A expenses may be subject to significant material change, includingHeritage Brands businesses as a result of the Heritage Brands transaction and the exit from the Heritage Brands Retail business, as the revenue from our Heritage Brands businesses carried lower SG&A expenses as a percentage of total revenue.
Goodwill and Other Intangible Asset Impairments
We recorded noncash impairment charges of $933 million during 2020 resulting from the impacts of the COVID-19 pandemic on our business, including $879 million related to goodwill and $54 million related to other intangible assets, primarily our then-owned ARROW and GeoffreyBeene tradenames. These impairments resulted from interim impairment assessments of our property, plant and equipment, operating lease right-of-use assets, or goodwill and other intangible assets, thatwhich we may recognizewere required to perform in the first quarter of 2020 due to the adverse impacts of the pandemic on our then-current and estimated future business results and cash flows, as well as the
significant decrease in our market capitalization as a result of a sustained decline in our common stock price. We have not recorded any further impairments of goodwill and other intangible assets since the COVID-19 outbreak.first quarter of 2020. Please see Note 7, “Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Non-Service Related Pension and Postretirement (Income) Cost
Non-service related pension and postretirement (income) was $(64) million and $(76) million in 2021 and 2020, respectively, as compared to non-service related pension and postretirement cost of $90 million in 2019. Non-service related pension and postretirement (income) in 2021 and 2020 included actuarial gains on our retirement plans of $49 million and $65 million, respectively. Non-service related pension and postretirement cost in 2019 was $90 million as compared to $5 million in 2018. Non-service related pension and postretirement cost in 2019 and 2018 included an actuarial lossesloss on our retirement plans of $98 million and $15 million, respectively. million.
Please see Note 13,12, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Non-service related pension and postretirement cost in 2018 was $5 million as compared to $3 million in 2017. Non-service related pension and postretirement cost in 2018 included a $15 million actuarial loss on our retirement plans. Non-service related pension and postretirement cost in 2017 included a $9 million loss recorded in connection with the noncash settlement of certain of our benefit obligations related to our retirement plans as a result of a group annuity purchased for certain participants under which such obligations were transferred to an insurer, as well as a $3 million actuarial loss on our retirement plans. Please see Note 13, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
We currently expect that non-service related pension and postretirement (income) for 2020 will be approximately $15 million compared to non-service related pension and postretirement cost of $90 million in 2019. Our 2019 non-service related pension and postretirement cost included a $98 million actuarial loss on our retirement plans recorded in the fourth quarter. Non-service related pension and postretirement (income) cost recorded throughout the year is calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are recorded immediately in earnings, generally in the fourth quarter of the year, which can create volatility in our results of operations. OurWe currently expect that non-service related pension and postretirement (income) for 2022 will be approximately $(14) million. However, our expectation of 20202022 non-service related pension and post-retirement income does not include the impact of an actuarial gain or loss. However, ifAs a result of the recent market volatility due, in part,the financial markets, there is significant uncertainty with respect to the COVID-19 outbreak continues,actuarial gain or loss we may record on our retirement plans in 2022. We may incur a significant actuarial gain or loss in 2020 as2022 if there is a result of the difference between actual and expected returns on plan assetssignificant increase or decrease in discount rates, respectively, or if there is a declinedifference in discount rates. Ourthe actual 2020and expected return on plan assets. As such, our actual 2022 non-service related pension and postretirement (income) cost may be significantly different than our projections.
Debt Modification and Extinguishment Costs
We incurred costs totaling $5 million in 2019 in connection with the refinancing of our senior credit facilities. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
Other (Gain) Loss, Net
We incurred costs totaling $24recorded a gain of $(119) million in 2017the third quarter of 2021 in connection with the early redemption of our $700 million 4 1/2% senior notes due December 15, 2022. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.
Other Noncash Loss, Net
Heritage Brands transaction.
We recorded a pre-taxnoncash net loss of $3 million in the first quarter of 2020 in connection with the Speedo transaction.
We recorded a noncash loss of $142 million in the fourth quarter of 2019 related toin connection with the then-pending Speedo transaction and expected deconsolidation of the net assets of the Speedo North America business, consisting oftransaction.
We recorded a noncash impairmentgain of our perpetual license right for$(113) million in the Speedo trademark, and a noncash loss to reducesecond quarter of 2019 in connection with the carrying value of the business to its estimated fair value, less costs to sell. Australia acquisition.
Please see Note 4, “Assets Held For Sale,3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.discussion of these transactions.
Equity in Net Income (Loss) of Unconsolidated Affiliates
We recorded
The equity in net income (loss) of unconsolidated affiliates was $24 million of income in 2021 as compared to a $(5) million loss in 2020 and $10 million of income in 2019. These amounts relate to our share of income (loss) from (i) our joint venture for the TOMMY HILFIGER, Calvin Klein, Warner’s, Olga, and certain licensed trademarks in Mexico, (ii) our joint venture for the TOMMY HILFIGER and Calvin Klein brands in India (our two prior joint ventures in India merged in the third quarter of 2020), (iii) our joint venture for the TOMMYHILFIGER brand in Brazil, (iv) our PVH Legwear joint venture for the TOMMYHILFIGER, Calvin Klein, IZOD, Van Heusen and Warner’s brands and other owned and licensed trademarks in the United States and Canada, (v) PVH Australia (prior to acquiring it on May 31, 2019 through the Australia acquisition), (vi) our investment in Gazal (prior to acquiring it on May 31, 2019 through the Australia acquisition) and (vii) our investment in Karl
Lagerfeld Holding B.V. (“Karl Lagerfeld”) (prior to suspending the equity method of accounting for our investment in the first quarter of 2020 and after we resumed the equity method of accounting for our investment in the fourth quarter of 2021). The equity in net income (loss) of unconsolidated affiliates for 2020 also included a $12 million pre-tax noncash gainimpairment of $113 millionour investment in the second quarter of 2019 to write up our equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition.Karl Lagerfeld. Please see Note 3, “Acquisitions,5, “Investments in Unconsolidated Affiliates,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Equitydiscussion of our investment in Net Income of Unconsolidated Affiliates
Karl Lagerfeld.
The equity in net income of unconsolidated affiliates was $10 million in 2019(loss) for 2021 increased as compared to $212020 primarily due to the absence in 2021 of the $12 million in 2018 and $10 million in 2017. These amounts relate topre-tax noncash impairment of our share of income (loss) from PVH Australia (prior to acquiring it on May 31, 2019 through the Australia acquisition), our joint venture for the TOMMY HILFIGER, CALVIN KLEIN, Warner’s, Olga and Speedo brands in Mexico, our joint ventures for the TOMMY HILFIGER brand in India and Brazil, our joint venture for the CALVIN KLEIN brand in India, and our newly formed PVH Legwear joint venture for the TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s brands and other owned and licensed trademarks in the United States and Canada. (PVH Legwear began operations in December 2019.) Also included is our share of income (loss) from our investmentsinvestment in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”) andrecorded in Gazal (prior to acquiring it2020 resulting from the impacts of the COVID-19 pandemic on May 31, 2019 throughits business, as well as an increase in the Australia
acquisition).income on our other investments. The equity in net (loss) income for 20192020 decreased as compared to 2018,2019 primarily due to having only(i) the $12 million pre-tax noncash impairment of our investment in Karl Lagerfeld, and (ii) a partial year ofreduction in income from our investments in Gazal and PVH Australia and one-time expenses of $2 million recorded on our equitycontinuing investments in Gazal and PVH Australia priordue to the Australia acquisition closing. Our investments in the continuing joint ventures and Karl Lagerfeld are being accounted for under the equity method of accounting. Subsequent to the closingnegative impacts of the Australia acquisition, we began to consolidate the operations of Gazal andCOVID-19 pandemic on our unconsolidated affiliates’ businesses, partially offset by (iii) income on our investment in PVH Australia into our financial statements. Please see the section entitled “InvestmentsLegwear in Unconsolidated Affiliates” within “Liquidity and Capital Resources” below for further discussion.2020.
We currently expect that our equity in net income (loss) of unconsolidated affiliates for 20202022 will include an increasebe relatively in income on our investment in PVH Legwear as compared to 2019, as we recognize a full year of income in 2020, offset by a decrease in income on our investments due to the negative impact of the COVID-19 outbreak on our unconsolidated affiliates’ businesses in 2020.line with 2021.
Interest Expense, Net
Net interestInterest expense, net decreased to $104 million in 2021 from $121 million in 2020 primarily due to (i) the impact of $1.030 billion of voluntary long-term debt repayments made during 2021, (ii) a decrease in interest rates as compared to 2020 and (iii) the absence in 2021 of a $5 million expense recorded in 2020 resulting from the remeasurement of a mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition, as the measurement period ended in 2020, partially offset by (iv) the full year impact in 2021 of the issuances in April 2020 of an additional €175 million principal amount of 3 5/8% senior unsecured notes due 2024 and in July 2020 of $500 million principal amount of 4 5/8% senior unsecured notes due 2025.
Interest expense, net increased to $121 million in 2020 from $115 million in 2019 from $116 million in 2018 primarily due to (i) the issuance of senior unsecured notes in April 2020 and July 2020, partially offset by (ii) lower interest rates on our senior unsecured credit facilities as compared to 2018, partially offset by the2019. Also included in interest expense, net in 2020 and 2019 were expenses of $5 million and $9 million, loss onrespectively, resulting from the remeasurement of oura mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition.
Please see the section entitled “Financing Arrangements” within “Liquidity and Capital Resources” below for further discussion.
Net interestInterest expense, decreasednet in 2022 is currently expected to $116be approximately $90 million compared to $104 million in 2018 from $122 million in 20172021 primarily due to (i) the netfull year impact of the early redemption of our $700 million 4 1/2% senior notes in January 2018 and issuance of €600 million euro-denominated 3 1/8% senior notes in December 2017 and (ii) the cumulative impact2022 of long-term debt repayments made during 2018 and 2017, partially offset by an increase in short-term borrowings and interest rates as compared to 2017. Please see the section entitled “Financing Arrangements” within “Liquidity and Capital Resources” below for further discussion.
2021.
We currently expect that net interest expense in 2020 will increase as compared to 2019. We have increased the aggregate borrowings outstanding under our senior unsecured revolving credit facilities, other short-term revolving credit facilities and unsecured commercial paper note program in 2020 to approximately $930 million in order to increase our cash position and preserve financial flexibility in responding to the impacts of the COVID-19 outbreak on our business, and we expect that we may further increase our borrowings under existing or new financing arrangements. There is significant uncertainty with respect to the impact of the COVID-19 outbreak on our business and our interest expense may be subject to further significant increase.
Income Taxes
Income tax expense (benefit) was as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Income tax expense (benefit) | $ | 21 | | | $ | (56) | | | $ | 29 | |
Income tax as a % of pre-tax income (loss) | 2.1 | % | | 4.7 | % | | 6.5 | % |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Income tax expense (benefit) | $ | 29 |
| | $ | 31 |
| | $ | (26 | ) |
Income tax expense (benefit) as a % of pre-tax income | 6.5 | % | | 4.0 | % | | (5.1 | )% |
The United States Tax Cuts and Job Act of 2017 (the “U.S. Tax Legislation”) was enacted on December 22, 2017. The U.S. Tax Legislation is comprehensive and significantly revised the United States tax code. The revisions that significantly impact us are (i) the reduction of the corporate income tax rate from 35.0% to 21.0%, (ii) the imposition of a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated, (iii) the implementation of a modified territorial tax system, (iv) the introduction of a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and a beneficial tax rate to be applied against foreign derived intangible income (known as “FDII”) and (v) the introduction of a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between United States corporations and their subsidiaries.
We recorded a provisional net tax benefit of $53 million in the fourth quarter of 2017 in connection with the U.S. Tax Legislation, consisting of a $265 million benefit primarily from the remeasurement of our net United States deferred tax liabilities, partially offset by a $38 million valuation allowance on our foreign tax credits and a $174 million transition tax on earnings of foreign subsidiaries deemed to be repatriated. In the fourth quarter of 2018, we completed our final analysis of the impacts of the U.S. Tax Legislation and recorded a net tax benefit of $25 million to adjust the provisional amount recorded in 2017, during the measurement period allowed by the Securities and Exchange Commission. The $25 million net
tax benefit included the release of a $26 million valuation allowance on our foreign tax credits, partially offset by a $2 million expense related to the remeasurement of our net United States deferred tax liabilities.
We file income tax returns in more than 40 international jurisdictions each year. A substantial amount of our earnings are in international jurisdictions, particularly in the Netherlands and Hong Kong SAR, where income tax rates, when coupled with special rates levied on income from certain of our jurisdictional activities, are lower than the United States statutory income tax rate, and reduced our consolidated effective income tax rate during 2019, 2018 and 2017.rate. We expect to benefitbenefitted from these special rates until 2022. The reduction inthe end of 2021.
Our effective income tax rate for 2021 was lower than the United States statutory income tax rate primarily due to (i) a $106 million benefit resulting from 35.0%a tax accounting method change made in conjunction with our 2020 United States federal income tax return that provides additional tax benefits to 21.0%the foreign components of our federal income tax provision, which resulted in a decrease to our effective income tax rate of 10.9%, (ii) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, which resulted in a decrease to our effective income
tax rate of 9.7%, (iii) a $32 million benefit related to the remeasurement of certain net deferred tax assets in connection with the expiration of the special tax rates at the end of 2021, which resulted in a decrease to our effective income tax rate of 3.3%, and (iv) the benefit of overall lower tax rates in certain international jurisdictions where we file tax returns, partially offset by (v) the tax on foreign earnings in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”).
The effective income tax rate for 2021 was 2.1% compared to 4.7% in 2020. The effective income tax rate for 2021 reflected a $21 million income tax expense recorded on $973 million of pre-tax income. The effective income tax rate for 2020 reflected a $(56) million income tax benefit recorded on $(1.193) billion of pre-tax losses. The 2021 effective income tax rate was lower than the effective income tax rate for 2020 primarily due to (i) the $106 million benefit resulting from a tax accounting method change made in conjunction with our 2020 United States federal income tax return that provides additional tax benefits to the foreign components of our federal income tax provision, (ii) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, and (iii) the $32 million benefit related to the remeasurement of certain net deferred tax assets in connection with the expiration of the special tax rates at the end of 2021, partially offset by (iv) the absence of the impact of the $879 million of pre-tax goodwill impairment charges recorded in 2020, which were mostly non-deductible in the prior year, and (v) the absence of a $33 million expense recorded in 2020 related to the remeasurement of certain of our net deferred tax liabilities in connection with the legislation enacted in the Netherlands known as the “2021 Dutch Tax Plan”, which became effective on January 1, 2021. The variance between the 2021 and 2020 effective income tax rates is also affected by the substantial change in our pre-tax income (loss). As a result, the effect that discrete tax amounts have on the effective income tax rate in each year is not comparable.
Our effective income tax benefit rate for 2020 was lower than the United States statutory income tax rate primarily due to (i) the unfavorable impact of the U.S.$879 million of pre-tax goodwill impairment charges, which were mostly non-deductible, and resulted in a 13.3% decrease to our effective income tax rate, (ii) the tax effects of GILTI, (iii) the mix of foreign and domestic pre-tax results and (iv) the $33 million expense related to the remeasurement of certain of our net deferred tax liabilities in connection with the enactment of the 2021 Dutch Tax Legislation did not havePlan, which resulted in a significantdecrease to our effective income tax rate of 2.8%, partially offset by (v) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, which resulted in an increase to our overall effective income tax rate of 2.1%.
The effective income tax rate for 2020 was 4.7% compared to 6.5% in 2019. The effective income tax rate for 2020 reflected a $(56) million income tax benefit recorded on $(1.193) billion of pre-tax losses. The effective income tax rate for 2019 reflected a $29 million income tax expense recorded on $444 million of pre-tax income. The 2020 effective income tax rate was lower than the effective income tax rate for 2019 primarily due to (i) the impact of the $879 million of pre-tax goodwill impairment charges, which were mostly non-deductible, and (ii) a reduction in certain discrete items, including the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation and the settlement of a multi-year audit from an international jurisdiction in 2019. The variance between the 2020 and 2019 effective income tax rates is also affected by the substantial change in our mix of earnings.pre-tax (loss) income. As a result, the effect that discrete tax amounts have on the effective income tax rate in each year is not comparable.
Our effective income tax rate for 2019 was lower than the 21.0% United States statutory income tax rate primarily due to (i) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation and the settlement of a multi-year audit from an international jurisdiction, which together resulted in a benefit to our effective income tax rate of 11.8%, and (ii) the favorable impact of a tax exemption on the noncash gain recorded to write-up our existing equity investments in Gazal and PVH Australia to fair value in connection with the Australia acquisition, which resulted in a 5.4% benefit to our effective income tax rate.
The effective income tax rate for 2019 was 6.5% compared with 4.0% in 2018. The 2019 effective income tax rate was higher than the effective income tax rate for 2018 primarily due to (i) the absence of a 5.3% benefit toWe currently expect that our 2018 effective income tax rate related to the remeasurement of certain of our net deferred tax liabilities in connection with the legislation enacted in the Netherlands known as the “2019 Dutch Tax Plan” and (ii) the absence of a 3.2% benefit to our 2018 effective income tax rate related to the U.S. Tax Legislation, partially offset by (iii) a favorable change in our uncertain tax positions activity of 8.1%, which includes the benefit to our 2019 effective income tax rate resulting from settlement of a multi-year audit from an international jurisdiction. The variance between the 2019 and 2018 effective income tax rates is also affected by the substantial change in our pre-tax income, which was $444 million in 2019 and $776 million in 2018. As a result, the effect that discrete tax amounts have on the effective income tax rate in each year is not comparable.
Our effective income tax rate for 2018 was lower than the 21.0% United States statutory income tax rate primarily due to (i) a $41 million benefit from the remeasurement of certain of our net deferred tax liabilities in connection with the enactment of the 2019 Dutch Tax Plan, which resulted2022 will be in a benefitrange of 29% to 30%. Our expectation that our effective income tax rate of 5.3%, (ii) the favorable impact on certain liabilities for uncertain tax positions resulting from the expiration of applicable statutes of limitation, which resulted in a benefit to our effective income tax rate of 3.7%, (iii) a net tax benefit of $25 million recorded in 2018 to adjust the provisional amount recorded in 2017 in connection with the U.S. Tax Legislation, which resulted in a benefit to our effective income tax rate of 3.2%, and (iv) the benefit of overall lower tax rates in certain international jurisdictions where we file tax returns.
The effective income tax rate for 2018 was 4.0% compared with (5.1)% in 2017. The 2018 effective income tax rate was2022 will be higher than the effective income tax rate for 2017 primarily due to (i) a lower net benefit recorded in connection with the U.S. Tax Legislation, which resulted in a 3.2% benefit to our 2018 effective income tax rate compared with a 10.4% benefit to our 2017 effective income tax rate, (ii) an unfavorable change in our uncertain tax positions activity of 3.8%, and (iii) the absence of a 3.0% benefit to our 2017 effective income tax rate resulting from an excess tax benefit from the exercise of stock options by our Chairman and Chief Executive Officer. These unfavorable impacts to our effective income tax rate for 2018 were partially offset by a 5.3% benefit to our 2018 effective income tax rate from the remeasurement of certain of our net deferred tax liabilities in connection with the 2019 Dutch Tax Plan.
As a result of the U.S. Tax Legislation, which reduced the United States statutory income tax rate from 35.0% to 21.0% effective January 1, 2018, our United States statutory income tax rate for 2017 was a blended rate of 33.7%. Our effective income tax rate for 2017 was lower than the United States statutory income tax rate primarilyis principally due to (i) the provisional net benefittax effects of $53 million recorded in connection with the U.S. Tax Legislation, which resulted in a benefit to our 2017 effective income tax rate of 10.4%,GILTI and (ii) the benefitmix of overall lower tax rates in certain international jurisdictions where we file tax returns,foreign and (iii) the overall benefit of certain discrete items, including the favorable impact on certain liabilities for uncertain tax positions and an excess tax benefit from the exercise of stock options by our Chairman and Chief Executive Officer, which resulted in benefits to our 2017 effective income tax rate of 7.5% and 3.0%, respectively.domestic pre-tax results.
Given the significant uncertainty with respect to the impact of the COVID-19 outbreak on our business and results of operations, we are not able to estimate our effective income tax rate in 2020.
Our tax rate is affected by many factors, including the mix of international and domestic pre-tax earnings, discrete events arising from specific transactions and new regulations, as well as audits by tax authorities and the receipt of new information, any of which can cause us to change our estimate for uncertain tax positions. Please see Note 10,9, “Income Taxes,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
The United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which includes various income tax provisions aimed at providing economic relief. There was a slight favorable cash flow impact in 2020 as a result of the deferral of income tax payments under the CARES Act. We also considered the significant adverse impact of the pandemic on our business in assessing the realizability of our deferred tax assets. Based on this assessment, we determined that no additional valuation allowances were needed against our deferred tax assets.
Redeemable Non-Controlling Interest
We haveformed a joint venture in Ethiopia with Arvind Limited in which we own a 75% interest. We consolidate the results of(“Arvind”) named PVH Ethiopia in our consolidated financial statements. Manufacturing Private Limited Company (“PVH Ethiopia was formedEthiopia”) to operate a manufacturing facility that producesproduced finished products for us for distribution primarily in the United States. TheWe held an initial economic interest of 75% in PVH Ethiopia, with Arvind’s 25% interest accounted for as a redeemable non-controlling interest (“RNCI”). We consolidated the results of PVH Ethiopia in our consolidated financial statements. We, together with Arvind, amended, effective May 31, 2021, the capital structure of PVH Ethiopia and we solely managed and effectively owned all economic interests in the joint venture. We closed the manufacturing facility began operations in 2017.the fourth quarter of 2021. The closure did not have a material impact on our consolidated financial statements.
The net loss attributable to the redeemable non-controlling interest in PVH Ethiopia was immaterial in 2019, 20182021, 2020 and 2017. We currently expect that2019. As a result of the net loss attributableamendments to the redeemable non-controlling interest for 2020 will also be immaterial.capital structure of PVH Ethiopia, we no longer attribute any net income or loss in PVH Ethiopia to an RNCI. Please see Note 7,6, “Redeemable Non-Controlling Interest,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Update
The COVID-19 pandemic had a significant impact on our business, results of operations, financial condition and cash flows in 2020. Given the unprecedented effects of the pandemic on our business, we took certain actions to improve our financial position in 2020, including the issuance in April 2020 of an additional €175 million principal amount of 3 5/8% senior unsecured notes due 2024 and in July 2020 of $500 million principal amount of 4 5/8% senior unsecured notes due 2025, as well as focused management of our working capital, with particular focus on our inventory levels, among others. We ended 2020 with $1.7 billion of cash on hand, which allowed us to make over $1.0 billion of voluntary long-term debt repayments during 2021, exceeding the incremental amount we borrowed during 2020.
We had also obtained a waiver in June 2020 of certain covenants under our senior unsecured credit facilities (referred to as the “June 2020 Amendment”). During the relief period (as defined below in the section entitled “2019 Senior Unsecured Credit Facilities”), the applicable margin for these facilities was increased 0.25% and we were not permitted to declare or pay dividends on our common stock or make share repurchases under our stock repurchase program, among other things. However, effective June 10, 2021, we terminated early this relief period and we were permitted to resume share repurchases and payment of dividends on our common stock at the discretion of the Board of Directors (as discussed below in the section entitled “2019 Senior Unsecured Credit Facilities”). We resumed share repurchases and reinstated dividends on our common stock during the third quarter of 2021. Please see the sections entitled “Acquisition of Treasury Shares” and “Dividends” below for further discussion.
We ended 2021 with $1.2 billion of cash on hand and approximately $1.5 billion of borrowing capacity available under our various debt facilities.
Cash Flow Summary and Trends
Cash and cash equivalents at February 2, 2020January 30, 2022 was $503 million, an increase$1.242 billion, a decrease of $51$409 million from the amount$1.651 billion at February 3, 2019 of $452 million.January 31, 2021. The change in cash and cash equivalents included the impact of (i) $325$1.030 billion of voluntary long-term debt repayments, (ii) $344 million of completed common stock repurchases under the stock repurchase program (ii) $71and (iii) $216 million of long-term debt repayments, (iii) a $59 million net payment madeproceeds in connection with the Australia acquisition, and (iv) a $74 million payment made in connection withclosing of the TH CSAP acquisition.
Heritage Brands transaction.
Cash flow in 20202022 will be impacted by various factors in addition to those noted below in this “Liquidity and Capital Resources” section, including (i) mandatory long-term debt repayments of approximately $14$35 million, subject to exchange rate fluctuations, and (ii) expected common stock repurchases under the stock repurchase program of $111approximately $223 million, which reflects stock repurchases through March 2020the remaining amount authorized under the program. There continues to be uncertainty with no further repurchases planned for the remainder of 2020, and (iii) the expected proceeds of $170 million, subject to a working capital adjustment, related to the Speedo transaction, which is expected to close in the first quarter of 2020. In addition, in March 2020 we increased the aggregate borrowings outstanding under our senior unsecured revolving credit facilities, other short-term revolving credit facilities and unsecured commercial paper note program to approximately $930 million, in order to increase our cash position and preserve financial flexibility in respondingrespect to the impacts of the COVID-19 outbreak on our business. Given the dynamic nature of the COVID-19 outbreak, our estimates ofpandemic and supply chain and logistics disruptions. Our cash flows in 2020 may be subject to material significant change, including as a result of the actual impact of the COVID-19 outbreak on our 2020 earnings, additional borrowings under existingincreased in-transit inventory levels or new financing arrangements, excess inventories,significant production delays in collection of, or inability to collect on, certain trade receivables, and other working capital changes that we may experience as a result of the COVID-19 outbreak.pandemic and supply chain and logistics disruptions.
As of February 2, 2020, approximately $405January 30, 2022, $755 million of cash and cash equivalents was held by international subsidiaries. Our intent is to reinvest indefinitely substantially all of our earnings in foreign subsidiaries outside of the United States. However, if management decides at a later date to repatriate these earnings to the United States, we may be required to accrue and pay additional taxes, including any applicable foreign withholding tax and United States state income taxes. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Operations
Cash provided by operating activities was $1.020$1.071 billion in 20192021 compared to $852$698 million in 2018.2020. The increase in cash provided by operating activities as compared to the prior year2020 was primarily driven by changes in working capital, including a favorable change in trade receivables and inventories, partially offset by a decreasesignificant increase in net income (loss) as adjusted for noncash charges.
charges, partially offset by changes in our working capital, including (i) an increase in trade receivables, primarily driven by a significant increase in our wholesale revenue, (ii) an increase in inventories during the current period due to the planned increase in revenue in the first quarter of 2022, and (iii) a decrease in accounts payable, primarily due to the temporary extension of vendor payment terms for the majority of the prior year period. Our cash flows from operations in 2020 were significantly impacted by widespread temporary store closures and other significant adverse impacts of the COVID-19 pandemic on our business. In connection with our acquisitionan effort to mitigate the impacts of Calvin Klein,the pandemic, we have been and continue to be focused on working capital management. During 2020, we were obligatedparticularly focused on tightly managing inventories, which included reducing and cancelling inventory commitments, increasing promotional selling, redeploying basic inventory items to pay Mr. Calvin Klein contingent purchase pricesubsequent seasons and consolidating future seasonal collections.
Supply Chain Finance Program
We have a voluntary supply chain finance program (the “SCF program”) that provides our inventory suppliers with the opportunity to sell their receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. The SCF program is administered through third party platforms that allow participating suppliers to track payments based on 1.15% of total worldwide net sales (as definedfrom us and sell their receivables due from us to financial institutions. We are not a party to the agreements between the suppliers and the financial institutions and have no economic interest in a supplier’s decision to sell a receivable. Our payment obligations, including the amounts due and payment terms, are not impacted by suppliers’ participation in the acquisition agreement, as amended)SCF program.
Accordingly, amounts due to suppliers that elected to participate in the SCF program are included in accounts payable in our consolidated balance sheets and the corresponding payments are reflected in cash flows from operating activities in our consolidated statements of products bearing anycash flows. We have been informed by the third party administrators of the CALVIN KLEIN brands with respectSCF program that suppliers had elected to sales madesell approximately $475 million of our payment obligations that were outstanding as of January 30, 2022 to financial institutions and approximately $1.7 billion had been settled through February 12, 2018. A significant portion of the
program during 2021.
sales on which the payments to Mr. Klein were made were wholesale sales by us and our licensees and other partners to retailers. Contingent purchase price payments totaled $16 million and $56 million
in 2018 and 2017, respectively. The final payment due to Mr. Klein was made in the second quarter of 2018.
Capital Expenditures
Our capital expenditures in 20192021 were $345$268 million compared to $379$227 million in 2018. The2020. We limited capital expenditures in 2019 primarily related2020 to (i) investments in new stores and store expansions, (ii) investments to upgrade and enhance our operating, supply chain and logistics systems and our digital commerce platforms and (iii) the expansion of our warehouse and distribution network in North America. We currently expect that capital expenditures for 2020 will decrease to approximately $190 million and will include only certain minimum required expenditures in our retail stores and expenditures for projects currentlythen in progress, primarily related to (i) investments to support the multi-year upgrade of our platforms and systems worldwide and (ii)
enhancements to our warehouse and distribution network. Given the dynamic nature of the COVID-19 outbreak, our estimates ofThe capital expenditures in 2020 may be subject2021 primarily related to change. Ourcontinued investments for these projects in progress and investments in store renovations. We currently expect that capital expenditures may differ materially comparedfor 2022 will increase to approximately $400 million and will primarily consist of investments in (i) new stores and store renovations, (ii) investments in our information technology infrastructure worldwide, including data centers and information security, (iii) continued investments in upgrades and enhancements to platforms and systems worldwide, including our digital commerce platforms, and (iv) enhancements to our current expectations as a result.warehouse and distribution network in Europe and North America.
Investments in Unconsolidated Affiliates
We own a 49% economic interest in our newly formedPVH Legwear. We received a dividend of $2 million from PVH Legwear joint venture. Weduring 2021 and made payments of $2 million and $28 million to PVH Legwear during 2020 and 2019, respectively, to contribute our share of the joint venture funding.
We held an approximately 22% ownership interest in Gazal and a 50% ownership interest in PVH Australia until the closing of the Australia acquisition on May 31, 2019. These investments were accounted for under the equity method of accounting. We derecognized our equity investments in Gazal and PVH Australia and began to consolidate the operations of Gazal and PVH Australia in our financial statements effective with the closing of the transaction. We received aggregate dividends of $6 million, $8 million and $4 million from Gazal and PVH Australia during 2019, 2018 and 2017, respectively.
We acquired a 51% economic interest in a joint venture, Calvin Klein Arvind Fashion Private Limited (“CK India”) in 2013. We sold 1% of our interest for $400,000 in 2017, decreasing our economic interest in CK India to 50%. Prior to the sale, we were not deemed to hold a controlling interest in CK India as the shareholders agreement provided the partners with equal rights. CK India licenses from one of our subsidiaries the rights to the CALVIN KLEIN trademarks in India for certain product categories. We made payments of $2 million to CK India during 2017 to contribute our share of the joint venture funding.
We own a 50% economic interest in a joint venture, Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from one of our subsidiaries the rights to the TOMMY HILFIGER trademarks in India for certain product categories. Arvind, our joint venture partner in PVH Ethiopia and CK India, is also our joint venture partner in TH India. We made payments of $3 million to TH India during 2017 to contribute our share of the joint venture funding.
We formed with two other parties a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”), in 2012, in which we have a 40% economic interest. We acquired an approximately 1% additional interest for $300,000 in 2017, increasing our economic interest in TH Brazil to approximately 41%. TH Brazil licenses from one of our subsidiaries the rights to the TOMMY HILFIGER trademarks in Brazil for certain product categories. We made payments of $3 million to TH Brazil during 2017 to contribute our share of the joint venture funding. We issued a note receivable to TH Brazil in 2016 for $12 million, of which $6 million was repaid in 2016 and the remaining balance, including accrued interest, was repaid in 2017.
We, along with Grupo Axo, S.A.P.I. de C.V., formed a joint venture (“PVH Mexico”) in 2016, in which we own a 49% economic interest. PVH Mexico licenses from certain of our wholly owned subsidiaries the rights to distribute and sell certain TOMMY HILFIGER, CALVIN KLEIN, Warner’s, Olga and Speedo brand products in Mexico. We received dividends of $17 million and $7 million from PVH Mexico during 2019.2021 and 2019, respectively.
We held an approximately 22% ownership interest in Gazal and a 50% ownership interest in PVH Australia prior to May 31, 2019. These investments were accounted for under the equity method of accounting until the closing of the Australia acquisition on May 31, 2019, on which date we derecognized our equity investments in Gazal and PVH Australia and began to consolidate the operations of Gazal and PVH Australia into our financial statements. We received aggregate dividends of $6 million from Gazal and PVH Australia during 2019.
Payments made to contribute our share of the joint ventures funding and the repayment of the note receivable we issued to TH Brazil wereare included in our net cash used by investing activities in our Consolidated Statements of Cash Flows for the respective period. The dividendsDividends received from our investments in unconsolidated affiliates wereare included in our net cash provided by operating activities in our Consolidated Statements of Cash Flows for the respective period.
Heritage Brands Transaction
Loan to a Supplier
Wuxi Jinmao Foreign Trade Co., Ltd. (“Wuxi”), oneWe completed the sale of certain of our finished goods inventory suppliers, has a wholly owned subsidiary withheritage brands trademarks, including Van Heusen, IZOD, ARROW and GeoffreyBeene, as well as certain related inventories of our Heritage Brands business, to ABG and other parties on August 2, 2021 for net proceeds of $216 million, of which we entered into a loan agreement$223 million of gross proceeds were presented as investing cash flows and $7 million of transaction costs were presented as operating cash flows in 2016. Under the agreement, Wuxi’s subsidiary borrowed a principal amountConsolidated Statement of $14 millionCash Flows for 2021. Please see Note 3, “Acquisitions and Divestitures,” in the developmentNotes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Speedo Transaction
We completed the sale of our Speedo North America business to Pentland on April 6, 2020 for net proceeds of $169 million. Please see Note 3, “Acquisitions and operationDivestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of a fabric mill. Principal payments are due in semi-annual installments beginning March 31, 2018 through September 30, 2026. The outstanding principal balance of the loan bears interest at a rate of (i) 4.50% per annum until the sixth anniversary of the closing date of the loan and (ii) LIBOR plus 4.00% thereafter. We received principal payments of $400,000 and $200,000 during 2019 and 2018, respectively. The outstanding balance, including accrued interest, was $13 million and $14 million as of February 2, 2020 and February 3, 2019, respectively.this report for further discussion.
TH CSAP Acquisition
We completed the acquisition of the Tommy Hilfiger retail business in Central and Southeast Asia on July 1, 2019 for $74 million. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Australia Acquisition
We completed the Australia acquisition on May 31, 2019. This acquisitiontransaction resulted in a net cash payment of $59 million, including (i) a payment of $118 million, net of cash acquired of $7 million, as cash consideration for the acquisition and (ii) proceeds of $59 million relatedfrom the divestiture to the salea third party of an office building and warehouse owned by Gazal. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Mandatorily Redeemable Non-Controlling Interest
The Australia acquisition agreement provided for key executives of Gazal and PVH Australia to exchange a portion of their interests in Gazal for approximately 6% of the Geoffrey Beene Tradename
outstanding shares of our previously wholly owned subsidiary that acquired 100% of the ownership interests in the Australia business. We were obligated to purchase this 6% interest within two years of the acquisition closing in two tranches. The purchase price for the tranche 1 and tranche 2 shares was based on a multiple of the subsidiary’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) less net debt as of the end of the applicable measurement year, and the multiple varied depending on the level of EBITDA compared to a target.
We acquiredpurchased tranche 1 (50% of the Geoffrey Beene tradename on April 20, 2018shares) for $17 million in June 2020 and tranche 2 (the remaining 50% of the shares) for $24 million in June 2021 based on exchange rates in effect on the applicable payment dates. We presented these payments within the Consolidated Statements of Cash Flows as follows: (i) $13 million and $15 million as financing cash flows in 2020 and 2021, respectively, which $16represented the initial fair values of the liabilities for the tranche 1 and tranche 2 shares, respectively, recognized on the acquisition date, and (ii) $5 million was paidand $9 million as operating cash flows in cash.2020 and 2021, respectively, for the tranche 1 and tranche 2 shares, respectively, attributable to interest. Please see Note 3, “Acquisitions” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Acquisition of the Wholesale and Concessions Businesses in Belgium and Luxembourg
We completed the Belgian acquisition on September 1, 2017. We paid $12 million as cash consideration for this transaction. Please see Note 3, “Acquisitions,Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Acquisition of True & Co.
We acquired True & Co. on March 30, 2017. We paid $28 million, net of $400,000 of cash acquired, as cash consideration for this transaction. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Speedo Transaction
We entered into a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland for $170 million in cash, subject to a working capital adjustment. The Speedo transaction is expected to close in the first quarter of 2020, subject to customary closing conditions. Please see Note 4, “Assets Held For Sale,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Dividends
Our common stock has historicallyCash dividends paid annual dividends, which totaled $0.15 per share in each of 2019, 2018 and 2017. Dividends on our common stock totaled $3 million, $3 million and $11 million in 2021, 2020 and 2019, and $12 million in each of 2018 and 2017.respectively.
We declaredsuspended our dividends following the $3 million payment of a $0.0375 per share dividend payable toon our common stockholders of record as of March 4, 2020, in respect of which we made dividend payments totaling approximately $3 millionstock on March 31, 2020. We have suspended our dividend policy2020 in order to increase our cash position and preserve financial flexibility in respondingresponse to the impacts of the COVID-19 outbreakpandemic on our business. IfIn addition, under the terms of the June 2020 Amendment, we were not permitted to declare or pay cash dividends totaling $0.15during the relief period. However, effective June 10, 2021, the relief period was terminated and we were permitted to declare and pay dividends on our common stock at the discretion of the Board of Directors. Please see the section entitled “2019 Senior Unsecured Credit Facilities” below for further discussion. We paid a $0.0375 per share dividend on our common stock in 2020, suchthe fourth quarter of 2021.
We currently project that cash dividends would totalon our common stock in 2022 will be approximately $11$10 million based on our current dividend rate, the number of shares of our common stock outstanding as of
February 2, 2020, January 30, 2022, our estimate of stock to be issued during 20202022 under our stock incentive plans and our estimate of stock repurchases during 2020.2022.
Acquisition of Treasury Shares
OurThe Board of Directors has authorized over time since 2015 an aggregate $2.0 billion stock repurchase program through June 3, 2023. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as we deem appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, trading restrictions under our insider trading policy and other relevant factors. The program may be modified by the Board of Directors, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.
We suspended share repurchases under the stock repurchase program beginning in March 2020, following the purchase of 1.4 million shares in open market transactions for $111 million completed earlier in the first quarter of 2020, in response to the impacts of the COVID-19 pandemic on our business. In addition, under the terms of the June 2020 Amendment, we were not permitted to make share repurchases during the relief period. However, effective June 10, 2021, the relief period was terminated and we were permitted to resume share repurchases at management’s discretion. Please see the section entitled “2019 Senior Unsecured Credit Facilities” below for further discussion.
During 2019, 20182021, 2020 and 2017,2019, we purchased approximately 3.43.3 million shares, 2.21.4 million shares and 2.23.4 million shares, respectively, of our common stock under the program in open market transactions for $325$350 million, $300$111 million and $250$325 million, respectively. Purchases of $6 million were accrued for in the Consolidated Balance Sheet as of January 30, 2022. Purchases of $500,000 that were accrued for in the Consolidated Balance Sheet as of February 2, 2020. Purchases of $2 million that were accrued for in the Consolidated Balance Sheet as of February 4, 20182020 were paid in 2018. Thethe first quarter of 2020. As of January 30, 2022, the repurchased shares were held as treasury stock and $683$223 million of the authorization remained available for future share repurchases as of February 2, 2020.repurchases. In 2022, we expect to repurchase the remaining amount authorized under the program.
Treasury stock activity also includes shares that were withheld principally in conjunction with the settlement of restricted stock units and performance share units to satisfy tax withholding requirements.
Mandatorily Redeemable Non-Controlling Interest
The Australia acquisition agreement provided for key members of Gazal and PVH Australia management to exchange a portion of their interests in Gazal for approximately 6% of the outstanding shares in our previously wholly owned subsidiary that acquired 100% of the ownership interests in the Australia business. We are obligated to purchase this 6% interest within two years of the acquisition closing in two tranches as follows: tranche 1 – 50% of the shares one year after the closing, but the holders had the option to defer half of this tranche to tranche 2; and tranche 2 – all remaining shares two years after the closing. With respect to tranche 1, the holders elected not to defer their shares to tranche 2 and as a result we are obligated to purchase all of the tranche 1 shares in the second quarter of 2020. The purchase price for the tranche 1 and tranche 2 shares is based on a multiple of the subsidiary’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) less net debt as of the end of the measurement year, and the multiple varies depending on the level of EBITDA compared to a target. The liability for the mandatorily redeemable non-controlling interest was $33.8 million as of February 2, 2020 based on exchange rates in effect on that date, of which $16.9 million is payable in the second quarter of 2020 for the purchase of the tranche 1 shares. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Financing Arrangements
Our capital structure was as follows at the end of 2019 and 2018:follows:
| | | | | | | | | | | |
(In millions) | 1/30/22 | | 1/31/21 |
Short-term borrowings | $ | 11 | | | $ | — | |
Current portion of long-term debt | 35 | | | 41 | |
Finance lease obligations | 9 | | | 13 | |
Long-term debt | 2,318 | | | 3,514 | |
Stockholders’ equity | 5,289 | | | 4,730 | |
|
| | | | | | | |
(In millions) | February 2, 2020 | | February 3, 2019 |
Short-term borrowings | $ | 50 |
| | $ | 13 |
|
Current portion of long-term debt | 14 |
| | — |
|
Finance lease obligations | 15 |
| | 17 |
|
Long-term debt | 2,694 |
| | 2,819 |
|
Stockholders’ equity | 5,811 |
| | 5,828 |
|
In addition, we had $503 million$1.242 billion and $452 million$1.651 billion of cash and cash equivalents as of February 2, 2020January 30, 2022 and February 3, 2019,January 31, 2021, respectively.
Short-Term Borrowings
We have the ability to draw revolving borrowings under ourthe senior unsecured credit facilities as discussed below in the section entitled “2019 Senior Unsecured Credit Facilities” below.Facilities.” We had no borrowings outstanding under these facilities as of January 30, 2022 and January 31, 2021.
February 2, 2020. The maximum amount ofWe also have the ability to draw revolving borrowings outstanding under these facilities during 2019 was $378 million. We had $8 million outstanding under our prior senior secured364-day unsecured revolving credit facilities as of February 3, 2019 asfacility discussed below in the section entitled “2016 Senior Secured“2021 Unsecured Revolving Credit Facilities” below. The weighted average interest rate on the funds borrowed as of February 3, 2019 was 4.45%.Facility.” We had no borrowings outstanding under this facility during 2021.
Additionally, we have the availabilityability to borrow under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies. These facilities which now include a facility in Australia as a result of the Australia acquisition, provided for borrowings of up to $132$207 million based on exchange rates in effect on February 2, 2020January 30, 2022 and are utilized primarily to fund working capital needs. We had $50 million and $5$11 million outstanding under these facilities as of February 2, 2020January 30, 2022 and February 3, 2019, respectively. The $50 million ofno borrowings outstanding under these facilities as of February 2, 2020 included borrowings under the facility in Australia.January 31, 2021. The weighted average interest rate on funds borrowed as of February 2, 2020 and February 3, 2019January 30, 2022 was 2.56% and 0.21%, respectively.0.17%. The maximum amount of borrowings outstanding under these facilities during 20192021 was $99$41 million.
Commercial Paper
We established on November 5, 2019 an unsecured commercial paper note program inhave the United States primarily to fund working capital needs. The program enables usability to issue, from time to time, unsecured commercial paper notes with maturities that vary but do not exceed 397 days from the date of issuance.issuance primarily to fund working capital needs. We had no borrowings outstanding under the commercial paper note program during 2021. We had no borrowings outstanding under the commercial paper note program as of February 2, 2020. The maximum amount of borrowings outstanding under the program during 2019 was $370 million.January 31, 2021.
The commercial paper note program allows for borrowings of up to $675 million to the extent that we have borrowing capacity under ourthe United States dollar-denominated revolving credit facility as discussedincluded in the section entitled “2019 Senior Unsecured Credit Facilities” below.2019 facilities (as defined below). Accordingly, the combined aggregate amount of (i) borrowings outstanding under the commercial paper note program and (ii) the revolving borrowings outstanding under the United States dollar-denominated revolving credit facility at any one time cannot exceed $675 million.
2021 Unsecured Revolving Credit Facility
On April 28, 2021, we replaced our 364-day $275 million United States dollar-denominated unsecured revolving credit facility, which matured on April 7, 2021 (the “2020 facility”), with a new 364-day $275 million United States dollar-denominated unsecured revolving credit facility (the “2021 facility”). The maximum aggregate amount2021 facility will mature on April 27, 2022. Wepaid approximately $800,000 and $2 million of debt issuance costs in connection with the 2021 facility and 2020 facility, respectively. We had no borrowings outstanding under these facilities during 2021 and 2020.
Currently, our obligations under the commercial paper program2021 facility are unsecured and are not guaranteed by any of our subsidiaries. However, within 120 days after the occurrence of a specified credit ratings decrease (as set forth in the 2021 facility), (i) we must cause each of our wholly owned United States subsidiaries (subject to certain customary exceptions) to become a guarantor under the 2021 facility and (ii) we and each subsidiary guarantor will be required to grant liens in favor of the collateral agent on substantially all of our respective assets (subject to customary exceptions).
The outstanding borrowings under the 2021 facility are prepayable at any time without penalty (other than customary breakage costs). The borrowings under the 2021 facility bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States dollar-denominated revolving creditfederal funds effective rate plus 1/2 of 1.00% and (iii) a one-month reserve adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2021 facility.
The current applicable margin with respect to the borrowings as of January 30, 2022 was 1.375% for adjusted Eurocurrency rate loans and 0.375% for base rate loans. The applicable margin for borrowings is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of our fiscal quarters, based upon our net leverage ratio or (ii) after the date of delivery of notice of a change in our public debt rating by Standard & Poor’s or Moody’s.
The 2021 facility duringrequires us to comply with affirmative, negative and financial covenants, including a minimum interest coverage ratio and maximum net leverage ratio, which are subject to change in the event that, and in the same manner as, the minimum interest coverage ratio and maximum net leverage ratio covenants under the 2019 was $567 million, which reflects a brief period of higher aggregate borrowings at the time that we launched the commercial paper program.facilities are amended.
Finance Lease Obligations
Our cash payments for finance lease obligations totaled $5 million in each of 2019, 20182021, 2020 and 2017.2019.
2016 Senior Secured Credit Facilities
On May 19, 2016, we entered into an amendment to our senior secured credit facilities (as amended, the “2016 facilities”). We replaced the 2016 facilities with new senior unsecured credit facilities on April 29, 2019 as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. The 2016 facilities, as of the date they were replaced, consisted of a $2.347 billion United States dollar-denominated Term Loan A facility and senior secured revolving credit facilities consisting of (i) a $475 million United States dollar-denominated revolving credit facility, (ii) a $25 million United States dollar-denominated revolving credit facility available in United States dollars and Canadian dollars and (iii) a €186 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen and Swiss francs.
2019 Senior Unsecured Credit Facilities
We refinanced the 2016 facilities on April 29, 2019 (the “Closing Date”) by entering into senior unsecured credit facilities (the(as amended, the “2019 facilities”), the proceeds of which, along with cash on hand, were used to repay all of the outstanding borrowings under the 2016 facilities, as well as the related debt issuance costs.
The 2019 facilities consist of a $1.093 billion United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €500 million euro-denominated Term Loan A facility (the “Euro TLA facility” and together with the USD TLA facility, the “TLA facilities”) and senior unsecured revolving credit facilities consisting of (i) a $675 million United States dollar-denominated revolving credit facility, (ii) a CAD $70 million Canadian dollar-denominated revolving credit facility available in United States dollars or Canadian dollars, (iii) a €200 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen, Swiss francs, Australian dollars and other agreed foreign currencies and (iv) a $50 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars. The
2019 facilities are due on April 29, 2024. In connection with the refinancing in 2019 of our senior credit2016 facilities, we paid debt issuance costs of $10 million (of which $3 million was expensed as debt modification costs and $7 million is being amortized over the term of the debt agreement)2019 facilities) and recorded debt extinguishment costs of $2 million to write off previously capitalized debt issuance costs.
Each of the senior unsecured revolving credit facilities, except for the $50 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars, also include amounts available for letters of credit and have a portion available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, we may add one or more senior unsecured term loan facilities or increase the commitments under the senior unsecured
revolving credit facilities by an aggregate amount not to exceed $1.5 billion. The lenders under the 2019 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
We had loans outstanding of $1.570 billion,$513 million, net of debt issuance costs and based on applicable exchange rates, under the TLA facilities, no borrowings outstanding under the senior unsecured revolving credit facilities and $20$13 million of outstanding letters of credit under the senior unsecured revolving credit facilities as of February 2, 2020. We had no borrowings outstanding under the senior unsecured revolving credit facilities as of February 2, 2020.January 30, 2022.
The terms of the TLA facilities require us to make quarterly repayments of amounts outstanding, under the 2019 facilities, which commenced with the calendar quarter ended September 30, 2019. Such required repayment amounts equal 2.50% per annum of the principal amount outstanding on the Closing Date for the first eight calendar quarters following the Closing Date, 5.00% per annum of the principal amount outstanding on the Closing Date for the four calendar quarters thereafter and 7.50% per annum of the principal amount outstanding on the Closing Date for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the TLA facilities. The outstanding borrowings under the 2019 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments we make would reduce the future required repayment amounts.
We made payments of $1.051 billion on our term loans under the 2019 facilities during 2021, which included the repayment of the outstanding principal balance under our United States dollar-denominated Term Loan A facility. We made payments of $14 million on our term loans under the 2019 facilities during 2020. We made payments of $71 million on our term loans under the 2019 facilities and we repaid the 2016 facilities in connection with the refinancing of the senior credit facilities during 2019. We made payments of $150 million and $250 million during 2018 and 2017, respectively, on our term loans under the 2016 facilities.
The United States dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds effective rate plus 1/2 of 1.00% and (iii) a one-month reserve adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The Canadian dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at our option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the average of the rates per annum for Canadian dollar bankers' acceptances having a term of one month or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
Borrowings available in Hong Kong dollars under the 2019 facilities bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The borrowings under the 2019 facilities in currencies other than United States dollars, Canadian dollars or Hong Kong dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The current applicable margin with respect to the TLA facilities and each revolving credit facility isas of January 30, 2022 was 1.375% for adjusted Eurocurrency rate loans and 0.375% for base rate or Canadian prime rate loans. The applicable margin for borrowings under the TLA facilities and the revolving credit facilities is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of our fiscal quarters, based upon our net leverage ratio, or (ii) after the date of delivery of notice of a change in our public debt rating by Standard & Poor’s or Moody’s.
We entered into interest rate swap agreements designed with the intended effect of converting notional amounts of our variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for theany outstanding notional amount, our exposure to fluctuations in the one-month LIBOR is eliminated and we pay a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2019, 20182021, 2020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | |
Designation Date | | Commencement Date | | Initial Notional Amount | | Notional Amount Outstanding as of January 30, 2022 | | Fixed Rate | | Expiration Date |
March 2020 | | February 2021 | | $ | 50 | | | $ | — | | (1) | 0.562% | | February 2023 |
February 2020 | | February 2021 | | 50 | | | — | | (1) | 1.1625% | | February 2023 |
February 2020 | | February 2020 | | 50 | | | — | | (1) | 1.2575% | | February 2023 |
August 2019 | | February 2020 | | 50 | | | — | | (1) | 1.1975% | | February 2022 |
June 2019 | | February 2020 | | 50 | | | — | | (1) | 1.409% | | February 2022 |
June 2019 | | June 2019 | | 50 | | | — | | | 1.719% | | July 2021 |
January 2019 | | February 2020 | | 50 | | | — | | | 2.4187% | | February 2021 |
November 2018 | | February 2019 | | 139 | | | — | | | 2.8645% | | February 2021 |
October 2018 | | February 2019 | | 116 | | | — | | | 2.9975% | | February 2021 |
June 2018 | | August 2018 | | 50 | | | — | | | 2.6825% | | February 2021 |
June 2017 | | February 2018 | | 306 | | | — | | | 1.566% | | February 2020 |
|
| | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | |
Designation Date | | Commencement Date | | Initial Notional Amount | | Notional Amount Outstanding as of February 2, 2020 | | Fixed Rate | | Expiration Date |
August 2019 | | February 2020 | | $ | 50 |
| | $ | — |
| | 1.1975% | | February 2022 |
June 2019 | | February 2020 | | 50 |
| | — |
| | 1.409% | | February 2022 |
June 2019 | | June 2019 | | 50 |
| | 50 |
| | 1.719% | | July 2021 |
January 2019 | | February 2020 | | 50 |
| | — |
| | 2.4187% | | February 2021 |
November 2018 | | February 2019 | | 139 |
| | 127 |
| | 2.8645% | | February 2021 |
October 2018 | | February 2019 | | 116 |
| | 103 |
| | 2.9975% | | February 2021 |
June 2018 | | August 2018 | | 50 |
| | 50 |
| | 2.6825% | | February 2021 |
June 2017 | | February 2018 | | 306 |
| | 56 |
| | 1.566% | | February 2020 |
July 2014 | | February 2016 | | 683 |
| | — |
| | 1.924% | | February 2018 |
The notional amounts(1) We terminated early the interest rate swap agreements due to expire in February 2022 and February 2023 in connection with the repayment of the outstanding principal balance under our USD TLA facility. Please see Note 10, “Derivative Financial Instruments,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Our 2019 facilities require us to comply with customary affirmative, negative and financial covenants, including a minimum interest rate swapscoverage ratio and a maximum net leverage ratio. A breach of any of these operating or financial covenants would result in a default under the 2019 facilities. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable, which would result in acceleration of our other debt. Given the disruption to our business caused by the COVID-19 pandemic and to ensure financial flexibility, we amended these facilities in June 2020 to provide temporary relief of certain financial covenants until the date on which a compliance certificate was delivered for the second quarter of 2021 (the “relief period”) unless we elected earlier to terminate the relief period and satisfied the conditions for doing so (the “June 2020 Amendment”). The June 2020 Amendment provided for the following during the relief period, among other things, the (i) suspension of compliance with the maximum net leverage ratio through and including the first quarter of 2021, (ii) suspension of the minimum interest coverage ratio through and including the first quarter of 2021, (iii) addition of a minimum liquidity covenant of $400 million, (iv) addition of a restricted payment covenant and (v) imposition of stricter limitations on the incurrence of indebtedness and liens. The limitation on restricted payments required that commencedwe suspend payments of dividends on our common stock and purchases of shares under our stock repurchase program during the relief period. The June 2020 Amendment also provided that during the relief period the applicable margin would be increased 0.25%. In addition, under the June 2020 Amendment, in February 2018the event there was a specified credit ratings downgrade by Standard & Poor’s and FebruaryMoody’s during the relief period (as set forth in the June 2020 Amendment), within 120 days thereafter (i) we would have been required to cause each of our wholly owned United States subsidiaries (subject to certain customary exceptions) to become a guarantor under the 2019 are adjusted accordingfacilities and (ii) we and each subsidiary guarantor would have been required to pre-set schedules duringgrant liens in favor of the collateral agent on substantially all of our respective assets (subject to customary exceptions). We terminated early, effective June 10, 2021, this temporary relief period and, as a result, the various provisions in the June 2020 Amendment described above were no longer in effect. Following the termination of the relief period, we were required to maintain a minimum interest coverage ratio and a maximum net leverage ratio, calculated in the manner set forth in the terms of the swap agreements such that,2019 facilities. As of January 30, 2022, we were in compliance with all applicable financial and non-financial covenants under these facilities.
We expect to maintain compliance with the financial covenants under the 2019 facilities based on our projections for future debt repayments, our outstanding debt under the USD TLA facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.current forecasts.
4 1/2% Senior Notes Due 2022
We had outstanding $700 million principal amount of 4 1/2% senior notes due December 15, 2022. We redeemed these notes on January 5, 2018 in connection with the issuance of €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027, as discussed below. We paid a premium of $16 million to the holders of these notes in connection with the redemption and recorded debt extinguishment costs of $8 million to write-off previously capitalized debt issuance costs associated with these notes during 2017.
7 3/4% Debentures Due 2023
We have outstanding $100 million of debentures due November 15, 2023 that accrue interest at the rate of 7 3/4%. The debentures are not redeemable at our option prior to maturity.
3 5/8% Euro Senior Notes Due 2024
We have outstanding €350€525 million euro-denominated principal amount of 3 5/8% senior notes due July 15, 2024.2024, of which €175 million principal amount was issued on April 24, 2020. Interest on the notes is payable in euros. We paid €3 million ($3 million based on exchange rates in effect on the payment date) of fees in connection with the issuance of the additional €175 million notes. We may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, we may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.
4 5/8% Senior Notes Due 2025
We issued on July 10, 2020, $500 million principal amount of 4 5/8% senior notes due July 10, 2025. The interest rate payable on the notes is subject to adjustment if either Standard & Poor’s or Moody’s, or any substitute rating agency, as defined in the indenture governing the notes, downgrades the credit rating assigned to the notes. We paid $6 million of fees in connection with the issuance of the notes. We may redeem some or all of these notes at any time prior to June 10, 2025 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, we may redeem some or all of these notes on or after June 10, 2025 at their principal amount plus any accrued and unpaid interest.
3 1/8% Euro Senior Notes Due 2027
We issued on December 21, 2017have outstanding €600 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027. Interest on the notes is payable in euros. We paid €9 million (approximately $10 million based on exchange rates in effect on the payment date) of fees during 2017 in connection with the issuance of these notes, which are amortized over the term of the notes. We may redeem some or all of these notes at any time prior to September 15, 2027 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, we may redeem some or all of these notes on or after September 15, 2027 at their principal amount plus any accrued and unpaid interest.
Our financing arrangements contain financial and non-financial covenants and customary events of default. As of February 2, 2020,January 30, 2022, we were in compliance with all applicable financial and non-financial covenants under our financing arrangements.
As of February 2, 2020,January 30, 2022, our issuer credit was rated BBB- by Standard & Poor’s with a stable outlook and our corporate credit was rated Baa3 by Moody’s with a stable outlook, and our commercial paper was rated A-3 by Standard & Poor’s and P-3 by Moody’s. In assessing our credit strength, we believe that both Standard & Poor’s and Moody’s considered, among other things, our capital structure and financial policies, our consolidated balance sheet, our historical acquisition activity and other financial information, as well as industry and other qualitative factors.
Please see Note 9,8, “Debt,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of our debt.
Additional Cash Requirements
Contractual Obligations
The following table summarizes current and long-term cash requirements as of February 2, 2020, our contractualJanuary 30, 2022, which we expect to fund primarily with cash obligations by future period:generated from operating cash flows and continued access to financial and credit markets:
| | | | Payments Due by Period | | | Cash Requirements | |
Description | | Total Obligations | | 2020 | | 2021-2022 | | 2023-2024 | | Thereafter | Description | | Total | | 2022 | | 2023-2024 | | 2025-2026 | | Thereafter | |
(In millions) | | | (In millions) | | | |
Long-term debt(1) | | $ | 2,725 |
| | $ | 14 |
| | $ | 142 |
| | $ | 1,906 |
| | $ | 663 |
| Long-term debt(1) | | $ | 2,368 | | | $ | 35 | | | $ | 1,165 | | | $ | 500 | | | $ | 668 | | |
Interest payments on long-term debt | | 419 |
| | 86 |
| | 159 |
| | 112 |
| | 62 |
| Interest payments on long-term debt | | 290 | | | 81 | | | 135 | | | 53 | | | 21 | | |
Short-term borrowings | | 50 |
| | 50 |
| | | | | | | Short-term borrowings | | 11 | | | 11 | | | |
Operating and finance leases(2) | | 2,274 |
| | 445 |
| | 740 |
| | 443 |
| | 646 |
| Operating and finance leases(2) | | 1,814 | | | 428 | | | 591 | | | 351 | | | 444 | | |
Inventory purchase commitments(3) | | 883 |
| | 883 |
| | | | | | | Inventory purchase commitments(3) | | 1,072 | | | 1,072 | | | |
Minimum contractual royalty payments(4) | | 23 |
| | 8 |
| | 11 |
| | 4 |
| | | |
Non-qualified supplemental defined benefit plan(5) | | 8 |
| | 1 |
| | 2 |
| | 1 |
| | 4 |
| |
Information-technology, sponsorships and other commitments(6) | | 134 |
| | 103 |
| | 29 |
| | 2 |
| | | |
Total contractual cash obligations | | $ | 6,516 |
| | $ | 1,590 |
| | $ | 1,083 |
| | $ | 2,468 |
| | $ | 1,375 |
| |
Non-qualified supplemental defined benefit plans(4) | | Non-qualified supplemental defined benefit plans(4) | | 42 | | | 37 | | | 1 | | | 1 | | | 3 | | |
Other cash requirements(5) | | Other cash requirements(5) | | 101 | | | 57 | | | 37 | | | 7 | | | |
Total | | Total | | $ | 5,698 | | | $ | 1,721 | | | $ | 1,929 | | | $ | 912 | | | $ | 1,136 | | |
______________________
| |
(1)(1)At January 30, 2022, the outstanding principal balance under our senior unsecured Term Loan A facilities was $515 million, which requires mandatory payments through April 29, 2024 (according to the mandatory repayment schedules). We also had outstanding $100 million of 7 3/4% debentures due November 15, 2023, $585 million of 3 5/8% senior unsecured euro notes due July 15, 2024, $500 million of 4 5/8% senior unsecured notes due July 10, 2025 and $668 million of 3 1/8% senior unsecured euro notes due December 15, 2027. | At February 2, 2020, the outstanding principal balance under senior unsecured Term Loan A facilities was $1.575 billion, which requires mandatory payments through April 29, 2024 (according to the mandatory repayment schedules). We also had outstanding $100 million of 7 3/4% debentures due November 15, 2023, $387 million of 3 5/8% senior unsecured euro notes due July 15, 2024 and $663 million of 3 1/8% senior unsecured euro notes due December 15, 2027. |
| |
(2)
| We lease Company-operated freestanding retail store locations, warehouses, distribution centers, showrooms, office space and a factory in Ethiopia, as well as certain equipment and other assets. Please see Note 17, “Leases,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information. |
| |
(3)
| Represents contractual commitments that are enforceable and legally binding for goods on order and not received or paid for as of February 2, 2020. Inventory purchase commitments also include fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. Substantially all of these goods are expected to be received and the related payments are expected to be made in 2020. However, in light of the COVID-19 outbreak, some of these orders may be canceled. This amount does not include foreign currency forward exchange contracts that we have entered into to manage our exposure to exchange rate changes with respect to certain of these purchases. Please see Note 11, “Derivative Financial Instruments,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information. |
| |
(4)
| Our minimum contractual royalty payments arise under numerous license agreements we have with third parties, each of which has different terms. Agreements typically require us to make minimum payments to the licensors of the licensed trademarks based on expected or required minimum levels of sales of licensed products, as well as additional royalty payments based on a percentage of sales when our sales exceed such minimum sales. Certain of our license agreements require that we pay a specified percentage of net sales to the licensor for advertising and promotion of the licensed products, in some cases requiring a minimum amount to be paid. Any advertising payments, with the exception of minimum payments to licensors, are excluded from the minimum contractual royalty payments shown in the table. There is no guarantee that we will exceed the minimum payments under any of these license agreements. |
(2)We lease Company-operated free-standing retail store locations, warehouses, distribution centers, showrooms, office space, and certain equipment and other assets. Please see Note 16, “Leases,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information.
(3)Represents contractual commitments that are enforceable and legally binding for goods on order and not received or paid for as of January 30, 2022. Inventory purchase commitments also include fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. Substantially all of these goods are expected to be received and the related payments are expected to be made in 2022. This amount does not include foreign currency forward exchange contracts that we have entered into to manage our exposure to exchange rate changes with respect to certain of these purchases. Please see Note 10, “Derivative Financial Instruments,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information.
(4)Represents cash requirements primarily related to benefit payments under our unfunded non-qualified supplemental defined benefit pension plan for certain employees resident in the United States hired prior to January 1, 2022, who meet certain age and service requirements that provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. Payments expected to be made within the next 12 months include $36 million of payments to certain vested senior executives who retired or terminated their employment in 2021 or who in 2021 announced their retirement or termination of their employment in 2022. Please see Note 12, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information on our supplemental defined benefit pension plans.
(5)Represents cash requirements primarily related to (i) information-technology service agreements, (ii) minimum contractual royalty payments under several license agreements we have with third parties, and (iii) advertising and sponsorship agreements.
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(5)
| We have an unfunded, non-qualified supplemental defined benefit plan covering certain retired executives under which the participants will receive a predetermined amount during the 10 years following the attainment of age 65, provided that prior to the termination of employment with us, the participant has been in such plan for at least 10 years and has attained age 55. |
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(6)
| Information-technology, sponsorships and other commitments represent future cash obligations related to (i) information-technology related service agreements, (ii) sponsorship and advertising agreements, including agreements relating to our sponsorship of the Barclays Center, the Brooklyn Nets, Mercedes-AMG Petronas Motorsport in Formula OneTM racing and certain other professional sports teams and athletes and other similar sponsorships, as well as agreements with celebrities, models and stylists and (iii) the mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition, of which the portion related to tranche 1 shares is payable in 2020 and has been included in the table above. Not included in the table above is the portion of the mandatorily redeemable non-controlling interest related to the tranche 2 shares that is payable in 2021, due to the uncertainty regarding the future cash outflows associated with this obligation. Please see Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
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Not included in the above table are contributions to our qualified defined benefit pension plans, or payments beyond the next 12 months to certain employees and retirees in connection with our unfunded supplemental executive retirement supplemental pension andplans, or payments in connection with our unfunded postretirement health care and life insurance benefits plans. ContractualThese cash obligations for these plansrequirements cannot be determined due to the number of assumptions required to estimate our future benefit obligations, including return on assets, discount rate and future compensation increases. The liabilities associated with these plans together with the liability for the non-qualified supplemental defined benefit plans included in the above table, are presented in Note 13,12, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report. Currently, we do not expect to make any material contributions to our pension plans in 2020.2022. Our actual
contributions may differ from our planned contributions due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.
Not included in the above table are $158$139 million of net potential cash obligations associated with uncertain tax positions due to the uncertainty regarding the future cash outflows associated with such obligations. Please see Note 10,9, “Income Taxes,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information related to uncertain tax positions.
Not included in the above table are $36$46 million of asset retirement obligations related to our obligation to dismantle or remove leasehold improvements from leased office, and retail store or warehouse locations at the end of a lease term in order to restore a facility to a condition specified in the lease agreement due to the uncertainty of timing of future cash outflows associated with such obligations. Please see Note 23,22, “Other Comments,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information related to asset retirement obligations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on our financial position, changes in financial position, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources.
MARKET RISK
Financial instruments held by us as of February 2, 2020January 30, 2022 include cash and cash equivalents, short-term borrowings, long-term debt and foreign currency forward exchange contracts and interest rate swap agreements.contracts. Note 12,11, “Fair Value Measurements,” in the Notes to Consolidated Financial Statements included in Item 8 of this report outlines the fair value of our financial instruments as of February 2, 2020.January 30, 2022. Cash and cash equivalents held by us are affected by short-term interest rates, which are currently low. The potential for a significant decrease in short-term interest rates is low due to the currently low rates of return we are receiving on our cash and cash equivalents and, therefore, a further decrease would not have a material impact on our interest income. However, there is potential for a more significant increase in short-term interest rates, which could have a more material impact on our interest income. Given our balance of cash and cash equivalents at February 2, 2020,January 30, 2022, the effect of a 10 basis point change in short-term interest rates on our interest income would be approximately $500,000$1.2 million annually. Borrowings under ourthe 2019 facilities and 2021 facility bear interest at a rate equal to an applicable margin plus a variable rate. As such, ourthe 2019 facilities and 2021 facility expose us to market risk for changes in interest rates. We have enteredconsider the debt outstanding under these facilities and enter into interest rate swap agreements for the intended purpose of reducing our exposure to interest rate volatility. As of February 2, 2020, after taking into account the effect of ourNo interest rate swap agreements that were in effectoutstanding as of such date,January 30, 2022. As of January 30, 2022, approximately 55%80% of our long-term debt was at a fixed interest rate, with the remainderremaining (euro-denominated) balance at a variable interest rates. Given our long-termrate. Interest on the euro-denominated debt position at February 2, 2020,is subject to change based on fluctuations in the effect ofthree-month Euro Interbank Offered Rate, which is currently negative. As such, a 10 basis point change in interest rates would have no impact on our variable interest expense would be approximately $1 million annually.expense. Please see the section entitled “Liquidity and Capital Resources” above for further discussion of our credit facilities and interest rate swap agreements.
Our Tommy Hilfiger and Calvin Klein businesses each have substantial international components that expose us to significant foreign exchange risk. Our Heritage Brands business also has international components but those components are not significant to the business. Over 60% of our $9.2 billion of revenue in 2021 and $7.1 billion of revenue in 2020, and over 50% of our $9.909$9.9 billion of revenue in 2019 was generated outside of the United States. Changes in exchange rates between the United States dollar and other currencies can impact our financial results in two ways: a translational impact and a transactional impact.
The translational impact refers to the impact that changes in exchange rates can have on our results of operations and financial position. The functional currencies of our foreign subsidiaries are generally the applicable local currencies. Our consolidated financial statements are presented in United States dollars. The results of operations in local foreign currencies are translated into United States dollars using an average exchange rate over the representative period and the assets and liabilities in local foreign currencies are translated into United States dollars using the closing exchange rate at the balance sheet date. Foreign exchange differences that arise from the translation of our foreign subsidiaries’ assets and liabilities into United States dollars are recorded as foreign currency translation adjustments in other comprehensive (loss) income. Accordingly, our results of operations and other comprehensive (loss) income will be unfavorably impacted during times of a strengthening United States dollar, particularly against the euro, the Brazilian real, the Japanese yen, the Korean won, the British pound sterling, the Australian dollar, the Canadian dollar and the Chinese yuan renminbi, and favorably impacted during times of a weakening United States dollar against those currencies.
Our 2019 revenues2021 revenue and net income decreasedincreased by approximately $215$140 million and $25 million, respectively, as compared to 20182020 due to the impact of foreign currency translation. We currently expect a decrease in our 2022 revenue and net income in 2020 as compared to 2019decrease by approximately $355 million and $50 million, respectively, due to the impact of foreign currency translation.
In addition, in 20192021, we recognized unfavorable foreign currency translation adjustments of $158$268 million within other comprehensive (loss) income principally driven by a strengthening of the United States dollar against the euro of 4%8% since February 3, 2019.January 31, 2021. Our foreign currency translation adjustments recorded in other comprehensive (loss) income are significantly impacted by the substantial amount of goodwill and other intangible assets denominated in the euro, which represented 33%37% of our $7.2$6.1 billion total goodwill and other intangible assets as of February 2, 2020.January 30, 2022. This translational impact was partially mitigated by the change in the fair value of our net investment hedges discussed below.
A transactional impact on financial results is common for apparel companies operating outside the United States that purchase goods in United States dollars, as is the case with most of our foreign operations. As with translation, ourOur results of operations will be unfavorably impacted during times of a strengthening United States dollar, as the increased local currency value of inventory results in a higher cost of goods in local currency when the goods are sold, and favorably impacted during times of a weakening United States dollar, as the decreased local currency value of inventory results in a lower cost of goods in local currency when the goods are sold. We also have exposure to changes in foreign currency exchange rates related to certain intercompany transactions and SG&A expenses. We currently use and plan to continue to use foreign currency forward exchange contracts or other derivative instruments to mitigate the cash flow or market value risks associated with these
inventory and intercompany transactions, but we are unable to entirely eliminate these risks. The foreign currency forward exchange contracts cover at least 70% of the projected inventory purchases in United States dollars by our foreign subsidiaries.
We currently expect a decrease in ourOur 2021 net income in 2020increased by approximately $30 million as compared to 20192020 due to the transactional impact.impact of foreign currency. We currently expect our 2022 net income to decrease by approximately $10 million due to the transactional impact of foreign currency.
Given our foreign currency forward exchange contracts outstanding at February 2, 2020,January 30, 2022, the effect of a 10% change in foreign currency exchange rates against the United States dollar would result in a change in the fair value of these contracts of approximately $105$115 million. Any change in the fair value of these contracts would be substantially offset by a change in the fair value of the underlying hedged items.
In order to mitigate a portion of our exposure to changes in foreign currency exchange rates related to the value of our investments in foreign subsidiaries denominated in the euro, we designated the carrying amount of our €950 million€1.125 billion aggregate principal amount of euro-denominated senior notes that we had issued in the United Statesby PVH Corp., a U.S.-based entity, as net investment hedges of our investments in certain of our foreign subsidiaries that use the euro as their functional currency. The effect of a 10% change in the euro against the United States dollar would result in a change in the fair value of the net investment hedges of approximately $105$125 million. Any change in the fair value of the net investment hedges would be more than offset by a change in the value of our investments in certain of our European subsidiaries. Additionally, during times of a strengthening United States dollar against the euro, we would be required to use a lower amount of our cash flows from operations to pay interest and make long-term debt repayments on our euro-denominated senior notes, whereas during times of a weakening United States dollar against the euro, we would be required to use a greater amount of our cash flows from operations to pay interest and make long-term debt repayments on these notes.
Included in the calculations of expense and liabilities for our pension plans are various assumptions, including return on assets, discount rates, mortality rates and future compensation increases. Actual results could differ from these assumptions, which would require adjustments to our balance sheet and could result in volatility in our future pension expense. Holding all other assumptions constant, a 1% change in the assumed rate of return on assets would result in a change to 20202022 net benefit cost related to the pension plans of approximately $7 million. Likewise, a 0.25% change in the assumed discount rate would result in a change to 20202022 net benefit cost of approximately $45$37 million.
SEASONALITY
Our business generally follows a seasonal pattern. Our wholesale businesses tend to generate higher levels of sales in the first and third quarters, while our retail businesses tend to generate higher levels of sales in the fourth quarter. Royalty, advertising and other revenue tends to be earned somewhat evenly throughout the year, although the third quarter has the highest level of royalty revenue due to higher sales by licensees in advance of the holiday selling season. The COVID-19 pandemic has disrupted these patterns, however. We otherwise expect this seasonal pattern will generally continue. Working capital requirements vary throughout the year to support these seasonal patterns and business trends.
RECENT ACCOUNTING PRONOUNCEMENTS
Please see Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for a discussion of recently issued and adopted accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are outlined in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this report. We believe that the following are the more critical judgmental areas in the application of our accounting policies that currently affect our financial position and results of operations:
Sales allowances and returns—We have arrangements with many of our department and specialty store customers to support their sales of our products. We establish accruals which, based on a review of the individual customer arrangements and the expected performance of our products in their stores, we believe will be required to satisfy our sales allowance obligations.obligations based on a review of the individual customer arrangements, which may be a predetermined percentage of sales in certain cases or may be based on the expected performance of our products in their stores. We also establish accruals, which are based on historical experience, an evaluation of current sales trends and market conditions, and authorized amounts, that we believe are necessary to provide for sales allowances and inventory returns. Our historical accrual estimates have not differed materially from actual results. It is possible that the accrual estimates could vary from actual results, which would require adjustment to the allowance and returns accruals.
Inventories—Inventories are comprised principally of finished goods and are stated at the lower of cost or net realizable value, except for certain retail inventories in North America that are stated at the lower of cost or market using the retail inventory method. Cost for substantially all wholesale inventories in North America and certain wholesale and retail inventories in Asia is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. We review current business trends and forecasts, inventory aging and discontinued merchandise categories to determine adjustments which we estimate will be needed to liquidate existing clearance inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market using the retail inventory method, as applicable. We believe that all inventory write-downs required at February 2, 2020January 30, 2022, have been recorded. Our historical estimates of inventory reserves have not differed materially from actual results. If market conditions were to change, including as a result of the current conflict in Ukraine and its broader macroeconomic implications or the COVID-19 outbreak,pandemic and the supply chain and logistics disruptions globally, it is possible that the required level of inventory reserves would need to be adjusted.
Asset impairments—We determined during each of2021, 2020 and 2019 2018 and 2017 that certain long-lived assets primarily in certain of our retail stores and shop-in-shops, were not recoverable, which resulted in us recording impairment charges. Additionally,The long-lived asset impairments in 2021, which primarily related to certain office, retail store and shop-in-shop assets, including property, plant and equipment and operating lease-right-of-use assets, were primarily as a result of actions taken by us to reduce our real estate footprint, including reductions in office space, and the financial performance in certain of our retail stores and shop-in-shops. The long-lived asset impairments in 2020, which primarily related to certain retail store and shop-in-shop assets, including property, plant and equipment and operating lease-right-of-use assets, were as a result of the significant adverse impacts of the COVID-19 pandemic on our business, the impact of the shift in consumer buying trends from our brick and mortar retail stores to digital channels, and our decision in July 2020 to exit from the Heritage Brands Retail business. We also determined during 2019 we determined2020 that certain finite-lived customer relationship intangible assets were impaired due to the adverse impacts of the pandemic on the then-current and projected performance of the underlying businesses. The long-lived asset impairments in 2019, which primarily related to certain retail store and shop-in-shop assets, including property, plant and equipment and operating lease right-of-use assets, were impaired primarily as a result of the closure of certain flagship and anchor stores in the United States. States and the financial performance in certain of our retail stores and shop-in-shops.
In order to calculate theseaddition, we determined during 2020 that our equity method investment in Karl Lagerfeld was impaired as a result of the adverse impacts of the pandemic on recent and projected business results.
To test long-lived assets for impairment, charges, we estimated the undiscounted future cash flows and the related fair value of each asset. Undiscounted future cash flows were estimated using current sales trends and other factors and, in the case of operating lease right-of-use assets, using estimated sublease income assumptions.or market rents. If the sum of such undiscounted future cash flows was less than the asset’s carrying amount, we recognized an impairment charge equal to the difference between the carrying amount of the asset and its estimated fair value. If different assumptions had been used, including the rate at which future cash flows were discounted, the recorded impairment charges could have been significantly higher or lower. Please see
Note 12,5, “Investments in Unconsolidated Affiliates,” Note 7, “Goodwill and Other Intangible Assets,” and Note 11, “Fair Value Measurements,” in the Notes to Consolidated Financial Statements included in Item 8 of this report includesfor further discussion of the circumstances surrounding thethese impairments and the assumptions related to the impairment charges.
Allowance for doubtful accountscredit losses on trade receivables—Trade receivables, as presented in our Consolidated Balance Sheets, are net of an allowance for doubtful accounts.credit losses. An allowance for doubtful accountscredit losses is determined through an analysis of the aging of accounts receivable and assessments of collectibilitycollectability based on historichistorical trends, the financial condition of our customers and licensees, including any known or anticipated bankruptcies, and an evaluation of current economic conditions.conditions as well as our expectations of conditions in the future. Because we cannot predict future changes in economic conditions and in the financial stability of our customers with certainty, including as a result of uncertainties surrounding the current conflict in Ukraine and its broader macroeconomic implications, and the ongoing effects of the COVID-19 pandemic, actual future losses from uncollectible accounts may differ from our estimates and could impact our allowance for doubtful accounts.credit losses.
Income taxes—Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience and expectations of future taxable income by taxing jurisdiction, the carryforward periods available to us for tax reporting purposes and other relevant factors. The actual realization of deferred tax assets may differ significantly from the amounts we have recorded.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if available evidence indicates it is more likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount with a greater than 50 percent likelihood of being realized upon ultimate settlement. For tax positions that are 50 percent or less likely of being sustained upon audit, we do not recognize any portion of that benefit in the financial statements. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our actual results have differed materially in the past and could differ materially in the future from our current estimates.
The U.S. Tax Legislation was enacted on December 22, 2017. The U.S. Tax Legislation is comprehensive and significantly revised the United States tax code. Please see Note 10, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 8 of this report for further discussion of the impacts of the U.S. Tax Legislation.
Goodwill and other intangible assets—Goodwill and other indefinite-lived intangible assets are tested for impairment annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is defined as an operating segment or one level below the operating segment, called a component. However, two or more components of an operating segment will be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Impairment testing for other indefinite-lived intangible assets is done at the individual asset level.
We assess qualitative factors to determine whether it is necessary to perform a more detailed quantitative impairment test for goodwill and other indefinite-lived intangible assets. We may elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting units or indefinite-lived intangible assets. Qualitative factors that we consider as part of our assessment include a change in our market capitalization and its implied impact on reporting unit fair value, a change in our weighted average cost of capital, industry and market conditions, macroeconomic conditions, trends in product costs and financial performance of our businesses. If we perform the quantitative test for any reporting units or indefinite-lived intangible assets, we generally use a discounted cash flow method to estimate fair value. The discounted cash flow method is based on the present value of projected cash flows. Assumptions used in these cash flow projections are generally consistent with our internal forecasts. The estimated cash flows are discounted using a rate that represents our weighted average cost of capital. The weighted average cost of capital is based on a number of variables, including the equity-risk premium and risk-free interest rate. Management believes the assumptions used for the impairment tests are consistent with those that would be utilized by a market participant performing similar analysis and valuations. Adverse changes in future market conditions or weaker operating results compared to our expectations may impact our projected cash flows and estimates of weighted average cost of capital, which could result in a potential impairment charge if we are unable to recover the carrying value of our goodwill and other indefinite-lived intangible assets. For goodwill, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the extent the carryingtotal amount of thegoodwill allocated to that reporting unit’s goodwill exceeds the implied fair value of the goodwill.unit. For indefinite-lived intangible assets, an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value.
Goodwill Impairment Testing
2021 Annual Impairment Test
For the 2021 annual goodwill impairment test performed as of the beginning of the third quarter of 2021, we elected to perform a qualitative assessment first to determine whether it was more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount.
We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and reporting unit-specific factors. In performing this assessment, we considered the results of our quantitative interim goodwill impairment test performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) the weighted average cost of capital for each reporting unit as of the beginning of the third quarter of 2021, which was either favorable to or consistent with the weighted average cost of capital used in our 2020 interim test, (ii) a favorable change in our market capitalization and its implied impact on the fair value of our reporting units subsequent to the 2020 interim test, and (iii) our recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in our 2020 interim test.
After assessing these events and circumstances, we determined that it was not more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from our annual impairment test in 2021.
2020 Annual Impairment Test
For the 2020 annual goodwill impairment test performed as of the beginning of the third quarter of 2020, we elected to perform a qualitative assessment first to determine whether it was more likely than not that the fair value of each reporting unit with allocated goodwill was less than the carrying amount.
We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and reporting unit-specific factors. In performing this assessment, we considered the results of our quantitative interim goodwill impairment test performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) favorable changes in the weighted average cost of capital subsequent to the 2020 interim test, (ii) a favorable change in our market capitalization and its implied impact on the fair value of our reporting units subsequent to the 2020 interim test, and (iii)ourrecent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in our 2020 interim goodwill impairment test.
After assessing these events and circumstances, we determined that it was not more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from our annual impairment test in 2020.
2020 Interim Impairment Test
We determined in the first quarter of 2020 that the significant adverse impact of the COVID-19 pandemic on our business, including an unprecedented material decline in revenue and earnings and an extended decline in our stock price and associated market capitalization, was a triggering event that required us to perform a quantitative interim goodwill impairment test. As a result of the interim test performed, we recorded $879 million of noncash impairment charges in the first quarter of 2020, which were included in goodwill and other intangible asset impairments in our Consolidated Statement of Operations and allocated to our segments as follows: $198 million in the Heritage Brands Wholesale segment, $287 million in the Calvin Klein North America segment, and $394 million in the Calvin Klein International segment.
Of these reporting units, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International were determined to be partially impaired. The remaining carrying amount of goodwill allocated to these reporting units as of the date of our interim test was $162 million, $143 million and $347 million, respectively. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate assumptions for these businesses would have resulted in a change to the estimated fair value of the reporting units of approximately $80 million, $20 million and $140 million, respectively. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the reporting units of approximately $60 million, $15 million and $125 million, respectively. While these reporting units were not determined to be fully impaired in the
first quarter of 2020, at the time they were considered to be at risk of further impairment in the future if the related businesses did not perform as projected or if market factors utilized in the impairment analysis deteriorated. However, as discussed in the 2021 annual impairment test section above (i) the weighted average cost of capital for each of our reporting units has either improved or remained consistent with the weighted average cost of capital used in our 2020 interim test and (ii) our recent financial performance and updated financial forecasts have been consistent with or exceeded the projections used in our 2020 interim test.
With respect to our other reporting units that were not determined to be impaired, the Tommy Hilfiger International reporting unit had an estimated fair value that exceeded its carrying amount, as of the date of our interim test, of $2,949 million by 5%. The carrying amount of goodwill allocated to this reporting unit as of the date of our interim test was $1,558 million. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate of the Tommy Hilfiger International business would have resulted in a change to the estimated fair value of the reporting unit of approximately $355 million. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the reporting unit of approximately $320 million. While the Tommy Hilfiger International reporting unit was not determined to be impaired in the first quarter of 2020, at the time it was considered to be at risk of future impairment if the related business did not perform as projected or if market factors utilized in the impairment analysis deteriorated. However, as discussed in the 2021 annual impairment test section above (i) the weighted average cost of capital for each of our reporting units has either improved or remained consistent with the weighted average cost of capital used in our 2020 interim test and (ii) our recent financial performance and updated financial forecasts have been consistent with or exceeded the projections used in our 2020 interim test.
The fair value of the reporting units for goodwill impairment testing was determined using an income approach and validated using a market approach. The income approach was based on discounted projected future (debt-free) cash flows for each reporting unit. The discount rates applied to these cash flows were based on the weighted average cost of capital for each reporting unit, which takes market participant assumptions into consideration. Estimated future operating cash flows used in the interim test were discounted at rates of 10.0%, 10.5% or 11.0%, depending on the reporting unit, to account for the relative risks of the estimated future cash flows. For the market approach, used to validate the results of the income approach method, we used both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenue and EBITDA for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue and EBITDA data from target companies deemed similar to the reporting unit. We classified the fair values of our reporting units as Level 3 fair value measurements due to the use of significant unobservable inputs.
2019 Interim Impairment Test
In the fourth quarter of 2019, the Speedo transaction was a triggering event that indicated that the amount of goodwill allocated to the Heritage Brands Wholesale reporting unit, the reporting unit that included the Speedo North America business, could be impaired, prompting the need to perform an interim goodwill impairment test for this reporting unit. No goodwill impairment resulted from this interim test in 2019.
2019 Annual Impairment Test
For the 2019 annual goodwill impairment test performed as of the beginning of the third quarter of 2019, we elected to bypass the qualitative assessment for all reporting units and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate the fair value of our reporting units. The annual goodwill impairment test during 2019 yielded estimated fair values in excess of the carrying amounts for all of our reporting units and therefore the second step of the quantitative goodwill impairment test (under previous accounting guidance in place at the time the test was performed) was not required. The reporting unit with the least excess fair value had an estimated fair value that exceeded its carrying amount by 15%. No impairment of goodwill resulted from our annual impairment test in 2019. In
Indefinite-Lived Intangible Assets Impairment Testing
2021 Annual Impairment Test
For the fourth2021 annual indefinite-lived intangible assets impairment test performed as of the beginning of the third quarter of 2019,2021, we elected to assess qualitative factors first to determine whether it was more likely than not that the Speedo transactionfair value of any asset was less than its carrying amount.
We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors. In performing this assessment, we considered the results of our interim impairment testing performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) the weighted average cost of capital for each of our indefinite-lived intangible assets as of the beginning of the third quarter of 2021, which was either favorable to or consistent with the weighted average cost of capital used in our 2020 interim test, and (ii) our recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in our 2020 interim test.
After assessing these events and circumstances, we determined that it was not more likely than not that the fair value of our indefinite-lived intangible assets were less than their carrying amounts and concluded that a quantitative impairment test was not required. No impairment of indefinite-lived intangible assets resulted from our annual impairment test in 2021.
2020 Annual Impairment Test
For the 2020 annual indefinite-lived intangible assets impairment test performed as of the beginning of the third quarter of 2020, we elected to assess qualitative factors first to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount.
We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors. In performing this assessment, we considered the results of our interim impairment testing performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) favorable changes in the weighted average cost of capital subsequent to the interim test and (ii) our recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in our 2020 interim test.
After assessing these events and circumstances, we determined that it was not more likely than not that the fair value of our indefinite-lived intangible assets were less than their carrying amounts and concluded that a quantitative impairment test was not required. No impairment of indefinite-lived intangible assets resulted from our annual impairment test in 2020.
2020 Interim Impairment Test
We determined in the first quarter of 2020 that the impact of the COVID-19 pandemic on our business was a triggering event that indicated that the amount of goodwill allocated to the Heritage Brands Wholesale reporting unit, the reporting unit that includes the Speedo North America business, could be impaired, promptingprompted the need to perform an interim goodwillimpairment testing of our indefinite-lived intangible assets. For the TOMMY HILFIGER, Calvin Klein, Warner’s and Olga tradenames, our then-owned Van Heusen tradename and the reacquired perpetual license rights for TOMMY HILFIGER in India, we elected to first assess qualitative factors to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount. For these assets, no impairment was identified as a result of our prior annual indefinite-lived intangible asset impairment test forin 2019 and the fair values of these indefinite-lived intangible assets substantially exceeded their carrying amounts. The asset with the least excess fair value had an estimated fair value that exceeded its carrying amount by approximately 85% as of the date of our 2019 annual test. Considering this reporting unit. Noand other factors, we determined qualitatively that it was not more likely than not that the fair values of these indefinite-lived intangible assets were less than their carrying amounts and concluded that the quantitative impairment test in the first quarter of 2020 was not required.
For the then-owned ARROW and Geoffrey Beene tradenames and the reacquired perpetual license rights recorded in connection with the Australia acquisition, we elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test. As a result of this quantitative interim impairment testing, we recorded $47 million of noncash impairment charges in the first quarter of 2020 to write down the two tradenames. This included $36 million to write down the ARROW tradename, which had a carrying amount as of the date of our interim test of $79 million, to a fair value of $43 million, and $12 million to write down the Geoffrey Beene tradename, which had a carrying amount of $17 million, to a fair value of $5 million. The $47 million of impairment charges recorded in the first quarter of 2020 was included in goodwill impairmentand other intangible asset impairments in our Consolidated Statement of Operations and allocated to our Heritage Brands Wholesale segment. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate of the Arrow business would have resulted from thisin a change to the estimated fair value of the tradename of approximately $5 million. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the ARROW tradename of approximately $5 million. Holding all other assumptions used in the interim test.test constant, a 100 basis point change to the annual revenue growth rate or weighted average cost of capital in the Geoffrey Beene business would have resulted in an immaterial change to the estimated fair value of the Geoffrey Beene tradename. The Van Heusen, ARROW and Geoffrey Beene tradenames were subsequently sold in the third quarter of 2021 in connection with
the Heritage Brands transaction. Please see Note 8, “Goodwill3, “Acquisitions and Other Intangible Assets,Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.discussion of the Heritage Brands transaction.
For the 2018 annual goodwill impairment test, we elected to bypass the qualitative assessment and proceeded directlyWith regard to the quantitative impairment testreacquired perpetual license rights recorded in connection with the Australia acquisition, we determined in the first quarter of 2020 that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired.
The fair value of the ARROW and Geoffrey Beene tradenames was determined using an income-based relief-from-royalty method. Under this method, the value of an asset is estimated based on the hypothetical cost savings that accrue as a result of not having to license the tradename from another party. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. We discounted the cash flow methodflows used to estimatevalue theARROW and Geoffrey Beene tradenames at a rate of 10.0%. The fair value of our reporting units. The annual goodwillreacquired perpetual license rights recorded in connection with the Australia acquisition was determined using an income approach, which estimates the net cash flows directly attributable to the subject intangible asset. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. We discounted the cash flows used to value the reacquired perpetual license rights recorded in connection with the Australia acquisition at a rate of 10.0%. We classified the fair values of these indefinite-lived intangible assets as Level 3 fair value measurements due to the use of significant unobservable inputs.
2019 Interim Impairment Test
In the fourth quarter of 2019, the Speedo transaction was a triggering event that prompted the need to perform an interim impairment test during 2018 yielded estimated fair values in excess of the carrying amountsthen-owned Speedo perpetual license right. As a result of this interim test, the perpetual license right was determined to be impaired and an impairment charge of $116 million was recorded to other (gain) loss, net in our Consolidated Statement of Operations. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for our reporting units, all of which had fair values in excessfurther discussion of the carrying amounts by more than 50%, and therefore the second step of the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from our annual impairment test in 2018.Speedo transaction.
2019 Annual Impairment Test
For the 2019 annual impairment test of all indefinite-lived intangible assets performed as of the beginning of the third quarter of 2019, except for the Australia reacquired perpetual license rights, we elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. For the Australia reacquired perpetual license rights, since only a few months had passed since the acquisition on May 31, 2019 and the business had performed better than initially expected, we determined qualitatively that it was not more likely than not that the fair value of these reacquired perpetual license rights were less than the carrying amount and concluded that the quantitative impairment test was not required. The fair values of all of our indefinite-lived intangible assets substantially exceedexceeded their carrying amounts, with the exception of the then-owned Speedoperpetual license right, related to our Speedo North America business, which had a fair value that exceeded its carrying amount by 3% at the testing date. In the fourth quarter of 2019, the Speedo transaction was a triggering event that prompted the need to perform an interim impairment test of this perpetual license right. As a result of this interim test, the perpetual license right was determined to be impaired and an impairment charge of $116 million was recorded to other noncash loss, net in the Consolidated Income Statement.
Please see Note 4, “Assets Held For Sale,7, “Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
discussion of goodwill and indefinite-lived intangible assets.
For
There have been no significant events or change in circumstances since the 2018date of the 2021 annual impairment testtests that would indicate the remaining carrying amounts of allour goodwill and indefinite-lived intangible assets except for the Geoffrey Beene tradename, we elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. For the Geoffrey Beene tradename, since only a few months had passed since the acquisition on April 20, 2018 and there had not been any significant changes in the business, we determined qualitatively that it was not more likely than not that the fair valuemay be impaired as of this tradename was less than the carrying amount and concluded that the
quantitative impairment test was not required. No impairment of indefinite-lived intangible assets resulted from our annual impairment tests in 2018.
January 30, 2022. If different assumptions for our goodwill and other indefinite-lived intangible assets impairment tests had been applied, significantly different outcomes could have resulted. There can be no assurance thatis significant uncertainty related to the estimatescurrent conflict in Ukraine and assumptions used in our goodwill and indefinite-lived intangible assets impairment testing performed in 2019 will prove to be accurate predictionsits broader macroeconomic implications, as well as continued uncertainty about the impacts of the future. For example,COVID-19 pandemic and the supply chain and logistics disruptions globally on our business. If economic conditions worsen as a result of the conflict in Ukraine and its related effects, or if general macroeconomicthe economic conditions caused by the pandemic do not recover as currently estimated by management, or market factors utilized in the impairment analysis deteriorate or otherwise vary from current assumptions (including those resulting in changes in the weighted average cost of capital), industry or market conditions deteriorate, business conditions or strategies for a specific reporting unit change from current assumptions, including cost increases or loss of major customers, our businesses do not perform as projected, or there is an extended period of a significant decline in our stock price, thiswe could be an indicator that the excess fair value of our reporting units could be lessened and the chance of an impairment ofincur additional goodwill and other indefinite-lived intangible assets could be raised.asset impairment charges in the future.
Pension and Benefit Plans—Pension and benefit plan expenses are recorded throughout the year based on calculations using actuarial valuations that incorporate estimates and assumptions that depend in part on financial market, economic and demographic conditions, including expected long-term rate of return on assets, discount rate and mortality rates. These assumptions require significant judgment. Actuarial gains and losses, which occur when actual experience differs from our
actuarial assumptions, are recognized in the year in which they occur and could have a material impact on our operating results. These gains and losses are measured at least annually at the end of our fiscal year and, as such, are generally recorded during the fourth quarter of each year.
The expected long-term rate of return on assets is based on historical returns and the level of risk premium associated with the asset classes in which the portfolio is invested as well as expectations for the long-term future returns of each asset class. The expected long-term rate of return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio. The expected return on plan assets is recognized quarterly and determined at the beginning of the year by applying the long-term expected rate of return on assets to the actual fair value of plan assets adjusted for expected benefit payments, contributions and plan expenses. At the end of the year, the fair value of the assets is remeasured and any difference between the actual return on assets and the expected return is recorded in earnings as part of the actuarial gain or loss.
The discount rate is determined based on current market interest rates. It is selected by constructing a hypothetical portfolio of high quality corporate bonds that matches the cash flows from interest payments and principal maturities of the portfolio to the timing of benefit payments to participants. The yield on such a portfolio is the basis for the selected discount rate. Service and interest cost is measured using the discount rate as of the beginning of the year, while the projected benefit obligation is measured using the discount rate as of the end of the year. The impact of the change in the discount rate on our projected benefit obligation is recorded in earnings as part of the actuarial gain or loss.
We revised during each of 20192021, 2020 and 20182019 the mortality assumptions used to determine our benefit obligations based on recently published actuarial mortality tables. These changes in life expectancy resulted in changes to the period for which we expect benefits to be paid. In 20192021, the increase in life expectancy increased our benefit obligations and 2018,future expense. In 2020 and 2019, the decrease in life expectancy decreased our benefit obligations and future expense.
We also periodically review and revise, as necessary, other plan assumptions such as rates of compensation increases, retirement and termination based on historical experience and anticipated future management actions. We have not historically had significant adjustmentsDuring 2021, we revised these assumptions based on recent trends and our future expectations, which resulted in a decrease to these assumptions.our benefit obligations and future expense.
Actual results could differ from our assumptions, which would require adjustments to our balance sheet and could result in volatility in our future net benefit cost. Holding all other assumptions constant, a 1% change in the assumed rate of return on assets would result in a change to 2020our 2022 net benefit cost related to the pension plans of approximately $7 million. Likewise, a 0.25% change in the assumed discount rate would result in a change to 2020our projected 2022 net benefit cost of approximately $45$37 million.
Note 13,12, “Retirement and Benefit Plans,” in the Notes to Consolidated Financial Statements included in Item 8 of this report sets forth certain significant rate assumptions and information regarding our target asset allocation, which are used in performing calculations related to our pension plans.
Stock-based compensation—Accounting for stock-based compensation requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation cost over the requisite service period for
awards expected to vest.period. We use the Black-Scholes-Merton option pricing model to determine the fair value of our stock options. This model uses assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. The fair value of restricted stock units is determined based on the quoted price of our common stock on the date of grant. The fair value of our stock options and restricted stock units is recognized as expense over the requisite service period, net of actual forfeitures.
We use the Monte Carlo simulation model to determine the fair value of our contingently issuable performance shares that are subject to market conditions. This model uses assumptions that include the risk-free interest rate, expected volatility and expected dividend yield. The fair value of these awards is recognized as expense ratably over the requisite service period, net of actual forfeitures, regardless of whether the market condition is satisfied. The fair value of contingently issuable performance shares that are subject tonot based on market conditions is established using a Monte Carlo simulation model.based on the quoted price of our common stock on the date of grant, reduced for the present value of any dividends expected to be paid on our common stock during the requisite service period, as these contingently issuable performance shares do not accrue dividends. We record expense for these awards over the requisite service period, net of actual forfeitures, based on the fair value and our current expectation of the probable number of shares that will ultimately be issued. Certain contingently issuable performance shares that are subject to market conditions are also subject to a holding period of one year
after the vesting date. For such awards, the grant date fair value is discounted for the restriction of liquidity, which is calculated using a model that is deemed appropriate after an evaluation of current market conditions.
Note 13, “Stock-Based Compensation,” in the Chaffe model. We record expense forNotes to Consolidated Financial Statements included in Item 8 of this report sets forth certain significant assumptions used to determine the awards that are subject to market conditions ratably over the vesting period, netfair value of actual forfeitures, regardless of whether the market condition is satisfied.our stock options and contingently issuable performance shares.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information with respect to Quantitative and Qualitative Disclosures About Market Risk appears under the heading “Market Risk” in Item 7.
Item 8. Financial Statements and Supplementary Data
See page F-1 of this report for a listing of the consolidated financial statements and supplementary data included in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and Interim Chief Operating & Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chairman and Chief Executive Officer and Interim Chief Operating & Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chairman and Chief Executive Officer and Interim Chief Operating & Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management’s report on internal control over financial reporting and our independent registered public accounting firm’s audit report on our assessment of our internal control over financial reporting can be found on pages F-65F-67 and F-66.F-68.
Changes in Internal Control over Financial Reporting
We implemented internal controls in connection with our adoption of the new lease accounting standard in the first quarter of 2019. There have been no other changes in our internal control over financial reporting during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that a significant number of our employees continued to work remotely in 2021 due to the COVID-19 pandemic.
We are currently undertaking a major multi-year SAP S/4 implementation to upgrade our platforms and systems worldwide. The implementation is occurring in phases over multiple years. We successfully launched the Global Finance functionality on the SAP S/4 platform in Asia and North America in the first quarter of 2020 and the commercial functionality on the SAP S/4 platform for certain businesses in North America in the third quarter of 2021.
As a result of this multi-year implementation, we have made certain changes to our processes and procedures, including as a result of the functionality launched to date, which have resulted in changes to our internal control over financial reporting. However, these changes were not material. We expect to continue to make changes as we launch the commercial functionality for additional businesses in future periods. While we expect this implementation to strengthen our internal control over financial reporting by automating certain manual processes and standardizing business processes and reporting across our organization, we will continue to evaluate and monitor our internal control over financial reporting for material changes as
processes and procedures in the affected areas evolve. For a discussion of risks related to the implementation of new systems and hardware, please see our Information Technology risk factor “We rely significantly on information technology. Our business and reputation could be adversely impacted if our computer systems, or systems of our business partners and service providers, are disrupted or cease to operate effectively or if we or they are subject to a data security or privacy breach” in Item 1A. Risk Factors of this report.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to Directors of the Registrant is incorporated herein by reference to the section entitled “Election of Directors” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022. Information with respect to compliance by our officers and directors with Section 16(a) of the Securities Exchange Act is incorporated herein by reference to the section entitled “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022. Information with respect to our executive officers is contained in the section entitled “Executive Officers of the Registrant” in Part I, Item 1 of this report. Information with respect to the procedure by which security holders may recommend nominees to ourthe PVH Board of Directors and with respect to our Audit & Risk Management Committee, our Audit Committee Financial Expert and our Code of Ethics for the Chief Executive and Senior Financial Officers is incorporated herein by reference to the section entitled “Election of Directors”“Corporate Governance” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated herein by reference to the sections entitled “Executive Compensation Tables,” “Compensation Committee Report,” “Compensation Discussion and Analysis”Analysis,” “Corporate Governance - Committees - Compensation Committee” and “Compensation Committee Interlocks and Insider Participation”“Director Compensation” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to the Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to Certain Relationships and Related Transactions and Director Independence is incorporated herein by reference to the sections entitled “Transactions with Related Persons,”Persons” and “Election of Directors” and “Director Compensation” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022.
Item 14. Principal Accounting Fees and Services
Information with respect to Principal Accounting Fees and Services is incorporated herein by reference to the section entitled “Ratification of the Appointment of Auditor” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.16, 2022.
PART IV
Item 15. Exhibits, Financial Statement Schedules
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(a)(1) | See page F-1 for a listing of the consolidated financial statements included in Item 8 of this report. |
(a)(2) | See page F-1 for a listing of consolidated financial statement schedules submitted as part of this report. |
(a)(3) | The following exhibits are included in this report: |
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Exhibit Number
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2.1 | 3.1 | Stock Purchase Agreement, dated December 17, 2002, among Phillips-Van Heusen Corporation, Calvin Klein, Inc., Calvin Klein (Europe), Inc., Calvin Klein (Europe II) Corp., Calvin Klein Europe S.r.l., CK Service Corp., Calvin Klein, Barry Schwartz, Trust for the Benefit of the Issue of Calvin Klein, Trust for the Benefit of the Issue of Barry Schwartz, Stephanie Schwartz-Ferdman and Jonathan Schwartz (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on December 20, 2002). The registrant agrees to furnish supplementally a copy of any omitted schedules to the Commission upon request. |
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4.1 |
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4.2 |
| Indenture, dated as of November 1, 1993, between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.01 to our Registration Statement on Form S-3 (Reg. No. 33-50751) filed on October 26, 1993); First Supplemental Indenture, dated as of October 17, 2002, to Indenture, dated as of November 1, 1993, between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.15 to our Quarterly Report on Form 10-Q for the period ended November 3, 2002); Second Supplemental Indenture, dated as of February 12, 2002, to Indenture, dated as of November 1, 1993, between Phillips-Van Heusen Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on February 26, 2003); Third Supplemental Indenture, dated as of May 6, 2010, between Phillips-Van Heusen Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (incorporated by reference to Exhibit 4.16 to our Quarterly Report on Form 10-Q for the period ended August 1, 2010); Fourth Supplemental Indenture, dated as of February 13, 2013, to Indenture, dated as of November 1, 1993, between PVH Corp. and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.11 to our Quarterly Report on Form 10-Q for the period ended May 5, 2013). |
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4.3 |
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4.4 |
| Indenture, dated as of June 20, 2016, between PVH Corp., U.S. Bank National Association, as Trustee, Elavon Financial Services Limited, UK Branch, as Paying Agent and Authenticating Agent, and Elavon Financial Services Limited, as Transfer Agent and Registrar (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on June 20, 2016). |
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4.5 |
4.4 | Indenture, dated as of December 21, 2017, between PVH Corp., U.S. Bank National Association, as Trustee, Elavon Financial Services DAC, UK Branch, as Paying Agent and Authenticating Agent, and Elavon Financial Services DAC, as Transfer Agent and Registrar (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on December 21, 2017). |
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+4.6 |
4.5 | |
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*10.3 |
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*10.4 |
| Second Amended and Restated Employment Agreement, dated as of December 23, 2008, between Phillips-Van Heusen Corporation and Emanuel Chirico (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal year ended February 1, 2009); First Amendment to Second Amended and Restated Employment Agreement, dated as of January 29, 2010, between Phillips-Van Heusen Corporation and Emanuel Chirico (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended May 2, 2010); Second Amendment to Second Amended and Restated Employment Agreement, dated as of May 27, 2010, between Phillips-Van Heusen Corporation and Emanuel Chirico (incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the period ended August 1, 2010); Third Amendment to Second Amended and Restated Employment Agreement, dated January 28, 2011, between Phillips-Van Heusen Corporation and Emanuel Chirico (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed January 28, 2011). |
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*10.5 |
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*10.6 |
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*10.7 |
10.5 | |
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*10.8 |
10.6 | |
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*10.9 |
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*10.10 |
10.7 | PVH Corp. 2006 Stock Incentive Plan, as amended and restated effective April 26, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 25, 2012); PVH Corp. 2006 Stock Incentive Plan, as amended and restated effective May 7, 2014 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended August 3, 2014); PVH Corp. 2006 Stock Incentive Plan, as amended and restated effective April 30, 20152020 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 22, 2015)2020).. |
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*10.11 |
10.8 | |
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*10.12 |
10.10 | |
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10.11 | |
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10.12 | |
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*10.15 |
10.13 | Form of Performance Share Award Agreement under the Phillips-Van Heusen Corporation 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 8, 2007); Revised Form of Performance Share Award Agreement under the Phillips-Van Heusen Corporation 2006 Stock Incentive Plan, effective as of April 30, 2008 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended May 4, 2008); Revised Form of Performance Share Award Agreement under the Phillips-Van Heusen Corporation 2006 Stock Incentive Plan, effective as of December 16, 2008 (incorporated by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the fiscal year ended February 1, 2009); Revised Form of Performance Share Award Agreement under the PVH Corp. 2006 Stock Incentive Plan, effective as of April 25, 2012 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended April 29, 2012); Alternative Form of Performance Share Unit Award Agreement under the PVH Corp. 2006 Stock Incentive Plan, effective as of May 1, 2013 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended May 5, 2013). |
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*10.16 |
10.14 | |
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10.15 | |
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10.18 |
| Credit and Guaranty Agreement, dated as of February 13, 2013, among PVH Corp., Tommy Hilfiger B.V., certain subsidiaries of PVH Corp., Barclays Bank PLC as Administrative Agent and Collateral Agent, Joint Lead Arranger and Joint Lead Bookrunner, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Co-Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner, Citigroup Global Markets Inc. as Co-Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner, Credit Suisse Securities (USA) LLC as Co-Documentation Agent and Joint Lead Bookrunner, Royal Bank of Canada as Co-Documentation Agent, and RBC Capital Markets as Joint Lead Bookrunner (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended May 5, 2013); First Amendment to Credit Agreement, dated as of March 21, 2014, entered into by and among PVH Corp., PVH B.V. (formerly known as Tommy Hilfiger B.V.), the Guarantors listed on the signature pages thereto, each Lender party thereto, each Lender Counterparty party thereto, each Issuing Bank party thereto and Barclays Bank PLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended May 4, 2014); Second Amendment to Credit Agreement, dated as of May 19, 2016, entered into by and among PVH Corp., PVH B.V., the Guarantors listed on the signature pages thereto, each Lender party thereto, each Issuing Bank party thereto, the Swing Line Lender party thereto and Barclays Bank PLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended July 31, 2016). |
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10.19 |
10.16 | Credit and Guaranty Agreement, dated as of April 29, 2019, among PVH Corp., PVH Asia Limited, PVH B.V., certain subsidiaries of PVH Corp., Barclays Bank PLC as Administrative Agent, Joint Lead Arranger and Joint Lead Bookrunner, Citibank, N.A. as Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner, Merrill Lynch, Pierce, Fenner & Smith Incorporated as Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner, JPMorgan Chase Bank, N.A. as Documentation Agent, Joint Lead Arranger and Joint Lead Bookrunner, Royal Bank of Canada as Documentation Agent, MUFG Securities Americas Inc. as Documentation Agent, US Bancorp as Documentation Agent, Wells Fargo Securities, LLC as Documentation Agent and RBC Capital Markets, LLC as Joint Lead Arranger and Joint Lead Bookrunner (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended May 5, 2019).First Amendment to Credit Agreement, dated as of June 3, 2020, entered into by and among PVH Corp, PVH Asia Limited, PVH B.V., each Lender party thereto and Barclays Bank PLC as administrative agent (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended August 2, 2020) |
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*10.20 |
10.17 | |
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10.18 | |
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*10.22 |
| Second Amended and Restated Employment Agreement, dated as of December 16, 2008, between Phillips-Van Heusen Corporation and Steven B. Shiffman (incorporated(incorporated by referencereference to Exhibit 10.25Exhibit 10.21 to our Annual Report on FormForm 10-K forfor the fiscal year ended February 1, 2015)2, 2020; First Amendment to Second Amended and Restated Employment Agreement, dated as of March 31, 2011, between Phillips-Van Heusen Corporation and Steven B. Shiffman (incorporated by reference to Exhibit 10.26 to our Annual Report on Form 10-K for the fiscal year ended February 1, 2015)); Second Amendment to Second Amended and Restated Employment Agreement, dated as of June 1, 2013, between PVH Corp. and Steven B. Shiffman (incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K for the fiscal year ended February 1, 2015).. |
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*10.23 |
*10.19 | |
*10.24
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*10.25 |
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*10.26 |
| Amended and RestatedFirst Amendment to Employment Agreement, dated as of December 16, 2008,January 27, 2021, between PVH Corp. and Cheryl Abel-Hodges (formerly known as Cheryl Dapolito)Stefan Larsson (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 11, 2019). First Amendment to Amended and Restated Employment Agreement, dated as of March 31, 2011, between PVH Corp. and Cheryl Abel-Hodges (formerly known as Cheryl Dapolito) (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on June 11, 2019)February 1, 2021).
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*10.27 |
10.20 |
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*10.21 | |
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10.22 | |
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*10.23 | |
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*10.24 | |
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10.25 | Credit Agreement, dated as of April 28, 2021, among PVH Corp., Barclays Bank PLC as Administrative Agent, Joint Lead Arranger and Joint Lead Bookrunner, Citibank, N.A. as Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner, Bank of America, N.A. as Documentation Agent, JPMorgan Chase Bank, N.A. as Documentation Agent, Joint Lead Arranger and Joint Lead Bookrunner, Royal Bank of Canada as Documentation Agent, Truist Bank as Documentation Agent, Joint Lead Arranger and Joint Lead Bookrunner, Citizens Bank N.A as Documentation Agent, MUFG Bank, LTD. as Documentation Agent, U.S. Bank National Association as Documentation Agent, Wells Fargo Bank, National Association as Documentation Agent, BOFA Securities, Inc. as Joint Lead Arranger and Joint Lead Bookrunner, and RBC Capital Markets, LLC as Joint Lead Arranger and Joint Lead Bookrunner (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended May 2, 2021). |
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10.26 | |
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*,+10.27 | |
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*,+10.28 | |
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*,+10.29 | |
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*,+10.30 | |
+21 | |
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+23 |
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+31.1 |
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+31.2 |
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*,+32.1 |
+32.1 | |
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*,+32.2 |
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+101.INS |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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+101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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+101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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+101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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+101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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|
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+101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
________________
| |
+ | Filed or furnished herewith. |
+ Filed or furnished herewith.
| |
* | Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report. |
* Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report.
Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
| |
(b) | Exhibits: See (a)(3) above for a listing of the exhibits included as part of this report. |
| |
(c) | Financial Statement Schedules: See page F-1 for a listing of the consolidated financial statement schedules submitted as part of this report. |
(b)Exhibits: See (a)(3) above for a listing of the exhibits included as part of this report.
(c)Financial Statement Schedules: See page F-1 for a listing of the consolidated financial statement schedules submitted as part of this report.
Item 16. Form 10-K Summary
None.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 1, 2020
|
| | | | | | | |
| PVH CORP. |
| | |
| By: | /s/ EMANUEL CHIRICOSTEFAN LARSSON |
| | Emanuel ChiricoStefan Larsson |
| | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | |
Signature | Title | Date |
| | |
/s/ STEFAN LARSSON | Director and Chief Executive Officer | March 30, 2022 |
Stefan Larsson | (Principal Executive Officer) |
| | |
| | |
| |
| | |
/s/ JAMES W. HOLMES | Executive Vice President, Interim Chief Financial | March 30, 2022 |
James W. Holmes | Officer and Controller (Interim Principal Financial Officer and Principal Accounting Officer) |
| | |
| | |
|
| | |
Signature/s/ HENRY NASELLA | TitleChairman (Director) | DateMarch 30, 2022 |
| | Henry Nasella |
/s/ EMANUEL CHIRICO | Chairman and Chief Executive Officer | April 1, 2020 |
Emanuel Chirico | (Principal Executive Officer) | |
| | |
/s/ MICHAEL SHAFFER | Executive Vice President and Chief Operating & | April 1, 2020 |
Michael Shaffer | Financial Officer (Principal Financial Officer) |
| | |
/s/ JAMES W. HOLMES | Senior Vice President and Controller | April 1, 2020 |
James W. Holmes | (Principal Accounting Officer) |
| | |
/s/ MARY BAGLIVO | Director | April 1, 2020 |
Mary Baglivo |
| | |
/s/ BRENT CALLINICOS | Director | April 1, 2020March 30, 2022 |
Brent Callinicos |
| | |
/s/ JUAN R. FIGUEREOGEORGE CHEEKS | Director | April 1, 2020March 30, 2022 |
Juan R. FiguereoGeorge Cheeks |
| | |
/s/ JOSEPH B. FULLER | Director | April 1, 2020March 30, 2022 |
Joseph B. Fuller |
| | |
/s/ JUDITH AMANDA SOURRY KNOX
| Director | April 1, 2020March 30, 2022 |
Judith Amanda Sourry Knox
|
| | |
/s/ V. JAMES MARINO | Director | April 1, 2020March 30, 2022 |
V. James Marino |
| | |
/s/ GERALDINE (PENNY) MCINTYRE | Director | April 1, 2020March 30, 2022 |
Geraldine (Penny) McIntyre |
| | |
/s/ AMY MCPHERSON | Director | April 1, 2020March 30, 2022 |
Amy McPherson |
| | |
/s/ HENRY NASELLA | Director | April 1, 2020 |
Henry Nasella |
| | |
/s/ ALLISON PETERSON | Director | March 30, 2022 |
Allison Peterson |
| | |
/s/ EDWARD R. ROSENFELD | Director | April 1, 2020March 30, 2022 |
Edward R. Rosenfeld |
| | |
/s/ CRAIG RYDIN | Director | April 1, 2020 |
Craig Rydin |
| | |
FORM 10-K-ITEM 15(a)(1) and 15(a)(2)
PVH CORP.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| | |
|
15(a)(1) The following consolidated financial statements and supplementary data are included in Item 8 of this report: |
|
| |
15(a)(2) The following consolidated financial statement schedule is included herein: |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
PVH CORP.
CONSOLIDATED INCOME STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net sales | $ | 8,723.7 | | | $ | 6,798.7 | | | $ | 9,400.0 | |
Royalty revenue | 340.1 | | | 260.4 | | | 379.9 | |
Advertising and other revenue | 90.9 | | | 73.5 | | | 129.1 | |
Total revenue | 9,154.7 | | | 7,132.6 | | | 9,909.0 | |
Cost of goods sold (exclusive of depreciation and amortization) | 3,830.6 | | | 3,355.8 | | | 4,520.6 | |
Gross profit | 5,324.1 | | | 3,776.8 | | | 5,388.4 | |
Selling, general and administrative expenses | 4,453.9 | | | 3,983.2 | | | 4,715.2 | |
Goodwill and other intangible asset impairments | — | | | 933.5 | | | — | |
Non-service related pension and postretirement (income) cost | (64.1) | | | (75.9) | | | 90.0 | |
Debt modification and extinguishment costs | — | | | — | | | 5.2 | |
Other (gain) loss, net | (118.9) | | | 3.1 | | | 28.9 | |
Equity in net income (loss) of unconsolidated affiliates | 23.7 | | | (4.6) | | | 9.6 | |
Income (loss) before interest and taxes | 1,076.9 | | | (1,071.7) | | | 558.7 | |
Interest expense | 108.6 | | | 125.5 | | | 120.0 | |
Interest income | 4.4 | | | 4.2 | | | 5.3 | |
Income (loss) before taxes | 972.7 | | | (1,193.0) | | | 444.0 | |
Income tax expense (benefit) | 20.7 | | | (55.5) | | | 28.9 | |
Net income (loss) | 952.0 | | | (1,137.5) | | | 415.1 | |
Less: Net loss attributable to redeemable non-controlling interest | (0.3) | | | (1.4) | | | (2.2) | |
Net income (loss) attributable to PVH Corp. | $ | 952.3 | | | $ | (1,136.1) | | | $ | 417.3 | |
Basic net income (loss) per common share attributable to PVH Corp. | $ | 13.45 | | | $ | (15.96) | | | $ | 5.63 | |
Diluted net income (loss) per common share attributable to PVH Corp. | $ | 13.25 | | | $ | (15.96) | | | $ | 5.60 | |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 9,400.0 |
| | $ | 9,154.2 |
| | $ | 8,439.4 |
|
Royalty revenue | 379.9 |
| | 375.9 |
| | 366.3 |
|
Advertising and other revenue | 129.1 |
| | 126.7 |
| | 109.1 |
|
Total revenue | 9,909.0 |
| | 9,656.8 |
| | 8,914.8 |
|
Cost of goods sold (exclusive of depreciation and amortization) | 4,520.6 |
| | 4,348.5 |
| | 4,020.4 |
|
Gross profit | 5,388.4 |
| | 5,308.3 |
| | 4,894.4 |
|
Selling, general and administrative expenses | 4,715.2 |
| | 4,432.8 |
| | 4,245.2 |
|
Non-service related pension and postretirement cost | 90.0 |
| | 5.1 |
| | 3.0 |
|
Debt modification and extinguishment costs | 5.2 |
| | — |
| | 23.9 |
|
Other noncash loss, net | 28.9 |
| | — |
| | — |
|
Equity in net income of unconsolidated affiliates | 9.6 |
| | 21.3 |
| | 10.1 |
|
Income before interest and taxes | 558.7 |
| | 891.7 |
| | 632.4 |
|
Interest expense | 120.0 |
| | 120.8 |
| | 128.5 |
|
Interest income | 5.3 |
| | 4.7 |
| | 6.3 |
|
Income before taxes | 444.0 |
| | 775.6 |
| | 510.2 |
|
Income tax expense (benefit) | 28.9 |
| | 31.0 |
| | (25.9 | ) |
Net income | 415.1 |
| | 744.6 |
| | 536.1 |
|
Less: Net loss attributable to redeemable non-controlling interest | (2.2 | ) | | (1.8 | ) | | (1.7 | ) |
Net income attributable to PVH Corp. | $ | 417.3 |
| | $ | 746.4 |
| | $ | 537.8 |
|
Basic net income per common share attributable to PVH Corp. | $ | 5.63 |
| | $ | 9.75 |
| | $ | 6.93 |
|
Diluted net income per common share attributable to PVH Corp. | $ | 5.60 |
| | $ | 9.65 |
| | $ | 6.84 |
|
See notes to consolidated financial statements.
PVH CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net income (loss) | $ | 952.0 | | | $ | (1,137.5) | | | $ | 415.1 | |
Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustments | (268.1) | | | 278.5 | | | (157.8) | |
| | | | | |
Net unrealized and realized gain (loss) related to effective cash flow hedges, net of tax expense (benefit) of $25.0, $(5.6) and $(1.0) | 90.7 | | | (63.1) | | | (4.1) | |
Net gain (loss) on net investment hedges, net of tax expense (benefit) of $27.5, $(30.6) and $9.6 | 83.8 | | | (94.4) | | | 29.7 | |
Total other comprehensive (loss) income | (93.6) | | | 121.0 | | | (132.2) | |
Comprehensive income (loss) | 858.4 | | | (1,016.5) | | | 282.9 | |
Less: Comprehensive loss attributable to redeemable non-controlling interest | (0.3) | | | (1.4) | | | (2.2) | |
Comprehensive income (loss) attributable to PVH Corp. | $ | 858.7 | | | $ | (1,015.1) | | | $ | 285.1 | |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net income | $ | 415.1 |
| | $ | 744.6 |
| | $ | 536.1 |
|
Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustments | (157.8 | ) | | (361.3 | ) | | 561.3 |
|
Net unrealized and realized (loss) gain related to effective cash flow hedges, net of tax (benefit) expense of $(1.0), $3.2 and $0.1 | (4.1 | ) | | 101.8 |
| | (99.1 | ) |
Net gain (loss) on net investment hedges, net of tax expense (benefit) of $9.6, $22.5 and $(28.7) | 29.7 |
| | 73.1 |
| | (70.8 | ) |
Total other comprehensive (loss) income | (132.2 | ) | | (186.4 | ) | | 391.4 |
|
Comprehensive income | 282.9 |
| | 558.2 |
| | 927.5 |
|
Less: Comprehensive loss attributable to redeemable non-controlling interest | (2.2 | ) | | (1.8 | ) | | (1.7 | ) |
Comprehensive income attributable to PVH Corp. | $ | 285.1 |
| | $ | 560.0 |
| | $ | 929.2 |
|
See notes to consolidated financial statements.
PVH CORP.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data) |
| | | | | | | |
| February 2, 2020 | | February 3, 2019 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 503.4 |
| | $ | 452.0 |
|
Trade receivables, net of allowances for doubtful accounts of $21.1 and $21.6 | 741.4 |
| | 777.8 |
|
Other receivables | 23.7 |
| | 26.0 |
|
Inventories, net | 1,615.7 |
| | 1,732.4 |
|
Prepaid expenses | 159.9 |
| | 168.7 |
|
Other | 112.9 |
| | 81.7 |
|
Assets held for sale | 237.2 |
| | — |
|
Total Current Assets | 3,394.2 |
| | 3,238.6 |
|
Property, Plant and Equipment, net | 1,026.8 |
| | 984.5 |
|
Operating Lease Right-of-Use Assets | 1,675.8 |
| | — |
|
Goodwill | 3,677.6 |
| | 3,670.5 |
|
Tradenames | 2,830.2 |
| | 2,863.7 |
|
Other Intangibles, net | 650.5 |
| | 705.5 |
|
Other Assets, including deferred taxes of $40.3 and $40.5 | 375.9 |
| | 400.9 |
|
Total Assets | $ | 13,631.0 |
| | $ | 11,863.7 |
|
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | |
| | |
|
Accounts payable | $ | 882.8 |
| | $ | 924.2 |
|
Accrued expenses | 929.6 |
| | 891.6 |
|
Deferred revenue | 64.7 |
| | 65.3 |
|
Current portion of operating lease liabilities | 363.5 |
| | — |
|
Short-term borrowings | 49.6 |
| | 12.8 |
|
Current portion of long-term debt | 13.8 |
| | — |
|
Liabilities related to assets held for sale | 57.1 |
| | — |
|
Total Current Liabilities | 2,361.1 |
| | 1,893.9 |
|
Long-Term Portion of Operating Lease Liabilities | 1,532.0 |
| | — |
|
Long-Term Debt | 2,693.9 |
| | 2,819.4 |
|
Other Liabilities, including deferred taxes of $558.1 and $565.2 | 1,234.5 |
| | 1,322.4 |
|
Redeemable Non-Controlling Interest | (2.0 | ) | | 0.2 |
|
Stockholders’ Equity: | | | |
Preferred stock, par value $100 per share; 150,000 total shares authorized | — |
| | — |
|
Common stock, par value $1 per share; 240,000,000 shares authorized; 85,890,276 and 85,446,141 shares issued | 85.9 |
| | 85.4 |
|
Additional paid in capital – common stock | 3,075.4 |
| | 3,017.3 |
|
Retained earnings | 4,753.0 |
| | 4,350.1 |
|
Accumulated other comprehensive loss | (640.1 | ) | | (507.9 | ) |
Less: 13,597,113 and 10,042,510 shares of common stock held in treasury, at cost | (1,462.7 | ) | | (1,117.1 | ) |
Total Stockholders’ Equity | 5,811.5 |
| | 5,827.8 |
|
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | $ | 13,631.0 |
| | $ | 11,863.7 |
|
| | | | | | | | | | | |
| January 30, 2022 | | January 31, 2021 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 1,242.5 | | | $ | 1,651.4 | |
Trade receivables, net of allowances for credit losses of $61.9 and $69.6 | 745.2 | | | 641.5 | |
Other receivables | 20.1 | | | 25.1 | |
Inventories, net | 1,348.5 | | | 1,417.1 | |
Prepaid expenses | 169.0 | | | 158.2 | |
Other | 128.4 | | | 50.4 | |
| | | |
Total Current Assets | 3,653.7 | | | 3,943.7 | |
Property, Plant and Equipment, net | 906.1 | | | 942.7 | |
Operating Lease Right-of-Use Assets | 1,349.0 | | | 1,564.8 | |
Goodwill | 2,828.9 | | | 2,954.3 | |
Tradenames | 2,722.9 | | | 2,869.7 | |
| | | |
Other Intangibles, net | 584.1 | | | 648.5 | |
Other Assets, including deferred taxes of $46.1 and $57.2 | 352.1 | | | 369.8 | |
Total Assets | $ | 12,396.8 | | | $ | 13,293.5 | |
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | | | |
Accounts payable | $ | 1,220.8 | | | $ | 1,124.2 | |
| | | |
Accrued expenses | 1,100.8 | | | 939.9 | |
Deferred revenue | 44.9 | | | 55.8 | |
Current portion of operating lease liabilities | 375.4 | | | 421.4 | |
Short-term borrowings | 10.8 | | | — | |
Current portion of long-term debt | 34.8 | | | 41.1 | |
| | | |
Total Current Liabilities | 2,787.5 | | | 2,582.4 | |
Long-Term Portion of Operating Lease Liabilities | 1,214.4 | | | 1,430.7 | |
Long-Term Debt | 2,317.6 | | | 3,513.7 | |
Other Liabilities, including deferred taxes of $373.9 and $418.4 | 788.5 | | | 1,039.8 | |
Redeemable Non-Controlling Interest | — | | | (3.4) | |
Stockholders’ Equity: | | | |
Preferred stock, par value $100 per share; 150,000 total shares authorized | — | | | — | |
Common stock, par value $1 per share; 240,000,000 shares authorized; 87,107,155 and 86,293,158 shares issued | 87.1 | | | 86.3 | |
Additional paid in capital – common stock | 3,198.4 | | | 3,129.4 | |
Retained earnings | 4,562.8 | | | 3,613.2 | |
Accumulated other comprehensive loss | (612.7) | | | (519.1) | |
Less: 18,572,482 and 15,133,663 shares of common stock held in treasury, at cost | (1,946.8) | | | (1,579.5) | |
Total Stockholders’ Equity | 5,288.8 | | | 4,730.3 | |
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | $ | 12,396.8 | | | $ | 13,293.5 | |
See notes to consolidated financial statements.
PVH CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 | |
OPERATING ACTIVITIES(1) | | | | | | |
Net income (loss) | $ | 952.0 | | | $ | (1,137.5) | | | $ | 415.1 | | |
Adjustments to reconcile to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 313.3 | | | 325.8 | | | 323.8 | | |
Equity in net (income) loss of unconsolidated affiliates | (23.7) | | | 4.6 | | | (9.6) | | |
Deferred taxes(2) | (64.9) | |
| (144.7) | | | (72.9) | | |
Stock-based compensation expense | 46.8 | | | 50.5 | | | 56.1 | | |
Impairment of goodwill and other intangible assets | — | | | 933.5 | | | — | | |
Impairment of other long-lived assets | 47.0 | | | 81.9 | | | 109.9 | | (3) |
Actuarial (gain) loss on retirement and benefit plans | (48.7) | | | (64.5) | | | 97.8 | | |
| | | | | | |
Debt modification and extinguishment costs | — | | | — | | | 5.2 | | |
Other (gain) loss, net | (118.9) | | | 3.1 | | | 28.9 | | |
| | | | | | |
| | | | | | |
Changes in operating assets and liabilities: | | | | | | |
Trade receivables, net | (138.1) | | | 138.4 | | | (17.1) | | |
Other receivables | 4.1 | | | 1.2 | | | 1.0 | | |
Inventories, net | (33.9) | | | 283.3 | | | 121.4 | | |
Accounts payable, accrued expenses and deferred revenue | 260.7 | | | 140.9 | | | 47.8 | | |
Prepaid expenses | (20.7) | | | 7.9 | | | (14.4) | | |
Employer pension contributions | — | | | — | | | (0.7) | | |
Other, net | (103.8) | | | 73.3 | | | (72.0) | | |
Net cash provided by operating activities | 1,071.2 | | | 697.7 | | | 1,020.3 | | |
INVESTING ACTIVITIES(4) | | | | | | |
Acquisitions, net of cash acquired | — | | | — | | | (192.4) | | |
| | | | | | |
| | | | | | |
Purchases of property, plant and equipment | (267.9) | | | (226.6) | | | (345.2) | | |
| | | | | | |
Proceeds from sale of building | — | | | — | | | 59.4 | | |
| | | | | | |
Investments in unconsolidated affiliates | — | | | (1.6) | | | (27.7) | | |
Proceeds from sale of the Speedo North America business | — | | | 169.1 | | | — | | |
Proceeds from sale of certain Heritage Brands trademarks and other assets | 222.9 | | | — | | | — | | |
Net cash used by investing activities | (45.0) | | | (59.1) | | | (505.9) | | |
FINANCING ACTIVITIES(1)(4) | | | | | | |
Net proceeds from (payments on) short-term borrowings | 10.5 | | | (53.6) | | | (12.1) | | |
Proceeds from 4 5/8% senior notes, net of related fees | — | | | 493.8 | | | — | | |
Proceeds from 3 5/8% senior notes, net of related fees | — | | | 185.9 | | | — | | |
Proceeds from 2019 facilities, net of related fees | — | | | — | | | 1,639.8 | | |
Repayment of 2016 facilities | — | | | — | | | (1,649.3) | | |
Repayment of 2019 facilities | (1,051.3) | | | (14.4) | | | (70.6) | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net proceeds from settlement of awards under stock plans | 26.7 | | | 3.9 | | | 2.5 | | |
Cash dividends | (2.7) | | | (2.7) | | | (11.3) | | |
Acquisition of treasury shares | (361.3) | | | (117.3) | | | (345.1) | | |
Payments of finance lease liabilities | (5.2) | | | (5.5) | | | (5.5) | | |
Payment of mandatorily redeemable non-controlling interest liability attributable to initial fair value | (15.2) | | | (12.7) | | | — | | |
| | | | | | |
Net cash (used) provided by financing activities | (1,398.5) | | | 477.4 | | | (451.6) | | |
Effect of exchange rate changes on cash and cash equivalents | (36.6) | | | 32.0 | | | (11.4) | | |
(Decrease) increase in cash and cash equivalents | (408.9) | | | 1,148.0 | | | 51.4 | | |
Cash and cash equivalents at beginning of year | 1,651.4 | | | 503.4 | | | 452.0 | | |
Cash and cash equivalents at end of year | $ | 1,242.5 | | | $ | 1,651.4 | | | $ | 503.4 | | |
|
| | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 | |
OPERATING ACTIVITIES | | | | | | |
Net income | $ | 415.1 |
| | $ | 744.6 |
| | $ | 536.1 |
| |
Adjustments to reconcile to net cash provided by operating activities: | |
| | |
| | |
| |
Depreciation and amortization | 323.8 |
| | 334.8 |
| | 324.9 |
| |
Equity in net income of unconsolidated affiliates | (9.6 | ) | | (21.3 | ) | | (10.1 | ) | |
Deferred taxes | (72.9 | ) |
| (113.3 | ) | (1) | (224.6 | ) | (1) |
Stock-based compensation expense | 56.1 |
| | 56.2 |
| | 44.9 |
| |
Impairment of long-lived assets | 109.9 |
| (2) | 17.9 |
| | 7.5 |
| |
Actuarial loss on retirement and benefit plans | 97.8 |
| | 15.0 |
| | 2.5 |
| |
Settlement loss on retirement plans | — |
| | — |
| | 9.4 |
| |
Debt modification and extinguishment costs | 5.2 |
| | — |
| | 23.9 |
| |
Other noncash loss, net | 28.9 |
| | — |
| | — |
| |
Changes in operating assets and liabilities: | |
| | |
| | |
| |
Trade receivables, net | (17.1 | ) | | (151.4 | ) | | 3.3 |
| |
Other receivables | 1.0 |
| | 10.7 |
| | (11.7 | ) | |
Inventories, net | 121.4 |
| | (212.1 | ) | | (163.5 | ) | |
Accounts payable, accrued expenses and deferred revenue | 47.8 |
| | 112.9 |
| | 185.9 |
| |
Prepaid expenses | (14.4 | ) | | 8.5 |
| | (41.0 | ) | |
Employer pension contributions | (0.7 | ) | | (10.0 | ) | | (0.3 | ) | |
Contingent purchase price payments to Mr. Calvin Klein | — |
| | (15.9 | ) | | (55.6 | ) | |
Other, net | (72.0 | ) | | 75.9 |
| | 12.6 |
| |
Net cash provided by operating activities | 1,020.3 |
| | 852.5 |
| | 644.2 |
| |
INVESTING ACTIVITIES(3) | |
| | |
| | |
| |
Acquisitions, net of cash acquired | (192.4 | ) | | (15.9 | ) | | (40.1 | ) | |
Purchases of property, plant and equipment | (345.2 | ) | | (379.5 | ) | | (358.1 | ) | |
Proceeds from sale of building | 59.4 |
| | — |
| | 3.4 |
| |
Investments in unconsolidated affiliates | (27.7 | ) | | — |
| | (14.2 | ) | |
Payment received on advance to unconsolidated affiliate | — |
| | — |
| | 6.3 |
| |
Net cash used by investing activities | (505.9 | ) | | (395.4 | ) | | (402.7 | ) | |
FINANCING ACTIVITIES(2) | |
| | |
| | |
| |
Net (payments on) proceeds from short-term borrowings | (12.1 | ) | | (6.7 | ) | | 0.4 |
| |
Proceeds from 2019 facilities, net of related fees | 1,639.8 |
| | — |
| | — |
| |
Repayment of 2016 facilities | (1,649.3 | ) | | — |
| | — |
| |
Repayment of 2019 facilities | (70.6 | ) | | — |
| | — |
| |
Proceeds from 3 1/8% senior notes, net of related fees | — |
| | — |
| | 701.6 |
| |
Redemption of 4 1/2% senior notes, including premium | — |
| | — |
| | (715.8 | ) | |
Repayment of 2016/2014 facilities | — |
| | (150.0 | ) | | (250.0 | ) | |
Net proceeds from settlement of awards under stock plans | 2.5 |
| | 20.4 |
| | 30.0 |
| |
Cash dividends | (11.3 | ) | | (11.6 | ) | | (11.9 | ) | |
Acquisition of treasury shares | (345.1 | ) | | (325.2 | ) | | (259.1 | ) | |
Payments of finance lease liabilities | (5.5 | ) | | (5.4 | ) | | (5.1 | ) | |
Tommy Hilfiger India contingent purchase price payments | — |
| | — |
| | (0.8 | ) | |
Contributions from non-controlling interest | — |
| | — |
| | 1.7 |
| |
Net cash used by financing activities | (451.6 | ) | | (478.5 | ) | | (509.0 | ) | |
Effect of exchange rate changes on cash and cash equivalents | (11.4 | ) | | (20.5 | ) | | 31.3 |
| |
Increase (decrease) in cash and cash equivalents | 51.4 |
| | (41.9 | ) | | (236.2 | ) | |
Cash and cash equivalents at beginning of year | 452.0 |
| | 493.9 |
| | 730.1 |
| |
Cash and cash equivalents at end of year | $ | 503.4 |
| | $ | 452.0 |
| | $ | 493.9 |
| |
(1) Includes the impact of the U.S. Tax Legislation in 2018 and 2017 and the impact of the 2019 Dutch Tax Plan in 2018.Please see Note 1016 for furtherlease related cash flow information.
(2)Please see Note 9 for information on deferred taxes.
(3) Noncash impairment charge of $116.4 million related to the sale of the Speedo North America business is included in Other noncash(gain) loss, net. Please see Note 43 for further information.
(3)(4) Please see Note 2019 for information on noncash investing and financing transactions.
See notes to consolidated financial statements.
PVH CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST
(In millions, except share and per share data) | | | | | | | | | | | | | | | | | | | | | | Stockholders’ Equity |
| | | Stockholders’ Equity | | | Common Stock | | Additional Paid In Capital- Common Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| | | | | Common Stock | | Additional Paid In Capital- Common Stock | | | | Accumulated Other Comprehensive Loss | | | | Total Stockholders’ Equity | | Redeemable Non-Controlling Interest | | Preferred Stock | | Shares | | td par Value | | Retained Earnings | | Treasury Stock | |
| Redeemable Non-Controlling Interest | | Preferred Stock | | Shares | | td par Value | | Retained Earnings | | Treasury Stock | | |
January 29, 2017 | $ | 2.0 |
| | $ | — |
| | 83,923,184 |
| | $ | 83.9 |
| | $ | 2,866.2 |
| | $ | 3,098.0 |
| | $ | (710.8 | ) | | $ | (532.8 | ) | | $ | 4,804.5 |
| |
Net income attributable to PVH Corp. | | | | | |
| | |
| | |
| | 537.8 |
| | |
| | |
| | 537.8 |
| |
Foreign currency translation adjustments | | | | | |
| | |
| | |
| | |
| | 561.3 |
| | |
| | 561.3 |
| |
Net unrealized and realized loss related to effective cash flow hedges, net of tax expense of $0.1 | | | | | |
| | |
| | |
| | |
| | (99.1 | ) | | |
| | (99.1 | ) | |
Net loss on net investment hedges, net of tax benefit of $28.7 | | | | | | | | | | | | | (70.8 | ) | | | | (70.8 | ) | |
Comprehensive income attributable to PVH Corp. | | | | | |
| | |
| | |
| | |
| | |
| | |
| | 929.2 |
| |
Reclassification related to the adoption of accounting guidance for certain tax effects in connection with the U.S. Tax Legislation | | | | | | | | | | | 2.1 |
| | (2.1 | ) | | | | — |
| |
Cumulative-effect adjustment related to the adoption of accounting guidance for share-based payment award transactions | | | | | | | | | 1.1 |
| | (0.8 | ) | | | | | | 0.3 |
| |
Settlement of awards under stock plans | | | | | 927,895 |
| | 1.0 |
| | 29.0 |
| | |
| | |
| | |
| | 30.0 |
| |
Stock-based compensation expense | | | | | |
| | |
| | 44.9 |
| | |
| | |
| | |
| | 44.9 |
| |
Cash dividends ($0.15 per common share) | | | | | |
| | |
| | | | (11.9 | ) | | |
| | |
| | (11.9 | ) | |
Acquisition of 2,300,657 treasury shares | | | | | |
| | |
| | |
| | | | |
| | (260.6 | ) | | (260.6 | ) | |
Contributions from the minority shareholder | 1.7 |
| | | | | | | | | | | | | | | | | |
Net loss attributable to redeemable non-controlling interest
| (1.7 | ) | | | | | | | | | | | | | | | | | |
February 4, 2018 | 2.0 |
| | — |
| | 84,851,079 |
| | 84.9 |
| | 2,941.2 |
| | 3,625.2 |
| | (321.5 | ) | | (793.4 | ) | | 5,536.4 |
| |
Net income attributable to PVH Corp. | | | | | | | | | | | 746.4 |
| | | | | | 746.4 |
| |
Foreign currency translation adjustments | | | | | | | | | | | | | (361.3 | ) | | | | (361.3 | ) | |
Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $3.2 | | | | | | | | | | | | | 101.8 |
| | | | 101.8 |
| |
Net gain on net investment hedges, net of tax expense of $22.5 | | | | | | | | | | | | | 73.1 |
| | | | 73.1 |
| |
Comprehensive income attributable to PVH Corp. | | | | | | | | | | | | | | | | | 560.0 |
| |
Cumulative-effect adjustment related to the adoption of accounting guidance for revenue recognition | | | | | | | | | | | (1.9 | ) | |
|
| | | | (1.9 | ) | |
Cumulative-effect adjustment related to the adoption of accounting guidance for income tax accounting on intercompany sales or transfers of assets other than inventory | | | | | | | | |
|
| | (8.0 | ) | | | | | | (8.0 | ) | |
Settlement of awards under stock plans | | | | | 595,062 |
| | 0.5 |
| | 19.9 |
| | | | | | | | 20.4 |
| |
Stock-based compensation expense | | | | | | | | | 56.2 |
| | | | | | | | 56.2 |
| |
Cash dividends ($0.15 per common share) | | | | | | | | | | | (11.6 | ) | | | | | | (11.6 | ) | |
Acquisition of 2,370,193 treasury shares | | | | | | | | | | | | | | | (323.7 | ) | | (323.7 | ) | |
Net loss attributable to redeemable non-controlling interest
| (1.8 | ) | | | | | | | | | | | | | | | | | |
February 3, 2019 | 0.2 |
| | — |
| | 85,446,141 |
| | 85.4 |
| | 3,017.3 |
| | 4,350.1 |
| | (507.9 | ) | | (1,117.1 | ) | | 5,827.8 |
| February 3, 2019 | $ | 0.2 | | | $ | — | | | 85,446,141 | | | $ | 85.4 | | | $ | 3,017.3 | | | $ | 4,350.1 | | | $ | (507.9) | | | $ | (1,117.1) | | | $ | 5,827.8 | |
Net income attributable to PVH Corp. | | | | | | | | | | | 417.3 |
| | | | | | 417.3 |
| Net income attributable to PVH Corp. | | | | | | | | | | 417.3 | | | | | | | 417.3 | |
Foreign currency translation adjustments | | | | | | | | | | | | | (157.8 | ) | | | | (157.8 | ) | Foreign currency translation adjustments | | | | | | | | | | | | (157.8) | | | | | (157.8) | |
Net unrealized and realized loss related to effective cash flow hedges, net of tax benefit of $1.0 | | | | | | | | | | | | | (4.1 | ) | | | | (4.1 | ) | Net unrealized and realized loss related to effective cash flow hedges, net of tax benefit of $1.0 | | | | | | | | | | | | (4.1) | | | | | (4.1) | |
Net gain on net investment hedges, net of tax expense of $9.6 | | | | | | | | | | | | | 29.7 |
| | | | 29.7 |
| Net gain on net investment hedges, net of tax expense of $9.6 | | 29.7 | | | 29.7 | |
Comprehensive income attributable to PVH Corp. | | | | | | | | | | | | | | | | | 285.1 |
| Comprehensive income attributable to PVH Corp. | | | | | | | | | | | | | | | | 285.1 | |
Cumulative-effect adjustment related to the adoption of accounting guidance for leases | | | | | | | | | | | (3.1 | ) | | | | | | (3.1 | ) | Cumulative-effect adjustment related to the adoption of accounting guidance for leases | | (3.1) | | | (3.1) | |
| Settlement of awards under stock plans | | | | | 444,135 |
| | 0.5 |
| | 2.0 |
| | | | | | | | 2.5 |
| Settlement of awards under stock plans | | | | 444,135 | | | 0.5 | | | 2.0 | | | | | | | | | 2.5 | |
Stock-based compensation expense | | | | | | | | | 56.1 |
| | | | | | | | 56.1 |
| Stock-based compensation expense | | | | | | | | 56.1 | | | | | | | | | 56.1 | |
Cash dividends ($0.15 per common share) | | | | | | | | | | | (11.3 | ) | | | | | | (11.3 | ) | |
Dividends declared ($0.15 per common share) | | Dividends declared ($0.15 per common share) | | | | | | | | (11.3) | | | | | | | (11.3) | |
Acquisition of 3,554,603 treasury shares | | | | | | | | | | | | | | | (345.6 | ) | | (345.6 | ) | Acquisition of 3,554,603 treasury shares | | | | | | | | | | | | (345.6) | | | (345.6) | |
| Net loss attributable to redeemable non-controlling interest
| (2.2 | ) | | | | | | | | | | | | | | | | | Net loss attributable to redeemable non-controlling interest | (2.2) | | |
February 2, 2020 | $ | (2.0 | ) | | $ | — |
| | 85,890,276 |
| | $ | 85.9 |
| | $ | 3,075.4 |
| | $ | 4,753.0 |
| | $ | (640.1 | ) | | $ | (1,462.7 | ) | | $ | 5,811.5 |
| February 2, 2020 | (2.0) | | | — | | | 85,890,276 | | | 85.9 | | | 3,075.4 | | | 4,753.0 | | | (640.1) | | | (1,462.7) | | | 5,811.5 | |
Net loss attributable to PVH Corp. | | Net loss attributable to PVH Corp. | | (1,136.1) | | | (1,136.1) | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | | 278.5 | | | 278.5 | |
Net unrealized and realized loss related to effective cash flow hedges, net of tax benefit of $5.6 | | Net unrealized and realized loss related to effective cash flow hedges, net of tax benefit of $5.6 | | (63.1) | | | (63.1) | |
Net loss on net investment hedges, net of tax benefit of $30.6 | | Net loss on net investment hedges, net of tax benefit of $30.6 | | (94.4) | | | (94.4) | |
Comprehensive loss attributable to PVH Corp. | | Comprehensive loss attributable to PVH Corp. | | (1,015.1) | |
Cumulative-effect adjustment related to the adoption of accounting guidance for credit losses | | Cumulative-effect adjustment related to the adoption of accounting guidance for credit losses | | (1.0) | | | (1.0) | |
| Settlement of awards under stock plans | | Settlement of awards under stock plans | | 402,882 | | | 0.4 | | | 3.5 | | | 3.9 | |
| Stock-based compensation expense | | Stock-based compensation expense | | 50.5 | | | 50.5 | |
Dividends declared ($0.0375 per common share) | | Dividends declared ($0.0375 per common share) | | (2.7) | | | (2.7) | |
Acquisition of 1,536,550 treasury shares | | Acquisition of 1,536,550 treasury shares | | (116.8) | | | (116.8) | |
Net loss attributable to redeemable non-controlling interest | | Net loss attributable to redeemable non-controlling interest | (1.4) | | |
January 31, 2021 | | January 31, 2021 | (3.4) | | | — | | | 86,293,158 | | | 86.3 | | | 3,129.4 | | | 3,613.2 | | | (519.1) | | | (1,579.5) | | | 4,730.3 | |
Net income attributable to PVH Corp. | | Net income attributable to PVH Corp. | | 952.3 | | | 952.3 | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | | (268.1) | | | (268.1) | |
Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $25.0 | | Net unrealized and realized gain related to effective cash flow hedges, net of tax expense of $25.0 | | 90.7 | | | 90.7 | |
Net gain on net investment hedges, net of tax expense of $27.5 | | Net gain on net investment hedges, net of tax expense of $27.5 | | 83.8 | | | 83.8 | |
Comprehensive income attributable to PVH Corp. | | Comprehensive income attributable to PVH Corp. | | 858.7 | |
| Settlement of awards under stock plans | | Settlement of awards under stock plans | | 813,997 | | | 0.8 | | 25.9 | | | 26.7 | |
| Stock-based compensation expense | | Stock-based compensation expense | | 46.8 | | | 46.8 | |
Dividends declared ($0.0375 per common share) | | Dividends declared ($0.0375 per common share) | | (2.7) | | | (2.7) | |
Acquisition of 3,438,819 treasury shares | | Acquisition of 3,438,819 treasury shares | | (367.3) | | | (367.3) | |
| Net loss attributable to redeemable non-controlling interest | | Net loss attributable to redeemable non-controlling interest | (0.3) | | |
Change in the economic interests of redeemable non-controlling interest | | Change in the economic interests of redeemable non-controlling interest | 3.7 | | | (3.7) | | | (3.7) | |
January 30, 2022 | | January 30, 2022 | $ | — | | | $ | — | | | 87,107,155 | | | $ | 87.1 | | | $ | 3,198.4 | | | $ | 4,562.8 | | | $ | (612.7) | | | $ | (1,946.8) | | | $ | 5,288.8 | |
See notes to consolidated financial statements.
PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business — PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company with a brand portfolio consisting of nationally and internationally recognized trademarks, includingthat includes TOMMY HILFIGER, CALVIN KLEIN,Calvin Klein, Warner’s, Olga, and True&Co., which are owned, Van Heusen, IZOD, ARROW, Warner’s, Olga,and True&Co. and Geoffrey Beene, which arethe Company owned as well asthrough the second quarter of 2021 and now licenses back for certain product categories, and other licensed brands. various other owned, licensed and, to a lesser extent, private label brands. The Company also licenses Speedo for North America and the Caribbean in perpetuity from Speedo International Limited. The Company entered into a definitive agreement on January 9, 2020 to sell its Speedo North America business to Pentland Group PLC (“Pentland”), the parent company of Speedo International Limited, (the “Speedo transaction”). The Company will deconsolidate the net assets of the Speedo North America business and no longer license the Speedo trademark upon closing of the sale, which is expected to occur in the first quarter of 2020, subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which was received early in the first quarter of 2020.
The Company designs and markets branded dress shirts, neckwear, sportswear (casual apparel), jeanswear, performance apparel, intimate apparel, underwear, swimwear, swim products,dress shirts, neckwear, handbags, accessories, footwear and other related products and licenses its owned brands globally over a broad array of product categories and for use in numerous discrete jurisdictions. The Company entered into a definitive agreement during the second quarter of 2021 to sell certain of its heritage brands trademarks, including Van Heusen, IZOD, ARROW and Geoffrey Beene, as well as certain related inventories of its Heritage Brands business, to Authentic Brands Group (“ABG”) and other parties (the “Heritage Brands transaction”). The Company completed the sale on the first day of the third quarter of 2021. Please see Note 3, “Acquisitions and Divestitures,” for further discussion.
The Company also licensed Speedo for North America and the Caribbean until April 6, 2020, on which date the Company sold its Speedo North America business to Pentland Group PLC (“Pentland”), the parent company of the Speedo brand (the “Speedo transaction”). Upon the closing of the transaction, the Company deconsolidated the net assets of the Speedo North America business and no longer licensed the Speedo trademark. Please see Note 3, “Acquisitions and Divestitures,” for further discussion.
Principles of Consolidation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements of Operations include its proportionate share of the net income or loss of these entities. Please see Note 6,5, “Investments in Unconsolidated Affiliates,” for further discussion. The Company and Arvind Limited (“Arvind”) haveformed a joint venture in Ethiopia, PVH Arvind Manufacturing Private Limited Company (“PVH Ethiopia”), in which the Company owns aheld an initial economic interest of 75% interest. PVH Ethiopia is consolidated and the minority shareholder’s proportionate share (25%) of the equity in this joint venture is, with Arvind’s 25% interest accounted for as a redeemable non-controlling interest. The Company consolidated PVH Ethiopia in its consolidated financial statements. The Company and Arvind amended, effective May 31, 2021, the capital structure of PVH Ethiopia and as a result the Company solely managed and effectively owned all economic interests in the joint venture. The Company closed in the fourth quarter of 2021 the manufacturing facility that was the joint venture’s sole operation. The closure did not have a material impact on the Company’s consolidated financial statements. Please see Note 7,6, “Redeemable Non-Controlling Interest,” for further discussion.
Use of Estimates — The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from the estimates.
Fiscal Year — The Company uses a 52-5352-53 week fiscal year ending on the Sunday closest to February 1. References to a year are to the Company’s fiscal year, unless the context requires otherwise. Results for 2019, 20182021, 2020 and 20172019 represent the 52 weeks ended January 30, 2022, January 31, 2021 and February 2, 2020, 52 weeks ended February 3, 2019 and 53 weeks ended February 4, 2018, respectively.
COVID-19 Pandemic — The COVID-19 pandemic has had, and may continue to have, a significant impact on the Company’s business, results of operations, financial condition and cash flows from operations. The Company’s stores have been, and continue to be, impacted by temporary closures, reduced hours, reduced occupancy levels and high absenteeism as a result of the pandemic.
•Virtually all of the Company’s stores were temporarily closed for varying periods of time throughout the first quarter and into the second quarter of 2020. Most stores reopened in June 2020 but operated at significantly reduced capacity. The Company’s stores in Europe and North America continued to face significant pressure throughout 2020 as a result of the pandemic, with the majority of its stores in Europe and Canada closed during the fourth quarter.
•During the first quarter of 2021, pandemic-related pressures on the Company’s stores included temporary closures for a significant percentage of its stores in Europe, Canada and Japan. Pressures on its stores continued throughout 2021, with certain stores in Europe, Japan and Australia temporarily closed for varying periods of time in the second quarter, the majority of its stores in Australia closed temporarily in the third quarter, and the temporary closure of certain stores in Europe and China for varying periods of time in the fourth quarter. Further, a significant percentage of the Company’s stores globally were operating on reduced hours during the fourth quarter of 2021 as a result of increased
levels of associate absenteeism due to the pandemic, particularly the Omicron variant. Pressures on the Company’s stores have continued into the first quarter of 2022, particularly in China and Hong Kong SAR.
•In addition, the Company’s North America stores have been, and are expected to continue to be, challenged by the lack of international tourists coming to the United States, as stores located in international tourist destinations have historically represented a significant portion of that business.
The Company’s brick and mortar wholesale customers and its licensing partners also have experienced significant business disruptions as a result of the pandemic, with several of the Company’s North America wholesale customers filing for bankruptcy in 2020. The Company’s wholesale customers and franchisees globally generally have experienced temporary store closures and operating restrictions and obstacles in the same countries and at the same times as the Company. The elevated inventory levels in their stores as a result of the temporary closures, as well as lower traffic and consumer demand, resulted in a sharp reduction in shipments to these customers in 2020.
The pandemic has also impacted, and continues to impact, the Company’s supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of its licensees. These supply chains have experienced, and may continue to experience in the future, disruptions as a result of closed factories or factories operating with a reduced workforce, or other logistics constraints, including vessel, container and other transportation shortages, labor shortages and port congestion due to the impact of the pandemic.
The Company took certain actions during 2020 to preserve its liquidity and strengthen its financial flexibility. The Company suspended share repurchases under its stock repurchase program and suspended its dividend in March 2020. It entered into an amendment to its senior unsecured credit facilities in June 2020 under which it was not permitted to resume share repurchases or payments of dividends until after the relief period (as defined). Effective June 10, 2021, the relief period was terminated and the Company was permitted to make share repurchases at management’s discretion and declare and pay dividends on its common stock at the discretion of the Board of Directors, both of which have happened. In addition, the Company took certain other actions starting in the first quarter of 2020 to (i) reduce payroll costs, including temporary furloughs, salary and incentive compensation reductions, decreased working hours, and hiring freezes, as well as taking advantage of COVID-related government payroll subsidy programs primarily in international jurisdictions, (ii) eliminate or reduce expenses in all discretionary spending categories, (iii) reduce rent expense through rent abatements negotiated with landlords for certain stores affected by temporary closures, (iv) reduce working capital, with a particular focus on tightly managing its inventories, including reducing and cancelling inventory commitments, increasing promotional selling, redeploying basic inventory items to subsequent seasons and consolidating future seasonal collections, as well as extending payment terms with its suppliers and (v) reduce capital expenditures. The Company also announced in July 2020 plans to streamline its North American operations to better align its business with the evolving retail landscape, including (i) a reduction in its North America office workforce by approximately 450 positions, or 12%, across all three brand businesses and corporate functions, which has resulted in annual cost savings of approximately $80 million, and (ii) the exit from its Heritage Brands Retail business, which was completed in 2021. In March 2021, the Company announced plans to reduce its workforce, primarily in certain international markets, and to reduce its real estate footprint, including reductions in office space and select store closures, which are expected to result in annual cost savings of approximately $60 million.
In April 2020, the Company entered into a $275.0 million 364-day unsecured revolving credit facility, which was replaced in April 2021 with a new $275.0million 364-day facility, and issued an additional €175.0 million principal amount of 3 5/8% senior notes due 2024. In July 2020, the Company issued $500.0 million principal amount of 4 5/8% senior notes due 2025. Please see Note 8, “Debt,” for further discussion.
The Company also assessed the impacts of the pandemic on the estimates and assumptions used in preparing these consolidated financial statements, including, but not limited to, the allowance for credit losses, inventory reserves, carrying values of goodwill, intangible assets and other long-lived assets, and the effectiveness of hedging instruments. Based on these assessments, the Company recorded pre-tax noncash impairment charges of $1.021 billion during 2020, including $879.0 million related to goodwill, $54.5 million related to other intangible assets, $74.7 million related to store assets and $12.3 million related to an equity method investment. Please see Note 7, “Goodwill and Other Intangible Assets,” for further discussion of the impairments related to goodwill and other intangible assets, Note 11, “Fair Value Measurements,” for further discussion of the impairments related to store assets and Note 5, “Investments in Unconsolidated Affiliates,” for further discussion of the impairment related to an equity method investment.
The estimates and assumptions used in these assessments were based on management’s judgment and may be subject to change as new events occur and additional information is received. In particular, there continues to be uncertainty about the
impacts of the COVID-19 pandemic and supply chain and logistics disruptions globally on the Company’s business and, if economic conditions caused by the pandemic do not recover consistent with management’s expectations, the Company’s results of operations, financial condition and cash flows from operations may be materially and adversely impacted.
Use of Estimates — The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from the estimates due to risks and uncertainties, including the extent of the impacts of the COVID-19 pandemic on the Company’s business.
Cash and Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents also includes amounts due from third party credit card processors for the settlement of customer debit and credit card transactions that are collectible in one week or less. The Company’s cash and cash equivalents at February 2, 2020January 30, 2022 consisted principally of bank deposits and investments in money market funds.
Accounts Receivable — Trade receivables, as presented in the Company’s Consolidated Balance Sheets, are net of returns and allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectibility based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, historical experience, and an evaluation of current market conditions.
The Company records an allowance for credit losses as a reduction to its trade receivables for amounts that the Company does not expect to recover. An allowance for credit losses is determined through an analysis of the aging of accounts receivable and assessments of collectability based on historical trends, the financial condition of the Company’s customers and licensees, including any known or anticipated bankruptcies, and an evaluation of current economic conditions as well as the Company’s expectations of conditions in the future. The Company writes off uncollectible trade receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable. As of January 30, 2022 and January 31, 2021, the allowance for credit losses on trade receivables was $61.9 million and $69.6 million, respectively. The Company recorded a $48.5 million increase in the allowance for credit losses on trade receivables during 2020, primarily due to the evaluation of certain customer and licensee account balances in connection with changes in their financial condition and/or developments regarding their credit, including the adverse impacts of the COVID-19 pandemic.
Goodwill and Other Intangible Assets— The Company assesses the recoverability of goodwill annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Impairment testing for goodwill is done at the
reporting unit level. A reporting unit is defined as an operating segment or one level below the operating segment, called a component. However, two or more components of an operating segment will be aggregated and deemed a single reporting unit if the components have similar economic characteristics.
The Company assesses qualitative factors to determine whether it is necessary to perform a more detailed two-step quantitative goodwill impairment test. The Company may elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting unit. TheWhen performing the quantitative test, an impairment loss is recognized if the carrying amount of the reporting unit, including goodwill, impairment test, if necessary, is a two-step process. The first step is to identify the existence of a potential impairment by comparing theexceeds its fair value of a reporting unit (the fair value of a reporting unit is estimated using a discounted cash flow model) with its. The impairment loss recognized is equal to the amount by which the carrying amount including goodwill. Ifexceeds the fair value, of a reporting unit exceeds its carrying amount,but is limited to the reporting unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative goodwill impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined using the same approach as used when determining thetotal amount of goodwill allocated to that would be recognizedreporting unit.
The Company determined in a business combination. That is, the fair valuefirst quarter of 2020 that the significant adverse impact of the reporting unit is allocated to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
For the 2019 annual goodwill impairment test, the Company elected to bypass the qualitative assessment for all reporting units and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate the fair value of its reporting units. The Company’s annual goodwill impairment test during 2019 yielded estimated fair values in excess of the carrying amounts for all ofCOVID-19 pandemic on the Company’s reporting unitsbusiness, including an unprecedented material decline in revenue and therefore the second step of the quantitative goodwill impairment test was not required. The reporting unit with the least excess fair value hadearnings and an estimated fair value that exceeded its carrying amount by 15%. No impairment of goodwill resulted fromextended decline in the Company’s annual impairment test in 2019. In the fourth quarter of 2019, the Speedo transactionstock price and associated market capitalization, was a triggering event that indicated that the amount of goodwill allocated to the Heritage Brands Wholesale reporting unit, the reporting unit that includes the Speedo North America business, could be impaired, prompting the need forrequired the Company to perform ana quantitative interim goodwill impairment test for this reporting unit. Notest. The Company recorded $879.0 million of noncash goodwill impairment resulted from this interim test.
For the 2018 annualcharges in 2020, which was included in goodwill impairment test, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate the fair value of its reporting units. The Company’s annual goodwill impairment test during 2018 yielded estimated fair valuesother intangible asset impairments in excess of the carrying amounts for the Company’s reporting units, allConsolidated Statement of which had fair valuesOperations. The Company did not record any goodwill impairments in excess of the carrying amounts by more than 50%,2021 or 2019. Please see Note 7, “Goodwill and therefore the second step of the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from the Company’s annual impairment test in 2018.Other Intangible Assets,” for further discussion.
Indefinite-lived intangible assets not subject to amortization are tested for impairment annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Indefinite-lived intangible assets and intangible assets with finite lives are tested for impairment prior to assessing the recoverability of goodwill. The Company assesses qualitative factors to determine whether it is necessary to perform a more detailed quantitative impairment test for its indefinite-lived intangible
assets. The Company may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment test. When performing the quantitative test, an impairment loss is recognized if the carrying amount of the asset exceeds the fair value of the asset, which is generally determined using the estimated discounted cash flows associated with the asset’s use. Intangible assets with finite lives are amortized over their estimated useful lives and are tested for impairment along with other long-lived assets when events and circumstances indicate that the assets might be impaired.
ForThe Company also determined in the 2019 annual impairment testfirst quarter of all indefinite-lived intangible assets, except for the Australia reacquired perpetual license rights, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. For the Australia reacquired perpetual license rights, since only a few months had passed since the acquisition on May 31, 2019 and the business had performed better than initially expected, the Company determined qualitatively that it was not more likely than not2020 that the fair value of these reacquired perpetual license rights were less than the carrying amount and concluded that the quantitative impairment test was not required. The fair values of allimpact of the Company’s indefinite-lived intangible assets substantially exceed their carrying amounts, with the exception of the Company’s perpetual license right related toCOVID-19 pandemic on its Speedo North America business which had a fair value that exceeded its
carrying amount by 3% at the testing date. In the fourth quarter of 2019, the Speedo transaction was a triggering event that prompted the need to perform interim impairment testing of its intangible assets. The Company recorded $47.2 million of noncash impairment charges related to indefinite-lived intangible assets and $7.3 million of noncash impairment charges related to finite-lived intangible assets in 2020, which were included in goodwill and other intangible asset impairments in the Company’s Consolidated Statement of Operations. Please see Note 7, “Goodwill and Other Intangible Assets,” for further discussion. In 2019, the Company to perform an interim impairment test of this perpetual license right. Asrecorded a result of this interim test, the perpetual license right was determined to be impaired and annoncash impairment charge of $116.4 million related to the then-owned Speedo perpetual license right, which was recordedincluded in other noncash(gain) loss, net in the Company’s Consolidated Income Statement.Statement of Operations. The Company did not record any intangible asset impairments in 2021. Please see Note 4, “Assets Held For Sale,3, “Acquisitions and Divestitures,” and Note 7, “Goodwill and Other Intangible Assets,” for further discussion.
For the 2018 annual impairment test of all indefinite-lived intangible assets, except for the Geoffrey Beene tradename, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. For the Geoffrey Beene tradename, since only a few months had passed since the acquisition on April 20, 2018 and there had not been any significant changes in the business, the Company determined qualitatively that it was not more likely than not that the fair value of this tradename was less than the carrying amount and concluded that the quantitative impairment test was not required. No impairment of indefinite-lived intangible assets resulted from the Company’s annual impairment tests in 2018.
Asset Impairments — The Company reviews for impairment of long-lived assets (excluding goodwill and other indefinite-lived intangible assets) when events and circumstances indicate that the assets might be impaired. The Company records an impairment loss when the carrying amount of the asset is not recoverable and exceeds its fair value. Please see Note 12,11, “Fair Value Measurements,” for further discussion.
Inventories — Inventories are comprised principally of finished goods and are stated at the lower of cost or net realizable value, except for certain retail inventories in North America that are stated at the lower of cost or market using the retail inventory method. Cost for substantially all wholesale inventories in North America and certain wholesale and retail inventories in Asia is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. The Company reviews current business trends and forecasts, inventory aging and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at either the lower of cost or net realizable value or the lower of cost or market using the retail inventory method, as applicable.
Property, Plant and Equipment — Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is generally provided over the estimated useful lives of the related assets on a straight-line basis. The range of useful lives is principally as follows: Buildings and building improvements — 15 to 40 years; machinery, software and equipment — 2 to 10 years; furniture and fixtures — 2 to 10 years; and fixtures located in shop-in-shop/concession locations and their related costs — 3 to 4 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the term of the related lease or the estimated useful life of the asset. In certain circumstances, contractual renewal options are considered when determining the term of the related lease. Major additions and improvements that extend the useful life of the asset are capitalized, and repairs and maintenance are charged to operations in the period incurred. Depreciation expense totaled $266.6 million, $280.8 million and $275.0 million $263.9 millionin 2021, 2020 and $252.2 million in 2019, 2018 and 2017, respectively.
Cloud Computing Arrangements — The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Implementation costs incurred during the application development stage of a project are capitalized and amortized over the term of the hosting arrangement on a straight-line basis. The Company capitalized $16.6$18.0 million and $10.0 million of costs incurred in 20192021 and 2020, respectively, to implement cloud computing arrangements, primarily related to digital and consumer data platforms. Amortization expense relating to cloud computing arrangements totaled $6.2 million, $4.4 million and $0.9 million in 2019.2021, 2020 and 2019, respectively. Cloud computing costs of $15.7$32.7 million and $20.5 million were included in prepaid expenses and other assets in the Company’s Consolidated Balance SheetSheets as of February 2, 2020.January 30, 2022 and January 31, 2021, respectively.
The Company’s policy for accounting for implementation costs incurred in a cloud computing arrangement that is a service contract reflects changes made in 2019 following the adoption of the updated cloud computing guidance. Please see the section “Recently Adopted Accounting Guidance” below for further discussion.
Leases — The Company leases approximately 1,600 Company-operated free-standing retail store locations across more than 35 countries, generally with initial lease terms of three to ten years. The Company also leases warehouses, distribution centers, showrooms and office space, and a factory in Ethiopia,generally with initial lease terms of ten to 20 years, as well as certain equipment and other assets. assets, generally with initial lease terms of one to five years.
The Company recognizes right-of-use assets and lease liabilities at the lease commencement date based on the present value of fixed lease payments over the expected lease term. The Company uses its incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable for the Company’s leases. The Company’s incremental borrowing rates are based on the term of the lease, the economic environment of the lease, and the effect of collateralization. Certain leases include one or more
renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and, as such, the Company typically determines that exercise of these renewal options is not reasonably certain until executed. As a result, the Company does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. Certain leases also contain termination options with an associated penalty. Generally, the Company is reasonably certain not to exercise these options and as such, they are not included in the determination of the expected lease term.
Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and long-term portion of operating lease liabilities in the Company’s Consolidated Balance Sheet.Sheets. The Company recognizes operating lease expense on a straight-line basis over the lease term. Finance leases are included in property, plant and equipment, net, accrued expenses and other liabilities in the Company’s Consolidated Balance Sheet.Sheets. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Leases generally provide for payments of nonlease components, such as common area maintenance, real estate taxes and other costs associated with the leased property. For lease agreements entered into or modified after February 3, 2019, the Company accounts for lease components and nonlease components together as a single lease component and, as such, includes fixed payments of nonlease components in the measurement of the right-of-use assets and lease liabilities. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred as variable lease costs and are not recorded on the Company’s Consolidated Balance Sheets. The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants. Please see Note 17,16, “Leases,” and the section “Recently Adopted Accounting Guidance” below for further discussion.
Revenue Recognition — Revenue is recognized upon the transfer of control of products or services to the Company’s customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those products or services. Please see Note 2, “Revenue,” for further discussion.
Cost of Goods Sold and Selling, General and Administrative Expenses — Costs associated with the production and procurement of product are included in cost of goods sold, including inbound freight costs, purchasing and receiving costs, inspection costs and other product procurement related charges, as well as the amounts recognized on foreign currency forward exchange contracts as the underlying inventory hedged by such forward exchange contracts is sold. Generally, all other expenses, excluding non-service related pension and post retirement (income) costs, interest expense (income) and income taxes, are included in selling, general and administrative (“SG&A”) expenses, including warehousing and distribution expenses, as the predominant expenses associated therewith are general and administrative in nature, including rent, utilities, payroll and depreciation and amortization. Warehousing and distribution expenses, which are subject to exchange rate fluctuations, totaled $332.4 million, $288.9 million and $351.4 million $307.7 millionin 2021, 2020 and $272.6 million in 2019,, 2018 and 2017, respectively.
Shipping and Handling Fees — Shipping and handling fees that are billed to customers are included in net sales. Shipping and handling costs incurred by the Company are accounted for as fulfillment activities and are recorded in SG&A expenses.
Advertising — Advertising costs are expensed as incurred and are included in SG&A expenses. Advertising expenses, which are subject to exchange rate fluctuations, totaled $535.8 million, $379.0 million and $509.7 million $526.0 millionin 2021, 2020 and $501.3 million in 2019, 2018 and 2017, respectively. Prepaid advertising expenses recorded in prepaid expenses and other assets totaled $5.9$5.2 million and $7.3$8.3 million at February 2, 2020January 30, 2022 and February 3, 2019,January 31, 2021, respectively. Costs associated with cooperative advertising programs, under which the Company shares the cost of a customer’s advertising expenditures, are treated as a reduction of revenue.
Sales Taxes — The Company accounts for sales taxes and other related taxes on a net basis, excluding such taxes from revenue.
Income Taxes — Deferred tax assets and liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
Significant judgment is required in assessing the timing and amount of deductible and taxable items, evaluating tax positions and determining the income tax provision. The Company recognizes income tax benefits only when it is more likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. If the recognition threshold is met, the Company measures the tax benefit at the largest amount with a greater than 50 percent likelihood of being realized upon ultimate settlement. For tax positions that are 50 percent or less likely of being sustained upon audit, the Company does not recognize any portion of that benefit in the financial statements. When the outcome of these tax matters changes, the change in estimate impacts the provision for income taxes in the period that such a determination is made. The Company recognizes interest and penalties related to unrecognized tax benefits in the Company’s income tax provision.
The United States Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Legislation”) was enacted on December 22, 2017. The U.S. Tax Legislation is comprehensive and significantly revised the United States tax code. Please see Note 10, “Income Taxes,” for further discussion of the U.S. Tax Legislation.
Financial Instruments — The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows primarily associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure. The Company also has exposure to interest rate volatility related to its secured term loan facilities.facilities and its 364-day United States dollar-denominated unsecured revolving credit facility, which borrowings bear interest at a rate equal to an applicable margin plus a variable rate. The Company enters intouses interest rate swap agreements to hedge against a portion of this exposure. The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets and does not net the related assets and liabilities. The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair value of the interest rate swap agreements is based on observable interest rate yield curves and represents the expected discounted cash flows underlying
the financial instruments. Changes in fair value of the foreign currency forward exchange contracts primarily associated with certain international inventory purchases and the interest rate swap agreements that are designated as effective hedging instruments (collectively referred to as “cash flow hedges”) are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”).
The Company also has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, the Company designates certain foreign currency borrowings issued in the United Statesby PVH Corp., a U.S.-based entity, as a net investment hedgehedges of its investments in certain of its foreign subsidiaries that use a functional currency other than the United States dollar. Changes in fair value of the foreign currency borrowings designated as net investment hedges are recorded in equity as a component of AOCL. The Company evaluates the effectiveness of its net investment hedges at inception and as ofat the beginning of each quarter.quarter thereafter.
The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”). Undesignated contracts primarily include all of the foreign currency forward exchange contracts related to third party and intercompany transactions, and intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts are largely offset by the remeasurement of the underlying intercompany balances. Undesignated contracts also include foreign currency option contracts previously used by
As a result of the use of derivative instruments, the Company to hedge against changes in foreign currency exchange rates relatedmay be exposed to the translationrisk that the counterparties to such contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon an evaluation of the earnings of the Company’s subsidiaries that use a functional currencytheir credit ratings and certain other than the United States dollar. The fair value of the foreign currency option contracts was estimated based on external valuation models, which used the original strike price, then current foreign currency exchange rates, the implied volatility in foreign currency exchange rates at the time and length of time to expiration as inputs. All foreign currency option contracts expired in 2017.financial factors.
The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes. Cash flows from the Company’s hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows in the same category as the items being hedged. Please see Note 11,10, “Derivative Financial Instruments,” for further discussion.
Foreign Currency Translation and Transactions — The consolidated financial statements of the Company are prepared in United States dollars. If the functional currency of a foreign subsidiary is not the United States dollar, assets and liabilities are translated to United States dollars at the closing exchange rate in effect at the applicable balance sheet date and revenue and expenses are translated to United States dollars at the average exchange rate for the applicable period. The resulting translation adjustments are included in the Company’s Consolidated Statements of Comprehensive Income (Loss) as a component of other comprehensive (loss) income and in the Consolidated Balance Sheets within AOCL. Gains and losses on the revaluation of intercompany loans made between foreign subsidiaries that are of a long-term investment nature are included in AOCL. Gains and losses arising from transactions denominated in a currency other than the functional currency of a particular entity, not including inventory purchases, are principally included in SG&A expenses and totaled a loss (gain) of $16.2$20.4 million, $17.3$(5.6) million and $(10.2)$16.2 million in 2019, 20182021, 2020 and 2017,2019, respectively.
Balance Sheet Classification of Early Settlements of Long-Term Obligations — The Company classifies obligations settled after the balance sheet date but prior to the issuance of the consolidated financial statements based on the contractual payment terms of the underlying agreements.
Pension and Benefit Plans — Employee pension benefits earned during the year, as well as interest on the projected benefit obligations or accumulated benefit obligations, are accrued quarterly. The expected return on plan assets is recognized quarterly and determined at the beginning of the year by applying the expected long-term rate of return on assets to the actual fair value of plan assets adjusted for expected benefit payments, contributions and plan expenses. Actuarial gains and losses are recognized in the Company’s operating results in the year in which they occur. These gains and losses include the difference between the actual return on plan assets and the expected return that was recognized quarterly, as well as the change in the projected benefit obligation caused by actual experience and updated actuarial assumptions differing from those assumptions used to record service and interest cost throughout the year. Actuarial gains and losses are measured at least annually at the end of the Company’s fiscal year and, as such, are generally recorded during the fourth quarter of each year. The service cost component of net benefit cost is recorded in SG&A expenses and the other components of net benefit cost, which typically include interest cost, actuarial (gain) loss and expected return on plan assets, are recorded in non-service related pension and postretirement (income) cost (income) in the Company’s Consolidated Income Statements.Statements of Operations. Please see Note 13,12, “Retirement and Benefit Plans,” for further discussion of the Company’s pension and benefit plans.
Stock-Based Compensation — The Company recognizes all share-based payments to employees and non-employee directors, net of actual forfeitures, as compensation expense in the consolidated financial statements based on their grant date fair values. Please see Note 14,13, “Stock-Based Compensation,” for further discussion.
Recently Adopted Accounting Guidance — The Financial Accounting Standards Board (“FASB”) issued in February 2016 new guidance on leases. The new guidance, among other changes, requires lessees to recognize a right-of-use asset and a lease liability in the balance sheet for most leases, but retains an expense recognition model similar to the previous guidance. The lease liability is measured at the present value of the fixed lease payments over the lease term and the right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. The guidance also requires additional quantitative and qualitative disclosures. The Company adopted the guidance in the first quarter of 2019 using the modified retrospective approach applied as of the period of adoption with a cumulative-effect adjustment to opening retained earnings and as such, prior periods have not been restated. Upon adoption, the Company (i) recognized operating lease right-of-use assets of $1.7 billion and lease liabilities of $1.9 billion, (ii) recorded a cumulative-effect adjustment to retained earnings of $3.1 million and (iii) recorded other reclassification adjustments within its Consolidated Balance Sheet related to, among other things, deferred rent.
The effects of the adoption on the Company’s Consolidated Balance Sheet as of February 3, 2019 were as follows: |
| | | | | | | | | | | |
(In millions) | As Reported 2/3/19 | | Adjustments | | Adjusted 2/3/19 |
Assets | | | | | |
Prepaid expenses | $ | 168.7 |
| | $ | (21.3 | ) | | $ | 147.4 |
|
Operating Lease Right-of-Use Assets | — |
| | 1,708.2 |
| | 1,708.2 |
|
Other Assets | 400.9 |
| | (10.3 | ) | | 390.6 |
|
Liabilities | | | | | |
Accrued expenses | 891.6 |
| | (17.0 | ) | | 874.6 |
|
Current portion of operating lease liabilities | — |
| | 350.5 |
| | 350.5 |
|
Long-Term Portion of Operating Lease Liabilities | — |
| | 1,514.1 |
| | 1,514.1 |
|
Other Liabilities | 1,322.4 |
| | (167.9 | ) | | 1,154.5 |
|
Stockholders’ Equity | | | | | |
Retained earnings | 4,350.1 |
| | (3.1 | ) | | 4,347.0 |
|
The Company also elected the package of practical expedients permitted under the transition guidance, which allows the Company not to reassess whether any existing contracts are or contain a lease, the lease classification for any existing leases, and the capitalization of initial direct costs for any existing leases, as of the adoption date. The Company’s accounting for finance leases (formerly called capital leases) remains substantially unchanged. The adoption of the guidance did not have a material impact on the Company’s results of operations or cash flows. Please see Note 17, “Leases,” for additional disclosures required by the guidance.
The FASB issued in August 2017 an update to accounting guidance to simplify the application of hedge accounting in certain situations and allow companies to better align their hedge accounting with their risk management activities. The update eliminates the requirement to separately measure and report hedge ineffectiveness and requires companies to recognize all elements of hedge accounting that impact earnings in the same income statement line as the hedged item. The update also simplifies the requirements for hedge documentation and effectiveness assessments and amends the presentation and disclosure requirements. The Company adopted this update in the first quarter of 2019 using a modified retrospective approach, except for the presentation and disclosure guidance, which is being applied on a prospective basis, as required. The adoption of this update did not have any impact on the Company’s consolidated financial statements.
The FASB issued in August 2018 an update to accounting guidance related to implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred under such arrangements with the requirements for capitalizing costs incurred to develop or obtain internal-use software. Under previous accounting guidance, the Company generally expensed the implementation costs incurred in
connection with a cloud computing arrangement that is a service contract. The Company early adopted this update in the first quarter of 2019 using a prospective approach and, as a result, has capitalized $16.6 million of costs incurred in 2019 to implement cloud computing arrangements, primarily related to digital and consumer data platforms. Such costs were included in prepaid expenses and other assets in the Company’s Consolidated Balance Sheet.
Accounting Guidance Issued But Not Adopted as of February 2, 2020 — The FASB issued in June 2016 an update to accounting guidance that introduces a new impairment model used to measure credit losses for certain financial assets measured at amortized cost, including trade and other receivables. This update requires entities to record an allowance for credit losses using a forward-looking expected loss impairment model that considers historical experience, current conditions, and reasonable and supportable forecasts that affect collectibility, rather than the incurred loss model required under existing guidance. The update will be effective for the Company in the first quarter of 2020. Entities are required to apply the update using a modified-retrospective approach with a cumulative effect adjustment to opening retained earnings in the period of adoption. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued in December 2019 an update to accounting guidance to simplify the accounting for income taxes by eliminating certain exceptions to the existing guidance and clarifying and amending certain guidance to reduce diversity in practice. The update eliminates certain exceptions to the guidance related to the approach for intraperiodintra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The update also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted the update in the first quarter of 2021. The adoption of the update did not have any impact on the Company’s consolidated financial statements.
Accounting Guidance Issued But Not Adopted as of January 30, 2022 — The FASB issued in November 2021 an update to accounting guidance requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (i) the types of transactions, (ii) the accounting for those transactions, and (iii) the effect of those transactions on an entity’s financial statements. The update will be effective for the Company in the first quarter of 2021, with early adoption permitted. Most amendments in2022. Entities have the update are required to be adoptedoption of adopting the guidance using either a prospective approach, while other amendments must be adopted using a modified-retrospective approach or retrospective approach. The Company is currently evaluatingintends to adopt the update in the first quarter of 2022 using the prospective approach. The Company will apply the update to determineapplicable transactions after the adoption date and the impact on the Company’s consolidated financial statement footnote disclosures will depend on the nature and amount of the government assistance received in the applicable period.
The FASB issued in October 2021 an update to accounting guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to their recognition and measurement. The update requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the revenue recognition guidance. This generally will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree immediately before the acquisition date. Historically, such amounts were recognized by the acquirer at fair value. The update will be effective for the Company in the first quarter of 2023, with early adoption permitted. The Company will apply the update to applicable transactions occurring on or after the adoption date. The impact on the Company’s consolidated financial statements will depend on the facts and circumstances of any future transactions.
The FASB issued in March 2020 an update to provide temporary optional guidance intended to ease the potential burden of accounting for reference rate reform. The amendments in the update provide optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships and other transactions affected by the expected market transition from the London interbank offered rate (“LIBOR”) and other interbank offered rates to alternative reference rates if certain criteria are met. The amendments were effective upon issuance and can be applied on a prospective basis through December 31, 2022. The adoption of the update is not expected to have a material impact on the Company’s consolidated financial statements.
2. REVENUE
The Company generates revenue primarily from sales of finished products under its owned and licensed trademarks through its wholesale and retail operations. The Company also generates royalty and advertising revenue from licensing the rights to its trademarks to third parties. Revenue is recognized upon the transfer of control of products or services to the Company’s customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those products or services.
Product Sales
The Company generates revenue from the wholesale distribution of its products to traditional retailers (including for sale through their digital commerce sites), pure play digital commerce retailers, franchisees, licensees and distributors. Revenue is recognized upon transfer of control of goods to the customer, which generally occurs when title to goods is passed and risk of loss transfers to the customer. Depending on the contract terms, transfer of control is upon shipment of goods to or upon receipt of goods by the customer. Payment is typically due within 30 to 90 days. The amount of revenue recognized is net of returns, sales allowances and other discounts that the Company offers to its wholesale customers. The Company estimates returns based on an analysis of historical experience and specificindividual customer arrangements and estimates sales allowances and other discounts based on seasonal negotiations, historical experience and an evaluation of current sales trends and market conditions.
The Company also generates revenue from the retail distribution of its products through its freestanding stores, shop-in-shop/concession locations and digital commerce sites. Revenue is recognized at the point of sale in the stores and shop-in-shop/concession locations and upon estimated time of delivery for sales through the Company’s digital commerce sites, at which point control of the products passes to the customer. The amount of revenue recognized is net of returns, which are estimated based on an analysis of historical experience. Costs associated with coupons are recorded as a reduction of revenue at the time of coupon redemption.
The Company excludes from revenue taxes collected from customers and remitted to government authorities related to sales of the Company’s products. Shipping and handling costs that are billed to customers are included in net sales.
Customer Loyalty Programs
The Company uses loyalty programs that offer customers of its retail businesses specified amounts off of future purchases for a specified period of time after certain levels of spending are achieved. Customers that are enrolled in the programs earn loyalty points for each purchase made.
Loyalty points earned under the customer loyalty programs provide the customer a material right to acquire additional products and give rise to the Company having a separate performance obligation. For each transaction where a customer earns loyalty points, the Company allocates revenue between the products purchased and the loyalty points earned based on the relative standalone selling prices. Revenue allocated to loyalty points is recorded as deferred revenue until the loyalty points are redeemed or expire.
Gift Cards
The Company sells gift cards to customers in its retail stores.stores and on certain of its digital commerce sites. The Company does not charge administrative fees on gift cards nor do they expire. Gift card purchases by a customer are prepayments for products to be provided by the Company in the future and are therefore considered to be performance obligations of the Company. Upon the purchase of a gift card by a customer, the Company records deferred revenue for the cash value of the gift card. Deferred revenue is relieved and revenue is recognized when the gift card is redeemed by the customer. The portion of gift cards that the Company does not expect to be redeemed (referred to as “breakage”) is recognized proportionately over the estimated customer redemption period, subject to the constraint that it must be probable that a significant reversal of revenue will not occur, if the Company determines that it does not have a legal obligation to remit the value of such unredeemed gift cards to any jurisdiction.
License Agreements
The Company generates royalty and advertising revenue from licensing the rights to access its trademarks to third parties, including the Company’s joint ventures. The license agreements are generally exclusive to a territory or product category, have terms in excess of one year and, in most cases, include renewal options. In exchange for providing these rights, the license agreements require the licensees to pay the Company a royalty and, in certain agreements, an advertising fee. In both cases, the Company generally receives the greater of (i) a sales-based percentage fee and (ii) a contractual minimum fee for each annual performance period under the license agreement.
In addition to the rights to access its trademarks, the Company provides ongoing support to its licensees over the term of the agreements. As such, the Company’s license agreements are licenses of symbolic intellectual property and, therefore, revenue is recognized over time. For license agreements where the sales-based percentage fee exceeds the contractual minimum fee, the Company recognizes revenues as the licensed products are sold as reported to the Company by its licensees. For license agreements where the sales-based percentage fee does not exceed the contractual minimum fee, the Company recognizes the contractual minimum fee as revenue ratably over the contractual period.
Under the terms of the license agreements, payments are generally due quarterly from the licensees. The Company records deferred revenue when amounts are received or receivable from the licensee in advance of the recognition of revenue.
As of February 2, 2020,January 30, 2022, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $1.2$1.1 billion, of which the Company expects to recognize $291.5$268.3 million as revenue in 2020, $242.42022, $256.6 million in 20212023 and $684.2$553.5 million thereafter.
Deferred Revenue
Changes in deferred revenue, which primarily relate to customer loyalty programs, gift cards and license agreements for the years ended February 2, 2020January 30, 2022 and February 3, 2019,January 31, 2021, were as follows:
|
| | | | | | | |
(In millions) | 2019 | | 2018 |
Deferred revenue balance at beginning of period | $ | 65.3 |
| | $ | 39.2 |
|
Impact of adopting the new revenue standard | — |
| | 15.6 |
|
Net additions to deferred revenue during the period | 60.3 |
| | 61.3 |
|
Reductions in deferred revenue for revenue recognized during the period (1) | (60.9 | ) | | (50.8 | ) |
Deferred revenue balance at end of period
| $ | 64.7 |
| | $ | 65.3 |
|
| | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | |
Deferred revenue balance at beginning of period | $ | 55.8 | | | $ | 64.7 | | |
| | | | |
Net additions to deferred revenue during the period | 42.2 | | | 50.5 | | |
Reductions in deferred revenue for revenue recognized during the period (1) | (51.5) | | | (59.4) | | |
Reduction in deferred revenue related to the Heritage Brands transaction | (1.6) | | (2) | — | | |
Deferred revenue balance at end of period | $ | 44.9 | | | $ | 55.8 | | |
(1) Represents the amount of revenue recognized during the period that was included in the deferred revenue balance at the beginning of the period as adjusted in 2018 for the impact of adopting the new revenue standard, and does not contemplate revenue recognized from amounts deferred during the period.
(2) The Company recorded a $1.6 million reduction in deferred revenue in connection with the Heritage Brands transaction. Please see Note 3, “Acquisitions and Divestitures,” for further discussion.
The Company also had long-term deferred revenue liabilities included in other liabilities in its Consolidated Balance Sheets of $10.3$15.0 million and $2.3$13.4 million as of February 2, 2020January 30, 2022 and February 3, 2019,January 31, 2021, respectively.
Optional Exemptions
The Company elected not to disclose the remaining performance obligations for contracts that have an original expected term of one year or less and expected sales-based percentage fees for the portion of all license agreements not yet satisfied.
Please see Note 21,20, “Segment Data,” for information on the disaggregation of revenue by segment and distribution channel.
3. ACQUISITIONS AND DIVESTITURES
TH CSAP Acquisition
The Company acquired on July 1, 2019 the Tommy Hilfiger retail business in Central and Southeast Asia from the Company’s previous licensee in that market (the “TH CSAP acquisition”). As a result of the TH CSAP acquisition, the Company now operates directly the Tommy Hilfiger retail business in the Central and Southeast Asia market.
The acquisition date fair value of the consideration paid was $74.3 million. The estimated fair value of the assets acquired consisted of $63.9 million of goodwill and $10.4 million of other net assets. The goodwill of $63.9 million was assigned as of the acquisition date to the Company’s Tommy Hilfiger International segment, which is the Company’s reporting unit that is expected to benefit from the synergies of the combination. Goodwill is not expected to be deductible for tax purposes. The Company is still in the process of finalizing the valuation of the assets acquired; thus, the allocation of the acquisition consideration is subject to change.
Australia Acquisition
The Company acquired on May 31, 2019 the approximately 78% ownership interestsinterest in Gazal Corporation Limited (“Gazal”) that it did not already own (the “Australia acquisition”). Prior to the Australia acquisition, the Company and Gazal jointly owned and managed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), with each owning a 50% interest. PVH Australia licensed and operated businesses in Australia, New Zealand and other parts of Oceania under the TOMMY HILFIGER, CALVIN KLEINCalvin Klein and Van Heusen brands, along with other owned and licensed brands. PVH Australia came under the Company’s full control as a result of the acquisition. The Company now operates directly those businesses.
Prior to May 31, 2019, the Company accounted for its approximately 22% interest in Gazal and its 50% interest in PVH Australia under the equity method of accounting. Following the completion of the Australia acquisition, the results of Gazal and PVH Australia have been consolidated in the Company’s consolidated financial statements.
Gain on Previously Held Equity Investments
The carrying values of the Company’s approximately 22% interest in Gazal and 50% interest in PVH Australia prior to the Australia acquisition were $16.5 million and $41.9 million, respectively. In connection with the acquisition, these investments were remeasured to fair values of $40.1 million and $131.4 million, respectively, resulting in the recognition of an aggregate noncash gain of $113.1 million during the second quarter of 2019, which was included in other noncash(gain) loss, net in the Company’s Consolidated Income Statement.Statement of Operations.
The fair value of the Company’s investment in Gazal was determined using the trading price of Gazal’s common stock, which was listed on the Australian Securities Exchange, on the date of the acquisition. The Company classified this as a Level 1 fair value measurement due to the use of an unadjusted quoted price in an active market. The fair value of Gazal included the fair value of Gazal’s 50% interest in PVH Australia. As such, the Company derived the fair value of its investment in PVH Australia from the fair value of Gazal by adjusting for (i) Gazal’s non-operating assets and net debt position and (ii) the estimated future operating cash flows of Gazal’s standalone operations, which were discounted at a rate of 12.5% to account for the relative risks of the estimated future cash flows. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs.
Mandatorily Redeemable Non-Controlling Interest
Pursuant to the terms of the acquisition agreement, key membersexecutives of Gazal and PVH Australia management exchanged a portion of their interests in Gazal for approximately 6% of the outstanding shares inof the Company’s previously wholly owned subsidiary of the Company that acquired 100% of the ownership interests in the Australia business. The Company iswas obligated to purchase this 6% interest within two years of the Australia acquisition closing in two tranches as follows:tranches: tranche 1 – 50% of the shares one year after the closing, but the holders had the option to defer half of this tranche to tranche 2;closing; and tranche 2 – all remaining shares two years after the closing. With respect to tranche 1, the holders elected not to defer their shares to tranche 2 and as a result the Company is obligated to purchase all of the tranche 1 shares in the second quarter of 2020. The purchase price for the tranche 1 and tranche 2 shares iswas based on a multiple of the subsidiary’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) less net debt as of the end of the applicable measurement year, and the multiple variesvaried depending on the level of EBITDA compared to a target.
The Company recognized a liability of $26.2 million for the fair value of the 6% interest on the date of the Australia acquisition, based on exchange rates in effect on that date, which iswas being accounted for as a mandatorily redeemable non-controlling interest. The fair value of the liability was determined using a Monte Carlo simulation model, which utilizesutilized inputs, including the volatility of financial results, in order to model the probability of different outcomes. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs.
In subsequent periods, the liability for the mandatorily redeemable non-controlling interest iswas adjusted each reporting period to its redemption value based on conditions that existexisted as of each subsequent balance sheet date, provided that the
liability could not be adjusted below the amount initially recorded at the acquisition date. The Company reflectsrecorded any adjustment insuch adjustments to the redemption valueliability in interest expense in the Company’s Consolidated Income Statement.Statements of Operations. The Company recorded a loss of $4.9 million and $8.6 million in interest expense during 2020 and 2019, respectively, in connection with the remeasurement of the mandatorily redeemable non-controlling interest to its redemption value, which forinterest.
For the tranche 1 reflectsand tranche 2 shares, the amount expected to bemeasurement periods ended in 2019 and 2020, respectively. The Company paid under the conditions specifiedmanagement shareholders an aggregate purchase price of $17.3 million for the tranche 1 shares in June 2020 and an aggregate purchase price of $24.4 million for the termstranche 2 shares in June 2021 based on exchange rates in effect on the applicable payment dates. The Company presented these payments within the Company’s Consolidated Statements of Cash Flows as follows: (i) $12.7 million and $15.2 million as financing cash flows in 2020 and 2021, respectively, which represented the initial fair values of the acquisition agreementliabilities for the tranche 1 and for tranche 2 reflects the amount that would be paid under the conditions specified in the terms ofshares, respectively, recognized on the acquisition agreement if settlementdate, and (ii) $4.6 million and $9.2 million, as operating cash flows in 2020 and 2021, respectively, for the tranche 1 and tranche 2 shares, respectively, attributable to interest.
The Company had occurredno remaining liability for the mandatorily redeemable non-controlling interest as of February 2, 2020.January 30, 2022. The liability for the mandatorily redeemable non-controlling interest, related to the tranche 2 shares, was $33.8$24.1 million as of February 2, 2020January 31, 2021 based on exchange rates in effect on that date, of which $16.9 millionand was included in accrued expenses and $16.9 million was included in other liabilities in the Company’s Consolidated Balance Sheet.
Fair Value of the Acquisition
The acquisition date fair value of the business acquired was $324.6 million, consisting of:
|
| | | | |
(In millions) | | |
Cash consideration | | $ | 124.7 |
|
Fair value of the Company’s investment in PVH Australia | | 131.4 |
|
Fair value of the Company’s investment in Gazal | | 40.1 |
|
Fair value of mandatorily redeemable non-controlling interest | | 26.2 |
|
Elimination of pre-acquisition receivable owed to the Company | | 2.2 |
|
Total acquisition date fair value of the business acquired | | $ | 324.6 |
|
| | | | | | | | |
(In millions) | | |
Cash consideration | | $ | 124.7 | |
Fair value of the Company’s investment in PVH Australia | | 131.4 | |
Fair value of the Company’s investment in Gazal | | 40.1 | |
Fair value of mandatorily redeemable non-controlling interest | | 26.2 | |
Elimination of pre-acquisition receivable owed to the Company | | 2.2 | |
Total acquisition date fair value of the business acquired | | $ | 324.6 | |
Allocation of the Acquisition Date Fair Value
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
| | | | |
(In millions) | | |
Cash and cash equivalents | | $ | 6.6 |
|
Trade receivables | | 15.1 |
|
Inventories | | 89.9 |
|
Prepaid expenses | | 1.3 |
|
Other current assets | | 3.5 |
|
Assets held for sale | | 58.8 |
|
Property, plant and equipment | | 18.4 |
|
Goodwill | | 65.9 |
|
Intangible assets | | 222.2 |
|
Operating lease right-of-use assets | | 56.4 |
|
Total assets acquired | | 538.1 |
|
Accounts payable | | 14.4 |
|
Accrued expenses | | 22.5 |
|
Short-term borrowings | | 50.5 |
|
Current portion of operating lease liabilities | | 10.9 |
|
Long-term portion of operating lease liabilities | | 43.9 |
|
Deferred tax liability | | 69.6 |
|
Other liabilities | | 1.7 |
|
Total liabilities assumed | | 213.5 |
|
Total acquisition date fair value of the business acquired | | $ | 324.6 |
|
Prior to the closing of the Australia acquisition, Gazal had entered into an agreement to sell an office building and warehouse to a third party and, as such, the building was classified as held for sale on the acquisition date.party. The building was subsequently sold to a third party and leased back to the Company in June 2019. Please see Note 17,16, “Leases,” for further discussion of this sale-leaseback transaction.
Sale of Certain Heritage Brands Trademarks and Other Assets
The Company entered into a definitive agreement on June 23, 2021 to sell certain of its heritage brands trademarks, including VanHeusen, IZOD, ARROW and Geoffrey Beene, as well as certain related inventories of its Heritage Brands business, with a net carrying value of $97.8 million, to ABG and other parties for $222.9 million in cash, which was, at the time, subject to a customary adjustment.
The goodwillCompany completed the sale on August 2, 2021 for net proceeds of $65.9$216.3 million, was assigned asafter transaction costs. In connection with the closing of the acquisition date totransaction, the Company’s Tommy Hilfiger International and Calvin Klein International segmentsCompany recorded a pre-tax gain of $118.5 million in the amountsthird quarter of $56.8 million and $9.1 million, respectively,2021, which includerepresented the Company’s reporting units that are expected to benefit from the synergiesexcess of the combination. Goodwill will not be deductible for tax purposes. The other intangible assetsamount of $222.2 million consisted of reacquired perpetual license rights of $204.9 million, which are indefinite lived, order backlog of $0.3 million, which was amortized on a straight-line basisconsideration received over 0.5 years, and customer relationships of $17.0 million, which are being amortized on a straight-line basis over 10.0 years. The Company
is still in the process of finalizing the valuationnet carrying value of the assets, and liabilities assumed; thus, the allocation of the acquisition date fair value is subjectless costs to change.
Acquisition of the Geoffrey Beene Tradename
sell. The Company acquired on April 20, 2018 the Geoffrey Beene tradename from Geoffrey Beene, LLC (“Geoffrey Beene”). Prior to the acquisition, the Company licensed the rights to design, market and distribute Geoffrey Beene dress shirts and neckwear from Geoffrey Beene.
The tradenamegain was acquired for $17.0 million, consisting of $15.9 million paidrecorded in cash, $0.7 million of royalties prepaid to Geoffrey Beene by the Company under the license agreement, and $0.4 million of liabilities assumed by the Company. The transaction was accounted for as an asset acquisition.
Acquisition of the Wholesale and Concessions Businessesother (gain) loss, net in Belgium and Luxembourg
The Company acquired on September 1, 2017 the Tommy Hilfiger and Calvin Klein wholesale and concessions businesses in Belgium and Luxembourg from a former agent (the “Belgian acquisition”). As a result of the Belgian acquisition, the Company now operates directly the Tommy Hilfiger and Calvin Klein businesses in this region.
The acquisition date fair value of the consideration paid was $12.0 million. The estimated fair value of assets acquired and liabilities assumed consisted of $12.4 million of goodwill and $0.4 million of other net liabilities. The goodwill of $12.4 million was assigned as of the acquisition date to the Company’s Tommy Hilfiger InternationalConsolidated Statement of Operations and Calvin Klein International segmentsincluded in the amounts of $11.1 million and $1.3 million, respectively, which are the Company’s reporting units that are expected to benefit from the synergies of the combination. Goodwill is not deductible for tax purposes. The Company finalized the purchase price allocation in 2018.
Acquisition of True & Co.
The Company acquired on March 30, 2017 True & Co., a direct-to-consumer intimate apparel digital-centric retailer. This acquisition enabled the Company to participate further in the fast-growing online channel and provided a platform to increase innovation, data-driven decisions and speed in the way it serves its consumers across its channels of distribution.
The acquisition date fair value of the consideration paid was $28.5 million. The estimated fair value of assets acquired and liabilities assumed consisted of $20.9 million of goodwill and $7.6 million of other net assets (including $7.3 million of deferred tax assets and $0.4 million of cash acquired). The goodwill of $20.9 million was assigned as of the acquisition date to the Company’s Calvin Klein North America, Calvin Klein International and Heritage Brands Wholesale segmentssegment.
In connection with the sale, the employment of certain U.S.-based employees engaged in the Heritage Brands business was terminated in the third quarter of 2021. However, the Company retained the liability for any deferred vested benefits earned by these employees under its retirement plans. No further benefits will be accrued under the plans for these employees and as a result, the Company recognized a gain of $1.8 million in the third quarter of 2021 with a corresponding decrease to its pension benefit obligation. For certain eligible employees affected by the transaction, the Company provided an enhanced retirement benefit and as a result recognized $1.4 million of special termination benefit costs in the third quarter of 2021 with a corresponding increase to its pension benefit obligation. These amounts of $5.4 million, $4.8 million and $10.7 million, respectively, which includewere included in other (gain) loss, net in the Company’s reporting units that are expected to benefit from the synergiesConsolidated Statement of Operations. Please see Note 12, “Retirement and Benefit Plans,” for further discussion.
Sale of the combination. For those reporting units that had not been assigned any of the assets acquired or liabilities assumed in the acquisition, the amount of goodwill assigned was determined by calculating the estimated fair value of such reporting units before and after the acquisition. Goodwill is not deductible for tax purposes. The Company finalized the purchase price allocation in 2017.Speedo North America Business
4. ASSETS HELD FOR SALE
The Company entered into a definitive agreement on January 9, 2020 to sell its Speedo North America business to Pentland, the parent company of theSpeedo International Limited, brand, for $170.0 million in cash, which was, at the time, subject to a working capital adjustment. Speedo International Limited licenses the Speedo trademark to a subsidiary of the Company for perpetual use in North America and the Caribbean. The Company will deconsolidate the net assets of the Speedo business and no longer license the Speedo trademark upon closing of the sale, which is expected to occur in the first quarter of 2020, subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which was received early in the first quarter of 2020.
The Company classified the assets and liabilities of the Speedo North America business as held for sale in the Company’s Consolidated Balance Sheet as of February 2, 2020 and recorded a pre-tax noncash loss of $142.0 million duringin the fourth quarter of 2019 (including a $116.4 million noncash impairment charge related to the Speedo perpetual license right) to reduce the carrying value of the Speedo North America business to its estimated fair value, less costs to sell. The estimated fair value, less costs to sell, reflectsreflected the amount of consideration the Company expectsexpected to receive upon closing of the transaction, inclusive of the working capital adjustment. The loss was recorded
in other noncash(gain) loss, net in the Company’s Consolidated Income Statement. The loss will be remeasuredStatement of Operations and included in connection with the closing of the transaction and will be impacted by changes to the net assets of the Speedo North America business subsequent to February 2, 2020.Heritage Brands Wholesale segment.
The $116.4 million noncash impairment charge related to the Speedo perpetual license right was recorded to write down its carrying value of $203.8 million to a fair value of $87.4 million, which was implied by the expected amount of consideration to be received upon closing of the transaction. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs.
The Speedo transaction was also a triggering event that prompted the need for the Company to perform an interim goodwill impairment test for its Heritage Brands Wholesale reporting unit.unit in the fourth quarter of 2019. No goodwill impairment resulted from this interim test.
The Company completed the sale of its Speedo North America business on April 6, 2020 for net proceeds of $169.1 million and deconsolidated the net assets and liabilitiesof the business.In connection with the closing of the Speedo transaction, the Company recorded a pre-tax noncash loss of $5.9 million in the first quarter of 2020 resulting from the remeasurement of the loss recorded in the fourth quarter of 2019, primarily due to changes to the net assets of the Speedo North America business classified as held for salesubsequent to February 2, 2020, based on the terms of the agreement, including the working capital adjustment. The loss was recorded in other (gain) loss, net in the Company’s Consolidated Balance Sheet asStatement of February 2, 2020 wereOperations and included in the Heritage Brands Wholesale segment and consistedsegment.
Upon the closing of the following:Speedo transaction, U.S.-based employees who were engaged primarily in the Speedo North America business terminated their employment with the Company. However, the Company retained the liability for any deferred vested benefits earned by these employees under its retirement plans. No further benefits are being accrued under the plans and as a result, the Company recognized a gain of $2.8 million in the first quarter of 2020 with a corresponding decrease to its pension benefit obligation. The gain was included in other (gain) loss, net in the Company’s Consolidated Statement of Operations. Please see Note 12, “Retirement and Benefit Plans,” for further discussion.
|
| | | |
(In millions) | |
Assets held for sale: | |
Trade receivables | $ | 48.8 |
|
Inventories, net | 54.3 |
|
Prepaid expenses | 0.6 |
|
Other current assets | 0.6 |
|
Property, plant and equipment, net | 6.1 |
|
Operating lease right-of-use assets | 9.0 |
|
Goodwill | 48.1 |
|
Other intangibles, net (1) | 95.3 |
|
Allowance for reduction of assets held for sale | (25.6 | ) |
Total assets held for sale | $ | 237.2 |
|
| |
Liabilities related to assets held for sale: | |
Accounts payable | $ | 38.7 |
|
Accrued expenses | 5.4 |
|
Current portion of operating lease liabilities | 0.6 |
|
Long-term portion of operating lease liabilities | 10.6 |
|
Other liabilities | 1.8 |
|
Total liabilities related to assets held for sale | $ | 57.1 |
|
(1) Other intangibles, net includes a perpetual license right of $87.4 million and customer relationships of $7.9 million.
5.4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, was as follows:
| | | | | | | | | | | |
(In millions) | 2021 | | 2020 |
Land | $ | 1.0 | | | $ | 1.0 | |
Buildings and building improvements | 30.6 | | | 54.5 | |
Machinery, software and equipment | 981.9 | | | 926.4 | |
Furniture and fixtures | 549.0 | | | 580.2 | |
Shop-in-shops/concession locations | 227.2 | | | 245.6 | |
Leasehold improvements | 765.1 | | | 834.5 | |
Construction in progress | 97.3 | | | 52.1 | |
Property, plant and equipment, gross | 2,652.1 | | | 2,694.3 | |
Less: Accumulated depreciation | (1,746.0) | | | (1,751.6) | |
Property, plant and equipment, net | $ | 906.1 | | | $ | 942.7 | |
|
| | | | | | | |
(In millions) | 2019 | | 2018 |
Land | $ | 1.0 |
| | $ | 1.0 |
|
Buildings and building improvements | 53.2 |
| | 54.8 |
|
Machinery, software and equipment | 871.7 |
| | 697.6 |
|
Furniture and fixtures | 586.0 |
| | 540.0 |
|
Shop-in-shops/concession locations | 209.8 |
| | 230.9 |
|
Leasehold improvements | 849.0 |
| | 790.3 |
|
Construction in progress | 35.5 |
| | 83.9 |
|
Property, plant and equipment, gross | 2,606.2 |
| | 2,398.5 |
|
Less: Accumulated depreciation | (1,579.4 | ) | | (1,414.0 | ) |
Property, plant and equipment, net | $ | 1,026.8 |
| | $ | 984.5 |
|
The increase in Machinery,machinery, software and equipment in 2019 primarily relates to2021 includes software and other equipment that was placed into service in 20192021 in connection with the Company’s multi-year upgrade of its platforms and systems worldwide and enhancements to its systemswarehouse and digital commerce platforms.distribution network. The decrease in leasehold improvements in 2021 primarily relates to
actions taken to reduce the Company’s real estate footprint, including reductions in office space and select store closures, as well as the exit from the Heritage Brands Retail business. Construction in progress at February 2, 2020January 30, 2022 and February 3, 2019January 31, 2021 represents costs incurred for machinery, software and equipment, furniture and fixtures, and leasehold improvements not yet placed in use. Construction in progress at February 2, 2020January 30, 2022 principally related to enhancements to the Company’s warehouse and February 3, 2019distribution network in Europe and North America and investments in new stores and store renovations. Construction in progress at January 31, 2021 principally related to upgrades and enhancements to operating, supply chain and logistics systems. Interest costs capitalized in construction in progress were immaterial during 2019, 20182021, 2020 and 2019.
2017.
6.5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Included in other assets in the Company’s Consolidated Balance Sheets was $176.3$165.3 million as of February 2, 2020January 30, 2022 and $207.1$164.0 million as of February 3, 2019January 31, 2021 related to the following investments in unconsolidated affiliates:
PVH India
The Company held a 50% economic interest in each of the Tommy Hilfiger Arvind Fashion Private Limited (“TH India”) and Calvin Klein Arvind Fashion Private Limited (“CK India”) joint ventures prior to August 15, 2020. These investments were accounted for under the equity method of accounting. TH India and CK India licensed from certain subsidiaries of the Company the rights to the TOMMY HILFIGER and Calvin Klein trademarks, respectively, in India for certain product categories. The Company and Arvind, the Company’s joint venture partner in TH India and CK India, entered into an agreement to merge TH India into CK India, effective August 15, 2020. As a result of the merger, the Company now owns a 50% economic interest in the merged entity, now known as PVH Arvind Fashion Private Limited (“PVH India”), which is being accounted for under the equity method of accounting. There has been no material change to the shareholders’ respective rights or economic interests as a result of the transaction and no consideration was exchanged in the merger. As such, no gain or loss was recorded in connection with the transaction. PVH India licenses from certain Company subsidiaries the rights to the TOMMY HILFIGER and Calvin Klein trademarks in India for certain product categories.
PVH Legwear
The Company and a wholly owned subsidiary of the Company’s former Heritage Brands socks and hosiery licensee formed a joint venture, PVH Legwear LLC (“PVH Legwear”) in 2019, in which the Company owns a 49% economic interest. PVH Legwear was formed in order to consolidate the Company’s socks and hosiery businesses for all Company brands in the United States and Canada. PVH Legwear licenses from certain subsidiaries of the Company the rights to distribute and sell in these countries TOMMY HILFIGER, CALVIN KLEINCalvin Klein, Warner’s and, through the second quarter of 2021, IZOD, and Van Heusen socks and hosiery. Following the Heritage Brands transaction, PVH Legwear now licenses from ABG the rights to distribute and sell in these countries IZODand Warner’sVan Heusen socks and hosiery beginning in December 2019.hosiery. Additionally, PVH Legwear sells socks and hosiery under other owned and licensed trademarks. This investment is being accounted for under the equity method of accounting.
The Company received a $2.0 million dividend from PVH Legwear during 2021.
The Company made payments of $1.6 million and $27.7 million to PVH Legwear during 2020 and 2019, respectively, to contribute its share of the joint venture funding.
Gazal and PVH Australia
Prior to May 31, 2019, theThe Company held an approximately 22% ownership interest in Gazal and a 50% ownership interest in PVH Australia.Australia prior to May 31, 2019. These investments were accounted for under the equity method of accounting until the closing of the Australia acquisition on May 31, 2019, on which date the Company derecognized its equity investments in Gazal and PVH Australia and began to consolidate the operations of Gazal and PVH Australia ininto its financial statements. Please see Note 3, “Acquisitions and Divestitures,” for further discussion.
The Company received aggregate dividends of $6.4 million, $7.6 million and $3.7 million from Gazal and PVH Australia during 2019, 2018, and 2017 respectively.
CK India
2019.
The Company acquired a 51% economic interest in a joint venture, Calvin Klein Arvind Fashion Private Limited (“CK India”) in 2013. The Company sold 1% of its interest for $0.4 million in 2017, decreasing its economic interest in CK India to 50%.
Prior to the sale, the Company was not deemed to hold a controlling interest in CK India as the shareholders agreement provided the partners with equal rights. This investment is being accounted for under the equity method of accounting. CK India licenses from a subsidiary of the Company the rights to the CALVIN KLEIN trademarks in India for certain product categories.
The Company made payments of $1.6 million to CK India during 2017 to contribute its share of the joint venture funding.
TH IndiaBrazil
The Company owns a 50%an economic interest in a joint venture, Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a subsidiary of the Company the rights to the TOMMY HILFIGER trademarksapproximately 41% in India for certain product categories. This investment is being accounted for under the equity method of accounting. Arvind, the Company’s joint venture partner in PVH Ethiopia and CK India, is also the Company’s joint venture partner in TH India.
The Company made payments of $2.7 million to TH India during 2017 to contribute its share of the joint venture funding.
TH Brazil
The Company acquired a 40% economic interest in a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”) in 2012. The Company acquired an approximately 1% additional interest for $0.3 million in 2017, increasing its economic interest in TH Brazil to approximately 41%. TH Brazil licenses from a subsidiary of the Company the rights to the TOMMY HILFIGER trademarks in Brazil for certain product categories. This investment is being accounted for under the equity method of accounting.
The Company made payments of $2.5 million to TH Brazil during 2017 to contribute its share of the joint venture funding.
The Company issued a note receivable to TH Brazil in 2016 for $12.5 million, of which $6.2 million was repaid in 2016 and the remaining balance, including accrued interest, was repaid in 2017.
PVH Mexico
The Company and Grupo Axo, S.A.P.I. de C.V. formed a joint venture (“PVH Mexico”) in 2016 in which the Company owns a 49% economic interest. PVH Mexico licenses from certain subsidiaries of the Company the rights to distribute and sell certain TOMMY HILFIGER, CALVIN KLEINCalvin Klein, Warner’s,and Olga and Speedo brand products in Mexico. Mexico. Additionally, PVH Mexico licenses certain other trademarks for some product categories. This investment is being accounted for under the equity method of accounting.
The Company received dividends of $16.8 million and $7.2 million from PVH Mexico during 2019.2021 and 2019, respectively.
Karl Lagerfeld
The Company owns an economic interest of approximately 8% in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”). The Company is deemed to have significant influence with respect to this investment which is being accountedand had been accounting for this investment under the equity method of accounting.accounting prior to the first quarter of 2020. The Company determined during the first quarter of 2020 that recent and projected business results for Karl Lagerfeld, which included an adverse impact of the COVID-19 pandemic, was an indicator of an other-than-temporary impairment with respect to the Company’s investment in Karl Lagerfeld. The Company calculated the fair value of its investment using future operating cash flow projections that were discounted at a rate of 10.9%, which accounted for the relative risks of the estimated future cash flows. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs. The Company determined the fair value of its investment was lower than its carrying amount as of May 3, 2020, and as a result recorded a noncash other-than-temporary impairment of $12.3 million during the first quarter of 2020 to fully impair the investment. The impairment was included in equity in net income (loss) of unconsolidated affiliates in the Company’s Consolidated Statement of Operations. The Company recorded the impairment charge in corporate expenses not allocated to any reportable segments, consistent with how it had historically recorded its proportionate share of the net income or loss of its investment in Karl Lagerfeld, and discontinued applying the equity method of accounting to this investment. The Company resumed the equity method of accounting for its investment in Karl Lagerfeld in the fourth quarter of 2021, as its share of net income from this investment exceeded its share of losses that were not recognized during the period the equity method was discontinued.
7.6. REDEEMABLE NON-CONTROLLING INTEREST
The Company and Arvind formed PVH Ethiopia in which the Company owns a 75% interest, during 2016. The Company consolidates PVH Ethiopia in its consolidated financial statements. PVH Ethiopia was formed2016 to operate a manufacturing facility that producesproduced finished products for the Company for distribution primarily in the United States. The manufacturing facility began operationsCompany and Arvind held initial economic interests of 75% and 25%, respectively, in 2017.
The shareholders agreement governing PVH Ethiopia, (the “Shareholders Agreement”) containswith Arvind’s 25% interest accounted for as a put option under whichredeemable non-controlling interest (“RNCI”). The Company consolidated PVH Ethiopia in its consolidated financial statements. The Company and Arvind can requireamended, effective May 31, 2021, the capital structure of PVH Ethiopia and as a result, the Company to purchasesolely managed and effectively owned all of its shareseconomic interests in the joint venture during various future periods as specifiedventure. The Company closed in the Shareholders Agreement.fourth quarter of 2021 the manufacturing facility that was the joint venture’s sole operation. The first such period immediately precedes the ninth anniversary of PVH Ethiopia’s date of incorporation. The Shareholders Agreement also contains call options under which the Company can require Arvind to sell to the Company (i) all orclosure did not have a portion of its shares during various future periods as specified in the Shareholders Agreement; (ii) all of its shares in the event of a change of control of Arvind; or (iii) all of its shares in the event that Arvind ceases to hold at least 10% of the outstanding shares. The Company’s first call option referred to in clause (i) immediately follows the fifth anniversary of the date of incorporation of PVH Ethiopia. The put and call prices are the fair market value of the sharesmaterial impact on the redemption date based upon a multiple of PVH Ethiopia’s EBITDA for the prior 12 months, less PVH Ethiopia’s net debt.Company’s consolidated financial statements.
The fair value of the redeemable non-controlling interest (“RNCI”)RNCI as of the date of formation of PVH Ethiopia was $0.1 million. The carrying amount of the RNCI isprior to May 31, 2021 was adjusted to equal the redemption amount at the end of each reporting period, provided that this amount at the end of each reporting period cannotcould not be lower than the initial fair value adjusted for the minority shareholder’s share of net income or loss. Any adjustment to the redemption amount of the RNCI, is determined after attribution of net income or loss of the RNCI, and will bewould have been recognized immediately in retained earnings of the Company, since it iswas probable that the RNCI willwould become redeemable in the future based on the passage of time. There was no adjustment to the redemption amount of the RNCI as of May 31, 2021.
The carrying amount of the RNCI as of February 2, 2020January 31, 2021 was $(2.0) million, which is greater than$(3.4) million. In connection with the redemption amount. Theamendment of the capital structure of PVH Ethiopia, the Company reclassified the carrying amount decreased from $0.2 millionof the RNCI as of February 3, 2019 as a resultMay 31, 2021 of a$(3.7) million to additional paid-in capital. Following this reclassification, the Company no longer attributed any net income or loss attributablein PVH Ethiopia to the RNCI for 2019 of $2.2 million.redeemable non-controlling interest.
8.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment (please see Note 21,20, “Segment Data,” for further discussion of the Company’s reportable segments), were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Calvin Klein North America | | Calvin Klein International | | Tommy Hilfiger North America | | Tommy Hilfiger International | | Heritage Brands Wholesale | | Heritage Brands Retail | | Total |
Balance as of February 2, 2020 | | | | | | | | | | | | | |
Goodwill, gross | $ | 780.4 | | | $ | 896.1 | | | $ | 204.4 | | | $ | 1,598.3 | | | $ | 198.4 | | | $ | 11.9 | | | $ | 3,689.5 | |
Accumulated impairment losses | — | | | — | | | — | | | — | | | — | | | (11.9) | | | (11.9) | |
Goodwill, net | 780.4 | | | 896.1 | | | 204.4 | | | 1,598.3 | | | 198.4 | | | — | | | 3,677.6 | |
Impairment | (287.3) | | | (394.0) | | | — | | | — | | | (197.7) | | | — | | | (879.0) | |
Currency translation and other | 1.4 | | | 6.7 | | | (1.4) | | | 149.7 | | | (0.7) | | | — | | | 155.7 | |
Balance as of January 31, 2021 | | | | | | | | | | | | | |
Goodwill, gross | 781.8 | | | 902.8 | | | 203.0 | | | 1,748.0 | | | 197.7 | | | 11.9 | | | 3,845.2 | |
Accumulated impairment losses | (287.3) | | | (394.0) | | | — | | | — | | | (197.7) | | | (11.9) | | | (890.9) | |
Goodwill, net | 494.5 | | | 508.8 | | | 203.0 | | | 1,748.0 | | | — | | | — | | | 2,954.3 | |
Reduction of goodwill, gross related to the exit from the Heritage Brands Retail business | — | | | — | | | — | | | — | | | — | | | (11.9) | | | (11.9) | |
Reduction of accumulated impairment losses related to the exit from the Heritage Brands Retail business | — | | | — | | | — | | | — | | | — | | | 11.9 | | | 11.9 | |
Reduction of goodwill, gross related to the Heritage Brands transaction | — | | | — | | | — | | | — | | | (92.7) | | | — | | | (92.7) | |
Reduction of accumulated impairment losses related to the Heritage Brands transaction | — | | | — | | | — | | | — | | | 92.7 | | | — | | | 92.7 | |
| | | | | | | | | | | | | |
Currency translation and other | — | | | (11.3) | | | — | | | (114.1) | | | — | | | — | | | (125.4) | |
Balance as of January 30, 2022 | | | | | | | | | | | | | |
Goodwill, gross | 781.8 | | | 891.5 | | | 203.0 | | | 1,633.9 | | | 105.0 | | | — | | | 3,615.2 | |
Accumulated impairment losses | (287.3) | | | (394.0) | | | — | | | — | | | (105.0) | | | — | | | (786.3) | |
Goodwill, net | $ | 494.5 | | | $ | 497.5 | | | $ | 203.0 | | | $ | 1,633.9 | | | $ | — | | | $ | — | | | $ | 2,828.9 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Calvin Klein North America | | Calvin Klein International | | Tommy Hilfiger North America | | Tommy Hilfiger International | | Heritage Brands Wholesale | | Heritage Brands Retail | | Total |
Balance as of February 4, 2018 | | | | | | | | | | | | | |
Goodwill, gross | $ | 780.2 |
| | $ | 942.0 |
| | $ | 204.4 |
| | $ | 1,661.6 |
| | $ | 246.5 |
| | $ | 11.9 |
| | $ | 3,846.6 |
|
Accumulated impairment losses | — |
| | — |
| | — |
| | — |
| | — |
| | (11.9 | ) | | (11.9 | ) |
Goodwill, net | 780.2 |
| | 942.0 |
| | 204.4 |
| | 1,661.6 |
| | 246.5 |
| | — |
| | 3,834.7 |
|
Contingent purchase price payments to Mr. Calvin Klein | 1.0 |
| | 0.7 |
| | — |
| | — |
| | — |
| | — |
| | 1.7 |
|
Currency translation | (0.9 | ) | | (33.2 | ) | | — |
| | (131.8 | ) | | — |
| | — |
| | (165.9 | ) |
Balance as of February 3, 2019 | | | | | | | | | | | | | |
Goodwill, gross | 780.3 |
| | 909.5 |
| | 204.4 |
| | 1,529.8 |
| | 246.5 |
| | 11.9 |
| | 3,682.4 |
|
Accumulated impairment losses | — |
| | — |
| | — |
| | — |
| | — |
| | (11.9 | ) | | (11.9 | ) |
Goodwill, net | 780.3 |
| | 909.5 |
| | 204.4 |
| | 1,529.8 |
| | 246.5 |
| | — |
| | 3,670.5 |
|
Australia acquisition | — |
| | 9.1 |
| | — |
| | 56.8 |
| | — |
| | — |
| | 65.9 |
|
TH CSAP acquisition | — |
| | — |
| | — |
| | 63.9 |
| | — |
| | — |
| | 63.9 |
|
Reclassification of goodwill to assets held for sale | — |
| | — |
| | — |
| | — |
| | (48.1 | ) | | — |
| | (48.1 | ) |
Currency translation | 0.1 |
| | (22.5 | ) | | — |
| | (52.2 | ) | | — |
| | — |
| | (74.6 | ) |
Balance as of February 2, 2020 | | | | | | | | | | | | | |
Goodwill, gross | 780.4 |
| | 896.1 |
| | 204.4 |
| | 1,598.3 |
| | 198.4 |
| | 11.9 |
| | 3,689.5 |
|
Accumulated impairment losses | — |
| | — |
| | — |
| | — |
| | — |
| | (11.9 | ) | | (11.9 | ) |
Goodwill, net | $ | 780.4 |
| | $ | 896.1 |
| | $ | 204.4 |
| | $ | 1,598.3 |
| | $ | 198.4 |
| | $ | — |
| | $ | 3,677.6 |
|
The goodwill acquired in the Australia and TH CSAP acquisitions was assigned as of the respective acquisition dates to the Company’s reporting units that are expected to benefit from the synergies of the combinations.
The Company reclassified $48.1recorded an $11.9 million ofreduction to goodwill, gross and a corresponding $11.9 million reduction to assets held for sale in the Company’s Consolidated Balance Sheet as of February 2, 2020accumulated impairment losses in connection with the Speedo transaction.exit from the Heritage Brands Retail business in 2021. As a result of the exit from the business, the Company’s Heritage Brands Retail segment has ceased operations. Please see Note 4, “Assets Held For Sale,17, “Exit Activity Costs,” for further discussion.
The Company was requiredrecorded a $92.7 million reduction to make contingent purchase price paymentsgoodwill, gross and a corresponding $92.7 million reduction to Mr. Calvin Kleinaccumulated impairment losses during 2021 in connection with the Company’s acquisition of allHeritage Brands transaction. The Company had recorded the accumulated impairment losses as a result of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies. Such payments were based on 1.15% of total worldwide net sales (as definedinterim goodwill impairment test performed in the acquisition agreement, as amended),first quarter of products bearing any2020 discussed below. Please see Note 3, “Acquisitions and Divestitures,” for further discussion of the Heritage Brands transaction.
CALVIN KLEIN brands and were required to be made with respect to sales made through February 12, 2018. AThe Company determined in the first quarter of 2020 that the significant portionadverse impact of the salesCOVID-19 pandemic on which the payments to Mr. Klein were made were wholesale sales byCompany’s business, including an unprecedented material decline in revenue and earnings and an extended decline in the Company’s stock price and associated market capitalization, was a triggering event that required the Company to perform a quantitative interim goodwill impairment test. As a result of the interim test performed, the Company recorded $879.0 million of noncash impairment charges in the first quarter of 2020. Please see the section “Goodwill and its licensees and other partners to retailers. All payments due to Mr. Klein under the agreement have been made.Other Intangible Assets Impairment Testing” below for further discussion.
The Company’s other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(In millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Intangible assets subject to amortization: | | | | | | | | | | | |
Customer relationships (1) | $ | 286.0 | | | $ | (232.3) | | | $ | 53.7 | | | $ | 301.7 | | | $ | (222.4) | | | $ | 79.3 | |
| | | | | | | | | | | |
Reacquired license rights | 506.1 | | | (193.1) | | | 313.0 | | | 511.2 | | | (181.0) | | | 330.2 | |
Total intangible assets subject to amortization | 792.1 | | | (425.4) | | | 366.7 | | | 812.9 | | | (403.4) | | | 409.5 | |
| | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | |
Tradenames (2)(3) | 2,722.9 | | | — | | | 2,722.9 | | | 2,869.7 | | | — | | | 2,869.7 | |
| | | | | | | | | | | |
Reacquired perpetual license rights | 217.4 | | | — | | | 217.4 | | | 239.0 | | | — | | | 239.0 | |
Total indefinite-lived intangible assets | 2,940.3 | | | — | | | 2,940.3 | | | 3,108.7 | | | — | | | 3,108.7 | |
Total other intangible assets | $ | 3,732.4 | | | $ | (425.4) | | | $ | 3,307.0 | | | $ | 3,921.6 | | | $ | (403.4) | | | $ | 3,518.2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(In millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Intangible assets subject to amortization: | | | | | | | | | | | |
Customer relationships (1)(2) | $ | 289.9 |
| | $ | (189.2 | ) | | $ | 100.7 |
| | $ | 307.4 |
| | $ | (186.1 | ) | | $ | 121.3 |
|
Reacquired license rights | 502.5 |
| | (161.9 | ) | | 340.6 |
| | 523.8 |
| | (154.4 | ) | | 369.4 |
|
Total intangible assets subject to amortization | 792.4 |
| | (351.1 | ) | | 441.3 |
| | 831.2 |
| | (340.5 | ) | | 490.7 |
|
| | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | |
Tradenames | 2,830.2 |
| | — |
| | 2,830.2 |
| | 2,863.7 |
| | — |
| | 2,863.7 |
|
Perpetual license right (2) | — |
| | — |
| | — |
| | 203.8 |
| | — |
| | 203.8 |
|
Reacquired perpetual license rights (1) | 209.2 |
| | — |
| | 209.2 |
| | 11.0 |
| | — |
| | 11.0 |
|
Total indefinite-lived intangible assets | 3,039.4 |
| | — |
| | 3,039.4 |
| | 3,078.5 |
| | — |
| | 3,078.5 |
|
Total other intangible assets | $ | 3,831.8 |
| | $ | (351.1 | ) | | $ | 3,480.7 |
| | $ | 3,909.7 |
| | $ | (340.5 | ) | | $ | 3,569.2 |
|
The gross carrying amount and accumulated amortization of certain intangible assets include the impact of changes in foreign currency exchange rates.
(1) The balance at January 31, 2021 reflects $7.3 million of noncash impairment charges recorded in the first quarter of 2020 to write down certain finite-lived intangible assets to a fair value of zero. Please see the section “Goodwill and Other Intangible Assets Impairment Testing” below for further discussion.
(2) The balance at January 31, 2021 reflects $47.2 million of noncash impairment charges recorded in the first quarter of 2020 to write down the then-owned ARROW and Geoffrey Beene tradenames. Please see the section “Goodwill and Other Intangible Assets Impairment Testing” below for further discussion.
(3) The change from February 3, 2019January 31, 2021 to February 2, 2020January 30, 2022 included intangible assets recordeda $66.9 million reduction to tradenames in connection with the Australia acquisition. The intangible assets as of the acquisition date included reacquired perpetual license rights of $204.9 million, which are indefinite-lived, and customer relationships of $17.0 million, which are being amortized on a straight-line basis over 10.0 years, both of which were subject to exchange rate fluctuations after the acquisition date.
(2)Heritage Brands transaction. The change from February 3, 2019 to February 2, 2020 included the intangible assets of the Company’s Speedo North America business, consisting of customer relationships of $7.9 million and a perpetual license right of $203.8 million. The Company recorded a $116.4 million noncash impairment charge related to the Speedo perpetual license right in the fourth quarter of 2019 in connection with the Speedo transaction. The remaining perpetual license right of $87.4 million and the customer relationships of $7.9 million were reclassified to assets held for sale in the Company’s Consolidated Balance Sheet as of February 2, 2020. Please see Note 4, “Assets Held For Sale,3, “Acquisitions and Divestitures,” for further discussion.discussion of the Heritage Brands transaction.
Amortization expense related to the Company’s intangible assets subject to amortization was $39.7$34.2 million and $62.8$34.3 million for 20192021 and 2018,2020, respectively. The decrease is primarily related to the reacquired license rights recorded in connection with the acquisition of the 55% ownership interests in the Company’s former joint venture for
TOMMY HILFIGER in China that it did not already own (the “TH China acquisition”), which became fully amortized in 2018.
Assuming constant foreign currency exchange rates and no change in the gross carrying amount of the intangible assets, amortization expense for the next five years related to the Company’s intangible assets subject to amortization as of February 2, 2020January 30, 2022 is expected to be as follows:
| | | | | | | | |
(In millions) | | |
Fiscal Year | | Amount |
2022 | | $ | 33.3 | |
2023 | | 24.1 | |
2024 | | 23.8 | |
2025 | | 17.8 | |
2026 | | 14.7 | |
|
| | | | |
(In millions) | | |
Fiscal Year | | Amount |
2020 | | $ | 36.8 |
|
2021 | | 36.6 |
|
2022 | | 34.3 |
|
2023 | | 24.0 |
|
2024 | | 23.6 |
|
Goodwill and Other Intangible Assets Impairment Testing
9.The Company assesses the recoverability of goodwill and other indefinite-lived intangible assets annually, at the beginning of the third quarter of each fiscal year, and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Please see Note 1, “Summary of Significant Accounting Policies,” for discussion of the Company’s goodwill and intangible assets impairment testing process.
Goodwill Impairment Testing
2021 Annual Impairment Test
For the 2021 annual goodwill impairment test performed as of the beginning of the third quarter of 2021, the Company elected to perform a qualitative assessment first to determine whether it was more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount.
The Company assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and reporting unit-specific factors. In performing this assessment, the Company considered the results of its quantitative interim goodwill impairment test performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) the weighted average cost of capital for each reporting unit as of the beginning of the third quarter of 2021, which was either favorable to or consistent with the weighted average cost of capital used in the Company’s 2020 interim test, (ii) a favorable change in the Company’s market capitalization and its implied impact on the fair value of the Company’s reporting units subsequent to the 2020 interim test, and (iii) the Company’s recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in the Company’s 2020 interim test.
After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from the Company’s annual impairment test in 2021.
There have been no significant events or change in circumstances since the date of the 2021 annual impairment test that would indicate the remaining carrying amount of the Company’s goodwill may be impaired as of January 30, 2022. There is continued uncertainty about the impacts of the COVID-19 pandemic and the supply chain and logistics disruptions globally on the Company’s business. If economic conditions caused by the pandemic do not recover as currently estimated by management, or market factors utilized in the impairment analysis deteriorate, the Company could incur additional goodwill impairment charges in the future.
2020 Annual Impairment Test
For the 2020 annual goodwill impairment test performed as of the beginning of the third quarter of 2020, the Company elected to perform a qualitative assessment first to determine whether it was more likely than not that the fair value of each reporting unit with allocated goodwill was less than the carrying amount.
The Company assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and reporting unit-specific factors. In performing this assessment, the Company considered the results of its quantitative interim goodwill impairment test performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) favorable changes in the weighted average cost of capital subsequent to the 2020 interim test, (ii) a favorable change in the Company’s market capitalization and its implied impact on the fair value of the Company’s reporting units subsequent to the 2020 interim test, and (iii)the Company’s recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in the Company’s 2020 interim goodwill impairment test.
After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of each reporting unit with allocated goodwill was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from the Company’s annual impairment test in 2020.
2020 Interim Impairment Test
The Company determined in the first quarter of 2020 that the significant adverse impact of the COVID-19 pandemic on the Company’s business, including an unprecedented material decline in revenue and earnings and an extended decline in the Company’s stock price and associated market capitalization, was a triggering event that required the Company to perform a quantitative interim goodwill impairment test. As a result of the interim test performed, the Company recorded $879.0 million of noncash impairment charges in the first quarter of 2020, which were included in goodwill and other intangible asset impairments in the Company’s Consolidated Statement of Operations and allocated to the Company’s segments as follows: $197.7 million in the Heritage Brands Wholesale segment, $287.3 million in the Calvin Klein North America segment, and $394.0 million in the Calvin Klein International segment.
Of these reporting units, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International were determined to be partially impaired. The remaining carrying amount of goodwill allocated to these reporting units as of the date of the interim test was $162.3 million, $143.4 million and $346.9 million, respectively. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate assumptions for these businesses would have resulted in a change to the estimated fair value of the reporting units of approximately $80 million, $20 million and $140 million, respectively. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the reporting units of approximately $60 million, $15 million and $125 million, respectively. While these reporting units were not determined to be fully impaired in the first quarter of 2020, at the time they were considered to be at risk of further impairment in the future if the related businesses did not perform as projected or if market factors utilized in the impairment analysis deteriorated. However, as discussed in the 2021 annual impairment test section above (i) the weighted average cost of capital for each of the Company’s reporting units has either improved or remained consistent with the weighted average cost of capital used in the 2020 interim test and (ii) the Company’s recent financial performance and updated financial forecasts have been consistent with or exceeded the projections used in the 2020 interim test.
With respect to the Company’s other reporting units that were not determined to be impaired, the Tommy Hilfiger International reporting unit had an estimated fair value that exceeded its carrying amount, as of the date of the interim test, of $2,948.5 million by 5%. The carrying amount of goodwill allocated to this reporting unit as of the date of the interim test was $1,557.5 million. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate of the Tommy Hilfiger International business would have resulted in a change to the estimated fair value of the reporting unit of approximately $355 million. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the reporting unit of approximately $320 million. While the Tommy Hilfiger International reporting unit was not determined to be impaired in the first quarter of 2020, at the time it was considered to be at risk of future impairment if the related business did not perform as projected or if market factors utilized in the impairment analysis deteriorated. However, as discussed in the 2021 annual impairment test section above (i) the weighted average cost of capital for each of the Company’s reporting units has either improved or remained consistent with the weighted average cost of capital used in the 2020 interim test and (ii) the Company’s recent financial performance and updated financial forecasts have been consistent with or exceeded the projections used in the 2020 interim test.
The fair value of the reporting units for goodwill impairment testing was determined using an income approach and validated using a market approach. The income approach was based on discounted projected future (debt-free) cash flows for each reporting unit. The discount rates applied to these cash flows were based on the weighted average cost of capital for each reporting unit, which takes market participant assumptions into consideration. Estimated future operating cash flows used in the interim test were discounted at rates of 10.0%, 10.5% or 11.0%, depending on the reporting unit, to account for the relative risks of the estimated future cash flows. For the market approach, used to validate the results of the income approach method, the Company used both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenue and EBITDA for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue and EBITDA data from target companies deemed similar to the reporting unit. The Company classified the fair values of its reporting units as Level 3 fair value measurements due to the use of significant unobservable inputs.
2019 Interim Impairment Test
In the fourth quarter of 2019, the Speedo transaction was a triggering event that indicated that the amount of goodwill allocated to the Heritage Brands Wholesale reporting unit, the reporting unit that included the Speedo North America business,
could be impaired, prompting the need for the Company to perform an interim goodwill impairment test for this reporting unit. No goodwill impairment resulted from this interim test in 2019.
2019 Annual Impairment Test
For the 2019 annual goodwill impairment test performed as of the beginning of the third quarter of 2019, the Company elected to bypass the qualitative assessment for all reporting units and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate the fair value of its reporting units. The Company’s annual goodwill impairment test during 2019 yielded estimated fair values in excess of the carrying amounts for all of the Company’s reporting units and therefore the second step of the quantitative goodwill impairment test (under previous accounting guidance in place at the time the test was performed) was not required. The reporting unit with the least excess fair value had an estimated fair value that exceeded its carrying amount by 15%. No impairment of goodwill resulted from the Company’s annual impairment test in 2019.
Indefinite- Lived Intangible Assets Impairment Testing
2021 Annual Impairment Test
For the 2021 annual indefinite-lived intangible assets impairment test performed as of the beginning of the third quarter of 2021, the Company elected to assess qualitative factors first to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount.
The Company assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors. In performing this assessment, the Company considered the results of its interim impairment testing performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) the weighted average cost of capital for each of its indefinite-lived intangible assets as of the beginning of the third quarter of 2021, which was either favorable to or consistent with the weighted average cost of capital used in the Company’s 2020 interim test and (ii) the Company’s recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in the Company’s 2020 interim test.
After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of its indefinite-lived intangible assets were less than their carrying amounts and concluded that a quantitative impairment test was not required. No impairment of indefinite-lived intangible assets resulted from the Company’s annual impairment test in 2021.
There have been no significant events or change in circumstances since the date of the annual impairment test that would indicate the remaining carrying amount of the Company’s indefinite-lived intangible assets may be impaired as of January 30, 2022. There is continued uncertainty about the impacts of the COVID-19 pandemic and the supply chain and logistics disruptions globally on the Company’s business. If economic conditions caused by the pandemic do not recover as currently estimated by management, or market factors utilized in the impairment analysis deteriorate, the Company could incur additional indefinite-lived intangible asset impairment charges in the future.
2020 Annual Impairment Test
For the 2020 annual indefinite-lived intangible assets impairment test performed as of the beginning of the third quarter of 2020, the Company elected to assess qualitative factors first to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount.
The Company assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors. In performing this assessment, the Company considered the results of its interim impairment testing performed in the first quarter of 2020, discussed below in further detail, and the impact of (i) favorable changes in the weighted average cost of capital subsequent to the interim test and (ii) the Company’s recent financial performance and updated financial forecasts, which were consistent with or exceeded the projections used in the Company’s 2020 interim test.
After assessing these events and circumstances, the Company determined that it was not more likely than not that the fair value of its indefinite-lived intangible assets were less than their carrying amounts and concluded that a quantitative impairment
test was not required. No impairment of indefinite-lived intangible assets resulted from the Company’s annual impairment test in 2020.
2020 Interim Impairment Test
The Company determined in the first quarter of 2020 that the impact of the COVID-19 pandemic on its business was a triggering event that prompted the need to perform interim impairment testing of its indefinite-lived intangible assets. For the TOMMY HILFIGER, Calvin Klein, Warner’s and Olga tradenames, our then-owned Van Heusen tradename and the reacquired perpetual license rights for TOMMY HILFIGER in India, the Company elected to first assess qualitative factors to determine whether it was more likely than not that the fair value of any asset was less than its carrying amount. For these assets, no impairment was identified as a result of the Company’s prior annual indefinite-lived intangible asset impairment test in 2019 and the fair values of these indefinite-lived intangible assets substantially exceeded their carrying amounts. The asset with the least excess fair value had an estimated fair value that exceeded its carrying amount by approximately 85% as of the date of the Company’s 2019 annual test. Considering this and other factors, the Company determined qualitatively that it was not more likely than not that the fair values of these indefinite-lived intangible assets were less than their carrying amounts and concluded that the quantitative impairment test in the first quarter of 2020 was not required.
For the then-owned ARROW and Geoffrey Beene tradenames and the reacquired perpetual license rights recorded in connection with the Australia acquisition, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test. As a result of this quantitative interim impairment testing, the Company recorded $47.2 million of noncash impairment charges in the first quarter of 2020 to write down the two tradenames. This included $35.6 million to write down the ARROW tradename, which had a carrying amount as of the date of the interim test of $78.9 million, to a fair value of $43.3 million, and $11.6 million to write down the Geoffrey Beene tradename, which had a carrying amount of $17.0 million, to a fair value of $5.4 million. The $47.2 million of impairment charges recorded in the first quarter of 2020 was included in goodwill and other intangible asset impairments in the Company’s Consolidated Statement of Operations and allocated to the Company’s Heritage Brands Wholesale segment. Holding all other assumptions used in the interim test constant, a 100 basis point change in the annual revenue growth rate of the Arrowbusiness would have resulted in a change to the estimated fair value of the tradename of approximately $5 million. Likewise, a 100 basis point change in the weighted average cost of capital would have resulted in a change to the estimated fair value of the ARROW tradename of approximately $5 million. Holding all other assumptions used in the interim test constant, a 100 basis point change to the annual revenue growth rate or weighted average cost of capital in the Geoffrey Beenebusiness would have resulted in an immaterial change to the estimated fair value of the Geoffrey Beene tradename. The Van Heusen, ARROW and Geoffrey Beene tradenames were subsequently sold in the third quarter of 2021 in connection with the Heritage Brands transaction. Please see Note 3, “Acquisitions and Divestitures,” for further discussion of the Heritage Brands transaction.
With regard to the reacquired perpetual license rights recorded in connection with the Australia acquisition, the Company determined in the first quarter of 2020 that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired.
The fair value of the ARROW and Geoffrey Beene tradenames was determined using an income-based relief-from-royalty method. Under this method, the value of an asset is estimated based on the hypothetical cost savings that accrue as a result of not having to license the tradename from another party. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. The Company discounted the cash flows used to value the ARROW and Geoffrey Beene tradenames at a rate of 10.0%. The fair value of the Company’s reacquired perpetual license rights recorded in connection with the Australia acquisition was determined using an income approach, which estimates the net cash flows directly attributable to the subject intangible asset. These cash flows are discounted to present value using a discount rate that factors in the relative risk of the intangible asset. The Company discounted the cash flows used to value the reacquired perpetual license rights recorded in connection with the Australia acquisition at a rate of 10.0%. The Company classified the fair values of these indefinite-lived intangible assets as Level 3 fair value measurements due to the use of significant unobservable inputs.
2019 Interim Impairment Test
In the fourth quarter of 2019, the Speedo transaction was a triggering event that prompted the need for the Company to perform an interim impairment test of the then-owned Speedo perpetual license right. As a result of this interim test, the perpetual license right was determined to be impaired and an impairment charge of $116.4 million was recorded to other (gain) loss, net in the Company’s Consolidated Statement of Operations. Please see Note 3, “Acquisitions and Divestitures,” for further discussion of the Speedo transaction.
2019 Annual Impairment Test
For the 2019 annual impairment test of all indefinite-lived intangible assets performed as of the beginning of the third quarter of 2019, except for the Australia reacquired perpetual license rights, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate fair value. For the Australia reacquired perpetual license rights, since only a few months had passed since the acquisition on May 31, 2019 and the business had performed better than initially expected, the Company determined qualitatively that it was not more likely than not that the fair value of these reacquired perpetual license rights were less than the carrying amount and concluded that the quantitative impairment test was not required. The fair values of all of the Company’s indefinite-lived intangible assets substantially exceeded their carrying amounts, with the exception of the Company’s then-owned Speedo perpetual license right, which had a fair value that exceeded its carrying amount by 3% at the testing date.
Finite-Lived Intangible Assets Impairment
The Company determined in the first quarter of 2020 that the impact of the pandemic on its business was also a triggering event that prompted the need to perform an impairment test of its finite-lived intangible assets. As a result of the test performed, the Company recorded $7.3 million of noncash impairment charges in the first quarter of 2020 to write down certain finite-lived customer relationship intangible assets to a fair value of zero. These impairments were included in goodwill and other intangible asset impairments in the Company’s Consolidated Statement of Operations and allocated to the Company’s segments as follows: $4.7 million in the Heritage Brands Wholesale segment and $2.6 million in the Calvin Klein North America segment.
There have been no significant events or change in circumstances since the first quarter of 2020 that would indicate the remaining carrying amount of the Company’s finite-lived intangible assets may be impaired as of January 30, 2022. There is continued uncertainty about the impacts of the COVID-19 pandemic and the supply chain and logistics disruptions globally on the Company’s business. If economic conditions caused by the pandemic do not recover as currently estimated by management, the Company could incur additional finite-lived intangible asset impairment charges in the future.
8. DEBT
Short-Term Borrowings
The Company has the ability to draw revolving borrowings under itsthe senior unsecured credit facilities as discussed below in the section entitled “2019 Senior Unsecured Credit Facilities” below.Facilities.” The Company had no borrowings outstanding under these facilities as of February 2, 2020. January 30, 2022 and January 31, 2021.
The maximum amount ofCompany also has the ability to draw revolving borrowings outstanding under these facilities during 2019 was $378.4 million. The Company had $7.8 million outstanding under its prior senior secured364-day unsecured revolving credit facilities as of February 3, 2019 asfacility discussed below in the section entitled “2016 Senior Secured“2021 Unsecured Revolving Credit Facilities” below.Facility.” The weighted average interest rate on the funds borrowed as of February 3, 2019 was 4.45%.Company had no borrowings outstanding under this facility during 2021.
Additionally, the Company has the availabilityability to borrow under short-term lines of credit, overdraft facilities and short-term revolving credit facilities denominated in various foreign currencies. These facilities which now include a facility in Australia as a result of the Australia acquisition, provided for borrowings of up to $132.0$207.2 million based on exchange rates in effect on February 2, 2020January 30, 2022 and are utilized primarily to fund working capital needs. The Company had $49.6 million and $5.1$10.8 million outstanding under these facilities as of February 2, 2020January 30, 2022 and February 3, 2019, respectively. The $49.6 million ofno borrowings outstanding under these facilities as of February 2, 2020 included borrowings under the facility in Australia.January 31, 2021. The weighted average interest rate on funds borrowed as of February 2, 2020 and February 3, 2019January 30, 2022 was 2.56% and 0.21%, respectively.0.17%. The maximum amount of borrowings outstanding under these facilities during 20192021 was $99.5$40.8 million.
Commercial Paper
The Company established on November 5, 2019 an unsecured commercial paper note program inhas the United States primarily to fund working capital needs. The program enables the Companyability to issue, from time to time, unsecured commercial paper notes with maturities that vary but do not exceed 397 days from the date of issuance.issuance primarily to fund working capital needs. The Company had no borrowings outstanding under the commercial paper note program during 2021. The Company had no borrowings outstanding under the commercial paper note program as of February 2, 2020. The maximum amount of borrowings outstanding under the program during 2019 was $370.0 million.January 31, 2021.
The commercial paper note program allows for borrowings of up to $675.0 million to the extent that the Company has borrowing capacity under itsthe United States dollar-denominated revolving credit facility as discussedincluded in the section entitled “2019 Senior Unsecured Credit Facilities” below.2019 facilities (as defined below). Accordingly, the combined aggregate amount of (i) borrowings outstanding under the commercial paper note
program and (ii) the revolving borrowings outstanding under the United States dollar-denominated revolving credit facility at any one time cannot exceed $675.0 million.
2021 Unsecured Revolving Credit Facility
On April 28, 2021, the Company replaced its 364-day $275.0 million United States dollar-denominated unsecured revolving credit facility, which matured on April 7, 2021 (the “2020 facility”), with a new 364-day $275.0 million United States dollar-denominated unsecured revolving credit facility (the “2021 facility”). The maximum aggregate amount2021 facility will mature on April 27, 2022. The Company paid $0.8 million and $2.0 million of debt issuance costs in connection with the 2021 facility and 2020 facility, respectively, which are amortized over the term of the respective debt agreements. The Company had no borrowings outstanding under these facilities during 2021 and 2020.
Currently, the commercial paper programCompany’s obligations under the 2021 facility are unsecured and are not guaranteed by any of the Company’s subsidiaries. However, within 120 days after the occurrence of a specified credit ratings decrease (as set forth in the 2021 facility), (i) the Company must cause each of its wholly owned United States subsidiaries (subject to certain customary exceptions) to become a guarantor under the 2021 facility and (ii) the Company and each subsidiary guarantor will be required to grant liens in favor of the collateral agent on substantially all of their respective assets (subject to customary exceptions).
The outstanding borrowings under the 2021 facility are prepayable at any time without penalty (other than customary breakage costs). The borrowings under the 2021 facility bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States dollar-denominated revolving creditfederal funds effective rate plus 1/2 of 1.00% and (iii) a one-month reserve adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2021 facility.
The current applicable margin with respect to the borrowings as of January 30, 2022 was 1.375% for adjusted Eurocurrency rate loans and 0.375% for base rate loans. The applicable margin for borrowings is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of the Company’s fiscal quarters, based upon the Company’s net leverage ratio or (ii) after the date of delivery of notice of a change in the Company’s public debt rating by Standard & Poor’s or Moody’s.
The 2021 facility during 2019 was $567.0 million, which reflects a brief period of higher aggregate borrowings at the time thatrequires the Company launchedto comply with affirmative, negative and financial covenants, including a minimum interest coverage ratio and maximum net leverage ratio, which are subject to change in the commercial paper program.event that, and in the same manner as, the minimum interest coverage ratio and maximum net leverage ratio covenants under the 2019 facilities are amended.
The 2021 facility contains other customary events of default in addition to violations of covenants discussed above, including but not limited to nonpayment; material inaccuracy of representations and warranties; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; and a change in control (as defined in the 2021 facility).
Long-Term Debt
The carrying amounts of the Company’s long-term debt were as follows:
|
| | | | | | | |
(In millions) | 2019 | | 2018 |
| | | |
Senior unsecured Term Loan A facilities due 2024 (1)(2) | $ | 1,569.5 |
| | $ | — |
|
Senior secured Term Loan A facility due 2021 | — |
| | 1,643.8 |
|
7 3/4% debentures due 2023 | 99.7 |
| | 99.6 |
|
3 5/8% senior unsecured euro notes due 2024 (2) | 382.9 |
| | 396.5 |
|
3 1/8% senior unsecured euro notes due 2027 (2) | 655.6 |
| | 679.5 |
|
Total | 2,707.7 |
| | 2,819.4 |
|
Less: Current portion of long-term debt | 13.8 |
| | — |
|
Long-term debt | $ | 2,693.9 |
| | $ | 2,819.4 |
|
| | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | |
| | | | |
Senior unsecured Term Loan A facilities due 2024 (1)(2) | $ | 513.5 | | | $ | 1,608.6 | | |
| | | | |
7 3/4% debentures due 2023 | 99.8 | | | 99.8 | | |
3 5/8% senior unsecured euro notes due 2024 (2) | 580.8 | | | 631.0 | | |
4 5/8% senior unsecured notes due 2025 | 495.7 | | | 494.5 | | |
3 1/8% senior unsecured euro notes due 2027 (2) | 662.6 | | | 720.9 | | |
Total | 2,352.4 | | | 3,554.8 | | |
Less: Current portion of long-term debt | 34.8 | | | 41.1 | | |
Long-term debt | $ | 2,317.6 | | | $ | 3,513.7 | | |
| |
(1)(1) The outstanding principal balance for the United States dollar-denominated Term Loan A facility and the euro-denominated Term Loan A facility was zero and €462.5 million, respectively, as of January 30, 2022.
(2) The carrying amount of the euro-denominated Term Loan A facility and the senior unsecured euro notes includes the impact of changes in the exchange rate of the United States dollar against the euro.
| The outstanding principal balance for the United States dollar-denominated Term Loan A facility and the euro-denominated Term Loan A facility was $1,029.6 million and €493.8 million, respectively, as of February 2, 2020. |
| |
(2)
| The carrying amount of the Company’s euro-denominated Term Loan A facility and senior unsecured euro notes includes the impact of changes in the exchange rate of the United States dollar against the euro. |
Please see Note 12,11, “Fair Value Measurements,” for the fair value of the Company’s long-term debt as of February 2, 2020January 30, 2022 and February 3, 2019.January 31, 2021.
As of February 2, 2020, theThe Company’s mandatory long-term debt repayments for the next five years were as follows:follows as of January 30, 2022:
|
| | |
(In millions) | |
Fiscal Year | Amount (1) |
2020 | 13.8 |
|
2021 | 39.0 |
|
2022 | 102.9 |
|
2023 | 223.4 |
|
2024 | 1,682.9 |
|
| | | | | |
(In millions) | |
Fiscal Year | Amount (1) |
2022 | $ | 34.8 | |
2023 | 141.8 | |
2024 | 1,023.3 | |
2025 | 500.0 | |
2026 | — | |
| |
(1)(1) A portion of the Company’s mandatory long-term debt repayments are denominated in euros and subject to changes in the exchange rate of the United States dollar against the euro.
| A portion of the Company’s mandatory long-term debt repayments are denominated in euro and subject to changes in the exchange rate of the United States dollar against the euro. |
Total debt repayments for the next five years exceed the total carrying amount of the Company’s Term Loan A facilities, 7 3/4% debentures due 2023, and 3 5/8% senior euro notes due 2024 and 4 5/8% senior notes due 2025 as of February 2, 2020January 30, 2022 because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.
As of February 2, 2020, after taking into account the effect of the Company’s interest rate swap agreements discussed in the section entitled “2019 Senior Unsecured Credit Facilities,” which were in effect as of such date,January 30, 2022, approximately 55%80% of the Company’s long-term debt had fixed interest rates, with the remainder at variable interest rates.
2016 Senior Secured Credit Facilities
On May 19, 2016, the Company entered into an amendment to its senior secured credit facilities (as amended, the “2016 facilities”). The Company replaced the 2016 facilities with new senior unsecured credit facilities on April 29, 2019 as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. The 2016 facilities, as of the date they were replaced, consisted of a $2,347.4 million United States dollar-denominated Term Loan A facility and senior secured revolving credit facilities consisting of (i) a $475.0 million United States dollar-denominated revolving credit facility, (ii) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars and Canadian dollars and (iii) a €185.9 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen and Swiss francs.
2019 Senior Unsecured Credit Facilities
The Company refinanced the 2016 facilities on April 29, 2019 (the “Closing Date”) by entering into senior unsecured credit facilities (the(as amended, the “2019 facilities”), the proceeds of which, along with cash on hand, were used to repay all of the outstanding borrowings under the 2016 facilities, as well as the related debt issuance costs.
The 2019 facilities consist of a $1,093.2 million United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €500.0 million euro-denominated Term Loan A facility (the “Euro TLA facility” and together with the USD TLA facility, the “TLA facilities”) and senior unsecured revolving credit facilities consisting of (i) a $675.0 million United States dollar-denominated revolving credit facility, (ii) a CAD $70.0 million Canadian dollar-denominated revolving credit facility available in United States dollars or Canadian dollars, (iii) a €200.0 million euro-denominated revolving credit facility available in euro, British pound sterling, Japanese yen, Swiss francs, Australian dollars and other agreed foreign currencies and (iv) a $50.0 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars. The 2019 facilities are due on April 29, 2024. In connection with the refinancing in 2019 of the senior credit2016 facilities, the Company paid debt issuance costs of $10.4 million (of which $3.5 million was expensed as debt modification costs and $6.9 million is being amortized over the term of the debt agreement)2019 facilities) and recorded debt extinguishment costs of $1.7 million to write off previously capitalized debt issuance costs.
Each of the senior unsecured revolving credit facilities, except for the $50.0 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars, also include amounts available for letters of credit and have a portion available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more senior unsecured term loan facilities or increase the commitments under the senior unsecured revolving credit facilities by an aggregate amount not to exceed $1,500.0 million. The lenders under the 2019 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.
The Company had loans outstanding of $1,569.5$513.5 million, net of debt issuance costs and based on applicable exchange rates, under the TLA facilities, no borrowings outstanding under the senior unsecured revolving credit facilities and $20.3$13.4 million of outstanding letters of credit under the senior unsecured revolving credit facilities as of February 2, 2020. The Company had no borrowings outstanding under the senior unsecured revolving credit facilities as of February 2, 2020.January 30, 2022.
The terms of the TLA facilities require the Company to make quarterly repayments of amounts outstanding, under the 2019 facilities, which commenced with the calendar quarter ended September 30, 2019. Such required repayment amounts equal 2.50% per annum of the principal amount outstanding on the Closing Date for the first eight calendar quarters following the Closing Date, 5.00% per annum of the principal amount outstanding on the Closing Date for the four calendar quarters thereafter and 7.50% per annum of the principal amount outstanding on the Closing Date for the remaining calendar quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the TLA facilities. The outstanding borrowings under the 2019 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments made by the Company would reduce the future required repayment amounts.
The Company made payments of $1,051.3 million on its term loans under the 2019 facilities during 2021, which included the repayment of the outstanding principal balance under its United States dollar-denominated Term Loan A facility. The Company made payments of $14.4 million on its term loans under the 2019 facilities during 2020. The Company made payments of $70.6 million on its term loans under the 2019 facilities and repaid the 2016 facilities in connection with the refinancing of the senior credit facilities during 2019. The Company made payments of $150.0 million and $250.0 million during 2018 and 2017, respectively, on its term loans under the 2016 facilities.
The United States dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company'sCompany’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds effective rate plus 1/2 of 1.00% and (iii) a one-month reserve adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The Canadian dollar-denominated borrowings under the 2019 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the average of the rates per annum for Canadian dollar
bankers' acceptances having a term of one month or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
Borrowings available in Hong Kong dollars under the 2019 facilities bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The borrowings under the 2019 facilities in currencies other than United States dollars, Canadian dollars or Hong Kong dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2019 facilities.
The current applicable margin with respect to the TLA facilities and each revolving credit facility isas of January 30, 2022 was 1.375% for adjusted Eurocurrency rate loans and 0.375% for base rate or Canadian prime rate loans. The applicable margin for borrowings under the TLA facilities and the revolving credit facilities is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of the Company’s fiscal quarters, based upon the Company’s net leverage ratio or (ii) after the date of delivery of notice of a change in the Company’s public debt rating by Standard & Poor’s or Moody’s.
The Company entered into interest rate swap agreements designed with the intended effect of converting notional amounts of its variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for theany outstanding notional amount, the Company’s exposure to fluctuations in the one-month London interbank offered rate (“LIBOR”)LIBOR is eliminated and the Company pays a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2019, 20182021, 2020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | |
Designation Date | | Commencement Date | | Initial Notional Amount | | Notional Amount Outstanding as of January 30, 2022 | | Fixed Rate | | Expiration Date |
March 2020 | | February 2021 | | $ | 50.0 | | | $ | — | | (1) | 0.562% | | February 2023 |
February 2020 | | February 2021 | | 50.0 | | | — | | (1) | 1.1625% | | February 2023 |
February 2020 | | February 2020 | | 50.0 | | | — | | (1) | 1.2575% | | February 2023 |
August 2019 | | February 2020 | | 50.0 | | | — | | (1) | 1.1975% | | February 2022 |
June 2019 | | February 2020 | | 50.0 | | | — | | (1) | 1.409% | | February 2022 |
June 2019 | | June 2019 | | 50.0 | | | — | | | 1.719% | | July 2021 |
January 2019 | | February 2020 | | 50.0 | | | — | | | 2.4187% | | February 2021 |
November 2018 | | February 2019 | | 139.2 | | | — | | | 2.8645% | | February 2021 |
October 2018 | | February 2019 | | 115.7 | | | — | | | 2.9975% | | February 2021 |
June 2018 | | August 2018 | | 50.0 | | | — | | | 2.6825% | | February 2021 |
June 2017 | | February 2018 | | 306.5 | | | — | | | 1.566% | | February 2020 |
|
| | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
Designation Date | | Commencement Date | | Initial Notional Amount | | Notional Amount Outstanding as of February 2, 2020 | | Fixed Rate | | Expiration Date |
August 2019 | | February 2020 | | $ | 50.0 |
| | $ | — |
| | 1.1975% | | February 2022 |
June 2019 | | February 2020 | | 50.0 |
| | — |
| | 1.409% | | February 2022 |
June 2019 | | June 2019 | | 50.0 |
| | 50.0 |
| | 1.719% | | July 2021 |
January 2019 | | February 2020 | | 50.0 |
| | — |
| | 2.4187% | | February 2021 |
November 2018 | | February 2019 | | 139.2 |
| | 126.6 |
| | 2.8645% | | February 2021 |
October 2018 | | February 2019 | | 115.7 |
| | 103.3 |
| | 2.9975% | | February 2021 |
June 2018 | | August 2018 | | 50.0 |
| | 50.0 |
| | 2.6825% | | February 2021 |
June 2017 | | February 2018 | | 306.5 |
| | 56.5 |
| | 1.566% | | February 2020 |
July 2014 | | February 2016 | | 682.6 |
| | — |
| | 1.924% | | February 2018 |
(1) The notional amountsCompany terminated early the interest rate swap agreements due to expire in February 2022 and February 2023 in connection with the repayment of the outstanding interest rate swaps that commenced in February 2018 and February 2019 are adjusted according to pre-set schedules during the terms of the swap agreements such that, based on the Company’s projections for future debt repayments, the Company’s outstanding debtprincipal balance under theits USD TLA facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.facility. Please see Note 10, “Derivative Financial Instruments,” for further discussion.
The 2019 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended; and a change in control (as defined in the 2019 facilities).
The 2019 facilities require the Company to comply with customary affirmative, negative and financial covenants, including a minimum interest coverage ratio and a maximum net leverage.leverage ratio. A breach of any of these operating or financial covenants would result in a default under the 2019 facilities. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable, which would result in acceleration of the Company’s other debt. Given the disruption to the Company’s business caused by the COVID-19 pandemic and to ensure financial flexibility, the Company amended these facilities in June 2020 to provide temporary relief of certain financial covenants until the date on which a compliance certificate was delivered for the second quarter of 2021 (the “relief period”) unless the Company elected earlier to terminate the relief period and satisfied the conditions for doing so (the “June 2020 Amendment”). The June 2020 Amendment provided for the following during the relief period, among other things, the (i) suspension of compliance with the maximum net leverage ratio through and including the first quarter of 2021, (ii)
4 1/2% Senior Notes Due 2022
suspension of the minimum interest coverage ratio through and including the first quarter of 2021, (iii) addition of a minimum liquidity covenant of $400.0 million, (iv) addition of a restricted payment covenant and (v) imposition of stricter limitations on the incurrence of indebtedness and liens. The limitation on restricted payments required that the Company suspend payments of dividends on its common stock and purchases of shares under its stock repurchase program during the relief period. The June 2020 Amendment also provided that during the relief period the applicable margin would be increased 0.25%. In addition, under the June 2020 Amendment, in the event there was a specified credit ratings downgrade by Standard & Poor’s and Moody’s during the relief period (as set forth in the June 2020 Amendment), within 120 days thereafter (i) the Company would have been required to cause each of its wholly owned United States subsidiaries (subject to certain customary exceptions) to become a guarantor under the 2019 facilities and (ii) the Company and each subsidiary guarantor would have been required to grant liens in favor of the collateral agent on substantially all of their respective assets (subject to customary exceptions). The Company had outstanding $700.0 million principal amountterminated early, effective June 10, 2021, this temporary relief period and, as a result, the various provisions in the June 2020 Amendment described above were no longer in effect. Following the termination of 4 1/2% senior notes due December 15, 2022. Thethe relief period, the Company redeemedwas required to maintain a minimum interest coverage ratio and a maximum net leverage ratio, calculated in the manner set forth in the terms of the 2019 facilities. As of January 30, 2022, the Company was in compliance with all applicable financial and non-financial covenants under these notes on January 5, 2018 in connection with the issuance of €600.0 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027, as discussed below. The Company paid a premium of $15.8 million to the holders of these notes in connection with the redemption and recorded debt extinguishment costs of $8.1 million to write-off previously capitalized debt issuance costs associated with these notes during 2017.facilities.
7 3/4% Debentures Due 2023
The Company has outstanding $100.0 million of debentures due November 15, 2023 that accrue interest at the rate of 7 3/4%. Pursuant to the indenture governing the debentures, the Company must maintain a certain level of stockholders’ equity in order to pay cash dividends and make other restricted payments, as defined in the indenture governing the debentures. The debentures are not redeemable at the Company’s option prior to maturity.
The 7 3/4% debentures due 2023 include a “negative lien” covenant that generally requires the debentures to be secured on an equal and ratable basis with secured indebtedness of the Company, as well as limits the Company’s ability to engage in sale/leaseback transactions.
3 5/8% Euro Senior Notes Due 2024
The Company has outstanding €350.0€525.0 million euro-denominated principal amount of 3 5/8% senior notes due July 15, 2024.2024, of which €175.0 million principal amount was issued on April 24, 2020. Interest on the notes is payable in euros. The Company paid €2.8 million ($3.0 million based on exchange rates in effect on the payment date) of fees in connection with the issuance of the additional €175.0 million notes, which are being amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.
The Company’s ability to create liens on the Company’s assets or engage in sale/leaseback transactions is restricted as set forthdefined in the indenture governing the notes.
4 5/8% Senior Notes Due 2025
The Company issued on July 10, 2020, $500.0 million principal amount of 4 5/8% senior notes due July 10, 2025. The interest rate payable on the notes is subject to adjustment if either Standard & Poor’s or Moody’s, or any substitute rating agency, as defined in the indenture governing the notes, downgrades the credit rating assigned to the notes. The Company paid $6.2 million of fees in connection with the issuance of the notes, which are being amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to June 10, 2025 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after June 10, 2025 at their principal amount plus any accrued and unpaid interest.
The Company’s ability to create liens on the Company’s assets or engage in sale/leaseback transactions is restricted as defined in the indenture governing the notes.
3 1/8% Euro Senior Notes Due 2027
The Company issued on December 21, 2017has outstanding €600.0 million euro-denominated principal amount of 3 1/8% senior notes due December 15, 2027. Interest on the notes is payable in euros. The Company paid €8.7 million (approximately $10.3 million based on exchange rates in effect on the payment date) of fees during 2017 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to September 15, 2027 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after September 15, 2027 at their principal amount plus any accrued and unpaid interest.
The Company’s ability to create liens on the Company’s assets or engage in sale/leaseback transactions is restricted as set forthdefined in the indenture governing the notes.
As of February 2, 2020,January 30, 2022, the Company was in compliance with all applicable financial and non-financial covenants under its financing arrangements.
The Company also has standby letters of credit outside of its 2019 facilities primarily to collateralize the Company’s insurance and lease obligations. The Company had $53.8 million of these standby letters of credit outstanding as of January 30, 2022.
Interest paid was $96.8 million, $111.2 million and $108.3 million $114.6 millionduring 2021, 2020 and $120.2 million during 2019, 2018 and 2017, respectively.
10.9. INCOME TAXES
The domestic and foreign components of income (loss) income before income taxes were as follows:
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Domestic | $ | (441.2 | ) | | $ | (5.3 | ) | | $ | (102.0 | ) |
Foreign | 885.2 |
| | 780.9 |
| | 612.2 |
|
Total | $ | 444.0 |
| | $ | 775.6 |
| | $ | 510.2 |
|
| | | | | | | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | | 2019 |
Domestic | $ | (120.3) | | | $ | (1,248.7) | | | $ | (441.2) | |
Foreign | 1,093.0 | | | 55.7 | | | 885.2 | |
Total | $ | 972.7 | | | $ | (1,193.0) | | | $ | 444.0 | |
The domestic loss(loss) before benefit for income taxes in 2019, 2018 and 2017 is primarily attributable2020 was due to the domestic portionsignificant adverse impacts of certain charges incurred in 2019, 2018 and 2017. Please see Note 21, “Segment Data,” for further discussionthe COVID-19 pandemic on the Company’s business, including $1,027.7 million of these costs.
noncash impairment charges.
Taxes paid were $155.4 million, $130.7 million and $133.0 million $138.4 millionin 2021, 2020 and $164.6 million in 2019,, 2018 and 2017, respectively.
The provision (benefit) for income taxes attributable to income (loss) consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | | 2019 | |
Federal: | | | | | | |
Current | $ | (87.7) | | | $ | (22.2) | | | $ | (30.4) | | |
Deferred | (51.4) | | (1) | (103.5) | | | (52.6) | | (4) |
State and local: | | | | | | |
Current | 19.6 | | | 3.1 | | | 4.3 | | |
Deferred | (21.7) | | | (19.0) | | | (16.5) | | |
Foreign: | | | | | | |
Current | 153.7 | | | 108.3 | | | 127.9 | | |
Deferred | 8.2 | | (2) | (22.2) | | (3) | (3.8) | | (4) |
Total | $ | 20.7 | | | $ | (55.5) | | | $ | 28.9 | | |
|
| | | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 | |
Federal: | | | | | | |
Current | $ | (30.4 | ) | | $ | (30.5 | ) | | $ | 51.7 |
| |
Deferred | (52.6 | ) | (1) | (53.2 | ) | (2) | (198.3 | ) | (2) |
State and local: | |
| | |
| | |
| |
Current | 4.3 |
| | 4.6 |
| | 3.5 |
| |
Deferred | (16.5 | ) | | 9.6 |
| | (7.8 | ) | |
Foreign: | |
| | |
| | |
| |
Current | 127.9 |
| | 170.2 |
| | 143.5 |
| |
Deferred | (3.8 | ) | (1) | (69.7 | ) | (3) | (18.5 | ) | |
Total | $ | 28.9 |
| | $ | 31.0 |
| | $ | (25.9 | ) | |
| |
(1) | Includes a $27.8 million benefit related to the write-off of deferred tax liabilities in connection with the pre-tax noncash impairment of the Speedo perpetual license right, primarily in the United States. Please see Note 4, “Assets Held For Sale,” for further discussion. |
(2) Includes a $24.7$106.3 million benefit related to a tax accounting method change made in 2018 andconjunction with the Company’s 2020 U.S. federal income tax return that provides additional tax benefits to the foreign components of the federal income tax provision.
(2) Includes a $52.8$32.3 million benefit in 2017 related to the U.S.remeasurement of certain net deferred tax assets in connection with the expiration of the special tax rates at the end of 2021.
(3) Includes a $33.1 million expense related to the remeasurement of certain net deferred tax liabilities in connection with the enactment of legislation in the Netherlands known as the “2021 Dutch Tax Legislation.Plan,” which became effective on January 1, 2021.
| |
(3)
| Includes a $41.1 million benefit related to the remeasurement of certain net deferred tax liabilities in connection with the enactment of legislation in the Netherlands known as the “2019 Dutch Tax Plan,” which became effective on January 1, 2019 and includes a gradual reduction of the corporate income tax rate by 2021. |
(4) Includes a $27.8 million benefit related to the write-off of deferred tax liabilities in connection with the pre-tax noncash impairment of the then-owned Speedo perpetual license right, primarily in the United States. Please see Note 3, “Acquisitions and Divestitures,” for further discussion.
The provision (benefit) for income taxes for the years 2019, 20182021, 2020 and 20172019 was different from the amount computed by applying the statutory United States federal income tax rate to the underlying income (loss) as follows:
| | | | | | | | | | | | 2021 | | 2020 | | 2019 | |
| 2019 | | 2018 | | 2017 | | |
Statutory federal income tax rate (1) | 21.0 | % | | 21.0 | % | | 33.7 | % | | |
Statutory federal income tax rate | | Statutory federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | |
State and local income taxes, net of federal income tax benefit | (2.4 | )% | | 0.5 | % | | (1.1 | )% | | State and local income taxes, net of federal income tax benefit | (0.1) | % | | 1.7 | % | | (2.4) | % | |
Effects of international jurisdictions, including foreign tax credits | (15.7 | )% | | (9.5 | )% | | (20.3 | )% | | Effects of international jurisdictions, including foreign tax credits | (8.0) | % | | (2.2) | % | | (15.7) | % | |
| Change in estimates for uncertain tax positions
| (11.8 | )% | (2) | (3.7 | )% | | (7.5 | )% | | Change in estimates for uncertain tax positions | (9.7) | % | | 2.1 | % | | (11.8) | % | |
Change in valuation allowance | 1.8 | % | | (5.3 | )% | (3) | 11.0 | % | (4) | Change in valuation allowance | 0.7 | % | | 0.9 | % | | 1.8 | % | |
One-time transition tax due to U.S. Tax Legislation | — | % | | — | % | | 34.0 | % | | |
Remeasurement due to U.S. Tax Legislation | — | % | | 0.2 | % | | (51.9 | )% | | |
Tax accounting method change | | Tax accounting method change | (10.9) | % | | — | % | | — | % | |
| Tax on foreign earnings (U.S. Tax Legislation - GILTI and FDII) | 10.0 | % | | 1.9 | % | | — | % | | Tax on foreign earnings (U.S. Tax Legislation - GILTI and FDII) | 7.6 | % | | (5.9) | % | | 10.0 | % | |
Tax on Speedo transaction basis difference | 2.3 | % | | — | % | | — | % | | Tax on Speedo transaction basis difference | — | % | | — | % | | 2.3 | % | |
Goodwill impairment | | Goodwill impairment | — | % | | (13.3) | % | | — | % | |
Excess tax benefits related to stock-based compensation | (0.2 | )% | | (0.6 | )% | | (2.8 | )% | (5) | Excess tax benefits related to stock-based compensation | — | % | | (0.4) | % | | (0.2) | % | |
Other, net | 1.5 | % | | (0.5 | )% | | (0.2 | )% | | Other, net | 1.5 | % | | 0.8 | % | | 1.5 | % | |
Effective income tax rate | 6.5 | % | | 4.0 | % | | (5.1 | )% | | Effective income tax rate | 2.1 | % | | 4.7 | % | | 6.5 | % | |
| |
(1)
| The United States statutory federal income tax rate changed from 35.0% to 21.0%, effective January 1, 2018, as a result of the U.S. Tax Legislation. The United States statutory federal income tax rate for 2017 is a blended rate of 33.7%. |
(2) Includes the settlement of a multi-year audit from an international jurisdiction.
| |
(3)
| Includes the release of a $26.3 million valuation allowance on the Company’s foreign tax credits to adjust the provisional amount recorded in 2017 as a result of the U.S. Tax Legislation. |
| |
(4)
| Includes the recognition of a $38.5 million provisional valuation allowance on the Company’s foreign tax credits as a result of the U.S. Tax Legislation. |
| |
(5)
| Includes an excess tax benefit from the exercise of stock options by the Company’s Chairman and Chief Executive Officer. |
The Company files income tax returns in more than 40 international jurisdictions each year. A substantial amount of the Company’s earnings are in international jurisdictions, particularly in the Netherlands and Hong Kong SAR, where income tax rates, when coupled with special rates levied on income from certain of the Company’s jurisdictional activities, continue to beare lower than the United States statutory income tax rate. The Company benefited from these special rates until the end of 2021. The effects of international jurisdictions, including foreign tax credits, reflected in the above table for 2019, 20182021, 2020 and 20172019 included those taxes at statutory income tax rates and at special rates levied on income from certain jurisdictional activities.
The United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which included various income tax provisions aimed at providing economic relief. The Company expects to benefit from these special rates until 2022.had a slight favorable cash flow impact as a result of the deferral of income tax payments under the CARES Act in 2020. The Company also considered the significant adverse impact of the pandemic on its business in assessing the realizability of its deferred tax assets. Based on this assessment, the Company determined that no additional valuation allowances were needed against its deferred tax assets.
The U.S.United States Tax LegislationCuts and Job Act of 2017 (the “U.S. Tax Legislation”) was enacted on December 22, 20172017. The U.S. Tax Legislation significantly revised the United States tax code by, among other things, (i) reducing the corporate income tax rate from 35.0% to 21.0%, effective January 1, 2018, (ii) imposing a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated, (iii) implementing a modified territorial tax system, (iv) introducing a tax on foreign incomeearnings in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and a beneficial tax rate to be applied against foreign derived intangible income (known as “FDII”) and (v) introducing a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between United States corporations and their subsidiaries.
The Company recorded a provisional net tax benefit of $52.8 million in the fourth quarter of 2017 in connection with the U.S. Tax Legislation, consisting of a $265.0 million benefit primarily from the remeasurement of the Company’s net deferred tax liabilities to the lower United States corporate income tax rate, partially offset by a $38.5 million valuation allowance on the Company’s foreign tax credits and a $173.7 million transition tax on undistributed post-1986 earnings and profits of foreign subsidiaries deemed to be repatriated.
The Company finalized its accounting related to the impacts of the U.S. Tax Legislation on the one-time transition tax liability, deferred taxes, valuation allowances, state tax considerations, and any remaining outside basis differences in the Company’s foreign subsidiaries during 2018. The analysis resulted in the Company recording an additional net tax benefit of $24.7 million to adjust the provisional net tax benefit recorded in the fourth quarter of 2017 during the measurement period allowed by the Securities and Exchange Commission. The net tax benefit included the release of a $26.3 million valuation allowance on the Company’s foreign tax credits, partially offset by a $1.6 million expense related to the remeasurement of the Company’s net deferred tax liabilities.
The GILTI provisions of the U.S. Tax Legislation impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations for tax years beginning after December 31, 2017. The guidance indicated that companies must make a policy election to either record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future years or treat any taxes on GILTI inclusions as period costs when incurred. The Company completed its analysis of the tax effects of the GILTI provisions in 2018 and elected to account for these tax effects as period costs when incurred.
The components of deferred income tax assets and liabilities were as follows:
| | | | | | | | | | | |
(In millions) | 2021 | | 2020 |
Gross deferred tax assets | | | |
Tax loss and credit carryforwards | $ | 131.7 | | | $ | 314.3 | |
Operating lease liabilities | 401.5 | | | 457.1 | |
Employee compensation and benefits | 111.8 | | | 107.1 | |
Inventories | 42.6 | | | 36.4 | |
Accounts receivable | 24.2 | | | 16.3 | |
Accrued expenses | 18.2 | | | 22.5 | |
Derivative financial instruments | — | | | 17.6 | |
Property, plant and equipment | 208.4 | | (1) | — | |
Other, net | — | | | 13.0 | |
Subtotal | 938.4 | | | 984.3 | |
Valuation allowances | (69.3) | | | (62.2) | |
Total gross deferred tax assets, net of valuation allowances | $ | 869.1 | | | $ | 922.1 | |
Gross deferred tax liabilities | | | |
Intangibles | $ | (828.8) | | | $ | (867.8) | |
Operating lease right-of-use assets | (352.8) | | | (399.2) | |
Property, plant and equipment | — | | | (16.3) | |
Derivative financial instruments | (11.1) | | | — | |
Other, net | (4.2) | | | — | |
Total gross deferred tax liabilities | $ | (1,196.9) | | | $ | (1,283.3) | |
Net deferred tax liability | $ | (327.8) | | | $ | (361.2) | |
|
| | | | | | | |
(In millions) | 2019 | | 2018 |
Gross deferred tax assets | | | |
Tax loss and credit carryforwards | $ | 232.5 |
| | $ | 230.1 |
|
Operating lease liabilities | 407.6 |
| | — |
|
Employee compensation and benefits | 110.9 |
| | 83.1 |
|
Inventories | 39.7 |
| | 26.8 |
|
Accounts receivable | 20.3 |
| | 17.1 |
|
Accrued expenses | 26.5 |
| | 30.2 |
|
Other, net | — |
| | 13.8 |
|
Subtotal | 837.5 |
| | 401.1 |
|
Valuation allowances | (69.8 | ) | | (62.6 | ) |
Total gross deferred tax assets, net of valuation allowances | $ | 767.7 |
| | $ | 338.5 |
|
Gross deferred tax liabilities |
|
| |
|
|
Intangibles | $ | (860.6 | ) | | $ | (825.3 | ) |
Operating lease right-of-use assets | (357.2 | ) | | — |
|
Property, plant and equipment | (46.2 | ) | | (33.6 | ) |
Derivative financial instruments | (12.8 | ) | | (4.3 | ) |
Other, net | (8.7 | ) | | — |
|
Total gross deferred tax liabilities | $ | (1,285.5 | ) | | $ | (863.2 | ) |
Net deferred tax liability | $ | (517.8 | ) | | $ | (524.7 | ) |
(1) Includes a deferred tax asset related to a tax accounting method change made in conjunction with the Company’s 2020 U.S. federal income tax return.
At the end of 2019,2021, the Company had on a tax-effected basis approximately $238.9$142.2 million of net operating loss and tax credit carryforwards available to offset future taxable income in various jurisdictions. This included net operating loss carryforwards of approximately $2.8$1.9 million and $47.1$43.2 million for federal and various state and local jurisdictions, respectively, and $15.5$24.4 million for various foreign jurisdictions. The Company also had federal and state tax credit and other carryforwards of $173.5$72.7 million. The carryforwards expire principally between 20202022 and 2039.2041.
Prior to the enactment of the U.S. Tax Legislation, the Company'sCompany’s undistributed foreign earnings were considered
permanently reinvested and, as such, United States federal and state income taxes were not previously recorded on these
earnings. As a result of the U.S. Tax Legislation, substantially all of the Company’s earnings in foreign subsidiaries generated prior to the enactment of the U.S. Tax Legislation were deemed to have been repatriated and, as a result, the Company recorded a one-time transition tax of $173.7 million in 2017.repatriated. The Company'sCompany’s intent is to reinvest indefinitely substantially all of its foreign earnings outside of the United States. However, if the Company decides at a later date to repatriate these earnings to the United States, the Company may be required to accrue and pay additional taxes, including any applicable foreign withholding
tax and United States state income taxes. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Uncertain tax positions activity for each of the last three years was as follows:
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Balance at beginning of year | $ | 248.3 |
| | $ | 297.1 |
| | $ | 245.6 |
|
Increases related to prior year tax positions | 7.7 |
| | 13.9 |
| | 15.4 |
|
Decreases related to prior year tax positions | (15.8 | ) | | (24.9 | ) | | (10.3 | ) |
Increases related to current year tax positions | 18.2 |
| | 25.5 |
| | 79.7 |
|
Lapses in statute of limitations | (36.0 | ) | | (54.7 | ) | | (46.3 | ) |
Effects of foreign currency translation | (2.5 | ) | | (8.6 | ) | | 13.0 |
|
Balance at end of year | $ | 219.9 |
| | $ | 248.3 |
| | $ | 297.1 |
|
| | | | | | | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 210.7 | | | $ | 219.9 | | | $ | 248.3 | |
| | | | | |
Increases related to prior year tax positions | 2.6 | | | 5.4 | | | 7.7 | |
Decreases related to prior year tax positions | (0.2) | | | (2.9) | | | (15.8) | |
Increases related to current year tax positions | 15.5 | | | 10.9 | | | 18.2 | |
| | | | | |
Lapses in statute of limitations | (93.3) | | | (30.7) | | | (36.0) | |
Effects of foreign currency translation | (7.5) | | | 8.1 | | | (2.5) | |
Balance at end of year | $ | 127.8 | | | $ | 210.7 | | | $ | 219.9 | |
The entire amount of uncertain tax positions as of February 2, 2020,January 30, 2022, if recognized, would reduce the future effective tax rate under current accounting guidance.
Interest and penalties related to uncertain tax positions are recorded in the Company’s income tax provision. Interest and penalties recognized in the Company’s Consolidated Income Statements of Operations for 2019, 20182021, 2020 and 20172019 totaled a benefit of $15.0$7.4 million, an expense of $12.1$2.3 million and an expensea benefit of $0.9$15.0 million, respectively. Interest and penalties accrued in the Company’s Consolidated Balance Sheets as of February 2, 2020January 30, 2022 and February 3, 2019January 31, 2021 totaled $25.2$19.9 million and $44.1$28.3 million, respectively. The Company recorded its liabilities for uncertain tax positions principally in accrued expenses and other liabilities in its Consolidated Balance Sheets.
The Company files income tax returns in the United States and in various foreign, state and local jurisdictions. Most examinations have been completed by tax authorities or the statute of limitations has expired for United States federal, foreign, state and local income tax returns filed by the Company for years through 2006. It is reasonably possible that a reduction of uncertain tax positions in a range of $20.0$8.0 million to $40.0$10.0 million may occur within 12 months of February 2, 2020.January 30, 2022.
11.10. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company uses foreign currency forward exchange contracts to hedge against a portion of this exposure.
The Company also has exposure to interest rate volatility related to its term loans under the 2019 facilities.facilities and 2021 facility, which borrowings bear interest at a rate equal to an applicable margin plus a variable rate. The Company hashad entered into interest rate swap agreements to hedge against a portion of this exposure.the exposure related to its term loans under the 2019 facilities. No interest rate swap agreements were outstanding as of January 30, 2022. As of January 30, 2022, approximately 80% of the Company’s long-term debt was at a fixed interest rate, with the remaining (euro-denominated) balance at a variable rate. The Company had no borrowings outstanding under the 2021 facility during 2021. Please see Note 9,8, “Debt,” for further discussion of the 2019 facilities, the 2021 facility and these agreements.
The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets and does not net the related assets and liabilities. The foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate swap agreements are designated as effective hedging instruments (collectively, “cash flow hedges”). TheAs such, the changes in the fair value of the cash flow hedges are recorded in equity as a component of AOCL. No amounts were excluded from effectiveness testing.
During 2021, the Company dedesignated certain cash flow hedges in connection with the repayment of the outstanding principal balance under its USD TLA facility, as the underlying interest payments were no longer probable to occur, which resulted in the release of a $1.5 million loss from AOCL into the Company’s Consolidated Statement of Operations. During 2020, the Company dedesignated certain cash flow hedges due to the impacts of the COVID-19 pandemic on its business, which resulted in the release of an immaterial gain from AOCL into the Company’s Consolidated Statement of Operations. The Company continues to believe as of January 30, 2022 that transactions relating to its designated cash flow hedges are probable to occur.
Net Investment Hedges
The Company has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, the Company designated the carrying amounts of its (i) €600.0 million euro-denominated principal amount of 3 1/8% senior notes due 2027 and €350.0(ii) €525.0 million euro-denominated principal amount of 3 5/8% senior notes due 2024 (collectively, “foreign currency borrowings”), that it hadwere issued in the United States,by PVH Corp., a U.S.-based entity, as net investment hedges of its investments in certain of its
foreign subsidiaries that use the euro as their functional currency. Please see Note 9,8, “Debt,” for further discussion of the Company’s foreign currency borrowings.
The Company records the foreign currency borrowings at carrying value in its Consolidated Balance Sheets. The carrying value of the foreign currency borrowings is remeasured at the end of each reporting period to reflect changes in the foreign currency exchange spot rate. Since the foreign currency borrowings are designated as net investment hedges, such remeasurement is recorded in equity as a component of AOCL. The fair value and the carrying value of the foreign currency borrowings designated as net investment hedges were $1,178.6$1,361.7 million and $1,038.5$1,243.4 million, respectively, as of February 2, 2020January 30, 2022 and $1,098.3$1,514.2 million and $1,076.0$1,351.9 million, respectively, as of February 3, 2019.January 31, 2021. The Company evaluates the effectiveness of its net investment hedges at inception and at the beginning of each quarter thereafter. No amounts were excluded from effectiveness testing.
Undesignated Contracts
The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”), including all of thewhich primarily include foreign currency forward exchange contracts related to third party and intercompany transactions, and intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts are largely offset by the remeasurement of the underlying intercompany balances.
In addition, the Company has exposure to changes in foreign currency exchange rates related to the translation of the earnings of its subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, the Company entered into several foreign currency option contracts during 2017. These contracts represented the Company’s purchase of euro put/United States dollar call options and Chinese yuan renminbi put/United States dollar call options. All foreign currency option contracts expired in 2017.
The Company’s foreign currency option contracts were also undesignated contracts. As such, the changes in the fair value of these foreign currency option contracts were immediately recognized in earnings.
The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes. The cash flows from the Company’s hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged.
The following table summarizes the fair value and presentation of the Company’s derivative financial instruments in its Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Liabilities |
| 2021 | | 2020 | | 2021 | | 2020 |
(In millions) | Other Current Assets | | Other Assets | | Other Current Assets | | Other Assets | | Accrued Expenses | | Other Liabilities | | Accrued Expenses | | Other Liabilities |
Contracts designated as cash flow hedges: | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts (inventory purchases) | $ | 48.0 | | | $ | 2.7 | | | $ | 1.2 | | | $ | 0.1 | | | $ | 0.6 | | | $ | — | | | $ | 29.0 | | | $ | 0.4 | |
Interest rate swap agreements | — | | | — | | | — | | | — | | | — | | | — | | | 3.2 | | | 1.5 | |
Total contracts designated as cash flow hedges | 48.0 | | | 2.7 | | | 1.2 | | | 0.1 | | | 0.6 | | | — | | | 32.2 | | | 1.9 | |
Undesignated contracts: | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts | 5.6 | | | — | | | 2.5 | | | — | | | 1.1 | | | — | | | 1.6 | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | $ | 53.6 | | | $ | 2.7 | | | $ | 3.7 | | | $ | 0.1 | | | $ | 1.7 | | | $ | — | | | $ | 33.8 | | | $ | 1.9 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Assets | | Liabilities |
| 2019 | | 2018 | | 2019 | | 2018 |
| Other Current Assets | | Other Assets | | Other Current Assets | | Other Assets | | Accrued Expenses | | Other Liabilities | | Accrued Expenses | | Other Liabilities |
Contracts designated as cash flow hedges: | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts (inventory purchases) | $ | 21.4 |
| | $ | 0.4 |
| | $ | 24.0 |
| | $ | 0.7 |
| | $ | 1.2 |
| | $ | 0.1 |
| | $ | 3.5 |
| | $ | 0.7 |
|
Interest rate swap agreements | 0.1 |
| | — |
| | 1.4 |
| | — |
| | 5.5 |
| | 0.4 |
| | 1.2 |
| | 1.6 |
|
Total contracts designated as cash flow hedges | 21.5 |
| | 0.4 |
| | 25.4 |
| | 0.7 |
| | 6.7 |
| | 0.5 |
| | 4.7 |
| | 2.3 |
|
Undesignated contracts: | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts | 1.5 |
| | — |
| | 0.1 |
| | — |
| | 0.9 |
| | — |
| | 2.0 |
| | — |
|
Total | $ | 23.0 |
| | $ | 0.4 |
| | $ | 25.5 |
| | $ | 0.7 |
| | $ | 7.6 |
| | $ | 0.5 |
| | $ | 6.7 |
| | $ | 2.3 |
|
The notional amount outstanding of foreign currency forward exchange contracts was $1,308.1$1,408.5 million at February 2, 2020.January 30, 2022. Such contracts expire principally between February 20202022 and June 2021.July 2023.
The following tables summarize the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
| | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Other Comprehensive (Loss) Income |
| |
| |
| |
| |
(In millions) | | 2021 | | 2020 | | 2019 |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 109.2 | | | $ | (57.3) | | | $ | 22.4 | |
| | | | | | |
Interest rate swap agreements | | 0.2 | | | (9.9) | | | (5.8) | |
Foreign currency borrowings (net investment hedges) | | 111.3 | | | (125.0) | | | 39.3 | |
Total | | $ | 220.7 | | | $ | (192.2) | | | $ | 55.9 | |
|
| | | | | | | | | | | | |
| | Gain (Loss) Recognized in Other Comprehensive (Loss) Income |
| |
| |
| |
(In millions) | |
| | 2019 | | 2018 | | 2017 |
Foreign currency forward exchange contracts (inventory purchases) | | $ | 22.4 |
| | $ | 97.1 |
| | $ | (122.0 | ) |
Interest rate swap agreements | | (5.8 | ) | | (2.6 | ) | | 3.2 |
|
Foreign currency borrowings (net investment hedges) | | 39.3 |
| | 95.6 |
| | (99.5 | ) |
Total | | $ | 55.9 |
| | $ | 190.1 |
| | $ | (218.3 | ) |
The following table summarizes the effect of the Company’s undesignated contracts recognized in SG&A expenses in its Consolidated Income Statements:Statements of Operations: