UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| (Mark One) | ||||||||
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the fiscal year ended | ||||||||
| OR | ||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from _________ to ___________ | ||||||||
| Commission File Number | 001-07572 | |||||||
| PVH CORP. | ||
(Exact name of registrant as specified in its charter)
| Delaware | 13-1166910 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| New York, | New York | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, $1.00 par value | PVH | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | x | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ ☐No No x
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant (assuming, for purposes of this calculation only, that the registrant’s directors and corporate officers are affiliates of the registrant) based upon the closing sale price of the registrant’s common stock on August 4, 2019July 31, 2022 (the last business day of the registrant’s most recently completed second quarter) was $5,921,209,861.$4,051,007,516.
Number of shares of Common Stock outstanding as of March 19, 2020: 70,883,44410, 2023: 62,712,753
DOCUMENTS INCORPORATED BY REFERENCE
for the Annual Meeting of Stockholders to be held on June 18, 2020 | ||
| Document | Location in Form 10-K in which incorporated | |||||||
| Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 22, 2023 | Part III | |||||||
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Forward-looking statements in this Annual Report on Form 10-K including, without limitation, statements relating to our future revenue, earnings and cash flows, plans, strategies, objectives, expectations and intentions are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated, including, without limitation, (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our ability to realize anticipated benefits and savings from divestitures, restructurings and similar plans, such as the headcount cost reduction initiative announced in August 2022 and the 2021 sale of assets of, and exit from, our Heritage Brands business to focus on our Calvin Klein and Tommy Hilfiger businesses; (iii) the ability to realize the intended benefits from the acquisition of licensees or the reversion of licensed rights (such as the recent announcement that the Company intends to bring in-house most of the product categories currently licensed to G-III Apparel Group, Ltd. upon the expirations over time of the underlying license agreements) and avoid any disruptions in the businesses during the transition from operation by the licensee to the direct operation by the Company; (iv) we may be considered to be highly leveragedhave significant levels of outstanding debt and weborrowing capacity and use a significant portion of our cash flows to service our indebtedness, as a result of which we might not have sufficient funds to operate our businesses in the manner we intend or have operated in the past; (iii)(v) the levels of sales of our apparel, footwear and related products, both to our wholesale customers and in our retail stores and our directly operated digital commerce sites, the levels of sales of our licensees at wholesale and retail, and the extent of discounts and promotional pricing in which we and our licensees and other business partners are required to engage, all of which can be affected by weather conditions, changes in the economy, (including inflationary pressures like those currently being seen globally), fuel prices, reductions in travel, fashion trends, consolidations, repositionings and bankruptcies in the retail industries, repositionings of brands by our licensors,consumer sentiment and other factors; (iv)(vi) our ability to manage our growth and inventory, including our ability to realize benefits from acquisitions, such as the acquisitions referenced in this Annual Report on Form 10-K; (v)inventory; (vii) quota restrictions, the imposition of safeguard controls and the imposition of new or increased duties or tariffs on goods from the countries where we or our licensees produce goods under our trademarks, such as the recently imposed tariffs and threatened increased tariffs on goods imported into the United States from China, any of which, among other things, could limit the ability to produce products in cost-effective countries, or in countries that have the labor and technical expertise needed, or require the Companyus to absorb costs or try to pass costs onto consumers, which could materially impact the Company’sour revenue and profitability; (vi)(viii) the availability and cost of raw materials; (vii)(ix) our ability to adjust timely to changes in trade regulations and the migration and development of manufacturers (which can affect where our products can best be produced); (viii)(x) the regulation or prohibition of the transaction of business with specific individuals or entities and their affiliates or goods manufactured in (or containing raw materials or components from) certain regions, such as the listing of a person or entity as a Specially Designated National or Blocked Person by the U.S. Department of the Treasury’s Office of Foreign Assets Control and the issuance of Withhold Release Orders by the U.S. Customs and Border Protection; (xi) changes in available factory and shipping capacity, wage and shipping cost escalation, and store closures in any of the countries where our licensees’ or wholesale customers’ or other business partners’ stores are located or products are sold or produced or are planned to be sold or produced, as a result of civil conflict, war or terrorist acts, the threat of any of the foregoing, or political or labor instability, such as the current war in anyUkraine that has led to our decision to exit from our Russia business, including the closure of our retail stores in Russia and the countries wherecessation of our orwholesale operations in Russia and Belarus, and the temporary cessation of our licensees’ or other business partners’ products are sold, produced or are planned to be sold or produced; (ix)by many of our business partners in Ukraine; (xii) disease epidemics and health relatedhealth-related concerns, such as the current outbreak ofongoing COVID-19 pandemic, which could result in (and, in the case of the COVID-19 outbreak,pandemic, has resulted in some of the following) supply chainsupply-chain disruptions due to closed factories, reduced workforces scarcity of raw materials and scrutiny or embargoing of goods produced in affected areas;production capacity, shipping delays, container and trucker shortages, port congestion and other logistics problems, closed stores, and reduced consumer traffic and purchasing, as consumers become ill or limit or cease shopping in order to avoid exposure, or governments imposeimplement mandatory business closures, travel restrictions or the like, to prevent the spread of disease; and market or other changes that could result (or, with respect to the COVID-19 pandemic, could continue to result) in shortages of inventory available to be delivered to our stores and customers, order cancellations and lost sales, as well as in noncash impairments of our goodwill and other intangible assets, operating lease right-of-use assets, and property, plant and equipment; (x) acquisitions(xiii) actions taken towards sustainability and divestituressocial and issues arising with acquisitions, divestituresenvironmental responsibility as part of our sustainability and proposed transactions, including, without limitation, the abilitysocial and environmental strategy, may not be achieved or may be perceived to integrate an acquired entity or business into us with no substantial adverse effect on the acquired entity’s, the acquired business’s orbe falsely claimed, which could diminish consumer trust in our existing operations, employee relationships, vendor relationships, customer relationships or financial performance, and the ability to operate effectively and profitablybrands, as well as our continuing businesses after the sale or other disposal of a subsidiary, business or the assets thereof; (xi)brands value; (xiv) the failure of our licensees to market successfully licensed products or to preserve the value of our brands, or their misuse of our brands; (xii)(xv) significant fluctuations of the United StatesU.S. dollar against foreign currencies in which we transact significant levels of business; (xiii)(xvi) our retirement plan expenses recorded throughout the year are calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions, and differences between estimated and actual results give rise to gains and losses, which can be significant, that are recorded immediately in earnings, generally in the fourth quarter of the year; (xiv)(xvii) the impact of new and revised tax legislation and regulations; and (xv)(xviii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
We do not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenue, earnings or cash flows, whether as a result of the receipt of new information, future events or otherwise.
PVH Corp.
Form 10-K
For the Year Ended February 2, 2020January 29, 2023
Table of Contents
| PART I | ||||||||
| Item 1. | Business | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 1B. | Unresolved Staff Comments | |||||||
| Item 2. | Properties | |||||||
| Item 3. | Legal Proceedings | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| PART II | ||||||||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||||||
| Item 6. | ||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 8. | Financial Statements and Supplementary Data | |||||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||||
| Item 9A. | Controls and Procedures | |||||||
| Item 9B. | Other Information | |||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |||||||
| PART III | ||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | |||||||
| Item 11. | Executive Compensation | |||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||||||
| Item 14. | Principal Accounting Fees and Services | |||||||
| PART IV | ||||||||
| Item 15. | Exhibits, Financial Statement Schedules | |||||||
| Item 16. | Form 10-K Summary | |||||||
| Signatures | ||||||||
| Index to Financial Statements and Financial Statement Schedule | F- | |||||||
PART I
Item 1. Business
Introduction
Unless the context otherwise requires, the terms “we,” “our” or “us” refer to PVH Corp. and its subsidiaries.
Our fiscal years are based on the 52-53 week period ending on the Sunday closest to February 1 and are designated by the calendar year in which the fiscal year commences. References to a year are to our fiscal year, unless the context requires otherwise. Our 20192022 year commenced on January 31, 2022 and ended on January 29, 2023; our 2021 year commenced on February 4, 20191, 2021 and ended on February 2, 2020;January 30, 2022; and our 20182020 year commenced on February 5, 20183, 2020 and ended on February 3, 2019; and our 2017 year commenced on January 30, 2017 and ended on February 4, 2018.31, 2021.
References to the brand names TOMMY HILFIGER, HILFIGER COLLECTIONTOMMY JEANS, TOMMY HILFIGER TAILORED, TOMMY JEANS, TOMMY SPORT, CALVIN KLEINCalvin Klein, CALVIN KLEIN 205 W39 NYC,CK CALVIN KLEINCalvin Klein, CALVIN KLEIN JEANSCalvin Klein Jeans, CALVIN KLEIN UNDERWEARCalvin Klein Underwear, CALVIN KLEIN PERFORMANCE, Van Heusen, IZOD, ARROW, SpeedoCalvin Klein Performance, Warner’s, Olga, and True&Co., which are owned, Van Heusen, IZOD, ARROW and Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Unlisted, a Kenneth Cole Production, MICHAEL Michael Kors, Michael Kors Collection, DKNY, Chaps, which we owned through the second quarter of 2021 and now license back for certain product categories, and to other brand names owned by us or licensed to us by third parties in this report, are to registered and common law trademarks owned by us or licensed to us by third parties and are identified by italicizing the brand name.
Company Information
We were incorporated in the State of Delaware in 1976 as the successor to a business begun in 1881. Our principal executive offices are located at 200285 Madison Avenue, New York, New York 10016;10017; our telephone number is (212) 381-3500.
We make available at no cost, on our corporate website, PVH.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have electronically filed such material with the Securities and Exchange Commission (“SEC”). All such filings are also available on the SEC’s website at sec.gov.sec.gov.
We also make available at no cost on PVH.com, the charters of the committees of ourthe PVH Board of Directors, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics.
Company Overview
We are one of the largest global apparel companies in the world. We have over 40,000approximately 31,000 associates operating in more than 40 countries and generated $9.9$9.0 billion, $9.2 billion and $7.1 billion in revenues in 2019. 2022, 2021 and 2020, respectively. Our iconic brands, TOMMYHILFIGER and CalvinKlein, together generated over 90% of our revenue during each of 2022 and 2021, and over 85% of our revenue during 2020. Our business was significantly negatively impacted by the COVID-19 pandemic during 2020, resulting in an unprecedented material decline in revenue. Revenue in 2021 and 2022 continued to be negatively impacted by the pandemic and related supply chain and logistics disruptions, although to a much lesser extent than in 2020. 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.
We manage a diversified brand portfolio of iconic brands, including TOMMYHILFIGER CALVIN KLEIN,Calvin Klein, Warner’s, Olga and True&Co., which are owned, Van Heusen, IZOD, ARROW, and Warner’sGeoffrey Beene, which we owned through the second quarter of 2021 and now license back for certain product categories, and other owned and licensed brands. We refer to our owned and licensed trademarks, other than Olga andTOMMY HILFIGER Geoffrey Beeneand brands,Calvin Klein, as well as the digital-centric True&Co. intimates brand. We license brands from third parties, including Speedo (licensed in perpetuity for North
We design and market 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. 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. During 2019, our
1
Our directly operated businesses in North America during 2022 consisted principally of (i) wholesale sales under our TOMMY HILFIGER, CALVIN KLEIN, Van Heusen,HILFIGER and IZOD, ARROW,Calvin Speedo,Klein Warner’s, Olgatrademarks and Geoffrey Beene trademarks;our owned and licensed heritage brands; (ii) the operation of digital commerce sites under theour TOMMY HILFIGER, CALVIN KLEIN, Speedo, True&Co., Van Heusen and IZODCalvin Klein trademarkstrademarks; and the styleBureau.com digital commerce site; and(iii) the operation of retail stores, principally in premium outlet centers, primarily under our TOMMY HILFIGER CALVIN KLEIN and certain of our heritage brandsCalvin Klein trademarks. Our directly operated businesses outside of North America consisted principally of (i) our wholesale and retail sales in Europe and the Asia-Pacific region under our TOMMY HILFIGER HILFIGERtrademarks; (ii) our wholesale and retail sales in Europe, the Asia-Pacific region and Latin AmericaBrazil under our CALVIN KLEIN CalvinKleintrademarks; and (iii) the operation of digital commerce sites in Europe and the Asia-Pacific region under the TOMMYHILFIGER and CALVIN KLEINCalvin trademarks.Klein trademarks, and in Brazil under the CalvinKlein trademark. Our licensing activities principally related to the licensing worldwide of our TOMMYHILFIGER and CALVIN KLEIN CalvinKleintrademarks for a broad array of product categories and for use in numerous discrete jurisdictions.
We have evolved from our 1881 roots to become a diversified global company of iconic brands through a combination of strategic acquisitions, including the Calvin Klein, Tommy Hilfiger, and Warnacotransformative acquisitions and by successfully growing our brands globally across all channels of distribution. Our key acquisitions include the acquisition of Calvin Klein, Inc. and certain affiliated companies (“Calvin Klein”) in February 2003 (the “Calvin Klein acquisition”), the acquisition of Tommy Hilfiger B.V. and certain affiliated companies (“Tommy Hilfiger”) in May 2010 (the “Tommy Hilfiger acquisition”), and the acquisition of The Warnaco Group, Inc. and its subsidiaries (“Warnaco”) in February 2013 (the “Warnaco acquisition”). We also have also acquired several regional licensed businesses and will continue to explore strategic acquisitions of licensed businesses, trademarks and companies that we believe are additive to our overall business.
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 (the “Socks and Hosiery transaction”)extended in order to consolidate the socks and hosiery businesses for allNovember 2022 most of our brands in the United States and Canada in a newly formed joint venture, PVH Legwear LLC (“PVH Legwear”), in which we own a 49% economic interest, and bring in-house the international Calvin Klein socks and hosiery wholesale businesses. The Socks and Hosiery transaction closed on December 2, 2019. PVH Legwear was formed with a wholly owned subsidiary of our former Heritage Brands socks and hosiery licensee. PVH Legwear licenses from us the rights to distribute and sell TOMMY HILFIGER, CALVIN KLEIN, IZOD, Van Heusen and Warner’s socks and hosiery.
We completed the sale of certain of our directly operated Calvin Kleinheritage brands trademarks, including Van Heusen, IZOD, ARROW and GeoffreyBeene, as well as certain related inventories of our Heritage Brands business to Authentic Brands Group (“ABG”) and other parties (the “Heritage Brands transaction”), on the first day of the third quarter of 2021.
We licensed Speedo for North America women’s jeanswear wholesaleand the Caribbean until April 6, 2020, on which date we sold the Speedo North America business in 2019.
We aggregate our reportable segments for purposes of discussion in this Reportreport into three main businesses: (i) Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments; (ii) Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; and (iii) Heritage Brands, which consists of the Heritage Brands Wholesale segment and, through the second quarter of 2021, the Heritage Brands Retail segments.segment. We announced in 2020 a plan to exit our Heritage Brands Retail business, which was completed in 2021. Our Heritage Brands Retail segment has ceased operations. Note 21,20, “Segment Data,” in the Notes to Consolidated Financial Statements included in Item 8 of this report contains information with respect to revenue, income (loss) before interest and taxes, assets, depreciation and amortization, and capital expenditures related to each segment, as well as information regarding our revenue generated by distribution channel and based on geographic location, and the geographic locations where our net property, plant and equipment is held.
2
Tommy Hilfiger Business Overview
The TOMMY HILFIGER brands in orderprincipally consist of TOMMY HILFIGER and TOMMY JEANS. Other sub-brands are used to fullyfurther capitalize on its globalthe TOMMY HILFIGER brand appeal as each brand variesand vary in terms of price point, product offerings, demographic target consumer or distribution.distribution channel. Products are sold globally in our stores, through our wholesale partners (in stores and online), through pure play digital commerce retailers and on tommy.com, and principally consist of men’s, women’s and kids’ sportswear, denim, underwear, swimwear, accessories and footwear. The TOMMY HILFIGERproducts sold under the brands consist of:include those produced under licenses with third parties for a broad range of lifestyle products, including footwear and accessories, eyewear, watches and jewelry, as well as for certain territories.
Tommy Hilfiger’s global marketing and communications strategy is to build a consumer-centric, go-to-market strategy that maintains the brand’sbrands’ momentum, driving awareness, consistency and relevancy across product lines and regions. We engage consumers through comprehensive 360° marketing campaigns, which have a particular focus on offering capsules and collaborations together with innovative experiences and digital marketing initiatives. Marketing campaigns for the brandbrands are focused on attracting a new generation of consumers worldwide through a blend of global and regional brand ambassadors. Tommy Hilfiger spent over $200approximately $235 million on global marketing and communications efforts in 2019.2022, with a significant portion related to digital media spend.
Through our Tommy Hilfiger North America and Tommy Hilfiger International segments, we sell TOMMY HILFIGER products in a variety of distribution channels, including:
•Wholesale — principally consists of the distribution and sale of products in North America, Europe and the Asia-Pacific region under the TOMMY HILFIGER brands. In North America, distribution is primarily through department stores •Retail — principally consists of the distribution and sale of products under the TOMMY HILFIGER brands in our stores in North America, Europe and the Asia-Pacific region, as well as on the tommy.com sites we operate in these regions. Our stores in North America are primarily located in premium outlet centers. In Europe and the Asia-Pacific region, we operate full-price and outlet stores and concession locations. •Licensing — we license the TOMMY HILFIGER brands to third parties globally for a broad range of products through approximately 35 license agreements. We provide support to our licensees and seek to preserve the integrity of our brands by taking an active role in the design, quality control, advertising, marketing and distribution of each licensed product, most of which are subject to our prior approval and continuing oversight. The arrangements generally are exclusive to a territory or product category. Territorial licensees include our joint ventures in Brazil, India and Mexico. 3 |
Tommy Hilfiger’s key licensees, and the products and territories licensed, include:
| Licensee | Product Category and Territory | |||||||
| American Sportswear S.A. | Men’s, women’s and children’s apparel, footwear and accessories (Central America, South America (excluding Brazil) and the Caribbean) | |||||||
| F&T Apparel LLC & KHQ Investment LLC | Children’s apparel, | |||||||
G-III Apparel Group, Ltd. / G-III Apparel Canada ULC (1) | Men’s and women’s outerwear, luggage, | |||||||
Handsome Corporation | Men’s, women’s and children’s apparel, sportswear, socks and accessories and men’s and women’s outerwear and golf products (South Korea) | |||||||
| MBF Holdings LLC | Men’s and women’s footwear (United States and Canada) | |||||||
| Movado Group, Inc. | Men’s and women’s watches and jewelry | |||||||
| Peerless Clothing International, Inc. | Men’s tailored clothing (United States and Canada) | |||||||
| Safilo Group | Men’s, women’s and children’s eyeglasses and non-ophthalmic sunglasses (worldwide, excluding India) | |||||||
(1) During the fourth quarter of 2022, we extended most of our license agreements with G-III for TOMMY HILFIGER in the United States and Canada, which now have staggered expirations from the end of 2023 through 2027. Upon expiration, we intend to bring most of these product categories in-house and directly operate these businesses.
Our Tommy Hilfiger North America segment includes the results of our Tommy Hilfiger wholesale, retail and licensing activities in the United States, Canada and Mexico, and our proportionate share of the net income or loss of our investments in our joint venture in Mexico and in the PVH Legwear in each caseLLC joint venture (“PVH Legwear”) relating to theeach joint venture’s Tommy Hilfiger businesses.business. Our Tommy Hilfiger International segment includes the results of our Tommy Hilfiger wholesale, retail and
licensing activities outside of North America, and our proportionate share of the net income or loss of our investments in our joint ventures in Brazil and India relating to theeach joint ventures’venture’s Tommy Hilfiger businesses.business. Please see Note 5, “Investments in Unconsolidated Affiliates,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s joint ventures.
Calvin Klein Business Overview
The CALVIN KLEIN Calvin Kleinbrands consist of:of CK Calvin Klein, Calvin Klein, Calvin Klein Jeans, Calvin Klein Underwear and Calvin Klein Performance. Products are sold globally in our stores, through our wholesale partners (in stores and online), through pure play digital commerce retailers and on calvinklein.com, and principally consist of men’s and women’s sportswear, jeanswear, underwear, swimwear, footwear and accessories. The products sold under the brands include those produced under licenses with third parties for a broad range of lifestyle products, including fragrance, men’s and women's apparel, home furnishings, footwear, eyewear, watches and jewelry in various countries and regions, as well as for certain territories.
4 |
Through our Calvin Klein North America and Calvin Klein International segments, we sell CALVIN KLEINCalvin Klein products in a variety of distribution channels, including:
•Wholesale — principally consists of the distribution and sale of products in North America, Europe, the Asia-Pacific region and Brazil under the Calvin Klein brands. In North America, distribution is primarily through department and specialty stores, warehouse clubs, and off-price and independent retailers, as well as digital commerce sites operated by department store customers and pure play digital commerce retailers. In Europe, the Asia-Pacific region and Brazil, distribution is primarily through department and specialty stores, and digital commerce sites operated by department store customers and pure play digital commerce retailers, as well as through distributors and franchisees.
•Retail — principally consists of the distribution and sale of products under the Calvin Klein brands in our stores in North America, Europe, the Asia-Pacific region and Brazil, as well as on the calvinklein.com sites we operate in these regions. Our stores in North America are primarily located in premium outlet centers. In Europe, the Asia-Pacific region and Brazil, we operate full-price and outlet stores and concession locations.
•Licensing — we license the Calvin Klein brands throughout the world in connection with a broad array of product categories. In these arrangements, Calvin Klein combines its design, marketing and branding skills with the specific manufacturing, distribution and geographic capabilities of its partners to develop, market and distribute these goods, most of which are subject to our prior approval and continuing oversight. Calvin Klein has approximately 40 licensing and other arrangements across the Calvin Klein brands. The arrangements generally are exclusive to a territory or product category. Territorial licensees include our joint ventures in India and Mexico.
5
Calvin Klein’s key licensees, and the products and territories licensed, include:
| Licensee | Product Category and Territory | |||||||
| CK21 Holdings Pte. Ltd. | Men’s and women’s CK | |||||||
(Swatch SA) | ||||||||
| Coty Inc. | Men’s and women’s fragrance | |||||||
| Himatsingka Seide, Ltd. | Soft home bed and bath furnishings (United States, Canada, Mexico, Europe, Middle East, Asia and India) | |||||||
| Children’s jeanswear and certain performance wear (United States and Canada) | ||||||||
G-III Apparel Group, Ltd. (1) | Women’s | |||||||
Men’s and women’s Calvin Klein and Calvin Klein Jeans footwear | ||||||||
| Marchon Eyewear, Inc. | Men’s and women’s optical frames and sunglasses (worldwide) | |||||||
Men’s and women’s watches and jewelry (worldwide) | ||||||||
| Peerless Clothing International, Inc. | Men’s tailored clothing (United States, Canada and Mexico) | |||||||
Our Calvin Klein North America segment includes the results of our Calvin Klein wholesale, retail and licensing activities in the United States, Canada and Mexico, and our proportionate share of the net income or loss of our investments in our joint venture in Mexico and in PVH Legwear, in each case relating to theeach joint venture’s Calvin Klein businesses in North America.business. Our Calvin Klein International segment includes the results of our Calvin Klein wholesale, retail and licensing activities outside of North America, and our proportionate share of the net income or loss of our investment in our joint venture in India relating to the joint venture’s Calvin Klein business. Please see Note 5, “Investments in Unconsolidated Affiliates,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s joint ventures.
Heritage Brands Business Overview
Our Heritage Brands business designs, sourcesincludes the design, sourcing and marketsmarketing of a varied selection of prominentwomen’s intimate apparel principally under the Warner’s and True&Co. brands and men’s underwear under the Nike brand, labelwhich is licensed. Our Heritage Brands business also includes the design, sourcing and marketing of men’s dress shirts and neckwear under the Van Heusen brand, as well as under various other licensed brand names.
This business also included until August 2, 2021, when we completed the Heritage Brands transaction, the design, sourcing and marketing of a varied selection of sportswear swimwear, swim products, intimate apparel, underwear under the Van Heusen, IZOD, ARROW and related apparelGeoffrey Beene brands and accessories, and licenses certainthe licensing to third parties of ourthese brands for an assortment of products. The Heritage Brands business also offers private label dress furnishings programs, particularly in neckwear. We design, source and market substantially all of these products on a brand-by-brand basis, targeting distinct consumer demographics and lifestyles in an effort to minimize competition among our brands. Global retail sales of products sold under our owned and licensed heritage brands, including sales by our licensees, were approximately $3.3 billion in 2019.product categories.
Our Heritage Brands Wholesale segment principally includes the results of our Heritage Brands wholesale and licensing activities, the results of our directly operated digital commerce sites, and our proportionate share of the net income or loss of our investments in our joint venture in Mexico and in PVH Legwear in each case
6
relating to theeach joint venture’s Heritage Brands businesses. business. This segment also included the results of our directly operated digital commerce site for Van Heusen and IZOD in the United States, which ceased operations during the third quarter of 2021 in connection with the Heritage Brands transaction. Please see Note 5, “Investments in Unconsolidated Affiliates,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s joint ventures.
Our Heritage Brands Retail segment includesceased operations in 2021. This segment had included the results of our Heritage Brands stores.retail stores, primarily located in outlet centers throughout the United States and Canada, through which we marketed a selection of Van Heusen, IZOD and Warner’s apparel, accessories and related products directly to consumers. We completed the exit from the business in the fourth quarter of 2021.
Our Business Strategy
•Win with product through a number of initiatives, which include:–
•Win in the digitally-led marketplace – By building a holistic distribution strategy for Calvin Klein and TOMMY HILFIGER, led by digital and direct-to-consumer channels, and supported by key wholesale partnerships.
•Develop a demand- and data-driven operating model – By driving a systematic and repeatable product creation model that puts the consumer first and leverages data to bring products consumers most desire to market retailerswith speed and digital commerce,agility.
•Drive efficiencies and invest in growth –By becoming more cost-competitive and reinvesting in key strategic growth drivers. We are simplifying how our teams work and identifying efficiencies to fuel growth initiatives with a focus on driving profitable volume.the greatest positive impact and strongest return.
Other Strategic Opportunities
We believe we have an attractive and diversemanage a portfolio of global iconic brands, with growth potential. Nonetheless, we willincluding TOMMYHILFIGER and CalvinKlein. We do continue to explore strategic acquisitions of licensed businesses, companies orand trademarks, licensing take-backs and licensing opportunities that we believe are additive to our overall business, including to addressbusiness. These could include product category, platform capability expertise, and brand positioning and design perspective needs. We take a disciplined approach to any acquisitions, seeking brands with broad consumer recognition that we can grow profitably and expand by leveraging our infrastructure and core competencies and, where appropriate, by extending the brand through licensing.competencies.
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 hastends to have the highest level of royalty revenue due to higher sales by licensees in advance of the holiday selling season. The COVID-19 pandemic and related supply chain and logistics disruptions have 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.
Design
Our business depends on our ability to stimulateappeal and respond to consumer tastes and demands, as well as on our ability to remain competitive in the areas of quality, sustainability and delivering a compelling price value proposition.proposition where the consumer is shopping.
Our in-house design teams, together with our merchandising teams, are significant contributors to the continued strength of our brands. Each of our branded businesses employs its own teamsteam of designers and merchandisers that develop products representing its brand’s aesthetics, whileare responsible for conceptualizing and implementing the design direction for the brand across the consumer touchpoints of product, stores and marketing. Designers have access to the brands’ extensive archives of product designs, which are a valuable resource for new product concepts. Our designers collaborate with merchandising teams that analyze sales, market trends and consumer preferences to identify market opportunities that help guide each season’s design process and create a globally relevant product assortment. Leveraging our strategic investments in data and analytics tools, merchandisers are able to gain a deeper understanding of customer behavior that empowers our teams to respond to changes in consumer preferences and demand, as well as scale opportunities across brands with greater speed and efficiency. Our merchandising teams manage the product life cycle to maximize sales and profitability across all channels. In an effort to keep our brands relevant, our teams also being mindful of consumers’ tastes, lifestyle needswork with other brands and current fashion trends. To reflect consumer variances in each ofkey collaborators to design and merchandise brand collaborations. These collaborations are intended to drive brand heat and product relevance with our regional markets, the businesses tailor their products and offerings to appeal to local tastes, fit differences or other preferences, while maintaining the cohesive creative vision for each brand. target consumers.
Our teams have expanded their use of 3D design technology to enhance our design capabilities, which reduceswas accelerated by the COVID-19 pandemic, reducing the need for samples early in the design process and the time needed to bring products to market.
Product Sourcing
We source finished products and, to a limited extent, raw materials and trim. Raw materials and trim include fabric, buttons, thread, labels and similar components. Finished products consist of manufactured and fully assembled products ready for shipment to our customers and our stores. Raw material, trim and finished product commitments are generally made two to six months prior to production. We believe we are one of the largest users of shirting fabric in the world. We believe that an ample number of alternative suppliers exist should we need to secure additional or replacement production capacity and raw materials.
Our purchases from our suppliers are effected through individual purchase orders specifying the price, quantity, delivery date and destination of the items to be produced. Sales are monitored regularly at both the retail and wholesale levels and modifications in production can be made either to increase or reduce inventories. We look to establish long-term supplier relationships in the appropriate locations throughout the world to meet our needs and we place our orders in a manner designed to limit the risk that a production disruption at any one facility could cause a serious inventory problem, while seeking to maximize the pricing opportunities. The COVID-19 pandemic has had impacts throughout our supply chain, including as a result of vessel, container and other transportation shortages, labor shortages and port congestion globally, as well as production delays in some of our key sourcing countries, which has delayed product orders. We have incurred, beginning in the second half of 2021 and throughout the first half of 2022, higher air freight and other logistics costs in connection with these disruptions. To mitigate these supply chain and logistics disruptions, we increased our core product inventory levels in 2022. We continue to
8
monitor for any production delays and other potential disruptions in our supply chain and will continue to implement mitigation plans as needed.
The manufacturers of our products are required to meet our quality, human rights, safety, environmental and cost requirements. Our global supply chain teams, offices and buying agents enable us to monitor the quality of the goods manufactured by, and the delivery performance of, our suppliers and work with our global compliance teams to ensure the enforcement of our human rights and labor standards and other code of conduct requirements through our ongoing extensive training, approval and monitoring system. They also monitor and track the primary cost inputs to the finished product to ensure that we pay the most appropriate cost for our finished goods.
We continue to explore new areas of production that can grow with our businesses. Our country of origin strategy provides a flexible approach to product sourcing, which enables us to maximize regional opportunities and mitigate our potential exposure to risks associated with new duties, tariffs, surcharges, or other import controls or restrictions. Whilerestrictions, as has been the case with China, remains an important sourcing country for us,where we have reduced our exposure tobeen reducing the countryamount of production over time by growing our sourcing basein favor of production in other parts of Asia as well as Africa.that better serve our sourcing strategy. Many of these efforts have been with our existing factory partners. Additionally, we began producing finished productspartners, but in Ethiopia during 2017 to evolve our supply chainfacilities and become more dynamic. Production is through a joint venture, PVH Arvind Manufacturing Private Limited Company (“PVH Ethiopia”),countries that we formed with Arvind Limited (“Arvind”). The goods produced are primarily distributedoffer us production or cost advantages over those in the United States through our Heritage Brands business.China.
We also continue to develop strategies that can enhance the operational efficiency of our supply chain and unlock gross margin opportunities. We have incorporatedIn addition to expanding our use of 3D design technology to enhance our design capabilities, which reduce our lead times, improve our planning abilitiesthe time needed to bring products to market, we have also utilized 3D showrooms to be more cost and eliminate the need for early samples in the design process.time efficient. Speed is another critical focus area across the Company. We have implemented various speed models, core replenishment and read and react capabilities for select categories to enhance our operations and make our business model more dynamic and responsive, while also increasing service levels, reducing inventory exposure and improving quality and consumer value. We believe the enhancement of our supply chain efficiencies and working capital management through the effective use of our distribution network and overall infrastructure will allow us to control costs better and provide improved service to our customers.
Corporate Responsibility
As an industry leader and one of the largest branded apparelfashion companies in the world, we recognize that we have a responsibility to address our social and environmental impacts. Corporate responsibility is central to how we conducthas always played a critical role within our broader business and it is a crucial consideration embodiedstrategy. We are steadfast in all of the strategic business decisions that we make.
Forward Fashion, our evolved vision for the future that provides a new level of ambition and transparency across ourglobal corporate responsibility programstrategy, is our roadmap for reaching our time-bound commitments in the critical areas of climate change and reinforceshuman rights. It represents a deepening of our long-standing commitment to sustainable business. Our Forward Fashion strategy supportsaction and a renewed sense of urgency to use our scale to transform ourselves and the standards released by the Global Fashion Agenda in its CEO Agenda 2019, which reflect global developments and focus on climate change as a core priority.industry. We are committed to the goals outlined in our Forward Fashion Fashion strategy and are taking action in a number of ways, including joining key pledges and industry groups that align with our strategy.remain focused on the following:
•Improving the lives of the Our businesses are an integral part of our Forward Fashion strategy and are equally committed to delivering against our corporate responsibility priorities. |
We issue an annual report on our corporate responsibility efforts that can be found on our corporate website.
Warehousing, Distribution and Logistics
Our products are shipped from manufacturers to our wholesale and retail warehousing and distribution centers for inspection, sorting, packing and shipment. Centers range in size, and our main facilities, some of which are owned and operated by independent third parties, are located in the United States, the Netherlands, Canada, China, Japan, South Korea, Brazil and Australia. Our warehousing and distribution centers are designed to provide responsive service to our wholesale and digital commerce customers, andas well as our retail stores, on a cost-effective basis.
Material Customers
Our largest customers account for significant portions of our revenue. Sales to our five largest customers were 18.4%14.1% of our revenue in 2019 and 18.9%2022, 15.0% of our revenue in each2021 and 16.3% of 2018 and 2017.our revenue in 2020. No single customer accounted for more than 10% of our revenue in 2019, 20182022, 2021 or 2017.2020.
Advertising and Promotion
Our marketing programs are an integral component of theour brands’ relevance and success of our brands and the products offered under them. We intendare focused on driving consumer engagement though a digital-first 360° approach around key hero products and key consumer moments, utilizing our iconic brands as creative platforms for collaborations, capsule collections and experiential events, and partnering with culturally relevant talent to build brand heat. Our initiatives fuse entertainment, pop culture, and digital commerce in innovative ways that digitally immerse consumers.
We build each of our brands to be a leader in its respective market segment, with strong consumer awareness, relevance and consumer loyalty. We believe that our brands are successful in their respective market segments because we have strategically positioned each brand to target a distinct consumer demographic. Advertisements generally portray a lifestyle representation of our category offerings rather than a specific item. We design and market our products to complement each other, satisfy lifestyle needs, emphasize product features important to our target consumers, including sustainability attributes, deliver a strong price/value proposition and encourage consumer loyalty.
Our marketing and advertising efforts encompass marketing, communications, social media and special events. Our in-house teams coordinate our brands’ marketing and advertising, tailoring the overall consumer experience for all regions and product lines, and across all channels of distribution. We believe that this enhanced marketing approach enables us to meet our consumers’ needs as we adapt to their rapidly changing demands.
A significant componentemphasis of our marketing programs is digital media, including our digital commerce platforms and social media channels, which allow us to expand our consumer reach to customers and enable us to provide timely information in an entertaining fashion in regard to consumers about our products, special events, promotions and store locations. Tommy Hilfiger’s digital commerce site, tommy.com, and Calvin Klein’s digital commerce site, calvinklein.com, serve as marketing vehicles to complement the ongoing development of the TOMMYHILFIGER and CALVIN KLEINCalvinKlein lifestyle brands, respectively, in addition to offering a broad array of apparel and licensed products. We also operate five Heritage BrandsIn 2022, a significant portion of our marketing and advertising spend related to digital commerce sites in the United States: VanHeusen.com, IZOD.com, styleBureau.com, TrueAndCo.com and SpeedoUSA.com.media.
We also advertiseleverage new ways to engage consumers through print media (includinglivestreaming fashion entertainment/human interest, business, men’s, women’sshows and sports magazinesother consumer activations and newspapers), on television, through outdoor signagein partnership with top live-streamers and through in-store point of sale materials,pure play partners, as well as participatethrough new innovative and creative ways that engage consumers in cooperative advertising programs with our retail partners.the metaverse. In addition, we advertise our brands through sport sponsorships and product tie-ins. We believe that our use of high-profile brand ambassadors and well-known social media influencers across our marketing programs helps drive our brand awareness and cultural relevance.
Our approach is intended to ensure a consistent consumer experience in the digitally led marketplace that is seamlessly connected both online and sales offices around the world. Nearlyoffline, across all of its showrooms are digitized, offering a more engaging, integratedour digital commerce, retail and seamless buying experience for its wholesale partners.channels.
10
Trademarks
We own the TOMMY HILFIGER,, CALVIN KLEIN, Van Heusen, IZOD, ARROW, Calvin Klein, Warner’s,, Olga, True&Co. and Geoffrey Beene True&Co.brands, trademarks, as well as related trademarks (e.g., the interlocking “IZ” logo for IZOD and the TOMMY HILFIGER flag logo and crest design) and lesser-known names. TheseWe own the Calvin Klein trademarks through our ownership of the Calvin Klein Trademark Trust (the “Trust”). The sole purpose of the Trust is to hold these marks. Our owned trademarks are registered for use in each of the primary countries where our products are sold and additional applications for registration of these and other trademarks are made in jurisdictions to accommodate new marks, uses in additional trademark classes or additional categories of goods or expansion into new countries.
Mr. Tommy Hilfiger is prohibited in perpetuity from using, or authorizing others to use, the TOMMY HILFIGER marks (except for the use by Mr. Hilfiger of his name personally and in connection with certain specified activities). In addition, we are prohibited in perpetuity from selling products not ordinarily sold under the names of prestige designer businesses or prestige global lifestyle brands without Mr. Hilfiger’s consent, from engaging in new lines of business materially different from such types of lines of business without Mr. Hilfiger’s consent, or from disparaging or intentionally tarnishing the TOMMY HILFIGER-related marks or Mr. Hilfiger’s personal name.
Mr. Calvin Klein retains the right to use his name, on a non-competitive basis, with respect to his right of publicity, unless those rights are already being used in theour Calvin Klein business. Mr. Klein also has also been granted a royalty-free worldwide right to use the CALVIN KLEINCalvin Klein mark with respect to certain personal businesses and activities, subject to certain limitations designed to protect the image and prestige of the CALVIN KLEINCalvin Klein brands and to avoid competitive conflicts.
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.
Our trademarks and other intellectual property rights are valuable assets and we vigorously seek to protect them on a worldwide basis against infringement. We are susceptible to others imitating our products and infringing on our intellectual property rights. This is especially the case with respect to theThe TOMMY HILFIGER and CALVIN KLEINCalvin Klein brands, as these brandsin particular, enjoy significant worldwide consumer recognition and their generally higher pricing (as compared to our heritage brands)price-positioning provides significant opportunity and incentive for counterfeiters and infringers. We have broad, proactive enforcement programs that we believe have been generally effective in controlling the sale of counterfeit products in the United States and in major markets abroad.our key markets.
Competition
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,remain competitive in these areas, as well as on our ability to remain competitivestimulate consumer tastes and demand through our product offerings and marketing and advertising efforts. Our brands are positioned to sell globally at various price points and in these areas. Our diversified portfolio of brands and products and our use of 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 recognition and awareness within their respective consumer segments. We
Imports and Import Restrictions
The United States and China are involved in a trade dispute that has seensaw the imposition in 2019 of significant additional tariffs on the products we sell that are imported into the United States from China. These tariffs remain in place. Additionally, other governmental actions, such as the imposition by U.S. Customs and Border Protection (“CBP”) of Withhold Release Orders (“WROs”) have had, continue to have and, in the future, may have an impact on our ability to import goods. Our industry has experienced and we have been impacted by, increased regulation and enforcement in 2022, in particular in regards to concerns around forced labor in supply chains. Please see our risk factor “We primarily use foreign suppliers for our products and raw materials, which poses risks to our business operations” in Item 1A, “Risk Factors,” for further discussion.
Our facilities and operations arebusiness is subject to various United States federal, state, and local and foreign laws and regulations, including environmental, health and safety laws and regulations. In addition, we may incur liability under environmental statutes and regulations with respect to the contamination of sites that we own or operate or previously owned or operated (including contamination caused by prior owners and operators of such sites abuttersand neighboring properties, or other persons) and the off-site disposal of hazardous materials. We believe our operations are in compliance with the terms of all applicable laws and regulations and our compliance with these laws and regulations has not had, and is not expected to have, a material effect on our capital expenditures, cash flows, earnings or competitive position.
We believe that attracting, developing and retaining capable and diverse talent is critical to our long-term success. To facilitate talent attraction and retention, we strive to create a strong associate experience and a diverse and inclusive workplace, with opportunities for our associates to grow and develop in their careers, supported by competitive compensation, benefits and health and wellness programs, and by programs that build connections between our associates and their communities.
Governance and Oversight
The PVH Board of Directors and its committees provide oversight on human capital matters. The Nominating, Governance & Management Development Committee is charged, in part, with monitoring issues of corporate conduct and culture, and provides oversight of diversity, equity and inclusion policies and programs as it relates to our management development, talent assessment and succession planning programs and processes. The Board’s Corporate Responsibility Committee is responsible for monitoring policies and performance related to corporate responsibility, including employment and workers’ rights. In addition, our Executive Leadership Team is regularly engaged in the development and management of key associate programs and initiatives, guiding our culture, associate experience, and talent development programs.
12
Associate Information
As of February 2, 2020,January 29, 2023, we employed approximately 21,500 persons on a full-time basis and31,000 associates, of which approximately 18,500 persons12,000 associates were employed on a part-time basis. Approximately 35% of our associates are employed in the United States. Approximately 63% of our associates are employed in Company-operated retail stores, 31% are assigned to offices and 6% are employed in warehousing and distribution facilities. Our use of seasonal workers is not significant and is largely associated with the Christmas and Lunar New Year selling periods. Approximately 2% of our employees weretotal associate population is represented for the purpose of collective bargaining by fourtwo different unions in the United States. Additional persons, some represented by these four unions, are employed from time to time based upon our manufacturing schedules and retailing seasonal needs. Our collective bargaining agreements generally are for three-year terms. In some international markets, a significant percentage of employeesassociates are covered by governmental labor arrangements. Additionally, we have one or more works councils in several European countries. Works councils are organizations that represent workers in respect to certain actions management seeks to take that could have a broad effect on the workers. We believe that our relations with our employeesassociates are good.
Diversity, Equity and Inclusion
Our culture is grounded in our values. We seek to cultivate an environment of inclusion, equity and belonging for all to build a better workplace, drive innovation in the marketplace and create positive impacts in our communities.
We believe we benefit from the unique strengths that each of our associates brings to the workplace, and that a diverse workforce is critical to our long-term success. We strive to improve continuously and make PVH an inclusive work environment through diversity recruitment, development programs, and equitable policies and initiatives. One example is our business resource groups (“BRGs”), which are associate-initiated and associate-led groups that foster an inclusive culture and are intended to contribute to the overall success of the business. We have ten BRGs with 18 chapters globally, most of which are comprised of associates from traditionally underrepresented groups and allies who support them. The BRGs are dedicated to bringing associates together to increase professional and social networks, enhance career development and business acumen, and contribute to building a more inclusive work environment. These groups are supported by our global and regional Inclusion and Diversity (“I&D”) Councils.
Our Chief Diversity Officer leads the development and implementation of an integrated global I&D strategy and works to enhance our ability to attract, develop, retain and promote diverse talent. The diversity of the Board of Directors continues to be a focus of the Board refreshment program. The seven independent directors who have joined the Board since 2015 include four women, a Southeast Asian and a director who self-identifies as Black/bi-racial and LGBTQIA+. These diverse directors comprise over 50% of our Board, bring with them strong operating and industry experiences, and contribute important and diverse perspectives that help better mirror the overall make-up of our associate and consumer populations.
Our I&D efforts have been recognized externally over the years, including PVH being named in 2022 to Forbes America’s Best Employers for Diversity and World’s Top Female Friendly Companies, and as one of America’s 100 Most JUST Companies by Forbes magazine and JUST Capital. We also received a score of 100% on the Human Rights Campaign’s Corporate Equality Index in 2022, for the sixth year in a row. We also were ranked ninth on the Fortune Measure Up list of 20 progressive companies in diversity and inclusion in 2021.
Talent Management and Development
Our talent management and development processes support associate performance, development, talent reviews and succession planning. We regularly review succession plans and conduct assessments to identify talent needs and growth paths for our associates.
Developing our associates is a key strategic priority for us, with the focus on developing leaders and preparing the workforce for the future. PVH University, our global internal learning and development platform, provides engaging and impactful learning content tools and learning opportunities that empower associates to build core competencies and develop skills necessary for improvement and advancement. PVH University programs include, among other things, academies for leadership and our Leadership Behaviors offerings, which are bespoke programs designed to build leadership capabilities for all associates to support our culture and deliver our business strategy. The PVH University library and curriculum includes its digital academy to build enterprise digital and data literacy, as well as to support digital transformation initiatives, and its functional academy to support functional skill building. Additionally, our approach to performance and development is designed to motivate our associates to develop, leverage their strengths and support a coaching and feedback culture.
13
Compensation, Benefits and Wellness
We are committed to providing market competitive compensation and benefits, tailoring our offerings to the countries and regions where our associates work to best position our programs locally while recognizing differing levels and types of government-provided and mandated benefits. These benefits include, among other things, corporate wellness programs, retirement plan benefits, flexible and hybrid working arrangements, a global employee assistance program, paid parental and other supportive leaves, recognition programs (for exemplary work, work anniversaries, etc.) and an associate discount program.
To support wellness, we have undertaken initiatives such as closing our offices worldwide in respect of World Mental Health Day and broadening access to physical, mental, and emotional well-being resources, including the wellness applications Headspace and Virgin Pulse. “Work from Anywhere” weeks provide associates with the flexibility to work up to four weeks each year from anywhere. In the United States, an annual “Be You Day” is an addition to paid days off for use as each individual decides, and the third Friday of every month includes a “You Matter Moment,” when calendars are blocked for associates to take PVH University courses, exercise, or engage in other self-directed wellness or enrichment activities.
In regard to compensation, we are committed to achieving pay equity and have developed a global framework of consistent guidelines and practices on compensation. We also engaged third party experts that recently conducted a global study of gender and ethnicity pay equity.
We are committed to supporting our associates in times of need. We have established a Company- and associate-funded Associate Relief Fund that provides grants to eligible associates experiencing personal hardship due to natural disasters, personal calamities and other events. In 2022, we provided financial and operational support to our associates and their families directly impacted by the war in Ukraine.
The health and safety of our associates is of utmost importance to us. In 2022, we continued to closely monitor the impacts of the COVID-19 pandemic and made decisions that we determined were in the best interest of our associates, as well as their families and the communities in which we operate, particularly in China where COVID-related lockdowns and restrictions continued to be in effect throughout 2022. The vast majority of our office-based associates worked remotely from March 2020 through most of 2021. In 2022, we took a phased approach to returning our office-based associates onsite when permissible. This included modifications to certain of our existing office locations as we adapted to a hybrid work environment that provides flexibility, while maintaining our strong culture of collaboration and connection, in addition to a safe working environment for our associates.
Associate and Community Engagement
We believe it is critical that our associates are informed and engaged. We communicate frequently with our associates through a variety of methods, including our news app, PVH Insider, which reaches associates around the world; our intranet site, the Thread; town hall meetings on regional, business-wide and global bases; and our regular global PVH Listens survey, as well as pulse surveys. We develop action plans based on the insights from these communications to strengthen programs and address any concerns to enhance associate experience.
Local community engagement activities exist in all major office locations. Our global philanthropic efforts are led by The PVH Foundation, a nonprofit corporation which supports global, national, and local nonprofits in communities where our associates work and live. PVH’s matching gift program allows our associates to have their philanthropic donations to qualifying organizations matched by The PVH Foundation to increase their impact. Associates are also offered paid time off each year to volunteer with organizations of their choice.
We encourage you to read our annual Corporate Responsibility Report on our PVH.com corporate website for more detailed information regarding our environmental, social and corporate governance programs and initiatives. None of our corporate website, our Corporate Responsibility Report nor any portions thereof are incorporated by reference into this Annual Report.
14
Executive Officers of the Registrant
The following table sets forth the name, age and position of each of our executive officers:
| Name | Age | Position | |||||||||||||
| Executive Vice President and Chief | |||||||||||||||
| Chief Executive Officer, Tommy Hilfiger Global and PVH Europe | |||||||||||||||
| Mark D. Fischer | Executive Vice President, General Counsel | ||||||||||||||
| Executive Vice President, Chief | |||||||||||||||
| Eva Serrano | 50 | Global Brand President, Calvin Klein | |||||||||||||
Mr. Larsson joined us as President in 2019.2019 and became Chief Executive Officer on the first day of 2021. 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. ShafferCoughlin joined us as Executive Vice President, Chief Financial Officer on April 4, 2022. From 2019 until 2021, Mr. Coughlin was Group Chief Financial Officer and Chief Operating Officer of DFS Holdings Limited, a subsidiary of the LVMH Group. From 2015 until 2018, he was Chief Financial Officer of Converse, Inc., a subsidiary of Nike, Inc.
Mr. Hagman has been employed by us since 1990. He served as Senior Vice President, Retail Operations immediately(including his employment within our Tommy Hilfiger organization prior to beingthe Tommy Hilfiger acquisition) since 2008. He was named Executive Vice President, Finance in 2005, Executive Vice President and Chief Financial Officer, PVH Europe in 2006, and Executive Vice President and2013, Chief Operating &and Financial Officer, PVH Europe in 2012.
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.
Ms. Serrano joined us as Global Brand President, Calvin Klein on March 6, 2023. From 2019 until joining PVH, Ms. Serrano was President, Inditex Greater China, having served as International Commercial Director for Zara Asia Pacific, a subsidiary of Inditex, from 2006 to 2018.
15
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 a significant impact on us and may continue to impact us in the future.
The COVID-19 pandemic has had 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 in the future, if any, will depend, in part, on the duration, severity, and location of any resurgences of infections.
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. COVID-related pressures continued into 2022, although to a much lesser extent than in 2021 in all regions except China. Strict lockdowns in China resulted in extensive temporary store closures and significant reductions in consumer traffic and purchasing throughout 2022, and impacted certain warehouses, resulting in a temporary pause of deliveries to our wholesale customers and from our digital commerce business in the first half of 2022. COVID-related restrictions in China were lifted at the end of the fourth quarter of 2022.
Our brick and mortar wholesale customers and our licensing partners also experienced significant business disruptions as a result of the pandemic. Our wholesale customers and franchisees globally generally experienced temporary store closures and operating restrictions and obstacles 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 resulted in them closing 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 our supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of our licensees. The 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 delayed product orders, particularly during the second half of 2021 and throughout 2022, 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 impacted our inventory levels and our sales volumes. We also incurred higher freight and other logistics costs in connection with these disruptions, which negatively impacted our gross margin.
Consumers have also been affected, and may continue to be affected, by the pandemic, resulting in adverse impacts on us. Concerns about the health risks in traveling, as well as consumers’ illness or unwillingness to shop in stores out of fear of exposure, has adversely affected traffic in our stores and our wholesale customers’ and franchisees’ stores. Consumer spending has been, and may continue to be, negatively impacted by job losses and reduced earnings power, inflationary pressures, and other factors. 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.
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.
16
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 18.4%14.1%, 15.0% and 16.3% of our revenue in 20192022, 2021 and 18.9% of our revenue in each of 2018 and 2017.2020, respectively. No single customer accounted for more than 10% of our revenue in 2019, 20182022, 2021 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.
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, such as those that resulted from the COVID-19 pandemic, could reduce substantially reduce our revenue and materially adversely affect our profitability.
Traditional brick and mortar retailers have experienced 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 businessPVH+ Plan 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:
•continue to maintain and enhance the distinctive brand identities of the TOMMY HILFIGER and Calvin Klein brands; • |
continue to maintain good working relationships with Tommy Hilfiger’s and Calvin Klein’s licensees;
• |
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,businesses, our financial condition and results of operations may be materially adversely affected.
17
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, the positions taken by celebrities, athletes and others who promote our products (and our response to the same) or a belief that we or our business partners have acted in an irresponsible or unacceptable manner.Negative claims or publicity regarding the TOMMY HILFIGER or Calvin Klein brands, stores or products, including stores operated by business partners and licensed products, or regarding celebrities, athletes and others who promote our 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.
Increased regulation and stakeholder scrutiny regarding our environmental, social and governance (“ESG”) matters, could result in additional costs or risks and adversely impact our reputation.
There is an increased focus, including by regulators, legislators, consumers, investors, our associates and other stakeholders on ESG matters, including increased pressure to expand our disclosures, ensure labor and other sustainability aspects within our supply chain, make and establish corporate responsibility goals and take actions to meet them, which could expose us to regulatory, legal, market, operational and execution costs or risks. We seek to comply with all applicable laws, rules and regulations and also have established focus areas and targets under our Fashion Forward corporate responsibility strategy in respect to many ESG measures, including in regards to diversity, greenhouse gas emissions, water usage and usage of more sustainable materials and packaging. There can be no assurance that we can achieve compliance without significant impact on our business or results of operations or that our stakeholders will agree with our strategy or that we will be successful in achieving our goals. This also could adversely affect our reputation and the reputation of our brands, sales and demand for our products, retention of our associates, willingness of our suppliers to do business with us, and investor interest in our securities.
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.purchasing.
Our U.S. retail store operations are a material contributor to our revenue and earnings.revenue. 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 negatively affected by the decrease in international tourists coming to the United States as a result of the pandemic, resurgences of infections, and pandemic-related travel restrictions. In addition to the factors discussed above,
18
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 reductionReductions in international tourist traffic orand spending therefore couldhave had, and in the future may 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.
The revenue of our digital commerce businesses, which historically has not represented a significant portion of our total revenue, experienced strong growth during 2020 and time-consuming.2021, both with respect to our direct-to-consumer businesses and the wholesale business (i.e., sales to pure play and digital commerce businesses of traditional retailers), and is now approximately 20% 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;
•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 sustain and support the continued 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
19
as the COVID-19 pandemic), or if there is a significant increase in demand for shipping capacity (as was the case in 2021 and through the first half of 2022), we may experience (and, in the case of the pandemic, did 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, did 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.
Global 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 and its broader macroeconomic implications. 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 experienced 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.
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 production or transportation of our products and raw materials to us and an increase in production and 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 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, did result in) increased freight and other logistics costs;
•natural disasters, such as floods, earthquakes, wildfires and droughts, 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);
20
•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, has resultedpandemic, did result 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;
We continuously look 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 result in an increase in our cost of goods sold for that product. We are looking at alternative sourcing options, but we may not be able to shift timely, if at all, production of inventory bound for the United States from China toa country when new or increased duties, tariffs, taxes or other countries.charges are imposed. 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, the enactment of the Uyghur Forced Labor Prevention Act 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 direct or indirect production of goods and the use of cotton grown in Xinjiang Province. 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 entities, 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, as well as outgrowth organizations such as the International Accord for Health and Safety in the Textile and Garment Industry, the mission of each of which is to improve workplace, fire and building safety in Bangladesh’sfactories in major textile and apparel factories.producing countries. 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. Our industry has experienced and we have been impacted by, increased regulation and enforcement, in particular in regards to concerns around forced labor in supply chains. These trends regarding regulation and enforcement are expected to continue, especially through action in the countries where we sell most of our products.
21
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, which hasas well as logistics disruptions, as occurred and may occur in the future,2020 through 2022 period as a result of the current COVID-19 outbreak,pandemic, or for manufacturers 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.
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, floods and droughts) 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.
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 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
22
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 (as we did in certain regions and for certain product categories during 2022) 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, 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 had 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 air freight costs we experienced beginning in the second half of 2021 and into 2022 and the increased costs of labor, raw materials and ocean freight we experienced in 2022, have resulted, and are expected to continue to result, particularly in the first half of 2023, in increased pricing pressures and, in turn, pressure on our margins. We implemented price increases in certain regions and for certain product categories during 2022 to mitigate the higher costs. However, in the future, we may not be able to implement price increases that fully mitigate the impact of higher costs and/or any such price increases could have an adverse impact on consumer demand for our products. As well, consumer spending has been, and may continue to be, negatively impacted by reduced earnings power resulting from the current
23
inflationary pressures, which has resulted, and may continue to result, lower sales of our products, increased inventories, order cancellations, higher discounts, pricing pressure, higher inventory levels industry-wide, and lower gross margins.
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, or our supply chain and logistics partners are unable to adjust to changes in consumer demand for our products, including, for example, as had occurred as a result of the COVID-19 pandemic in 2020, we may at times experience excess inventory levels or a shortage of product required to meet demand. Inventory levels in excess of consumer demand have resulted in, and may in the future result in, inventory write-downs and the sale of excess inventory at heavily discounted prices, which could have a material adverse effect on our profitability and the reputation of our brands. 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.
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 loss of services of one or more of these individuals or the inability to effectively identify a suitable successor for them could have a material adverse effect on us.
We may not be successful in the take-back of licensed businesses.
As part of our PVH+ Plan strategy, we are planning to, and in the future may pursue further opportunities to, increase direct management of our Calvin Klein and TOMMY HILFIGER brands through take-backs of licensed businesses. For example, we recently announced our intention to bring in-house and directly operate most of the Calvin Klein and TOMMY HILFIGER product categories currently licensed in the United States and Canada to G-III as the license agreements expire beginning at the end of 2023 through 2027.
The integration of previously licensed businesses may be complex, costly and time-consuming. We may have difficulty, or may not succeed in, integrating the businesses into our operations, hiring qualified key employees needed to operate the businesses, or otherwise managing the previously licensed businesses. Furthermore, we may incur higher than expected costs to bring previously licensed businesses in-house and/or to operate these businesses. As such, license take-backs may not achieve the intended benefits to our overall growth strategy, our brands and results of operations, and our overall profitability may decline to the extent we are unable to operate these businesses at the same level of earnings that we realized when they were licensed businesses.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies.
Acquisitions historically have been a 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;
24
•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.
Financial Risks
Our level of debt could impair our financial condition and ability to operate.
We had outstanding as of January 29, 2023 an aggregate principal amount of $2.301 billion of indebtedness, of which $100 million of unsecured debentures are due in 2023, €525 million of euro-denominated senior unsecured notes are due in 2024 and $500 million of senior unsecured notes are due in 2025. 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 principal and 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.
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 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,
25
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.
Our ability to maintain compliance with the financial covenant 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 a maximum net leverage ratio. A prolonged disruption to our business, such as we experienced in 2020 and into 2021, as a result of the COVID-19 pandemic, may impact our ability to comply with this covenant in the future. Non-compliance with this covenant 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 the maximum net leverage ratio 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.
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.
26
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, the war in Ukraine and its broader macroeconomic implications and inflationary pressures, there continues to be significant uncertainty with respect to the actuarial gain or loss we may record on our retirement plans in 2023. We may incur a significant actuarial gain or loss in 2023 if there is a significant increase or decrease in discount rates, respectively, or if there is a difference between 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 occurred in 2020 as a result of the COVID-19 pandemic and as a result of discount rates in 2022, may impact our projected cash flows and estimates of weighted average cost of capital, which could result 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.
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. Additionally, in the third quarter of 2022, in conjunction with our 2022 annual goodwill impairment test, we recorded $417 million of noncash impairment charges. The impairment was non-
27
operational and driven by a significant increase in discount rates, as a result of then-current economic conditions. As of January 29, 2023, we had $2.359 billion of goodwill and $3.250 billion of other intangible assets on our balance sheet, which together represented 48% 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.
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.
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
28
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 2022, 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 an 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
29
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.
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 29, 2023 are set forth below:
| 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 | |||||||||||||||||||||
| Bridgewater, New Jersey | Corporate and retail administrative offices | Leased | |||||||||||||||||||||
| Banksmeadow, Australia | Tommy Hilfiger, Calvin Klein and Heritage Brands administrative offices, showrooms, warehouse and distribution center | Leased | |||||||||||||||||||||
| Amsterdam, The Netherlands | |||||||||||||||||||||||
Tommy Hilfiger and Calvin Klein administrative offices and showrooms | Leased | ||||||||||||||||||||||
| 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 | |||||||||||||||||||||
As of February 2, 2020,January 29, 2023, we leased certain other administrative offices, showrooms and showroomswarehouse and distribution centers in various domestic and international locations. We also leased and operated as of February 2, 2020 over 1,800January 29, 2023, approximately 1,500 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.
30
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, 2020,10, 2023, there were 562495 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) | ||||||||||||||||||||||
| October 31, 2022 - | ||||||||||||||||||||||||||
| November 27, 2022 | 388,452 | $ | 56.34 | 387,400 | $ | 874,795,801 | ||||||||||||||||||||
| November 28, 2022 - | ||||||||||||||||||||||||||
| January 1, 2023 | 735,876 | 70.55 | 726,600 | 823,514,975 | ||||||||||||||||||||||
| January 2, 2023 - | ||||||||||||||||||||||||||
| January 29, 2023 | 292 | 75.28 | — | 823,514,975 | ||||||||||||||||||||||
| Total | 1,124,620 | $ | 65.65 | 1,114,000 | $ | 823,514,975 | ||||||||||||||||||||
___________________
(1)The Company’s Board of Directors has authorized over time since 2015 an aggregate $3.0 billion stock repurchase program through June 3, 2026, which includes a $1.0 billion increase in the authorization and a three year extension of the program approved by the Board of Directors on April 11, 2022. 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 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 2022 in connection with the settlement of restricted stock units to satisfy tax withholding requirements. |
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.
31
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, the S&P 500 Apparel, Accessories & Luxury Goods Index, the Russell 3000 Index and the S&P 5001500 Apparel, Accessories & Luxury Goods Index for the five fiscal years ended February 2, 2020.January 29, 2023.
| Value of $100.00 invested after 5 years: | |||
| Our Common Stock | $ | 79.62 | |
| S&P 500 Index | $ | 179.17 | |
| S&P 500 Apparel, Accessories & Luxury Goods Index | $ | 78.24 | |
| Value of $100.00 invested after 5 years: | |||||
| Our Common Stock | $ | 58.58 | |||
| Russell 3000 Index | $ | 157.61 | |||
| S&P 1500 Apparel, Accessories & Luxury Goods Index | $ | 76.93 | |||
| S&P 500 Index | $ | 160.94 | |||
| S&P 500 Apparel, Accessories & Luxury Goods Index | $ | 60.32 | |||
Item 6. Selected Financial Data[Reserved]
32
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, with a history going back over 140 years and in March 2020, we marked our 100-year anniversary as ahave been listed company on the New York Stock Exchange.Exchange for over 100 years. 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 also consists, which we owned through the second quarter of various2021 and now license back for certain product categories, and other owned licensed and to a lesser extent, private labellicensed brands. We entered intoalso had a definitive agreement on January 9, 2020 to sell our Speedo North America business to Pentland and, upon closing of the sale, we will no longerperpetual license thefor Speedo trademark. The Speedo transaction is expected to close in North America and the first quarter ofCaribbean until April 6, 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.
At our April 2022 Investor Day, we introduced the PVH+ Plan, our multi-year, strategic plan to drive brand-, digital- and direct-to-consumer-led growth and financial performance for sustainable, long-term profitable growth and value creation. The PVH+ Plan builds on our core strengths and connects Calvin Klein and TOMMY HILFIGER closer to the consumer than ever before through five key drivers: (1) win with product, (2) win with consumer engagement, (3) win in the digitally-led marketplace, (4) develop a demand- and data-driven operating model, and (5) drive efficiencies and invest in growth. These five foundational drivers apply to each of our businesses and are activated in the regions to meet the unique expectations of our consumers around the world.
RESULTS OF OPERATIONS
War in Ukraine
As a result of the war in Ukraine, we announced in March 2022 that we were temporarily closing stores and pausing commercial activities in Russia and Belarus. In the second quarter of 2022, we made the decision to exit from our Russia business, including the closure of our retail stores in Russia and the cessation of our wholesale operations in Russia and Belarus. Additionally, while we have no direct operations in Ukraine, virtually all of our wholesale customers and franchisees in Ukraine were impacted during 2022, which resulted in a reduction in shipments to these customers and canceled orders.
We recorded net pre-tax costs of $43 million in 2022 in connection with our decision to exit from the Russia business, consisting of (i) $44 million of noncash asset impairments, (ii) $5 million of contract termination and other costs and (iii) $2 million of severance, partially offset by an $8 million gain related to the early termination of certain store lease agreements in Russia. Please see Note 17, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
In addition, our revenue in 2022 reflected a reduction of approximately $122 million compared to the prior year, as a result of the war in Ukraine. Our net income in 2022 also reflected a reduction of approximately $41 million,apart from the $43 million of net pre-tax costs discussed above, as well as the related tax impact, as compared to the prior year.Approximately 2% of our revenue in 2021 was generated in Russia, Belarus and Ukraine.
The war also has led to, and may lead to further, broader macroeconomic implications, including the weakening of the euro against the United States dollar for a significant portion of 2022, 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 on the broader European market, will impact our business, financial condition and results of operations in 2023.
33
Inflationary pressures
We believe inflationary pressures have negatively impacted our revenue and earnings in 2022, including (i) increased costs of labor, raw materials and freight and (ii) beginning late in the second quarter of 2022, a slowdown in consumer demand for our products. We implemented price increases in certain regions and for certain product categories during 2022 to mitigate the higher costs. However, the slowdown in consumer demand has also resulted in an increased promotional environment as consumers reduced discretionary spend and certain wholesale customers have taken a more cautious approach, particularly in North America and to a lesser extent in Europe. We expect inflationary pressures to continue to negatively impact our revenue and earnings into 2023.
COVID-19 OutbreakPandemic Update
The COVID-19 outbreak is havingpandemic has had a significant impact on our business, financial condition, cash flows and results of operations, financial condition and cash flows from operations. We currently do not expect the pandemic to have a significant impact on us in 2020.2023.
•Our stores continued to be impacted during 2021 by the pandemic, including temporary closures of our stores in Europe, Canada, Japan, Australia and China for varying periods. 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.
•COVID-related pressures continued into 2022, although to a much lesser extent than in 2021 in all regions except China. Strict lockdowns in China resulted in extensive temporary store closures and significant reductions in consumer traffic and purchasing, as well as have impacted certain warehouses, which resulted in the temporary pause of deliveries to our wholesale customers and from our digital commerce businesses in the first half of 2022. COVID-related restrictions in China were lifted at the end of the fourth quarter of 2022.
•In addition, our North America stores have been challenged by the significant decrease in international tourists coming to the United States since the onset of the pandemic. While the impact has continuously improved since 2020, we expect international tourists shopping in our stores in 2023 will continue to be below 2019 levels. Stores located in international tourist destinations have historically represented a significant portion of this 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.
Our digital channels, which have historically represented a less significant portion of our overall business, experienced exceptionally strong growth during 2020 and into the first quarter of 2021, 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 growth was less pronounced during the remainder of 2021 as stores reopened and capacity restrictions lessened. Sales through digital channels decreased 12% in 2022 compared to exceptionally strong revenue in 2021, inclusive of a negative impact of approximately 8% related to foreign currency translation. We currently expect our sales through digital channels as a percentage of total revenue in 2023 to remain consistent with 2022 levels at approximately 20%.
In addition, the pandemic has impacted our supply chain partners, including third party manufacturers, logistics providers and other vendors, as well as the supply chains of our licensees. The vessel, container and other transportation shortages, labor shortages and port congestion globally, as well as production delays in some of our key sourcing countries delayed product orders, particularly during the second half of 2021 and into the first half of 2022, 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 impacted our inventory levels, including in-transit goods, and our sales volumes. These impacts significantly improved in the second half of 2022. We incurred beginning in the second half of 2021 and through the first half of 2022 higher air freight and other logistics costs in connection with these disruptions. To mitigate the supply chain and logistics disruptions, we increased our core product inventory levels.
34
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.
Outlook Uncertainty due to War in Ukraine and Inflation
There continues to be significant uncertainty in the current macroeconomic environment due to inflationary pressures globally, the war in Ukraine and foreign currency volatility. Our 2023 outlook assumes no material worsening of current conditions. Our revenue and earnings in 2023 may be subject to significant material change based on changes in these and other factors.
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 1,8301,500 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 1,500 1,300Company-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, under our TOMMY HILFIGER and CALVIN KLEINCalvin Klein trademarks and in the United States through our directly operated digital commerce sites for trademarks.Speedo, True&Co., Van Heusen, and IZOD, as well as our
•We announced in August 2022 plans to reduce people costs in our global offices by approximately 10% by the end of 2023 to drive efficiencies and enable continued strategic investments to fuel growth, including in digital, supply chain and consumer engagement (the “2022 cost savings initiative”), which is expected to result in annual cost savings of approximately $100 million, net of continued strategic people investments. We recorded pre-tax costs of $20 million during 2022, consisting of severance related to initial actions taken under the plans. We expect to incur additional costs in 2023 in connection with the Australia2022 cost savings initiative, however the additional costs are not known at this time. 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 completed the sale of our approximately 8% economic interest in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”) to a subsidiary of G-III (the “Karl Lagerfeld transaction”) on May 31, 2022 for approximately $20 million in cash, subject to customary adjustments, with $1 million of the proceeds held in escrow. We recorded a pre-tax gain of $16 million in the second quarter of 2022 in connection with the transaction. Please see Note 5, “Investments in Unconsolidated Affiliates,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
35
•We completed the sale of certain of our heritage brands trademarks, including VanHeusen, IZOD, ARROW and TH CSAP acquisitions, weGeoffreyBeene, as well as certain related inventories of our Heritage Brands business with a net carrying value of $98 million, to ABG and other parties, 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 $83$113 million during 2019, includingin the third quarter of 2021 in connection with the transaction, consisting of (i) a noncash gain of $113$119 million, which represented the excess of the amount of consideration received over the carrying value of the net assets, less costs to write upsell, and a net gain on our existing equity investments in Gazal and PVH Australia to fair value,retirement plans associated with the transaction, partially offset by (ii) $21$6 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 our mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition.
•(collectively with (i), the “CK Collection closure”), (iii) the restructuringWe 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 have resulted in annual cost savings 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. approximately $60 million. We recorded pre-tax costs of $103$48 million during 2019 in connection with the Calvin Klein restructuring,2021 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, $9 million of other noncash asset impairments and $13 million of inventory markdowns. We recorded pre-tax costs of $41 million in the fourth quarter of 2018, consisting of $27 million of severance, $7(i) $28 million of noncash asset impairments, (ii) $16 million of severance and (iii) $4 million of contract termination and other costs. All costs and $2 millionrelated to these actions were incurred by the end of inventory markdowns.2021. Please see Note 18,17, “Exit Activity Costs,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
•We issued on December 21, 2017 €600announced 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, euro-denominated principal amountand (ii) the exit from our Heritage Brands Retail business, which was substantially completed in the second quarter 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 licensed Speedo We also announced in November 2022 that we extended most of our licensing agreements with G-III for Calvin Klein and TOMMY HILFIGER in the United States and Canada, largely pertaining to the women’s apparel product categories sold at wholesale in North America. These agreements now have staggered expirations from the end of 2023 through 2027. Upon expiration, we intend to bring most of the licensed product categories in-house and directly operate these businesses. |
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%65% of our 20192022 revenue was subject to foreign currency translation. The United States dollar strengthenedweakened against most major currencies
36
most major currencies, during the first nine months of 2022, but then began to weaken in the fourth quarter of 2022 and into 2023. Our 2022 revenue and net income decreased by approximately $215$630 million and $25$70 million, respectively, as compared to 20182021 due to the impact of foreign currency translation. WeHowever, we currently expect a decrease in our 2023 revenue and net income in 2020to increase by approximately $70 million and $10 million, respectively, as compared to 20192022 due to the impact of foreign currency translation.
There also is also a transactional impact of foreign exchange 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 20192022 net income included a slight benefitdecreased by approximately $25 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 20192021 due to the transactional impact.impact of foreign currency.We currently expect our 2023 net income to decrease by approximately $75 million as compared to 2022 due to the transactional impact of foreign currency with an expected negative impact to our 2023 gross margin of approximately 100 basis points.
37
The following table summarizes our income statements of operations in 2019, 20182022, 2021 and 2017:2020:
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Net sales | $ | 8,545 | $ | 8,724 | $ | 6,799 | |||||||||||
| Royalty revenue | 372 | 340 | 260 | ||||||||||||||
| Advertising and other revenue | 107 | 91 | 74 | ||||||||||||||
| Total revenue | 9,024 | 9,155 | 7,133 | ||||||||||||||
| Gross profit | 5,123 | 5,324 | 3,777 | ||||||||||||||
| % of total revenue | 56.8 | % | 58.2 | % | 53.0 | % | |||||||||||
| SG&A expenses | 4,377 | 4,454 | 3,983 | ||||||||||||||
| % of total revenue | 48.5 | % | 48.7 | % | 55.8 | % | |||||||||||
| Goodwill and other intangible asset impairments | 417 | — | 933 | ||||||||||||||
| Non-service related pension and postretirement income | (92) | (64) | (76) | ||||||||||||||
| Other (gain) loss, net | — | (119) | 3 | ||||||||||||||
| Equity in net income (loss) of unconsolidated affiliates | 50 | 24 | (5) | ||||||||||||||
| Income (loss) before interest and taxes | 471 | 1,077 | (1,072) | ||||||||||||||
| Interest expense | 90 | 109 | 125 | ||||||||||||||
| Interest income | 7 | 4 | 4 | ||||||||||||||
| Income (loss) before taxes | 388 | 973 | (1,193) | ||||||||||||||
| Income tax expense (benefit) | 188 | 21 | (56) | ||||||||||||||
| Net income (loss) | 200 | 952 | (1,137) | ||||||||||||||
| Less: Net loss attributable to redeemable non-controlling interest | — | (0) | (1) | ||||||||||||||
| Net income (loss) attributable to PVH Corp. | $ | 200 | $ | 952 | $ | (1,136) | |||||||||||
| 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 | ||||||||
| Total revenue | 9,909 | 9,657 | 8,915 | ||||||||
| Gross profit | 5,388 | 5,308 | 4,894 | ||||||||
| % of total revenue | 54.4 | % | 55.0 | % | 54.9 | % | |||||
| SG&A | 4,715 | 4,433 | 4,245 | ||||||||
| % of total revenue | 47.6 | % | 45.9 | % | 47.6 | % | |||||
| Non-service related pension and postretirement cost | 90 | 5 | 3 | ||||||||
| Debt modification and extinguishment costs | 5 | — | 24 | ||||||||
| Other noncash loss, net | 29 | — | — | ||||||||
| 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 | ||||||||
| Less: Net loss attributable to redeemable non-controlling interest | (2 | ) | (2 | ) | (2 | ) | |||||
| Net income attributable to PVH Corp. | $ | 417 | $ | 746 | $ | 538 | |||||
Total Revenue
Total revenue was $9.909$9.024 billion in 2019, $9.6572022, $9.155 billion in 20182021 and $8.915$7.133 billion in 2017. Revenue in 2017 included the benefit of a 53rd week.2020. The increasedecrease in revenue of $252$130 million, or 3%1%, in 20192022 as compared to 2018 was due principally to2021 included (i) a 7% negative impact of foreign currency translation, (ii) 2% reduction resulting from the net effectHeritage Brands transaction and the exit from the Heritage Brands Retail business and (iii) a 1% reduction resulting from the impact of the following items:war in Ukraine, including closures of our stores in Russia, the cessation of wholesale shipments to Russia and Belarus, and a reduction in wholesale shipments to Ukraine, and included the following:
• |
The net reduction of an aggregate $63$46 million of revenue, or a 2%1% decrease compared to the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included a negative impact of $387 million, or 8%, related to foreign currency translation. Tommy Hilfiger International segment revenue decreased 4% (including an 11% negative foreign currency impact). Revenue in our Tommy Hilfiger North America segment increased 9%.
•The addition of an aggregate $123 million of revenue, or a 3% increase compared to the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included a negative impact of $85$232 million, or 2%6%, related to foreign currency translation. Calvin Klein International segment revenue increased 3%1% (including a 4%10% negative 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.increased 8%.
•The reduction of an aggregate $52$207 million of revenue, or a 3%26% decrease compared to the prior year, attributable to our Heritage Brands RetailWholesale and Heritage Brands WholesaleRetail segments, primarily due to weakness inwhich included a 25% decline resulting from the North America wholesale businessHeritage Brands transaction and the exit from the Heritage Brands Retail business.
Our 2022 revenue through our direct-to-consumer distribution channel decreased 1%, including a 7% negative foreign currency impact and a 2% declinereduction resulting from the exit of the Heritage Brands Retail business. Sales through our directly operated digital commerce businesses decreased 7% in comparable store sales.2022, including an 8% negative foreign currency impact, following exceptionally strong growth in 2021. Our sales through digital channels, including the digital businesses of our traditional and
38
Revenue in 2020 was significantly negatively impacted by the COVID-19 pandemic as discussed above. The increase in revenue of $742 million,$2.022 billion, or 8%28%, in 20182021 as compared to 2017 was due principally to2020 included the effect of the following items:following:
•The addition of an aggregate $451 million$1.067 billion of revenue, or a 12%29% increase overcompared to the prior year, attributable to our Tommy Hilfiger International and Tommy Hilfiger North America segments, which included the additiona positive impact of $49$74 million, or 1%2%, related to the impact of foreign currency translation. Tommy Hilfiger International segment revenue increased 15%32% (including a 2% positive foreign currency impact), driven by strong performance across all regions and channels. Tommy Hilfiger International comparable store sales increased 13%. Revenue in our Tommy Hilfiger North America segment increased 6%, principally attributable to strength in the wholesale business and a 5% increase in Tommy Hilfiger North America comparable store sales.22%.
•The addition of an aggregate $270 million$1.022 billion of revenue, or an 8%a 39% increase overcompared to the prior year, attributable to our Calvin Klein International and Calvin Klein North America segments, which included the additiona positive impact of $12$60 million, or 2%, 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%39% (including a 3% positive foreign currency impact). 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.38%.
•The additionreduction of an aggregate $21$67 million of revenue, or a 1% increase overan 8% decrease compared to the prior year, attributable to our Heritage Brands RetailWholesale and Heritage Brands Wholesale segments. Comparable store salesRetail segments, which included a 27% decline resulting from (i) the Heritage Brands transaction, (ii) the exit from the Heritage Brands Retail business, and (iii) the April 2020 closing of the Speedo transaction.
Our revenue through our direct-to-consumer distribution channel in 2021 increased 1%.
We currently expect that revenue will decrease significantly in 2020for the full year 2023 to increase approximately 3% to 4% compared to 2019,2022, inclusive of a negative impactthe positive impacts of approximately 1% related to foreign currency translation primarily dueand less than 1% related to the negative impacts to our businesses caused by the COVID-19 outbreak. Revenue53rd week in 2020 is also expected to decrease by approximately $150 million due to the aggregate net effect of reductions resulting from (i) the Speedo transaction, which is expected to close in the first quarter of 2020, and (ii) the G-III license, which commenced 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 2019.2023.
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 selling, general and administrative (“SG&A&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.
39
The following table shows our revenue mix between net sales and royalty, advertising and other revenue, as well as our gross margin for 2019, 20182022, 2021 and 2017:2020:
| 2022 | 2021 | 2020 | |||||||||||||||
| Components of revenue: | |||||||||||||||||
| Net sales | 94.7 | % | 95.3 | % | 95.3 | % | |||||||||||
| Royalty, advertising and other revenue | 5.3 | 4.7 | 4.7 | ||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Gross margin | 56.8 | % | 58.2 | % | 53.0 | % | |||||||||||
| 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 20192022 was $5.388$5.123 billion, or 54.4%56.8% of total revenue, as compared to $5.308$5.324 billion, or 55.0%58.2% of total revenue, in 2018.2021. The 60140 basis point decrease in gross margin decrease was principallyprimarily driven by (i) a gross margin decline in our Tommy Hilfiger North America business due to more promotional sellinghigher product, freight and other logistics costs 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 inflationary pressures and the onsetsupply chain and logistics disruptions, and (ii) increased promotional activity due to elevated inventory levels industry-wide compared to consumer demand, particularly in the second half of the COVID-19 outbreak, (iii) short-lived noncash inventory valuation adjustments recorded in connection with the Australia and TH CSAP acquisitions, and (iv) the negative impact of tariffs imposed on goods imported from China into the United States.2022. These decreases were partially offset by (i) price increases that were implemented in certain regions and for certain product categories during 2022and (ii) the favorable impact of faster growththe reduction in revenue from our Tommy HilfigerHeritage 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 gross margins.
Gross profit in 20182021 was $5.308$5.324 billion, or 55.0%58.2% of total revenue, as compared to $4.894$3.777 billion, or 54.9%53.0% of total revenue, in 2017.2020. The 10520 basis point increase in gross margin increase was principallyprimarily driven by (i) more full price selling, (ii) the impact of a favorablechange 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 gross margins, and (ii) gross margin improvement(iii) the favorable impact of the weaker United States dollar on our international businesses, particularly our European businesses, that purchase inventory in our Tommy Hilfiger business. Partially offsetting these increasesUnited 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 gross margin declinespartially offset by higher freight costs in our Calvin Klein2021 than in the prior year, including an increase of approximately $35 million in air freight to mitigate supply chain and Heritage Brands businesses principally due to more promotional selling.logistics delays.
We currently expect that gross margin in 20202023 will decreaseincrease by approximately 120 basis points as compared to 20192022. Our expectation for 2023 includes increases primarily due to (i) the need for increased promotional selling and inventory liquidation as a result of (i) more full price selling and promotional activity at lower overall discount levels, (ii) lower freight and other logistics costs as compared to the COVID-19 outbreakprior year, (iii) the annualization of price increases that were implemented during 2022 in certain regions and (ii)for certain product categories, (iv) the impact of a change in the revenue mix between our International and North America segments as compared to 2022, as our International segments revenue is expected to be a larger proportion in 2023 than in 2022 and generally carries higher gross margins, and (v) the impact of a change in the revenue mix between our direct-to-consumer distribution channel and our wholesale distribution channel as compared to 2022, as our direct-to-consumer distribution channel is expected to be a larger proportion in 2023 than in 2022 and generally carries higher gross margins. These increases are expected to be partially offset by (i) the approximately 100 basis point decline due to the unfavorable impact of the stronger United States dollar on our international businesses that purchase inventory in United States dollars as discussed above and (ii) the higher product costs we expect to incur in 2023 as a result of inflationary pressures, particularly our European businesses, asin the increased local currency value of inventory results in higher cost of goods in local currency when the goods are sold. There is significant uncertainty with respect to the impactfirst half of the COVID-19 outbreak on our business and the businesses of our licensees and other business partners.year.
SG&A Expenses
Our SG&A expenses were as follows:
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| SG&A expenses | $ | 4,377 | $ | 4,454 | $ | 3,983 | |||||||||||
| % of total revenue | 48.5 | % | 48.7 | % | 55.8 | % | |||||||||||
| 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 20192022 were $4.715$4.377 billion, or 47.6%48.5% of total revenue, as compared to $4.433$4.454 billion, or 45.9%48.7% of total revenue in 2018.2021. The 17020 basis point increasedecrease was primarily as a result of (i) the absence of costs incurred in the prior year and the realized cost savings in 2022 as a result of actions taken to reduce our workforce, primarily in certain international markets, and to reduce our real estate footprint and (ii) the absence in 2022 of costs incurred in the prior year associated with the exit from our Heritage Brands Retail business. These decreases were partially offset by (i) net costs incurred in connection with the exit from our Russia business, primarily consisting of noncash asset impairments and a gain on contract terminations,
40
and (ii) the impact of the reduction in revenue from our Heritage Brands businesses as a result of the Heritage Brands transaction and the exit from our Heritage Brands Retail business, as the revenue from our Heritage Brands businesses carried lower SG&A expenses as a percentage of total revenue.
SG&A expenses in 2021 were $4.454 billion, or 48.7% of total revenue, as compared to $3.983 billion, or 55.8% of total revenue in 2020. The 710 basis point decrease 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.
We currently expect that SG&A expenses as a percentage of revenue in 2018 were $4.433 billion, or 45.9% of total revenue,2023 will decrease slightly as compared to $4.245 billion, or 47.6%2022.Our expectation for 2023 includes decreases primarily as a result of (i) the favorable impact of the 2022 cost savings initiative and (ii) the absence in 2023 of costs incurred in 2022 in connection with the exit from our Russia business. These decreases are expected to be partially offset by (i) the impact of the change in the revenue mix between our International and North America segments as compared to 2022, as our International segments revenue are expected to be a larger proportion in 2023 than in 2022 and generally carries higher SG&A expenses as percentages of total revenueand (ii) the impact of a change in 2017. The 170 basis point decreasethe revenue mix between our direct-to-consumer distribution channel and our wholesale distribution channel as compared to 2022, as our direct-to-consumer distribution channel is expected to be a larger proportion in 2023 than in 2022 and generally carries higher SG&A expenses as a percentage of total revenuerevenue.
Goodwill and Other Intangible Asset Impairments
We recorded a pre-tax noncash goodwill impairment charge of $417 million during 2022 in conjunction with our annual goodwill and other indefinite-lived intangible asset impairment testing. The impairment was principally attributable to the absence in 2018 of costs that were recorded in 2017 in connection with (i) the Mr. Hilfiger amendment, (ii) the Li & Fung termination,non-operational and (iii) the relocation of our Tommy Hilfiger office in New York, including noncash depreciation expense. Also contributing to the decrease wasdriven by a leveraging of expenses in the Tommy Hilfiger business. These decreases were partially offset by (i) a change in the 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 SG&A expenses as percentages of total revenue, (ii) the costs incurred in connection with the Calvin Klein restructuring and (iii) ansignificant increase in corporate expenses due, in part, to investments in digital and information technology initiatives.
We recorded pre-tax noncash impairment charges of $933 million during 2020 of costs related to (i) the Calvin Klein restructuring, (ii) the Socks and Hosiery transaction and (iii) the TH U.S. store closures. However, we expect our 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 to the impactimpacts of the COVID-19 outbreakpandemic on our business, including $879 million related to goodwill and $54 million related to other intangible assets, primarily our SG&A expenses may be subject to significant material change, including as a result of noncashthen-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.
Please see Note 7, “Goodwill and Other Intangible Assets,” in the COVID-19 outbreak.Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of these impairments.
Non-Service Related Pension and Postretirement CostIncome
Non-service related pension and postretirement cost in 2019income was $90$92 million, as compared to $5$64 million and $76 million in 2018.2022, 2021 and 2020, respectively. Non-service related pension and postretirement costincome in 20192022, 2021 and 20182020 included actuarial lossesgains on our retirement plans of $98$78 million, $49 million and $15$65 million, respectively.
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.
41
may record on plan assetsour retirement plans in 2023. We may record a significant actuarial gain or loss in 2023 if there is a significant increase or decrease in discount rates, respectively, or if there is a decline in discount rates. Ourdifference between the actual 2020and expected return on plan assets. As such, our actual 2023 non-service related pension and postretirement (income) costincome may be significantly different than our projections.
We incurred costs totaling $5recorded a gain of $(119) million in 2019the third quarter of 2021 in connection with the refinancing of our senior credit facilities. Please see the section entitled “Liquidity and Capital Resources” below for further discussion.Heritage Brands transaction.
We incurred costs totaling $24recorded a noncash net loss of $3 million in 2017the first quarter of 2020 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.
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.
The equity in net income (loss) of unconsolidated affiliates was $50 million and $24 million of income in 2022 and 2021, respectively, as compared to a pre-tax noncash gain$(5) million loss in 2020. These amounts relate to our share of $113 millionincome (loss) from (i) our joint venture for the TOMMY HILFIGER, Calvin Klein, and Warner’s brands, and certain licensed trademarks in Mexico, (ii) our joint venture for the TOMMY HILFIGER and Calvin Klein brands in India, (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, and (v) our investment in Karl Lagerfeld prior to the closing of the Karl Lagerfeld transaction in the second quarter of 2019 to write up our2022. The equity investments in Gazal and PVH Australia to fair valuenet income (loss) of unconsolidated affiliates for 2022 also included a $16 million pre-tax gain in connection with the Australia acquisition.Karl Lagerfeld transaction. The equity in net income (loss) of unconsolidated affiliates for 2020 also included a $12 million pre-tax noncash impairment of our investment in Karl Lagerfeld resulting from the impacts of the COVID-19 pandemic on its business. 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.discussion of our investment in Karl Lagerfeld.
The equity in net income (loss) of unconsolidated affiliates was $10 million in 2019for 2022 increased as compared to $212021 primarily as a result of the $16 million pre-tax gain that we recorded in 2018 and $10 million2022 in 2017. These amounts relateconnection with the Karl Lagerfeld transaction, as well as an increase in income attributable to 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 HILFIGERin Mexico 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 investments in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”) and in Gazal (prior to acquiring it on May 31, 2019 through the Australia
We currently expect that our equity in net income (loss) of unconsolidated affiliates for 20202023 will include an increase in income on our investment in PVH Legweardecrease as compared to 2019, as we recognize a full year of income in 2020, offset by a decrease in income on our investments2022 due to the negative impactabsence in 2023 of the COVID-19 outbreak on our unconsolidated affiliates’ businesses$16 million pre-tax gain that we recorded in 2020.the second quarter of 2022.
Interest Expense, Net
Interest 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 on our senior unsecured credit facilities as compared to 2018, partially offset by2020 and (iii) the $9absence in 2021 of a $5 million loss onexpense recorded in 2020 resulting from the remeasurement of oura mandatorily redeemable non-controlling interest that was recognized in connection with the Australia acquisition. acquisition of the 78% ownership interests in Gazal Corporation Limited (“Gazal”) that we did not already own (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. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the remeasurement of the mandatorily redeemable non-controlling interest.
Please see the section entitled “Financing Arrangements” within “Liquidity and Capital Resources” below for further discussion.
42
Interest expense, decreasednet in 2023 is currently expected to $116be approximately $100 million compared to $83 million in 2018 from $122 million in 20172022 primarily due to (i) the net 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 impact 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.
Income Taxes
Income tax expense (benefit) was as follows:
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Income tax expense (benefit) | $ | 188 | $ | 21 | $ | (56) | |||||||||||
| Income tax as a % of pre-tax income (loss) | 48.4 | % | 2.1 | % | 4.7 | % | |||||||||||
| 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 | )% | |||||
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, arehave historically been lower than the United States statutory income tax rate. These special rates expired at the end of 2021.
Significant items which have caused our tax rate and reduced our consolidatedto fluctuate each year include the items discussed below. The effect that discrete tax amounts have on the effective income tax rate during 2019, 2018 and 2017. We expect to benefit from these special rates until 2022. The reduction in the United States statutory income tax rate from 35.0% to 21.0% as a result of the U.S. Tax Legislation dideach year is not have a significant impact on our overall effective tax ratecomparable due to changes in our mix of earnings.pre-tax income (loss).
Our effective income tax rate for 20192022 was lower than the 21.0% United States statutory48.4%. Our 2022 effective income tax rate primarily dueincluded the impact of the $417 million noncash goodwill impairment charge recorded in 2022, which was non-deductible and resulted in an increase to our effective income tax rate of 22.3%.
Our effective income tax rate for 2021 was 2.1%. Our 2021 effective income tax rate included (i) a $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, which resulted in a decrease to our effective income tax rate of 10.9%, (ii) a 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,$93 million, which together resulted in a benefitdecrease to our effective income tax rate of 11.8%9.7%, and (ii)(iii) a $32 million benefit related to the favorable impactremeasurement of acertain net deferred tax exemption on the noncash gain recorded to write-up our existing equity investments in Gazal and PVH Australia to fair valueassets in connection with the Australia acquisition,expiration of the special tax rates at the end of 2021, which resulted in a 5.4% benefitdecrease to our effective income tax rate.rate of 3.3%.
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.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act, with tax provisions primarily focused on implementing a 15% corporate minimum tax based on global adjusted financial statement income and a 1% excise tax on share repurchases. The corporate minimum tax will be effective in fiscal 2023 and the excise tax was effective January 1, 2023. Based on our current analysis, we do not expect the new law to have a material impact on our consolidated financial statements.
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 (“PVH Ethiopia in our consolidated financial statements. PVH Ethiopia was formedEthiopia”) to operate a manufacturing facility that producesproduced finished products for us for distribution primarily in the United States. We held an initial economic interest of 75% in PVH Ethiopia, with our partner’s 25% interest accounted for as a redeemable non-controlling interest (“RNCI”). We consolidated the results of
43
PVH Ethiopia in our consolidated financial statements. The manufacturing facility began operationscapital structure of PVH Ethiopia was amended effective May 31, 2021 and we solely managed and effectively owned all economic interests in 2017.
the joint venture. As a result of the amendments to the capital structure of PVH Ethiopia, we stopped attributing any net income or loss in PVH Ethiopia to an RNCI beginning May 31, 2021. The net loss attributable to the redeemable non-controlling interest in PVH EthiopiaRNCI was immaterial in 2019, 20182021 and 2017.2020. We currently expectclosed in the fourth quarter of 2021 the manufacturing facility that the net loss attributable to the redeemable non-controlling interest for 2020 will also be immaterial.was PVH Ethiopia’s sole operation. The closure did not have a material impact on our consolidated financial statements. 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
Cash Flow Summary and Trends
Cash and cash equivalents at February 2, 2020January 29, 2023 was $503$551 million, an increasea decrease of $51$692 million from the amount$1.242 billion at February 3, 2019 of $452 million.January 30, 2022. The change in cash and cash equivalents included the impact of (i) $325$405 million of completed common stock repurchases under the stock repurchase program, (ii) $71$23 million of mandatory long-term debt repayments and (iii) a $59$19 million net payment madeof cash proceeds received in connection with the Australia acquisition, and (iv) a $74Karl Lagerfeld transaction (the remaining $1 million payment madeof proceeds is being held in connectionescrow as of January 29, 2023). We ended 2022 with the TH CSAP acquisition.
Cash flow in 20202023 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$112 million, subject to exchange rate fluctuations, and (ii) expected common stock repurchases under the stock repurchase program of $111million, which reflects stock repurchases through March 2020at least $200 million. 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 oninflationary pressures globally and, as such, our business. Given the dynamic nature of the COVID-19 outbreak, our estimates of 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 existing or new financing arrangements, excess inventories, delays in collection of, or inability to collect on, certain trade receivables, and other working capital changeselevated inventory levels that we have experienced and may continue to experience, as a result of the COVID-19 outbreak.due to lower consumer demand and elevated inventory levels industry-wide.
As of February 2, 2020, approximately $405January 29, 2023, $397 million of cash and cash equivalents was held by international subsidiaries. Our intent is to reinvest indefinitely substantially all of our historical 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$39 million in 2022 compared to $1.071 billion in 2019 compared to $852 million in 2018.2021. The increasedecrease in cash provided by operating activities as compared to the prior year2021 was primarily driven by changes in our working capital including a favorable change in trade receivables and inventories, partially offset by a decrease in net income as adjusted for noncash charges.
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 from 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 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 cash flows. We have been informed by the third party administrators of the SCF program that
44
suppliers had elected to sell approximately $550 million and $475 million of our payment obligations that were outstanding as of January 29, 2023 and January 30, 2022, respectively, to financial institutions and approximately $2.2 billion and $1.7 billion had been settled through the program during 2022 and 2021, respectively.
Investments in Unconsolidated Affiliates
We own a 49% economic interest in our newly formedPVH Legwear. We received dividends of $6 million and $2 million from PVH Legwear joint venture. Weduring 2022 and 2021, respectively, and made paymentsa payment of $28$2 million to PVH Legwear during 20192020 to contribute our share of the joint venture funding.
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 $7$10 million and $17 million from PVH Mexico during 2019.2022 and 2021, respectively.
Payments made to contribute our share of the joint venturesventures’ 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.
Karl Lagerfeld Transaction
We completed the acquisitionsale of our approximately 8% economic interest in Karl Lagerfeld to a subsidiary of G-III on May 31, 2022 for $20 million in cash, subject to customary adjustments, of which $19 million was received in the Tommy Hilfiger retail businesssecond quarter of 2022 and the remaining $1 million is being held in Centralescrow and Southeast Asia on July 1, 2019 for $74 million.is subject to exchange rate fluctuation. 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.
We completed the Australia acquisitionsale of certain of our heritage 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 May 31, 2019. This acquisition resulted in aAugust 2, 2021 for net proceeds of $216 million, of which $223 million of gross proceeds were presented as investing cash payment of $59 million, including (i) a payment of $118 million, net of cash acquired offlows and $7 million of transaction costs were presented as operating cash considerationflows in the Consolidated Statement of Cash Flows for the acquisition and (ii) proceeds of $59 million related to the sale of an office building and warehouse owned by Gazal.2021. 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 sellcompleted the sale of our Speedo North America business to Pentland on April 6, 2020 for $170 million in cash, subject to a working capital adjustment. The Speedo transaction is expected to close in the first quarternet proceeds of 2020, subject to customary closing conditions.$169 million. 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.
Capital Expenditures
Our capital expenditures in 2022 were $290 million compared to $268 million in 2021. The capital expenditures in 2022 primarily consisted of (i) investments in (a) new stores and store renovations, (b) our information technology infrastructure worldwide, including information security and (c) upgrades and enhancements to platforms and systems worldwide, including our digital commerce platforms, and (ii) enhancements to our warehouse and distribution network in Europe and North America. We currently expect that capital expenditures for 2023 will increase to approximately $350 million and will primarily consist of continued investments in these same categories.
45
Mandatorily Redeemable Non-Controlling Interest
We completed the Australia acquisition in 2019. The Australia acquisition agreement provided for key executives of Gazal and PVH Brands Australia Pty. Limited to exchange 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. We were obligated to purchase this 6% interest within two years of the acquisition closing in two tranches.
We purchased tranche 1 (50% of the shares) 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 represented 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 and $9 million as operating cash flows in 2020 and 2021, respectively, for the tranche 1 and tranche 2 shares, respectively, attributable to interest. Please see Note 3, “Acquisitions and Divestitures,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
Dividends
We declaredsuspended our dividends following a $0.0375 per share$3 million dividend payable to our common stockholders of record as ofpayment in March 4, 2020 in respect of which we made dividend payments totaling approximately $3 million on March 31, 2020. We have suspended our dividend policy 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 a waiver we obtained in June 2020 of certain covenants under our senior unsecured credit facilities (referred to as the “June 2020 Amendment”), we were not permitted to declare or pay dividends during the relief period. However, effective June 10, 2021, the relief period under the June 2020 Amendment 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 of the June 2020 Amendment and the relief period. Following termination of the relief period, we made a $3 million dividend payment in the fourth quarter of 2021.
We currently project that cash dividends totaling $0.15 per sharepaid on our common stock in 2020, such dividends would total2023 will be approximately $11$10 million based on our current dividend rate, the number of shares of our common stock outstanding as of
Acquisition of Treasury Shares
We suspended share repurchases under the stock repurchase program beginning in March 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, which we did starting in the third quarter of 2021. Please see the section entitled “2019 Senior Unsecured Credit Facilities” below for further discussion of the June 2020 Amendment and the relief period.
During 2019, 20182022, 2021 and 2017,2020, we purchased approximately 3.46.2 million shares, 2.23.3 million shares and 2.21.4 million shares, respectively, of our common stock under the program in open market transactions for $325$399 million, $300$350 million and $250$111 million, respectively. Purchases of $6 million that were accrued for in the Consolidated Balance Sheet as of January 30, 2022 were paid in 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 in the first quarter of 2020. As of January 29, 2023, the repurchased shares were held as treasury stock and $683$824 million of the authorization remained available for future share repurchases.
We currently expect common stock repurchases asunder the stock repurchase program of February 2, 2020.at least $200 million in 2023.
46
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.
Financing Arrangements
Our capital structure was as follows at the end of 2019 and 2018:follows:
| (In millions) | 1/29/23 | 1/30/22 | |||||||||
| Short-term borrowings | $ | 46 | $ | 11 | |||||||
| Current portion of long-term debt | 112 | 35 | |||||||||
| Finance lease obligations | 12 | 9 | |||||||||
| Long-term debt | 2,177 | 2,318 | |||||||||
| Stockholders’ equity | 5,013 | 5,289 | |||||||||
| (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$551 million and $452 million$1.242 billion of cash and cash equivalents as of February 2, 2020January 29, 2023 and February 3, 2019,January 30, 2022, respectively.
Short-Term Borrowings
We have the ability to draw revolving borrowings under ourthe senior unsecured credit facilities discussed below in the section entitled “2022 Senior Unsecured Credit Facilities.” We had no borrowings outstanding under these facilities as of January 29, 2023. We had no borrowings outstanding under the prior senior unsecured credit facilities as of January 30, 2022 as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. We had no borrowings outstanding under these facilities as of
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$199 million based on exchange rates in effect on February 2, 2020January 29, 2023 and are utilized primarily to fund working capital needs. We had $50$46 million and $5$11 million outstanding under these facilities as of February 2, 2020January 29, 2023 and February 3, 2019,January 30, 2022, respectively. The $50 million of borrowings outstanding as of February 2, 2020 included borrowings under the facility in Australia. The weighted average interest rate on funds borrowed as of February 2, 2020January 29, 2023 and February 3, 2019January 30, 2022 was 2.56%2.31% and 0.21%0.17%, respectively. The maximum amount of borrowings outstanding under these facilities during 20192022 was $99$49 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 as of February 2, 2020.January 29, 2023 and January 30, 2022. The maximum amount of borrowings outstanding under the program during 20192022 was $370$130 million.
The commercial paper note program allows for borrowings of up to $675 million$1.150 billion to the extent that we have borrowing capacity under our United States dollar-denominatedthe multicurrency revolving credit facility as discussedincluded in the section entitled “2019 Senior Unsecured Credit Facilities” below.2022 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-denominatedmulticurrency revolving credit facility at any one time cannot exceed $675 million.$1.150 billion.
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 364-day $275 million United States dollar-denominated unsecured revolving credit facility (the “2021 facility”). The maximum aggregate amount2021 facility matured 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 the commercial paper program and the United States dollar-denominated revolving credit facility during 2019 was $567 million, which reflects a brief period of higher aggregate borrowings at the time that we launched the commercial paper program.these facilities in 2021 or in 2022 prior to maturity on April 27, 2022.
47
Finance Lease Obligations
Our cash payments for finance lease obligations totaled $5 million in each of 2019, 20182022, 2021 and 2017.2020.
On May 19, 2016,December 9, 2022 (the “Closing Date”), 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.
The 20192022 facilities consist of (a) a $1.093 billion United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €500€441 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), (b) a $675 million$1.150 billion United States dollar-denominated multicurrency revolving credit facility (ii) a CAD $70 million Canadian dollar-denominated(the “multicurrency revolving credit facilityfacility”), which is available in (i) United States dollars, or(ii) Australian dollars (limited to A$50 million), (iii) Canadian dollars (iii) a €200 million euro-denominated revolving credit facility available in euro, British pound(limited to C$70 million), or (iv) euros, yen, pounds sterling, Japanese yen, Swiss francs Australian dollars andor other agreed foreign currencies (limited to €250 million), and (iv)(c) a $50 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars.dollars (together with the multicurrency revolving credit facility, the “revolving credit facilities”). The
We had loans outstanding of $1.570 billion,$477 million, net of debt issuance costs and based on applicable exchange rates, under the Euro TLA facilitiesfacility and $20 million ofno borrowings outstanding letters of credit under the 2022 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 29, 2023.
The terms of the Euro TLA facilitiesfacility require us to make quarterly repayments of amounts outstanding, under the 2019 facilities, which commencedcommencing with the calendar quarter ended September 30, 2019.ending March 31, 2023. 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 Euro TLA facilities.facility. The outstanding borrowings under the 20192022 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments we makemade by us would reduce the future required repayment amounts.
We made no payments on our term loan under the 2022 facilities during 2022. We made payments of $71$488 million on our term loans under the 2019 facilities during 2022, which included $23 million of mandatory payments and we repaid the 2016$465 million repayment of the 2019 facilities in connection with the refinancing of the senior credit facilities during 2019.facilities. We made payments of $150 million and $250 million during 2018 and 2017, respectively,$1.051 billion on our term loans under the 2016 facilities.2019 facilities during 2021, which included the repayment of the outstanding principal balance under our United States dollar-denominated Term Loan A facility (the “USD TLA facility”). We made payments of $14 million on our term loans under the 2019 facilities during 2020.
The euro-denominated borrowings under the Euro TLA facility and multicurrency revolving credit facility bear interest at a rate per annum equal to a euro interbank offered rate (“EURIBOR”) and the euro-denominated swing line borrowings under the 2022 facilities bear interest at a rate per annum equal to an adjusted daily simple euro short term rate (“ESTR”), calculated in a manner set forth in the 2022 facilities, plus in each case an applicable margin.
The United States dollar-denominated borrowings under the 20192022 facilities bear interest at a rate per annum 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 Eurocurrencyterm secured overnight financing rate (“SOFR”), calculated in a manner set forth in the 2019 facilities.2022 facilities, plus an applicable margin.
The Canadian dollar-denominated borrowings denominated in other foreign currencies under the 20192022 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 tovarious indexed rates specified in 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 borrowers2022 facilities 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,are calculated in a manner set forth in the 2019 facilities.
48
The current applicable margin with respect to the Euro TLA facilities and eachFacility as of January 29, 2023 was 1.250%. The current applicable margin with respect to the revolving credit facility is 1.375%facilities as of January 29, 2023 was 0.125% for adjusted Eurocurrency rate loans and 0.375% forbearing interest at the base rate, or Canadian prime rate loans.or daily simple ESTR rate and 1.125% for loans bearing interest at the EURIBOR rate or any other rate specified in the 2022 facilities. The applicable margin for borrowings under the Euro TLA facilitiesfacility and theeach revolving credit facilitiesfacility 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 2022 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 2022 facilities).
The 2022 facilities require us to comply with customary affirmative, negative and financial covenants, including a maximum net leverage ratio. A breach of any of these operating or financial covenants would result in a default under the 2022 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.
2019 Senior Unsecured Credit Facilities
On April 29, 2019, we entered into senior unsecured credit facilities (as amended, the “2019 facilities”). We replaced the 2019 facilities with the 2022 facilities. The 2019 facilities consisted of a €500 million euro-denominated Term Loan A facility, of which €441 million was outstanding as of the date it was replaced, and senior unsecured revolving credit facilities consisting of (i) a $675 million United States dollar-denominated revolving credit facility, (ii) a C$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, 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 had also previously included a $1.093 billion USD TLA facility. We repaid the remaining principal balance of $1.030 billion under our USD TLA facility in 2021.
49
We had entered into interest rate swap agreements designed with the intended effect of converting notional amounts of our variable rate debt obligation under the 2019 facilities to fixed rate debt. Under the terms of the agreements, for theany outstanding notional amount, our exposure to fluctuations in the one-month LIBOR iswas eliminated and we paypaid a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2019, 20182021 and 2017:
| (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 | |||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| Designation Date | Commencement Date | Initial Notional Amount | Notional Amount Outstanding as of January 29, 2023 | 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 | |||||||||||||||||||||||||||
(1) We terminated in 2021 the interest rate swap agreements due to expire in February 20182022 and February 2019 are adjusted according to pre-set schedules during the terms of the swap agreements such that, 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.
Our 2019 facilities also required us to comply with customary affirmative, negative and financial covenants, including a minimum interest coverage ratio and a maximum net leverage ratio. 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 3 1/8% senior notes due December 15, 2027, as discussed below. We paidcertain financial covenants until the date on which a premiumcompliance certificate was delivered for the second quarter of $16 million2021 (the “relief period”) unless we elected earlier to terminate the holdersrelief 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 these notes in connectioncompliance with the redemptionmaximum net leverage ratio through and recorded debt extinguishment costsincluding the first quarter of $82021, (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, to write-off previously capitalized debt issuance costs associated with these notes(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 we suspend payments of dividends on our common stock and purchases of shares under our stock repurchase program during 2017.the relief period. The June 2020 Amendment also provided that during the relief period the applicable margin would be increased 0.25%. 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.
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.
50
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 29, 2023, we were in compliance with all applicable financial and non-financial covenants under our financing arrangements.
As of February 2, 2020,January 29, 2023, 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
The following table summarizes current and long-term cash requirements as of February 2, 2020, our contractualJanuary 29, 2023, 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 | 2023 | 2024-2025 | 2026-2027 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt(1) | $ | 2,725 | $ | 14 | $ | 142 | $ | 1,906 | $ | 663 | Long-term debt(1) | $ | 2,301 | $ | 112 | $ | 1,094 | $ | 1,095 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest payments on long-term debt | 419 | 86 | 159 | 112 | 62 | Interest payments on long-term debt | 270 | 87 | 115 | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 50 | 50 | Short-term borrowings | 46 | 46 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating and finance leases(2) | 2,274 | 445 | 740 | 443 | 646 | Operating and finance leases(2) | 1,763 | 416 | 582 | 369 | 396 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory purchase commitments(3) | 883 | 883 | Inventory purchase commitments(3) | 767 | 767 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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) | 12 | 7 | 1 | 1 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other cash requirements(5) | Other cash requirements(5) | 148 | 81 | 60 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | $ | 5,307 | $ | 1,516 | $ | 1,852 | $ | 1,540 | $ | 399 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
______________________
(1)At January 29, 2023, the outstanding principal balance under our senior unsecured Term Loan A facility was $479 million, which requires mandatory payments through December 9, 2027 (according to the mandatory repayment schedules). We also had outstanding $100 million of 7 3/4% debentures due November 15, 2023, $570 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 $652 million of 3 1/8% senior unsecured euro notes due December 15, 2027. |
51
(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 29, 2023. 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 2023. 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. 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. |
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 2020.2023. 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$99 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$45 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.
52
MARKET RISK
Financial instruments held by us as of February 2, 2020January 29, 2023 primarily 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 29, 2023. 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.rates. Given our balance of cash and cash equivalents at February 2, 2020,January 29, 2023, the effect of a 10 basis point change in short-term interest rates on our interest income would be approximately $500,000$0.6 million annually. Borrowings under our 2019the 2022 facilities bear interest at a rate equal to an applicable margin plus a variable rate. As such, our 2019the 2022 facilities expose us to market risk for changes in interest rates. We havepreviously had exposure to interest rate volatility related to the term loans under the 2019 facilities, and had entered into interest rate swap agreements for the intended purpose of reducingto reduce 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 29, 2023. As of January 29, 2023, 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 one-month EURIBOR. The effect of a 10 basis point change in interest ratesthe current one-month EURIBOR on our variable interest expense would be approximately $1$0.5 million, annually. Please see the section entitled “Liquidity and Capital Resources” above for further discussion of our credit facilities and prior 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 50%65% of our $9.909$9.0 billion of revenue in 20192022, $9.2 billion of revenue in 2021, and $7.1 billion of revenue in 2020 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 revenues2022 revenue and net income decreased by approximately $215$630 million and $25$70 million, respectively, as compared to 20182021 due to the impact of foreign currency translation. We currently expect a decrease in our 2023 revenue and net income in 2020to increase by approximately $70 million and $10 million, respectively, as compared to 20192022 due to the impact of foreign currency translation.
In addition, in 20192022, we recognized unfavorable foreign currency translation adjustments of $158$68 million within other comprehensive (loss) income principally driven by a strengthening of the United States dollar against the euro of 4%2% since February 3, 2019.January 30, 2022. 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%39% of our $7.2$5.6 billion total goodwill and other intangible assets as of February 2, 2020.January 29, 2023. 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.
53
Our 2022 net income in 2020decreased by approximately $25 million as compared to 20192021 due to the transactional impact.impact of foreign currency. We currently expect our 2023 net income to decrease by approximately $75 million as compared to 2022 due to the transactional impact of foreign currency with an expected negative impact to our 2023 gross margin of approximately 100 basis points.
Given our foreign currency forward exchange contracts outstanding at February 2, 2020,January 29, 2023, 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$130 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$120 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.
We conduct business in Turkey where the cumulative inflation rate surpassed 100% for the three-year period that ended during the first quarter of 2022. The impact of currency devaluation in countries experiencing high inflation rates, as is the case in Turkey, can unfavorably impact our results of operations. Since the first day of the second quarter of 2022, we have been accounting for our operations in Turkey as highly inflationary. As a result, we have changed the functional currency of our subsidiary in Turkey from the Turkish lira to the euro, which is the functional currency of its parent.The required remeasurement of our monetary assets and liabilities denominated in Turkish lira into euro did not have a material impact on our results of operations during 2022. As of January 29, 2023, net monetary assets denominated in Turkish lira represented less than 1% of our total net assets.
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 20202023 net benefit cost related to the pension plans of approximately $7$5 million. Likewise, a 0.25% change in the assumed discount rate would result in a change to 20202023 net benefit cost of approximately $45$23 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
54
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 29, 2023, 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 inflationary pressures globally and the current COVID-19 outbreak,war in Ukraine and its broader macroeconomic implications, it is possible that the required level of inventory reserves would need to be adjusted.
Asset impairments—We determined during each of 2019, 20182022, 2021 and 20172020 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, during 2019 we determined thatThe long-lived asset impairments in 2022, which primarily related to certain office, retail store and shop-in-shop assets, including property, plant and equipment and operating lease right-of-uselease-right-of-use assets, were impairedprimarily in connection with our decision in the second quarter of 2022 to exit from our Russia business and the financial performance in certain of our retail stores. 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 closurefinancial performance in certain of our retail stores and shop-in-shops. The long-lived asset impairments in 2020, which primarily related to certain flagshipretail store and anchorshop-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 United States. Heritage Brands Retail business. We also determined during 2020 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.
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 the then-current 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 inflationary pressures globally and the war in Ukraine and its
55
broader macroeconomic implications, 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.
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
2022 Annual Impairment Test
For the 20192022 annual goodwill impairment test 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 excessperformed as of the carrying amounts for all of our reporting units and therefore the second stepbeginning of the quantitative goodwill impairment test 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 the fourththird 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 includes 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. Please see Note 8, “Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion.
56
As a result of our 2022 annual impairment test, we recorded $417 million of noncash impairment charges during the third quarter of 2022, which were included in goodwill and other intangible asset impairments in our Consolidated Statement of Operations. The impairments were driven primarily by a significant increase in discount rates. The impairment charges, which related to the Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International and Tommy Hilfiger Retail North America reporting units, were recorded to our segments as follows: $163 million in the Calvin Klein North America segment, $77 million in the Calvin Klein International segment and $177 million in the Tommy Hilfiger North America segment.
Of these reporting units, Calvin Klein Licensing and Advertising International was determined to be partially impaired. The remaining carrying amount of goodwill allocated to this reporting unit as of the date of the test was $41 million. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate assumption for this business would have resulted in a change to the estimated fair value of the reporting unit of approximately $8 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 $6 million. While the Calvin Klein Licensing and Advertising International reporting unit was not determined to be fully impaired, it may be at risk of further impairment in the future if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in long-term growth rates or the weighted average cost of capital.
With respect to our other reporting units that were not determined to be impaired, the Calvin Klein Licensing and Advertising North America reporting unit had an estimated fair value that exceeded its carrying amount of $464 million by 9%. The carrying amount of goodwill allocated to this reporting unit as of the date of the test was $330 million. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate assumption for this business would have resulted in a change to the estimated fair value of the reporting unit of approximately $43 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 $34 million. While the Calvin Klein Licensing and Advertising North America reporting unit was not determined to be impaired, it may be at risk of future impairment if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the long-term growth rate or the weighted average cost of capital.
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, inclusive of a Company-specific 4% risk premium to account for the additional risk of uncertainty perceived by market participants related to our overall cash flows due to the macroeconomic environment. Estimated future operating cash flows were discounted at rates of 16.0% or 16.5%, 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 the guideline company method, which analyzes market multiples of adjusted earnings before interest, taxes, depreciation and amortization (“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. We classified the fair values of our reporting units as Level 3 fair value measurements due to the use of significant unobservable inputs.
2021 Annual Impairment Test
For the 2021 annual goodwill impairment test during 2018 yielded estimated fair values in excessperformed 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 amountsamount.
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 allsubsequent 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.
57
After assessing these events and circumstances, we determined that it was not more likely than not that the fair value of which had fair values in excess of theeach reporting unit with allocated goodwill was less than its carrying amounts by more than 50%,amount and therefore the second step ofconcluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from our annual impairment test in 2018.2021.
2020 Annual Impairment Test
For the 20192020 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) our recent 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. The impairment charges, which related to the Heritage Brands Wholesale, Calvin Klein Retail North America, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International reporting units, were recorded 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. 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. As discussed in the 2022 annual impairment test section above, we performed a quantitative impairment test for all reporting units in the third quarter of 2022. As a result of this test, the Calvin Klein Wholesale North America reporting unit was determined to be fully impaired and the Calvin Klein Licensing and Advertising International reporting unit was determined to be further partially impaired in the third quarter of 2022. No further impairment was identified for the Calvin Klein International reporting unit and it was no longer considered to be at risk of further impairment in the future.
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. 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. As discussed in the 2022 annual impairment test section above, we performed a quantitative impairment test for all reporting units in the third quarter of 2022. No impairment was identified relating to the Tommy Hilfiger International reporting unit as a result of this test and it was no longer considered to be at risk of further impairment in the future.
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
58
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.
Indefinite-Lived Intangible Assets Impairment Testing
2022 Annual Impairment Test
For the 2022 annual impairment test of allthe TOMMY HILFIGER and Calvin Klein tradenames and the reacquired perpetual license rights for TOMMY HILFIGER in India performed as of the beginning of the third quarter of 2022, 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 most recent quantitative impairment test and the fair values of these indefinite-lived intangible assets exceptsubstantially exceeded their carrying amounts. The asset with the least excess fair value had an estimated fair value that exceeded its carrying amount by approximately 183% as of the date of our most recent quantitative impairment test. We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors, including changes in the weighted average cost of capital for each of our indefinite-lived intangible assets since the Australiadate of the most recent quantitative test and our recent financial performance and updated financial forecasts as compared to those used in the most recent quantitative tests. After assessing these events and circumstances, 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 was not required.
For the 2022 annual impairment test of the Warner’s tradename and the reacquired perpetual license rights recorded in connection with the Australia acquisition performed as of the beginning of the third quarter of 2022, we elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test using a discounted cash flow methodtest. With regard to estimate fair value. For the Australia reacquired perpetual license rights, since onlywe determined that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired. The fair value of the Warner’s tradename exceeded its carrying amount of $96 million by 4% at the testing date. Holding all other assumptions constant, a few months had passed since100 basis point change in the annual revenue growth rate of the related business would have resulted in a change to the estimated fair value of the asset of approximately $7 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 asset of approximately $7 million. While the Warner’s tradename was not determined to be impaired, it may be at risk of future impairment if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the long-term growth rate or the weighted average cost of capital.
The fair value of the Warner’s tradename 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 flows used to value the Warner’s tradename at a rate of 16.0%. The fair value of our 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. We discounted the cash flows used to value the reacquired perpetual license rights recorded in connection with the Australia acquisition at a rate of 19.0%. 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.
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, 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.
59
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 May 31,our business was a triggering event that prompted the need to perform interim impairment testing of our indefinite-lived intangible assets. For the TOMMY HILFIGER, Calvin Klein, and Warner’s 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 in 2019 and the businessfair values of these indefinite-lived intangible assets substantially exceeded their carrying amounts. The asset with the least excess fair value had performed better than initially expected,an estimated fair value that exceeded its carrying amount by approximately 85% as of the date of our 2019 annual test. Considering this and other factors, we determined qualitatively that it was not more likely than not that the fair valuevalues of these reacquired perpetual license rightsindefinite-lived intangible assets were less than thetheir carrying amountamounts and concluded that the quantitative impairment test in the first quarter of 2020 was not required. The fair values of all of our indefinite-lived intangible assets substantially exceed their carrying amounts,
For the then-owned ARROW and Geoffrey Beene tradenames and the reacquired perpetual license rights recorded in connection with the exception ofAustralia acquisition, we elected to bypass the perpetual license right relatedqualitative assessment and proceeded directly 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 interimquantitative impairment test of this perpetual license right.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 perpetual license right was determinedGeoffrey Beene tradename, which had a carrying amount of $17 million, to be impaired and ana fair value of $5 million. The $47 million of impairment charge of $116 million wascharges recorded to other noncash loss, net in the first quarter of 2020 was included in goodwill and other intangible asset impairments in our Consolidated Income Statement.Statement of Operations and allocated to our Heritage Brands Wholesale segment. 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 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.
With regard to the 2018 annual impairment testreacquired perpetual license rights recorded in connection with the Australia acquisition, we determined in the first quarter of all indefinite-lived intangible assets, except for2020 that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired.
60
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 we electedfrom another party. These cash flows are discounted to bypass the qualitative assessment and proceeded directly to the quantitative impairment testpresent value using a discount rate that factors in the relative risk of the intangible asset. We discounted the cash flow methodflows used to estimate fair value. Forvalue theARROW and Geoffrey Beene tradename, since onlytradenames at 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 therate of 10.0%. The fair value of this tradenameour reacquired perpetual license rights recorded in connection with the Australia acquisition was less thandetermined using an income approach, which estimates the carrying amount and concludednet 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
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 of goodwill and indefinite-lived intangible assets.
There have been no significant events or change in circumstances since the date of the 2022 annual impairment tests in 2018.
that would indicate the remaining carrying amounts of our goodwill and indefinite-lived intangible assets may be impaired as of January 29, 2023. 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 that the estimates and assumptions used in our goodwill and indefinite-lived intangible assets impairment testing performed in 2019 will provecontinues to be accurate predictions ofsignificant uncertainty in the future. For example, if generalcurrent macroeconomic conditionsenvironment due to inflationary pressures globally, the war in Ukraine and its broader macroeconomic implications, and foreign currency volatility. If 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 and 20182020 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, 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 at that time, which resulted in a decrease to these assumptions.our benefit obligations and future expense.
61
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 2023 net benefit cost related to the pension plans of approximately $7$5 million. Likewise, a 0.25% change in the assumed discount rate would result in a change to 2020our 2023 net benefit cost of approximately $45$23 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
We use the Monte Carlo simulation model to determine the grant date 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 grant date 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 grant date 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 grant date 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.
When estimating the Chaffe model. We record expense forgrant date fair value of stock-based awards, we consider whether an adjustment is required to the awards thatclosing price or the expected volatility of our common stock on the date of grant when we are subjectin possession of material non-public information. Note 13, “Stock-Based Compensation,” in the Notes to market conditions ratably overConsolidated Financial Statements included in Item 8 of this report sets forth certain significant assumptions used to determine 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 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 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 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-66 and F-66.F-67.
Changes in Internal Control over Financial Reporting
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.
63
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. 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 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for the Annual Meeting of Stockholders to be held on June 18, 2020.22, 2023. 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, 2020.22, 2023.
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 & Analysis,” “Corporate Governance - Committees - Compensation Committee” and Analysis” 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, 2020.22, 2023.
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, 2020.22, 2023.
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, 2020.22, 2023.
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, 2020.22, 2023.
64
PART IV
Item 15. Exhibits, Financial Statement Schedules
| (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: | ||||
Exhibit Number | |||||||||
| 3.1 | |||||||||
| 3.2 | |||||||||
| 4.6 | ||||||
| *10.1 | Phillips-Van Heusen Corporation Capital Accumulation Plan (incorporated by reference to our Current Report on Form 8-K, filed on January 16, 1987); Phillips-Van Heusen Corporation Amendment to Capital Accumulation Plan (incorporated by reference to Exhibit 10(n) to our Annual Report on Form 10-K for the fiscal year ended February 2, 1987); Form of Agreement amending Phillips-Van Heusen Corporation Capital Accumulation Plan with respect to individual participants (incorporated by reference to Exhibit 10(1) to our Annual Report on Form 10-K for the fiscal year ended January 31, 1988); Form of Agreement amending Phillips-Van Heusen Corporation Capital Accumulation Plan with respect to individual participants (incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the period ended October 29, 1995). | |||||
| *10.2 | ||||||
65
66
67
| +31.2 | ||||||
| +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. | |||||
| +101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||
| +101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||
| +101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||
| +101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||
| +101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||
________________
+ Filed or furnished herewith.
* 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.
68
Item 16. Form 10-K Summary
69
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: March 28, 2023
| PVH CORP. | ||||||||
| By: | /s/ | |||||||
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 28, 2023 | ||||||
| Stefan Larsson | (Principal Executive Officer) | |||||||
| /s/ ZACHARY COUGHLIN | Executive Vice President and Chief Financial | March 28, 2023 | ||||||
| Zachary Coughlin | Officer (Principal Financial Officer) | |||||||
| /s/ JAMES W. HOLMES | Executive Vice President and Controller | March 28, 2023 | ||||||
| James W. Holmes | (Principal Accounting Officer) | |||||||
| /s/ MICHAEL | ||||||||
| Michael | ||||||||
| /s/ | ||||||||
| /s/ BRENT CALLINICOS | Director | |||||||
| Brent Callinicos | ||||||||
| /s/ | Director | |||||||
| /s/ JOSEPH B. FULLER | Director | |||||||
| Joseph B. Fuller | ||||||||
/s/ JUDITH AMANDA SOURRY KNOX | Director | |||||||
Judith Amanda Sourry Knox | ||||||||
| /s/ V. JAMES MARINO | Director | |||||||
| V. James Marino | ||||||||
| /s/ GERALDINE (PENNY) MCINTYRE | Director | |||||||
| Geraldine (Penny) McIntyre | ||||||||
| /s/ AMY MCPHERSON | Director | |||||||
| Amy McPherson | ||||||||
| /s/ ALLISON PETERSON | Director | March 28, 2023 | ||||||
| Allison Peterson | ||||||||
| /s/ EDWARD R. ROSENFELD | Director | |||||||
| Edward R. Rosenfeld | ||||||||
70
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.
F-1
PVH CORP.
CONSOLIDATED INCOME STATEMENTS OF OPERATIONS
(In millions, except per share data)
| 2022 | 2021 | 2020 | |||||||||||||||
| Net sales | $ | 8,544.9 | $ | 8,723.7 | $ | 6,798.7 | |||||||||||
| Royalty revenue | 372.0 | 340.1 | 260.4 | ||||||||||||||
| Advertising and other revenue | 107.3 | 90.9 | 73.5 | ||||||||||||||
| Total revenue | 9,024.2 | 9,154.7 | 7,132.6 | ||||||||||||||
| Cost of goods sold (exclusive of depreciation and amortization) | 3,901.3 | 3,830.6 | 3,355.8 | ||||||||||||||
| Gross profit | 5,122.9 | 5,324.1 | 3,776.8 | ||||||||||||||
| Selling, general and administrative expenses | 4,377.4 | 4,453.9 | 3,983.2 | ||||||||||||||
| Goodwill and other intangible asset impairments | 417.1 | — | 933.5 | ||||||||||||||
| Non-service related pension and postretirement income | (91.9) | (64.1) | (75.9) | ||||||||||||||
| Other (gain) loss, net | — | (118.9) | 3.1 | ||||||||||||||
| Equity in net income (loss) of unconsolidated affiliates | 50.4 | 23.7 | (4.6) | ||||||||||||||
| Income (loss) before interest and taxes | 470.7 | 1,076.9 | (1,071.7) | ||||||||||||||
| Interest expense | 89.6 | 108.6 | 125.5 | ||||||||||||||
| Interest income | 7.1 | 4.4 | 4.2 | ||||||||||||||
| Income (loss) before taxes | 388.2 | 972.7 | (1,193.0) | ||||||||||||||
| Income tax expense (benefit) | 187.8 | 20.7 | (55.5) | ||||||||||||||
| Net income (loss) | 200.4 | 952.0 | (1,137.5) | ||||||||||||||
| Less: Net loss attributable to redeemable non-controlling interest | — | (0.3) | (1.4) | ||||||||||||||
| Net income (loss) attributable to PVH Corp. | $ | 200.4 | $ | 952.3 | $ | (1,136.1) | |||||||||||
| Basic net income (loss) per common share attributable to PVH Corp. | $ | 3.05 | $ | 13.45 | $ | (15.96) | |||||||||||
| Diluted net income (loss) per common share attributable to PVH Corp. | $ | 3.03 | $ | 13.25 | $ | (15.96) | |||||||||||
| 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.
F-2
PVH CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) | $ | 200.4 | $ | 952.0 | $ | (1,137.5) | |||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||
| Foreign currency translation adjustments | (68.3) | (268.1) | 278.5 | ||||||||||||||
| Net unrealized and realized (loss) gain related to effective cash flow hedges, net of tax (benefit) expense of $(19.7), $25.0 and $(5.6) | (56.2) | 90.7 | (63.1) | ||||||||||||||
| Net gain (loss) on net investment hedges, net of tax expense (benefit) of $6.3, $27.5 and $(30.6) | 24.1 | 83.8 | (94.4) | ||||||||||||||
| Total other comprehensive (loss) income | (100.4) | (93.6) | 121.0 | ||||||||||||||
| Comprehensive income (loss) | 100.0 | 858.4 | (1,016.5) | ||||||||||||||
| Less: Comprehensive loss attributable to redeemable non-controlling interest | — | (0.3) | (1.4) | ||||||||||||||
| Comprehensive income (loss) attributable to PVH Corp. | $ | 100.0 | $ | 858.7 | $ | (1,015.1) | |||||||||||
| 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.
F-3
PVH CORP.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
| February 2, 2020 | February 3, 2019 | January 29, 2023 | January 30, 2022 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current Assets: | Current Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 503.4 | $ | 452.0 | Cash and cash equivalents | $ | 550.7 | $ | 1,242.5 | |||||||||
| Trade receivables, net of allowances for doubtful accounts of $21.1 and $21.6 | 741.4 | 777.8 | ||||||||||||||||
| Trade receivables, net of allowances for credit losses of $42.6 and $61.9 | Trade receivables, net of allowances for credit losses of $42.6 and $61.9 | 923.7 | 745.2 | |||||||||||||||
| Other receivables | 23.7 | 26.0 | Other receivables | 21.5 | 20.1 | |||||||||||||
| Inventories, net | 1,615.7 | 1,732.4 | Inventories, net | 1,802.6 | 1,348.5 | |||||||||||||
| Prepaid expenses | 159.9 | 168.7 | Prepaid expenses | 209.2 | 169.0 | |||||||||||||
| Other | 112.9 | 81.7 | Other | 72.7 | 128.4 | |||||||||||||
| Assets held for sale | 237.2 | — | ||||||||||||||||
| Total Current Assets | 3,394.2 | 3,238.6 | Total Current Assets | 3,580.4 | 3,653.7 | |||||||||||||
| Property, Plant and Equipment, net | 1,026.8 | 984.5 | Property, Plant and Equipment, net | 904.0 | 906.1 | |||||||||||||
| Operating Lease Right-of-Use Assets | 1,675.8 | — | Operating Lease Right-of-Use Assets | 1,295.7 | 1,349.0 | |||||||||||||
| Goodwill | 3,677.6 | 3,670.5 | Goodwill | 2,359.0 | 2,828.9 | |||||||||||||
| Tradenames | 2,830.2 | 2,863.7 | Tradenames | 2,701.1 | 2,722.9 | |||||||||||||
| Other Intangibles, net | 650.5 | 705.5 | Other Intangibles, net | 548.8 | 584.1 | |||||||||||||
| Other Assets, including deferred taxes of $40.3 and $40.5 | 375.9 | 400.9 | ||||||||||||||||
| Other Assets, including deferred taxes of $33.8 and $46.1 | Other Assets, including deferred taxes of $33.8 and $46.1 | 379.3 | 352.1 | |||||||||||||||
| Total Assets | $ | 13,631.0 | $ | 11,863.7 | Total Assets | $ | 11,768.3 | $ | 12,396.8 | |||||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Current Liabilities: | Current Liabilities: | |||||||||||||||||
| Accounts payable | $ | 882.8 | $ | 924.2 | Accounts payable | $ | 1,327.4 | $ | 1,220.8 | |||||||||
| Accrued expenses | 929.6 | 891.6 | Accrued expenses | 874.0 | 1,100.8 | |||||||||||||
| Deferred revenue | 64.7 | 65.3 | Deferred revenue | 54.3 | 44.9 | |||||||||||||
| Current portion of operating lease liabilities | 363.5 | — | Current portion of operating lease liabilities | 353.7 | 375.4 | |||||||||||||
| Short-term borrowings | 49.6 | 12.8 | Short-term borrowings | 46.2 | 10.8 | |||||||||||||
| Current portion of long-term debt | 13.8 | — | Current portion of long-term debt | 111.9 | 34.8 | |||||||||||||
| Liabilities related to assets held for sale | 57.1 | — | ||||||||||||||||
| Total Current Liabilities | 2,361.1 | 1,893.9 | Total Current Liabilities | 2,767.5 | 2,787.5 | |||||||||||||
| Long-Term Portion of Operating Lease Liabilities | 1,532.0 | — | Long-Term Portion of Operating Lease Liabilities | 1,140.0 | 1,214.4 | |||||||||||||
| Long-Term Debt | 2,693.9 | 2,819.4 | Long-Term Debt | 2,177.0 | 2,317.6 | |||||||||||||
| 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 | |||||||||||||||
| Other Liabilities, including deferred taxes of $357.5 and $373.9 | Other Liabilities, including deferred taxes of $357.5 and $373.9 | 671.1 | 788.5 | |||||||||||||||
| Stockholders’ Equity: | Stockholders’ Equity: | |||||||||||||||||
| Preferred stock, par value $100 per share; 150,000 total shares authorized | — | — | 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 | ||||||||||||||||
| Common stock, par value $1 per share; 240,000,000 shares authorized; 87,641,611 and 87,107,155 shares issued | Common stock, par value $1 per share; 240,000,000 shares authorized; 87,641,611 and 87,107,155 shares issued | 87.6 | 87.1 | |||||||||||||||
| Additional paid-in capital – common stock | Additional paid-in capital – common stock | 3,244.5 | 3,198.4 | |||||||||||||||
| Retained earnings | 4,753.0 | 4,350.1 | Retained earnings | 4,753.1 | 4,562.8 | |||||||||||||
| Accumulated other comprehensive loss | (640.1 | ) | (507.9 | ) | Accumulated other comprehensive loss | (713.1) | (612.7) | |||||||||||
| Less: 13,597,113 and 10,042,510 shares of common stock held in treasury, at cost | (1,462.7 | ) | (1,117.1 | ) | ||||||||||||||
| Less: 24,932,374 and 18,572,482 shares of common stock held in treasury, at cost | Less: 24,932,374 and 18,572,482 shares of common stock held in treasury, at cost | (2,359.4) | (1,946.8) | |||||||||||||||
| Total Stockholders’ Equity | 5,811.5 | 5,827.8 | Total Stockholders’ Equity | 5,012.7 | 5,288.8 | |||||||||||||
| Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | $ | 13,631.0 | $ | 11,863.7 | ||||||||||||||
| Total Liabilities and Stockholders’ Equity | Total Liabilities and Stockholders’ Equity | $ | 11,768.3 | $ | 12,396.8 | |||||||||||||
See notes to consolidated financial statements.
F-4
PVH CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| 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 | ||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
OPERATING ACTIVITIES(1) | ||||||||||||||||||||
| Net income (loss) | $ | 200.4 | $ | 952.0 | $ | (1,137.5) | ||||||||||||||
| Adjustments to reconcile to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 301.5 | 313.3 | 325.8 | |||||||||||||||||
| Equity in net (income) loss of unconsolidated affiliates | (50.4) | (23.7) | 4.6 | |||||||||||||||||
Deferred taxes(2) | 9.8 | (64.9) | (144.7) | |||||||||||||||||
| Stock-based compensation expense | 46.6 | 46.8 | 50.5 | |||||||||||||||||
| Impairment of goodwill and other intangible assets | 417.1 | — | 933.5 | |||||||||||||||||
| Impairment of other long-lived assets | 51.7 | 47.0 | 81.9 | |||||||||||||||||
| Actuarial gain on retirement and benefit plans | (78.4) | (48.7) | (64.5) | |||||||||||||||||
| Other (gain) loss, net | — | (118.9) | 3.1 | |||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Trade receivables, net | (188.5) | (138.1) | 138.4 | |||||||||||||||||
| Other receivables | (1.3) | 4.1 | 1.2 | |||||||||||||||||
| Inventories, net | (466.9) | (33.9) | 283.3 | |||||||||||||||||
| Accounts payable, accrued expenses and deferred revenue | (62.6) | 260.7 | 140.9 | |||||||||||||||||
| Prepaid expenses | (41.9) | (20.7) | 7.9 | |||||||||||||||||
| Other, net | (97.9) | (103.8) | 73.3 | |||||||||||||||||
| Net cash provided by operating activities | 39.2 | 1,071.2 | 697.7 | |||||||||||||||||
INVESTING ACTIVITIES(3) | ||||||||||||||||||||
| Purchases of property, plant and equipment | (290.1) | (267.9) | (226.6) | |||||||||||||||||
| Investments in unconsolidated affiliates | — | — | (1.6) | |||||||||||||||||
| Proceeds from sale of the Speedo North America business | — | — | 169.1 | |||||||||||||||||
| Proceeds from sale of certain Heritage Brands trademarks and other assets | — | 222.9 | — | |||||||||||||||||
| Proceeds from sale of Karl Lagerfeld investment | 19.1 | — | — | |||||||||||||||||
| Purchases of investments held in rabbi trust | (8.6) | — | — | |||||||||||||||||
| Proceeds from investments held in rabbi trust | 1.4 | — | — | |||||||||||||||||
| Net cash used by investing activities | (278.2) | (45.0) | (59.1) | |||||||||||||||||
FINANCING ACTIVITIES(1)(3) | ||||||||||||||||||||
| Net proceeds from (payments on) short-term borrowings | 36.6 | 10.5 | (53.6) | |||||||||||||||||
| 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 2022 facilities, net of related fees | 456.4 | — | — | |||||||||||||||||
| Repayment of 2019 facilities | (487.8) | (1,051.3) | (14.4) | |||||||||||||||||
| Net proceeds from settlement of awards under stock plans | — | 26.7 | 3.9 | |||||||||||||||||
| Cash dividends | (10.1) | (2.7) | (2.7) | |||||||||||||||||
| Acquisition of treasury shares | (418.6) | (361.3) | (117.3) | |||||||||||||||||
| Payments of finance lease liabilities | (4.7) | (5.2) | (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 | (428.2) | (1,398.5) | 477.4 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (24.6) | (36.6) | 32.0 | |||||||||||||||||
| (Decrease) increase in cash and cash equivalents | (691.8) | (408.9) | 1,148.0 | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 1,242.5 | 1,651.4 | 503.4 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 550.7 | $ | 1,242.5 | $ | 1,651.4 | ||||||||||||||
(1) Please see Note 2016 for lease related cash flow information.
(2) Please see Note 9 for information on deferred taxes.
(3) Please see Note 19 for information on noncash investing and financing transactions.
See notes to consolidated financial statements.
F-5
PVH CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST
(In millions, except share and per share data)
| Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid In Capital- Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Redeemable Non-Controlling Interest | Preferred Stock | Shares | $1 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 | |||||||||||||||||||||||
| Net income attributable to PVH Corp. | 417.3 | 417.3 | ||||||||||||||||||||||||||||||||
| 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 gain on net investment hedges, net of tax expense of $9.6 | 29.7 | 29.7 | ||||||||||||||||||||||||||||||||
| Comprehensive income attributable to PVH Corp. | 285.1 | |||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | 56.1 | 56.1 | ||||||||||||||||||||||||||||||||
| Cash dividends ($0.15 per common share) | (11.3 | ) | (11.3 | ) | ||||||||||||||||||||||||||||||
| Acquisition of 3,554,603 treasury shares | (345.6 | ) | (345.6 | ) | ||||||||||||||||||||||||||||||
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 | ||||||||||||||
| Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital- Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Non-Controlling Interest | Preferred Stock | Shares | $1 par Value | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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. | (1,136.1) | (1,136.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | (63.1) | (63.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss on net investment hedges, net of tax benefit of $30.6 | (94.4) | (94.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss attributable to PVH Corp. | (1,015.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment related to the adoption of accounting guidance for credit losses | (1.0) | (1.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of awards under stock plans | 402,882 | 0.4 | 3.5 | 3.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 50.5 | 50.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.0375 per common share) | (2.7) | (2.7) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of 1,536,550 treasury shares | (116.8) | (116.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to redeemable non-controlling interest | (1.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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. | 952.3 | 952.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | 90.7 | 90.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net gain on net investment hedges, net of tax expense of $27.5 | 83.8 | 83.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income attributable to PVH Corp. | 858.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of awards under stock plans | 813,997 | 0.8 | 25.9 | 26.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 46.8 | 46.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.0375 per common share) | (2.7) | (2.7) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of 3,438,819 treasury shares | (367.3) | (367.3) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to redeemable non-controlling interest | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in the economic interests of redeemable non-controlling interest | 3.7 | (3.7) | (3.7) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| January 30, 2022 | — | — | 87,107,155 | 87.1 | 3,198.4 | 4,562.8 | (612.7) | (1,946.8) | 5,288.8 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to PVH Corp. | 200.4 | 200.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (68.3) | (68.3) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized and realized loss related to effective cash flow hedges, net of tax benefit of $19.7 | (56.2) | (56.2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net gain on net investment hedges, net of tax expense of $6.3 | 24.1 | 24.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income attributable to PVH Corp. | 100.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of awards under stock plans | 534,456 | 0.5 | (0.5) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 46.6 | 46.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.15 per common share) | (10.1) | (10.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of 6,359,892 treasury shares | (412.6) | (412.6) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| January 29, 2023 | $ | — | $ | — | 87,641,611 | $ | 87.6 | $ | 3,244.5 | $ | 4,753.1 | $ | (713.1) | $ | (2,359.4) | $ | 5,012.7 | ||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
F-6
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 owned and 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.interest (“RNCI”). The Company consolidated the results of PVH Ethiopia in its consolidated financial statements. The Company closed in the fourth quarter of 2021 the manufacturing facility that was PVH Ethiopia’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.
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, 20182022, 2021 and 20172020 represent the 52 weeks ended February 2, 2020, 52 weeks ended February 3, 2019January 29, 2023, January 30, 2022 and 53 weeks ended February 4, 2018,January 31, 2021, respectively.
War in Ukraine — As a result of the war in Ukraine, the Company announced in March 2022 that it was temporarily closing stores and pausing commercial activities in Russia and Belarus. In the second quarter of 2022, the Company made the decision to exit from its Russia business, including the closure of its retail stores in Russia and the cessation of its wholesale operations in Russia and Belarus. Additionally, while the Company has no direct operations in Ukraine, virtually all of its wholesale customers and franchisees in Ukraine were impacted during 2022, which resulted in a reduction in shipments to these customers and canceled orders. Approximately 2% of the Company’s revenue in 2021 was generated in Russia, Belarus and Ukraine. The war also has led to broader macroeconomic implications, including the 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.
The Company assessed the impacts of the war in Ukraine on the estimates and assumptions used in preparing these consolidated financial statements, including, but not limited to, the allowance for credit losses, inventory reserves, and carrying values of long-lived assets. Based on these assessments, the Company recorded pre-tax noncash impairment charges related to long-lived assets of $43.6 million during 2022. Please see Note 11, “Fair Value Measurements,” for further discussion of the impairments.
There is significant uncertainty regarding the extent to which the war and its broader macroeconomic implications, including the potential impacts on the broader European market, will further impact the Company’s business, financial condition and results of operations in 2023.
F-7
COVID-19 Pandemic — The COVID-19 pandemic has had a significant impact on the Company’s business, results of operations, financial condition and cash flows from operations.
•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.
•The Company’s stores continued to be impacted during 2021 by the pandemic, including temporary closures of its stores in Europe, Canada, Japan, Australia and China for varying periods. 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.
•COVID-related pressures continued into 2022, although to a much lesser extent than in 2021 in all regions except China. Strict lockdowns in China resulted in extensive temporary store closures and significant reductions in consumer traffic and purchasing, as well as have impacted certain warehouses, which resulted in the temporary pause of deliveries to the Company’s wholesale customers and from its digital commerce business in the first half of 2022. COVID-related restrictions in China were lifted at the end of the fourth quarter of 2022.
•In addition, the Company’s North America stores have been challenged by the significant decrease in international tourists coming to the United States since the onset of the pandemic. Stores located in international tourist destinations have historically represented a significant portion of this 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.
In addition, the pandemic has impacted 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 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, beginning in the third quarter of 2021. These impacts significantly improved in the second half of 2022.
The Company 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.
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 impacts of inflationary pressures globally and the war in Ukraine and its broader macroeconomic implications, 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 29, 2023 consisted principally of bank deposits and investments in money market funds.
F-8
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 29, 2023 and January 30, 2022, the allowance for credit losses on trade receivables was $42.6 million and $61.9 million, respectively.
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 that would be recognized in a business combination. That is, the fair value 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 thethat reporting unit.
The Company determined in the first quarter of 2020 that the significant adverse impact of the Company’s reporting units and therefore the second step of the quantitative goodwill impairment test 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 fromCOVID-19 pandemic on the Company’s annual impairment testbusiness, including an unprecedented material decline in 2019. Inrevenue and earnings and an extended decline in the fourth quarter of 2019, the Speedo transactionCompany’s stock 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.
The Company did not record any goodwill impairments in excess 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 the Company’s annual impairment test in 2018.2021.
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.
F-9
impairments in the Company’s Consolidated Income Statement.Statement of Operations. The Company did not record any intangible asset impairments in 2022 or 2021. Please see Note 4, “Assets Held For Sale,7, “Goodwill and Other Intangible Assets,” for further discussion.
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 $275.0$255.4 million, $263.9$266.6 million and $252.2$280.8 million in 2019, 20182022, 2021 and 2017,2020, 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$30.1 million and $18.0 million of costs incurred in 20192022 and 2021, respectively, to implement cloud computing arrangements, primarily related to digital and consumer data platforms. Amortization expense relating to cloud computing arrangements totaled $0.9$10.6 million, $6.2 million and $4.4 million in 2019.2022, 2021 and 2020, respectively. Cloud computing costs of $15.7$51.5 million and $32.7 million were included in prepaid expenses and other assets in the Company’s Consolidated Balance SheetSheets as of February 2, 2020.January 29, 2023 and January 30, 2022, respectively.
Leases — The Company leases approximately 1,500 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.
F-10
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 $351.4$357.9 million, $307.7$332.4 million and $272.6$288.9 million in 2019, 20182022, 2021 and 2017,2020, 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 $509.7$492.1 million, $526.0$535.8 million and $501.3$379.0 million in 2019, 20182022, 2021 and 2017,2020, respectively. Prepaid advertising expenses recorded in prepaid expenses and other assets totaled $5.9$2.0 million and $7.3$5.2 million at February 2, 2020January 29, 2023 and February 3, 2019,January 30, 2022, 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”Company elected to recognize the tax on Global Intangible Low Taxed Income (“GILTI”) was enacted on December 22, 2017. The U.S. Tax Legislationas a period expense in the year the tax 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
F-11
contracts to hedge against a portion of this exposure. The Company also has exposure to interest rate volatility related to its securedsenior unsecured term loan facilities.facility, and previously had exposure to interest rate volatility related to its prior senior unsecured term loan facilities, which borrowings bear interest at a rate equal to an applicable margin plus a variable rate. The Company enters intohad used interest rate swap agreements to hedge against a portion of this exposure.its exposure related to the term loans previously outstanding under its prior senior unsecured credit facilities. 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$13.1 million, $17.3$20.4 million and $(10.2)$(5.6) million in 2019, 20182022, 2021 and 2017,2020, respectively.
Since the first day of the second quarter of 2022, the Company has been accounting for its operations in Turkey as highly inflationary, as the cumulative inflation rate surpassed 100% for the three-year period that ended during the first quarter of 2022. Accordingly, the Company has changed the functional currency of its subsidiary in Turkey from the Turkish lira to the euro, which is the functional currency of its parent. The required remeasurement of monetary assets and liabilities denominated in Turkish lira into euro did not have a material impact on the Company’s results of operations during 2022. As of January 29, 2023, net monetary assets denominated in Turkish lira represented less than 1% of the Company’s total net assets.
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.
F-12
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.
| (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 | |||||||
Accounting Guidance Issued But Not Adopted as of February 2, 2020January 29, 2023 — The FASB issued in June 2016September 2022 an update to accounting guidance requiring disclosures that introducesincrease the transparency surrounding the use of supplier finance programs, including the key terms of the programs, and information about the obligations under these programs, including a new impairment model used to measure credit losses for certainrollforward of those obligations. The update does not affect the recognition, measurement, or 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.statement presentation of obligations covered by supplier finance programs. The update will be effective for the Company in the first quarter of 2020. Entities are required2023 on a retrospective basis, except for the requirement to applydisclose rollforward information, which will be effective for the Company in the first quarter of 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the update using a modified-retrospective approach with a cumulative effect adjustment to opening retained earnings indetermine the period of adoption. Theimpact the adoption of this update is not expected towill have a material impact on the Company’s consolidated financial statements.statements footnote disclosures related to its supply chain finance program.
The FASB issued in December 2019October 2021 an update to accounting guidance to simplifyimprove the accounting for income taxesacquired revenue contracts with customers in a business combination by eliminating certain exceptions to the existing guidance and clarifying and amending certain guidance to reduceaddressing diversity in practice.practice and inconsistency related to their recognition and measurement. The update eliminates certain exceptionsrequires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and therevenue 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 thatguidance. This generally will result in a step-up in the tax basis of goodwill.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 2021, with early adoption permitted. Most amendments in the update are required to be adopted using a prospective approach, while other amendments must be adopted using a modified-retrospective approach or retrospective approach.2023. The Company is currently evaluatingwill apply the update to determineapplicable transactions occurring on or after the adoption date. The impact of the adoption on the Company’s consolidated financial statements.statements will depend on the facts and circumstances of any future transactions.
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.
F-13
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 typically 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 generally 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
F-14
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 generally 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 29, 2023, the contractual minimum fees on the portion of all license agreements not yet satisfied totaled $1.2 billion,$998.5 million, of which the Company expects to recognize $291.5$301.4 million as revenue in 2020, $242.42023, $258.6 million in 20212024 and $684.2$438.5 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 29, 2023 and February 3, 2019,January 30, 2022, 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) | 2022 | 2021 | |||||||||||||||
| Deferred revenue balance at beginning of period | $ | 44.9 | $ | 55.8 | |||||||||||||
| Net additions to deferred revenue during the period | 49.8 | 42.2 | |||||||||||||||
Reductions in deferred revenue for revenue recognized during the period (1) | (40.4) | (51.5) | |||||||||||||||
| Reduction in deferred revenue related to the Heritage Brands transaction | — | (1.6) | (2) | ||||||||||||||
| Deferred revenue balance at end of period | $ | 54.3 | $ | 44.9 | |||||||||||||
(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$12.1 million and $2.3$15.0 million as of February 2, 2020January 29, 2023 and February 3, 2019,January 30, 2022, 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
Australia Acquisition
The Company acquired on May 31,in 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 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.
Mandatorily Redeemable Non-Controlling Interest
Pursuant to the terms of the acquisition agreement, key membersexecutives of Gazal and PVH Brands Australia managementPty. Limited (“PVH Australia”) 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 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 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 utilizes 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,
F-15
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 $8.6$4.9 million in interest expense during 20192020 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 occurred as of February 2, 2020. Theno remaining liability for the mandatorily redeemable non-controlling interest was $33.8 million as of FebruaryJanuary 30, 2022.
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.
The Company completed the sale on August 2, 2020 based on exchange rates2021 for net proceeds of $216.3 million, after transaction costs. In connection with the closing of the transaction, the Company recorded a pre-tax gain of $118.5 million in effect on that date,the third quarter of 2021, which $16.9 millionrepresented the excess of the amount of consideration received over the net carrying value of the assets, less costs to sell. The gain was included in accrued expenses and $16.9 million was includedrecorded in other liabilities(gain) loss, net in the Company’s Consolidated Balance Sheet.Statement of Operations and included in the Heritage Brands Wholesale segment.
| (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 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 | ||
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 estimated fair value, less costs to sell, reflectsCompany completed the amountsale of considerationits Speedo North America business on April 6, 2020 for net proceeds of $169.1 million and deconsolidated the Company expects to receive upon closingnet assets of the transaction, inclusive of the working capital adjustment. The loss was recorded
2020, based on the terms of the agreement. The noncash impairment charge related to the Speedo perpetual license rightloss 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.
Upon the closing of the following:Speedo transaction, employees based in the United States 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 were to be 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 | |
F-16
Property, plant and equipment, at cost, was as follows:
| (In millions) | 2022 | 2021 | |||||||||
| Land | $ | 1.0 | $ | 1.0 | |||||||
| Buildings and building improvements | 30.7 | 30.6 | |||||||||
| Machinery, software and equipment | 1,093.5 | 981.9 | |||||||||
| Furniture and fixtures | 588.3 | 549.0 | |||||||||
| Shop-in-shops/concession locations | 234.0 | 227.2 | |||||||||
| Leasehold improvements | 768.2 | 765.1 | |||||||||
| Construction in progress | 88.3 | 97.3 | |||||||||
| Property, plant and equipment, gross | 2,804.0 | 2,652.1 | |||||||||
| Less: Accumulated depreciation | (1,900.0) | (1,746.0) | |||||||||
| Property, plant and equipment, net | $ | 904.0 | $ | 906.1 | |||||||
| (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 to2022 includes software and other equipment that was placed into service in 20192022 in connection with the (i) enhancements to the Company’s upgrade ofwarehouse and distribution network in Europe and North America and (ii) investments in (a) upgrades and enhancements to itsplatforms and systems andworldwide, including digital commerce platforms.platforms, and (b) information technology infrastructure worldwide, including information security. Construction in progress at February 2, 2020January 29, 2023 and February 3, 2019January 30, 2022 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 29, 2023 and February 3, 2019January 30, 2022 principally related to (i) enhancements to the Company’s warehouse and distribution network in Europe and North America and (ii) investments in (a) upgrades and enhancements to operating, supply chainplatforms and logistics systems.systems worldwide and (b) new stores and store renovations. Interest costs capitalized in construction in progress were immaterial during 2019, 20182022, 2021 and 2020.
Included in other assets in the Company’s Consolidated Balance Sheets was $176.3$190.2 million as of February 2, 2020January 29, 2023 and $207.1$165.3 million as of February 3, 2019January 30, 2022 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 andowns a wholly owned subsidiary of the Company’s former Heritage Brands socks and hosiery licensee formed a joint venture,49% economic interest in 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 countriesthe United States and Canada 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 dividends of $6.4 million and $2.0 million from PVH Legwear during 2022 and 2021, respectively.
F-17
The Company made paymentsa payment of $27.7$1.6 million to PVH Legwear during 20192020 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.
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 $7.2$9.8 million and $16.8 million from PVH Mexico during 2019.2022 and 2021, respectively.
Karl Lagerfeld
The Company ownsowned an economic interest of approximately 8% in Karl Lagerfeld Holding B.V. (“Karl Lagerfeld”). The Company iswas deemed to have significant influence with respect to this investment which is beingand accounted for the investment under the equity method of accounting.accounting prior to the completion of the Karl Lagerfeld transaction (as defined below) on May 31, 2022.
The Company completed the sale of its economic interest in Karl Lagerfeld to a subsidiary of G-III Apparel Group, Ltd. (the “Karl Lagerfeld transaction”) on May 31, 2022 for approximately $20.5 million in cash, subject to customary adjustments, of which $19.1 million was received during the second quarter of 2022 and $1.4 million is being held in escrow and subject to exchange rate fluctuation. The carrying value of the Company’s investment in Karl Lagerfeld was $1.0 million immediately prior to the completion of the sale.
In connection with the closing of the Karl Lagerfeld transaction, the Company recorded a pre-tax gain of $16.1 million during the second quarter of 2022, which reflected (i) the excess of the proceeds over the carrying value of the Karl Lagerfeld investment, less (ii) $3.4 million of foreign currency translation adjustment losses previously recorded in accumulated other comprehensive loss. The gain was included in equity in net income (loss) of unconsolidated affiliates in the Company’s Consolidated Statement of Operations and recorded in corporate expenses not allocated to any reportable segments, consistent with how the Company has historically recorded its proportionate share of the net income or loss of its investment in Karl Lagerfeld.
The Company had previously determined during the first quarter of 2020 that the then-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.
F-18
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 its partner held initial economic interests of 75% and 25%, respectively, in 2017.
In connection with the amendment of the RNCI is adjusted to equal the redemption amount at the endcapital structure of each reporting period, provided that this amount at the end of each reporting period cannot be lower than the initial fair value adjusted for the minority shareholder’s share of net income or loss. Any adjustment to the redemption amount of the RNCI is determined after attribution of net income or loss of the RNCI and will be recognized immediately in retained earnings ofPVH Ethiopia, the Company since it is probable thatreclassified the RNCI will become redeemable in the future based on the passage of time. The carrying amount of the RNCI as of February 2, 2020 was $(2.0)May 31, 2021 of $(3.7) million which is greater thanto additional paid-in capital. Following this reclassification, the redemption amount. The carrying amount decreased from $0.2 million as of February 3, 2019 as a result of aCompany stopped attributing any net income or loss attributablein PVH Ethiopia to the RNCI for 2019 of $2.2 million.redeemable non-controlling interest.
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 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 | — | (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 | ||||||||||||||||||||||||||||||||||
| Impairment | (162.6) | (77.3) | (177.2) | — | — | — | (417.1) | ||||||||||||||||||||||||||||||||||
| Currency translation | — | (6.5) | — | (46.3) | — | — | (52.8) | ||||||||||||||||||||||||||||||||||
| Balance as of January 29, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Goodwill, gross | 781.8 | 885.0 | 203.0 | 1,587.6 | 105.0 | — | 3,562.4 | ||||||||||||||||||||||||||||||||||
| Accumulated impairment losses | (449.9) | (471.3) | (177.2) | — | (105.0) | — | (1,203.4) | ||||||||||||||||||||||||||||||||||
| Goodwill, net | $ | 331.9 | $ | 413.7 | $ | 25.8 | $ | 1,587.6 | $ | — | $ | — | $ | 2,359.0 | |||||||||||||||||||||||||||
| (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 | |||||||||||||
F-19
As a result of the respective acquisition dates toCompany’s 2022 annual impairment test, the Company’s reporting units that are expected to benefit fromCompany recorded $417.1 million of noncash impairment charges during the synergiesthird quarter of 2022. Please see the combinations.section “Goodwill and Other Intangible Assets Impairment Testing” below for further discussion.
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 in the section “Goodwill and Other Intangible Assets Impairment Testing.” Please see Note 3, “Acquisitions and Divestitures,” for further discussion of the CALVIN KLEIN brands and were required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein were made were wholesale sales by the Company and its licensees and other partners to retailers. All payments due to Mr. Klein under the agreement have been made.Heritage Brands transaction.
The Company’s other intangible assets consisted of the following:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 281.0 | $ | (248.3) | $ | 32.7 | $ | 286.0 | $ | (232.3) | $ | 53.7 | |||||||||||||||||||||||
| Reacquired license rights | 494.3 | (199.3) | 295.0 | 506.1 | (193.1) | 313.0 | |||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | 775.3 | (447.6) | 327.7 | 792.1 | (425.4) | 366.7 | |||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Tradenames | 2,701.1 | — | 2,701.1 | 2,722.9 | — | 2,722.9 | |||||||||||||||||||||||||||||
| Reacquired perpetual license rights | 221.1 | — | 221.1 | 217.4 | — | 217.4 | |||||||||||||||||||||||||||||
| Total indefinite-lived intangible assets | 2,922.2 | — | 2,922.2 | 2,940.3 | — | 2,940.3 | |||||||||||||||||||||||||||||
| Total other intangible assets | $ | 3,697.5 | $ | (447.6) | $ | 3,249.9 | $ | 3,732.4 | $ | (425.4) | $ | 3,307.0 | |||||||||||||||||||||||
| 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.
Amortization expense related to the Company’s intangible assets subject to amortization was $39.7$32.1 million and $62.8$34.2 million for 20192022 and 2018,2021, 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
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 29, 2023 is expected to be as follows:
| (In millions) | ||||
| Fiscal Year | Amount | |||
| 2020 | $ | 36.8 | ||
| 2021 | 36.6 | |||
| 2022 | 34.3 | |||
| 2023 | 24.0 | |||
| 2024 | 23.6 | |||
| (In millions) | ||||||||
| Fiscal Year | Amount | |||||||
| 2023 | $ | 23.6 | ||||||
| 2024 | 23.3 | |||||||
| 2025 | 17.5 | |||||||
| 2026 | 14.6 | |||||||
| 2027 | 14.3 | |||||||
F-20
Goodwill and Other Intangible Assets Impairment Testing
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. Intangible assets with finite lives are amortized over their estimated useful life and are tested for impairment, along with other long-lived assets, when events and circumstances indicate that the assets might 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
2022 Annual Impairment Test
For the 2022 annual goodwill impairment test performed as of the beginning of the third quarter of 2022, 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. In making this election, the Company considered the changes resulting from the then-current macroeconomic environment, in particular the increase in interest rates and the strengthening of the U.S. dollar against most major currencies in which the Company transacts business.
As a result of the Company’s 2022 annual impairment test, the Company recorded $417.1 million of noncash impairment charges during the third quarter of 2022, which were included in goodwill and other intangible asset impairments in the Company’s Consolidated Statement of Operations. The impairments were driven primarily by a significant increase in discount rates. The impairment charges, which related to the Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International and Tommy Hilfiger Retail North America reporting units, were recorded to the Company’s segments as follows: $162.6 million in the Calvin Klein North America segment, $77.3 million in the Calvin Klein International segment and $177.2 million in the Tommy Hilfiger North America segment.
Of these reporting units, Calvin Klein Licensing and Advertising International was determined to be partially impaired. The remaining carrying amount of goodwill allocated to this reporting unit as of the date of the test was $41.0 million. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate assumption for this business would have resulted in a change to the estimated fair value of the reporting unit of approximately $8 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 $6 million. While the Calvin Klein Licensing and Advertising International reporting unit was not determined to be fully impaired, it may be at risk of further impairment in the future if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in long-term growth rates or the weighted average cost of capital.
With respect to the Company’s other reporting units that were not determined to be impaired, the Calvin Klein Licensing and Advertising North America reporting unit had an estimated fair value that exceeded its carrying amount of $464.4 million by 9%. The carrying amount of goodwill allocated to this reporting unit as of the date of the test was $330.4 million. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate assumption for this business would have resulted in a change to the estimated fair value of the reporting unit of approximately $43 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 $34 million. While the Calvin Klein Licensing and Advertising North America reporting unit was not determined to be impaired, it may be at risk of future impairment if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the long-term growth rate or the weighted average cost of capital.
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, inclusive of a Company-specific 4% risk premium to account for the additional risk of uncertainty perceived by market participants related to the Company’s overall cash flows due to the macroeconomic environment. Estimated future operating cash flows were discounted at rates of 16.0% or 16.5%, 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 the guideline company method, which analyzes market multiples of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of
F-21
the reporting unit compared to the selected guideline companies. The Company classified the fair values of its reporting units as Level 3 fair value measurements due to the use of significant unobservable inputs.
There have been no significant events or change in circumstances since the date of the 2022 annual impairment test that would indicate the remaining carrying amount of the Company’s goodwill may be impaired as of January 29, 2023. There continues to be significant uncertainty in the current macroeconomic environment due to inflationary pressures globally, the war in Ukraine and its broader macroeconomic implications, and foreign currency volatility. If 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 conditions deteriorate, business conditions or strategies for a specific reporting unit change from current assumptions, the Company’s businesses do not perform as projected, or there is an extended period of a significant decline in the Company’s stock price, the Company could incur additional goodwill impairment charges in the future.
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.
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.
F-22
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. The impairment charges, which related to the Heritage Brands Wholesale, Calvin Klein Retail North America, Calvin Klein Wholesale North America, Calvin Klein Licensing and Advertising International, and Calvin Klein International reporting units, were recorded 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. 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. As discussed in the 2022 annual impairment test section above, the Company performed a quantitative impairment test for all reporting units in the third quarter of 2022. As a result of this test, the Calvin Klein Wholesale North America reporting unit was determined to be fully impaired and the Calvin Klein Licensing and Advertising International reporting unit was determined to be further partially impaired in the third quarter of 2022. No further impairment was identified for the Calvin Klein International reporting unit and it was no longer considered to be at risk of further impairment in the future.
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. 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. As discussed in the 2022 annual impairment test section above, the Company performed a quantitative impairment test for all reporting units in the third quarter of 2022. No impairment was identified relating to the Tommy Hilfiger International reporting unit as a result of this test and it was no longer considered to be at risk of further impairment in the future.
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.
Indefinite- Lived Intangible Assets Impairment Testing
2022 Annual Impairment Test
For the 2022 annual impairment test of the TOMMY HILFIGER and Calvin Klein tradenames and the reacquired perpetual license rights for TOMMY HILFIGER in India performed as of the beginning of the third quarter of 2022, 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 most recent quantitative impairment test 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 183% as of
F-23
the date of the Company’s most recent quantitative impairment test. The Company assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and asset-specific factors, including changes in the weighted average cost of capital for each of its indefinite-lived intangible assets since the date of the most recent quantitative test and the Company’s recent financial performance and updated financial forecasts as compared to those used in the most recent quantitative tests. After assessing these events and circumstances, 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 was not required.
For the 2022 annual impairment test of the Warner’s tradename and the reacquired perpetual license rights recorded in connection with the Australia acquisition performed as of the beginning of the third quarter of 2022, the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative impairment test. With regard to the reacquired perpetual license rights, the Company determined that its fair value substantially exceeded its carrying amount and, therefore, the asset was not impaired. The fair value of the Warner’s tradename exceeded its carrying amount of $95.8 million by 4% at the testing date. Holding all other assumptions constant, a 100 basis point change in the annual revenue growth rate of the related business would have resulted in a change to the estimated fair value of the asset of approximately $7 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 asset of approximately $7 million. While the Warner’s tradename was not determined to be impaired, it may be at risk of future impairment if the related business does not perform as projected, or if market factors utilized in the impairment analysis deteriorate, including an unfavorable change in the long-term growth rate or the weighted average cost of capital.
The fair value of the Warner’s tradename 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 Warner’s tradename at a rate of 16.0%. 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 19.0%. 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.
There have been no significant events or change in circumstances since the date of the 2022 annual impairment test that would indicate the remaining carrying amount of the Company’s indefinite-lived intangible assets may be impaired as of January 29, 2023. There continues to be significant uncertainty in the current macroeconomic environment due to inflationary pressures globally, the war in Ukraine and its broader macroeconomic implications, and foreign currency volatility. If 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 conditions deteriorate, business conditions or strategies change from current assumptions, or the Company’s businesses do not perform as projected, the Company could incur additional indefinite-lived intangible asset impairment charges in the future.
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.
F-24
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, and Warner’s 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. 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
F-25
fair values of these indefinite-lived intangible assets as Level 3 fair value measurements due to the use of significant unobservable inputs.
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 29, 2023. There continues to be significant uncertainty in the current macroeconomic environment due to inflationary pressures globally, the war in Ukraine and its broader macroeconomic implications, and foreign currency volatility. If 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 conditions deteriorate, business conditions or strategies change from current assumptions, or the Company’s businesses do not perform as projected, 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 discussed below in the section entitled “2022 Senior Unsecured Credit Facilities.” The Company had no borrowings outstanding under these facilities as of January 29, 2023. The Company had no borrowings outstanding under its prior senior unsecured credit facilities as of January 30, 2022 as discussed in the section entitled “2019 Senior Unsecured Credit Facilities” below. The Company had no borrowings outstanding under these facilities as of February 2, 2020. The maximum amount of revolving borrowings outstanding under these facilities during 2019 was $378.4 million. The Company had $7.8 million outstanding under its prior senior secured credit facilities as of February 3, 2019 as discussed in the section entitled “2016 Senior Secured Credit Facilities” below. The weighted average interest rate on the funds borrowed as of February 3, 2019 was 4.45%.
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$198.8 million based on exchange rates in effect on February 2, 2020January 29, 2023 and are utilized primarily to fund working capital needs. The Company had $49.6$46.2 million and $5.1$10.8 million outstanding under these facilities as of February 2, 2020January 29, 2023 and February 3, 2019,January 30, 2022, respectively. The $49.6 million of borrowings outstanding as of February 2, 2020 included borrowings under the facility in Australia. The weighted average interest rate on funds borrowed as of February 2, 2020January 29, 2023 and February 3, 2019January 30, 2022 was 2.56%2.31% and 0.21%0.17%, respectively. The maximum amount of borrowings outstanding under these facilities during 20192022 was $99.5$49.4 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 as of February 2, 2020.January 29, 2023 and January 30, 2022. The maximum amount of borrowings outstanding under the program during 20192022 was $370.0$130.0 million.
The commercial paper note program allows for borrowings of up to $675.0$1,150.0 million to the extent that the Company has borrowing capacity under its United States dollar-denominatedthe multicurrency revolving credit facility as discussedincluded in the section entitled “2019 Senior Unsecured Credit Facilities” below.2022 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-denominatedmulticurrency revolving credit facility at any one time cannot exceed $675.0$1,150.0 million.
F-26
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 364-day $275.0 million United States dollar-denominated unsecured revolving credit facility (the “2021 facility”). The maximum aggregate amount2021 facility matured 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 were amortized over the term of the respective debt agreements. The Company had no borrowings outstanding under the commercial paper program and the United States dollar-denominated revolving credit facility during 2019 was $567.0 million, which reflects a brief period of higher aggregate borrowings at the time that the Company launched the commercial paper program.these facilities in 2021 or in 2022 prior to maturity on April 27, 2022.
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) | 2022 | 2021 | ||||||||||||
Senior unsecured Term Loan A facility due 2027 (1)(2) | $ | 476.6 | $ | — | ||||||||||
Senior unsecured Term Loan A facility due 2024 (2) | — | 513.5 | ||||||||||||
| 7 3/4% debentures due 2023 | 99.9 | 99.8 | ||||||||||||
3 5/8% senior unsecured euro notes due 2024 (2) | 568.1 | 580.8 | ||||||||||||
| 4 5/8% senior unsecured notes due 2025 | 497.0 | 495.7 | ||||||||||||
3 1/8% senior unsecured euro notes due 2027 (2) | 647.3 | 662.6 | ||||||||||||
| Total | 2,288.9 | 2,352.4 | ||||||||||||
| Less: Current portion of long-term debt | 111.9 | 34.8 | ||||||||||||
| Long-term debt | $ | 2,177.0 | $ | 2,317.6 | ||||||||||
(1) The outstanding principal balance for the euro-denominated Term Loan A facility was €440.6 million as of January 29, 2023. (2) The carrying amount of the euro-denominated Term Loan A facilities and the 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 29, 2023 and February 3, 2019.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) | ||||
| 2023 | $ | 112.0 | |||
| 2024 | 582.4 | ||||
| 2025 | 512.0 | ||||
| 2026 | 12.0 | ||||
| 2027 | 1,082.8 | ||||
(1) A portion of the Company’s mandatory long-term debt repayments is denominated in euros 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 2024debt as of February 2, 2020January 29, 2023 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 29, 2023, approximately 55%80% of the Company’s long-term debt had fixed interest rates, with the remainder at variable interest rates.
F-27
2022 Senior SecuredUnsecured Credit Facilities
On May 19, 2016,December 9, 2022 (the “Closing Date”), 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.
The 20192022 facilities consist of (a) a $1,093.2 million United States dollar-denominated Term Loan A facility (the “USD TLA facility”), a €500.0€440.6 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), (b) a $675.0$1,150.0 million United States dollar-denominated multicurrency revolving credit facility (ii) a CAD $70.0 million Canadian dollar-denominated(the “multicurrency revolving credit facilityfacility”), which is available in (i) United States dollars, or(ii) Australian dollars (limited to A$50.0 million), (iii) Canadian dollars (iii) a €200.0 million euro-denominated revolving credit facility available in euro, British pound(limited to C$70.0 million), or (iv) euros, yen, pounds sterling, Japanese yen, Swiss francs Australian dollars andor other agreed foreign currencies (limited to €250.0 million), and (iv)(c) a $50.0 million United States dollar-denominated revolving credit facility available in United States dollars or Hong Kong dollars.dollars (together with the multicurrency revolving credit facility, the “revolving credit facilities”). The 20192022 facilities are due on April 29, 2024.December 9, 2027. In connection with the refinancing in 2022 of the senior credit2019 facilities (as defined below), the Company paid debt issuance costs of $10.4$8.9 million (of which $3.5$1.4 million was expensed as debt modification costs and $6.9$7.5 million is being amortized over the term of the debt agreement)2022 facilities) and recorded debt extinguishment costs of $1.7$1.3 million to write off previously capitalized debt issuance costs.
The Company had loans outstanding of $1,569.5$476.6 million, net of debt issuance costs and based on applicable exchange rates, under the Euro TLA facilitiesfacility and $20.3 million ofno borrowings outstanding letters of credit under the 2022 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 29, 2023.
The terms of the Euro TLA facilitiesfacility require the Company to make quarterly repayments of amounts outstanding, under the 2019 facilities, which commencedcommencing with the calendar quarter ended September 30, 2019.ending March 31, 2023. 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 Euro TLA facilities.facility. The outstanding borrowings under the 20192022 facilities are prepayable at any time without penalty (other than customary breakage costs). Any voluntary repayments made by the Company would reduce the future required repayment amounts.
The Company made no payments on its term loan under the 2022 facilities during 2022. The Company made payments of $70.6$487.8 million on its term loans under the 2019 facilities during 2022, which included $22.5 million of mandatory payments and repaid the 2016$465.3 million repayment of the 2019 facilities in connection with the refinancing of the senior credit facilities during 2019.facilities. The Company made payments of $150.0$1,051.3 million and $250.0 million during 2018 and 2017, respectively, on its term loans under the 2016 facilities.2019 facilities during 2021, which included the repayment of the outstanding principal balance under its United States dollar-denominated Term Loan A facility (the “USD TLA facility”). The Company made payments of $14.4 million on its term loans under the 2019 facilities during 2020.
The euro-denominated borrowings under the Euro TLA facility and multicurrency revolving credit facility bear interest at a rate per annum equal to a euro interbank offered rate (“EURIBOR”) and the euro-denominated swing line borrowings under the 2022 facilities bear interest at a rate per annum equal to an adjusted daily simple euro short term rate (“ESTR”), calculated in a manner set forth in the 2022 facilities, plus in each case an applicable margin.
The United States dollar-denominated borrowings under the 20192022 facilities bear interest at a rate per annum 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 Eurocurrencyterm secured overnight financing rate (“SOFR”), calculated in a manner set forth in the 2019 facilities.2022 facilities, plus an applicable margin.
The Canadian dollar-denominated borrowings denominated in other foreign currencies under the 20192022 facilities bear interest at a rate equal to an applicable margin plus, as determined atvarious indexed rates specified in 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 borrowers2022 facilities and (ii) the average of the rates per annum for Canadian dollar
The current applicable margin with respect to the Euro TLA facilities and eachFacility as of January 29, 2023 was 1.250%. The current applicable margin with respect to the revolving credit facility is 1.375%facilities as of January 29, 2023 was 0.125% for adjusted Eurocurrency rate loans and 0.375% forbearing interest at the base rate, or Canadian prime rate loans.or daily simple ESTR rate and 1.125% for loans bearing interest at the EURIBOR rate or any other rate specified in the 2022 facilities. The applicable margin for borrowings under the Euro TLA facilitiesfacility and theeach revolving
F-28
credit facilitiesfacility is subject to adjustment (i) after the date of delivery of the compliance certificate and financial statements, with respect to each of the Company’s fiscal quarters, based upon the Company’s net leverage ratio or (ii) after the date of delivery of notice of a change in the Company’s public debt rating by Standard & Poor’s or Moody’s.
The Company entered into interest rate swap agreements designed with the intended effect of converting notional amounts of its variable rate debt obligation to fixed rate debt. Under the terms of the agreements, for the outstanding notional amount, the Company’s exposure to fluctuations in the one-month London interbank offered rate (“LIBOR”) is eliminated and the Company pays a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2019, 2018 and 2017:
| (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 | |||||||||
The 20192022 facilities require the Company to comply with customary affirmative, negative and financial covenants, including minimum interest coverage anda maximum net leverage.leverage ratio. A breach of any of these operating or financial covenants would result in a default under the 20192022 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.
On April 29, 2019, the Company entered into senior unsecured credit facilities (as amended, the “2019 facilities”). The Company replaced the 2019 facilities with the 2022 facilities. The 2019 facilities consisted of a €500.0 million euro-denominated Term Loan A facility, of which €440.6 million was outstanding as of the date it was replaced, and senior unsecured revolving credit facilities consisting of (i) a $675.0 million United States dollar-denominated revolving credit facility, (ii) a C$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, 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 had also previously included a $1,093.2 million USD TLA facility. The Company repaid the remaining principal balance of $1,029.6 million under its USD TLA facility in 2021.
The Company had entered into interest rate swap agreements designed with the intended effect of converting notional amounts of its variable rate debt obligation under the 2019 facilities to fixed rate debt. Under the terms of the agreements, for any outstanding $700.0 million principalnotional amount, of 4 1/2% senior notes due December 15, 2022. the Company’s exposure to fluctuations in the one-month LIBOR was eliminated and the Company paid a fixed rate plus the current applicable margin. The following interest rate swap agreements were entered into or in effect during 2021 and 2020 (no interest rate swap agreements were entered into or in effect during 2022):
| (In millions) | ||||||||||||||||||||||||||||||||
| Designation Date | Commencement Date | Initial Notional Amount | Notional Amount Outstanding as of January 29, 2023 | 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 | |||||||||||||||||||||||||||
(1) The Company redeemed these notes on January 5, 2018terminated in 2021 the interest rate swap agreements due to expire in February 2022 and February 2023 in connection with the issuanceearly repayment of €600.0the outstanding principal balance under its USD TLA facility.
The 2019 facilities also required the Company to comply with customary affirmative, negative and financial covenants, including a minimum interest coverage ratio and a maximum net leverage ratio. Given the disruption to the Company’s business caused by the COVID-19 pandemic and to ensure financial flexibility, the Company amended the 2019 facilities in June 2020 to provide temporary relief of certain financial covenants until the date on which a compliance certificate was
F-29
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) 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, euro-denominated principal amount(iv) addition of 3 1/8% senior notes due December 15, 2027, as discussed below.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%. The Company paidterminated early, effective June 10, 2021, this temporary relief period and, as a premium of $15.8 million toresult, the holders of these notesvarious provisions 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.June 2020 Amendment described above were no longer in effect.
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.
F-30
As of February 2, 2020,January 29, 2023, 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 primarily to collateralize the Company’s insurance and lease obligations. The Company had $74.2 million of these standby letters of credit outstanding as of January 29, 2023.
Interest paid was $108.3$82.1 million, $114.6$96.8 million and $120.2$111.2 million during 2019, 20182022, 2021 and 2017,2020, respectively.
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) | 2022 | 2021 | 2020 | ||||||||||||||
| Domestic | $ | (404.9) | $ | (120.3) | $ | (1,248.7) | |||||||||||
| Foreign | 793.1 | 1,093.0 | 55.7 | ||||||||||||||
| Total | $ | 388.2 | $ | 972.7 | $ | (1,193.0) | |||||||||||
The domestic lossincome before benefit for income taxes in 2019, 2018 and 2017 is primarily attributable2022 includes a $417.1 million noncash goodwill impairment recorded in conjunction with the Company’s annual goodwill impairment testing. The (loss) before income taxes in 2020 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.
Taxes paid were $133.0$254.5 million, $138.4$155.4 million and $164.6$130.7 million in 2019, 20182022, 2021 and 2017,2020, respectively.
The provision (benefit) for income taxes attributable to income (loss) consisted of the following:
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Federal: | ||||||||||||||||||||
| Current | $ | (6.9) | $ | (87.7) | $ | (22.2) | ||||||||||||||
| Deferred | (5.1) | (51.4) | (1) | (103.5) | ||||||||||||||||
| State and local: | ||||||||||||||||||||
| Current | (6.2) | 19.6 | 3.1 | |||||||||||||||||
| Deferred | 0.8 | (21.7) | (19.0) | |||||||||||||||||
| Foreign: | ||||||||||||||||||||
| Current | 191.1 | 153.7 | 108.3 | |||||||||||||||||
| Deferred | 14.1 | 8.2 | (2) | (22.2) | (3) | |||||||||||||||
| Total | $ | 187.8 | $ | 20.7 | $ | (55.5) | ||||||||||||||
| (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) |
(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.
F-31
The provision (benefit) for income taxes for the years 2019, 20182022, 2021 and 20172020 was different from the amount computed by applying the statutory United States federal income tax rate to the underlying income (loss) as follows:
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| 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 | 1.1 | % | (0.1) | % | 1.7 | % | ||||||||||||||||
| Effects of international jurisdictions, including foreign tax credits | (15.7 | )% | (9.5 | )% | (20.3 | )% | Effects of international jurisdictions, including foreign tax credits | 1.6 | % | (8.0) | % | (2.2) | % | ||||||||||||||||
Change in estimates for uncertain tax positions | (11.8 | )% | (2) | (3.7 | )% | (7.5 | )% | Change in estimates for uncertain tax positions | (2.2) | % | (9.7) | % | 2.1 | % | |||||||||||||||
| Change in valuation allowance | 1.8 | % | (5.3 | )% | (3) | 11.0 | % | (4) | Change in valuation allowance | 1.2 | % | 0.7 | % | 0.9 | % | ||||||||||||||
| One-time transition tax due to U.S. Tax Legislation | — | % | — | % | 34.0 | % | |||||||||||||||||||||||
| Remeasurement due to U.S. Tax Legislation | — | % | 0.2 | % | (51.9 | )% | |||||||||||||||||||||||
| Tax on foreign earnings (U.S. Tax Legislation - GILTI and FDII) | 10.0 | % | 1.9 | % | — | % | |||||||||||||||||||||||
| Tax on Speedo transaction basis difference | 2.3 | % | — | % | — | % | |||||||||||||||||||||||
| Excess tax benefits related to stock-based compensation | (0.2 | )% | (0.6 | )% | (2.8 | )% | (5) | ||||||||||||||||||||||
| Tax accounting method change | Tax accounting method change | — | % | (10.9) | % | — | % | ||||||||||||||||||||||
| Tax on foreign earnings (GILTI and FDII) | Tax on foreign earnings (GILTI and FDII) | 1.2 | % | 7.6 | % | (5.9) | % | ||||||||||||||||||||||
| Goodwill impairment | Goodwill impairment | 22.3 | % | — | % | (13.3) | % | ||||||||||||||||||||||
| Excess tax expense (benefits) related to stock-based compensation | Excess tax expense (benefits) related to stock-based compensation | 0.5 | % | — | % | (0.4) | % | ||||||||||||||||||||||
| Other, net | 1.5 | % | (0.5 | )% | (0.2 | )% | Other, net | 1.7 | % | 1.5 | % | 0.8 | % | ||||||||||||||||
| Effective income tax rate | 6.5 | % | 4.0 | % | (5.1 | )% | Effective income tax rate | 48.4 | % | 2.1 | % | 4.7 | % | ||||||||||||||||
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 behave historically been lower than the United States statutory income tax rate. The effectsbenefit of special rates, which expired at the end of 2021, are reflected above in Effects of international jurisdictions, including foreign tax credits, reflectedcredits.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act, with tax provisions primarily focused on implementing a 15% corporate minimum tax based on global adjusted financial statement income and a 1% excise tax on share repurchases. The corporate minimum tax will be effective in fiscal 2023 and the above table for 2019, 2018 and 2017 included those taxes at statutory incomeexcise tax rates and at special rates levied on income from certain jurisdictional activities. The Company expects to benefit from these special rates until 2022.
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 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 ofhad 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.
F-32
The components of deferred income tax assets and liabilities were as follows:
| (In millions) | 2022 | 2021 | ||||||||||||
| Gross deferred tax assets | ||||||||||||||
| Tax loss and credit carryforwards | $ | 143.6 | $ | 131.7 | ||||||||||
| Operating lease liabilities | 378.9 | 401.5 | ||||||||||||
| Employee compensation and benefits | 59.9 | 111.8 | ||||||||||||
| Inventories | 44.6 | 42.6 | ||||||||||||
| Accounts receivable | 12.9 | 24.2 | ||||||||||||
| Accrued expenses | 15.4 | 18.2 | ||||||||||||
| Property, plant and equipment | 242.3 | 208.4 | ||||||||||||
| Other, net | 17.2 | — | ||||||||||||
| Subtotal | 914.8 | 938.4 | ||||||||||||
| Valuation allowances | (72.9) | (69.3) | ||||||||||||
| Total gross deferred tax assets, net of valuation allowances | $ | 841.9 | $ | 869.1 | ||||||||||
| Gross deferred tax liabilities | ||||||||||||||
| Intangibles | $ | (807.1) | $ | (828.8) | ||||||||||
| Operating lease right-of-use assets | (340.0) | (352.8) | ||||||||||||
| Derivative financial instruments | (18.5) | (11.1) | ||||||||||||
| Other, net | — | (4.2) | ||||||||||||
| Total gross deferred tax liabilities | $ | (1,165.6) | $ | (1,196.9) | ||||||||||
| Net deferred tax liability | $ | (323.7) | $ | (327.8) | ||||||||||
| (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 | ) | |
At the end of 2019,2022, the Company had on a tax-effected basis approximately $238.9$173.0 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 million and $47.1 million for federal and various state and local jurisdictions, respectively, and $15.5 million for various foreign jurisdictions. The Company also had federal and state tax credit and other carryforwards of $173.5 million. The carryforwards expire principally between 20202023 and 2039.2042.
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) | 2022 | 2021 | 2020 | ||||||||||||||
| Balance at beginning of year | $ | 127.8 | $ | 210.7 | $ | 219.9 | |||||||||||
| Increases related to prior year tax positions | 12.4 | 2.6 | 5.4 | ||||||||||||||
| Decreases related to prior year tax positions | (12.3) | (0.2) | (2.9) | ||||||||||||||
| Increases related to current year tax positions | 2.7 | 15.5 | 10.9 | ||||||||||||||
| Lapses in statute of limitations | (12.0) | (93.3) | (30.7) | ||||||||||||||
| Effects of foreign currency translation | (3.9) | (7.5) | 8.1 | ||||||||||||||
| Balance at end of year | $ | 114.7 | $ | 127.8 | $ | 210.7 | |||||||||||
The entire amount of uncertain tax positions as of February 2, 2020,January 29, 2023, 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, 20182022, 2021 and 20172020 totaled an expense of $0.9 million, a benefit of $15.0 million, an expense of $12.1$7.4 million and an expense of $0.9$2.3 million, respectively. Interest and penalties accrued in the Company’s Consolidated Balance Sheets as of February 2, 2020January 29, 2023 and February 3, 2019January 30, 2022 totaled $25.2$20.1 million and $44.1$19.9 million, respectively. The Company recorded its liabilities for uncertain tax positions principally in accrued expenses and other liabilities in its Consolidated Balance Sheets.
F-33
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 millionup to $40.0$45.0 million may occur within the next 12 months.
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 the2022 facilities borrowings, and previously had exposure to interest rate volatility related to its 2019 facilities.facilities borrowings, which 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 its 2019 facilities. No interest rate swap agreements were outstanding as of January 29, 2023 and January 30, 2022. As of January 29, 2023, 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. Please see Note 9,8, “Debt,” for further discussion of the 2022 and 2019 facilities and these agreements.
The Company records the foreign currency forward exchange contracts and interest rate swap agreements at fair value in its Consolidated Balance Sheets and does not net the related assets and liabilities. The foreign currency forward exchange contracts associated with certain international inventory purchases and theany 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 29, 2023 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$1,192.0 million and $1,038.5$1,215.4 million, respectively, as of February 2, 2020January 29, 2023 and $1,098.3$1,361.7 million and $1,076.0$1,243.4 million, respectively, as of February 3, 2019.January 30, 2022. 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
F-34
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.
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 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (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) | $ | 15.7 | $ | 0.1 | $ | 48.0 | $ | 2.7 | $ | 20.7 | $ | 2.2 | $ | 0.6 | $ | — | |||||||||||||||||||||||||||||||
| Undesignated contracts: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward exchange contracts | — | — | 5.6 | — | 12.5 | — | 1.1 | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 15.7 | $ | 0.1 | $ | 53.6 | $ | 2.7 | $ | 33.2 | $ | 2.2 | $ | 1.7 | $ | — | |||||||||||||||||||||||||||||||
| (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$1,492.6 million at February 2, 2020.January 29, 2023. Such contracts expire principally between February 20202023 and June 2021.July 2024.
The following tables summarize the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
| (Loss) Gain Recognized in Other Comprehensive (Loss) Income | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Foreign currency forward exchange contracts (inventory purchases) | $ | (48.3) | $ | 109.2 | $ | (57.3) | ||||||||||||||
| Interest rate swap agreements | — | 0.2 | (9.9) | |||||||||||||||||
| Foreign currency borrowings (net investment hedges) | 30.4 | 111.3 | (125.0) | |||||||||||||||||
| Total | $ | (17.9) | $ | 220.7 | $ | (192.2) | ||||||||||||||
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 | ) | |||||
| Amount of Gain (Loss) Reclassified from AOCL into Income (Expense), Consolidated Income Statement Location, and Total Amount of Consolidated Income Statement Line Item | ||||||||||||||||||||||||||
| (In millions) | Amount Reclassified | Location | Total Income Statement Amount | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||||
| Foreign currency forward exchange contracts (inventory purchases) | $ | 23.1 | $ | (11.6 | ) | $ | (13.6 | ) | Cost of goods sold | $ | 4,520.6 | $ | 4,348.5 | $ | 4,020.4 | |||||||||||
| Interest rate swap agreements | (1.4 | ) | 1.1 | (6.2 | ) | Interest expense | 120.0 | 120.8 | 128.5 | |||||||||||||||||
| Total | $ | 21.7 | $ | (10.5 | ) | $ | (19.8 | ) | ||||||||||||||||||
| Amount of Gain (Loss) Reclassified from AOCL into Income (Expense), Consolidated Statements of Operations Location, and Total Amount of Consolidated Statements of Operations Line Item | ||||||||||||||||||||||||||||||||||||||||||||
| Amount Reclassified | Location | Total Statements of Operations Amount | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Foreign currency forward exchange contracts (inventory purchases) | $ | 27.6 | $ | (1.8) | $ | 12.5 | Cost of goods sold | $ | 3,901.3 | $ | 3,830.6 | $ | 3,355.8 | |||||||||||||||||||||||||||||||
| Interest rate swap agreements | — | (1.5) | — | SG&A expenses (1) | 4,377.4 | 4,453.9 | 3,983.2 | |||||||||||||||||||||||||||||||||||||
| Interest rate swap agreements | — | (3.0) | (11.0) | Interest expense | 89.6 | 108.6 | 125.5 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 27.6 | $ | (6.3) | $ | 1.5 | ||||||||||||||||||||||||||||||||||||||
(1) The Company dedesignated certain cash flow hedges related to its interest rate swap agreements during 2021 as discussed in the section entitled “Cash Flow Hedges” above.
A net gain in AOCL on foreign currency forward exchange contracts at February 2, 2020January 29, 2023 of $29.5$16.6 million is estimated to be reclassified in the next 12 months in the Company’s Consolidated Income Statement of Operations to costscost of goods sold as the underlying inventory hedged by such forward exchange contracts is sold. In addition, a net loss in AOCL for interest rate swap agreements at February 2, 2020 of $5.4 million is estimated to be reclassified to interest expense within the next 12 months. Amounts recognized in AOCL for foreign currency borrowings would be recognized in earnings only upon the sale or substantially complete liquidation of the hedged net investment. No amounts remained in AOCL related to interest rate swap agreements as of January 29, 2023.
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:
| Gain (Loss) Recognized in SG&A Expenses | ||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||
| Foreign currency forward exchange contracts | $ | 11.4 | $ | 14.7 | $ | (11.8) | ||||||||||||||
| Gain (Loss) Recognized in Income (Expense) | ||||||||||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Foreign currency forward exchange contracts | $ | 3.4 | $ | (1.5 | ) | $ | (4.6 | ) | ||||
| Foreign currency option contracts | — | — | (4.3 | ) | ||||||||
The Company dedesignated certain cash flow hedges related to its interest rate swap agreements during 2021 as discussed in the section entitled “Cash Flow Hedges” above. Following the dedesignation, the effect of these interest rate swap agreements recognized in SG&A expenses in the Company’s Consolidated Statement of Operations was immaterial in 2021.
The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of February 2, 2020.January 29, 2023.
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
F-36
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward exchange contracts | N/A | $ | 15.8 | N/A | $ | 15.8 | N/A | $ | 56.3 | N/A | $ | 56.3 | |||||||||||||||||||||||||||||||||||
| Rabbi trust assets | 1.5 | 5.7 | N/A | 7.2 | — | 0.3 | N/A | 0.3 | |||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 1.5 | $ | 21.5 | N/A | $ | 23.0 | N/A | $ | 56.6 | N/A | $ | 56.6 | ||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward exchange contracts | N/A | $ | 35.4 | N/A | $ | 35.4 | N/A | $ | 1.7 | N/A | $ | 1.7 | |||||||||||||||||||||||||||||||||||
| Total Liabilities | N/A | $ | 35.4 | N/A | $ | 35.4 | N/A | $ | 1.7 | N/A | $ | 1.7 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2019 | 2018 | |||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Foreign currency forward exchange contracts | N/A | $ | 23.3 | N/A | $ | 23.3 | N/A | $ | 24.8 | N/A | $ | 24.8 | |||||||||||
| Interest rate swap agreements | N/A | 0.1 | N/A | 0.1 | N/A | 1.4 | N/A | 1.4 | |||||||||||||||
| Total Assets | N/A | $ | 23.4 | N/A | $ | 23.4 | N/A | $ | 26.2 | N/A | $ | 26.2 | |||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency forward exchange contracts | N/A | $ | 2.2 | N/A | $ | 2.2 | N/A | $ | 6.2 | N/A | $ | 6.2 | |||||||||||
| Interest rate swap agreements | N/A | 5.9 | N/A | 5.9 | N/A | 2.8 | N/A | 2.8 | |||||||||||||||
| Total Liabilities | N/A | $ | 8.1 | N/A | $ | 8.1 | N/A | $ | 9.0 | N/A | $ | 9.0 | |||||||||||
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 agreementsLevel 1 rabbi trust assets, which consist of investments in mutual funds, is basedvalued at the net asset value of the funds, as determined by the closing price in the active market in which the individual fund is traded. The fair value of the Level 2 rabbi trust assets, which consist of investments in common collective trust funds, is valued at the net asset value of the funds, as determined by the fund family. Funds are redeemable on observable interest rate yield curvesa daily basis without restriction.
The Company established a rabbi trust that, beginning January 1, 2022, holds investments related to the Company’s supplemental savings plan. The rabbi trust assets, which generally mirror the investment elections made by eligible plan participants, were $7.2 million and represents$0.3 million as of January 29, 2023 and January 30, 2022, respectively, and recorded in the expected discounted cash flows underlyingCompany’s Consolidated Balance Sheets as follows: $0.7 million and $6.5 million were included in other current assets and other assets, respectively, as of January 29, 2023, and $0.3 million was included in other assets as of January 30, 2022. The corresponding deferred compensation liability was included in accrued expenses and other liabilities in the financial instruments. Company’s Consolidated Balance Sheets as of January 29, 2023 and January 30, 2022. Unrealized losses recognized on the rabbi trust investments were immaterial during 2022 and 2021.
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
F-37
The following table showstables show the fair values of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a non-recurring basis (consisting of operating lease right-of-use assets, property, plantduring 2022, 2021 and equipment, and other intangible assets) during 2019, 2018 and 2017,2020, and the total impairments recorded as a result of the remeasurement process:
| (In millions) | (In millions) | Fair Value Measurement Using | Fair Value As Of Impairment Date | Total Impairments | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | N/A | N/A | $ | 3.0 | $ | 3.0 | $ | 27.4 | |||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | Property, plant and equipment, net | N/A | N/A | 0.3 | 0.3 | 24.3 | ||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Goodwill | N/A | N/A | 41.0 | 41.0 | 417.1 | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Fair Value Measurement Using | Fair Value As Of Impairment Date | Total Impairments | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | N/A | N/A | $ | 14.5 | $ | 14.5 | $ | 83.0 | Operating lease right-of-use assets | N/A | N/A | 14.3 | 14.3 | 21.2 | ||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | N/A | N/A | — | — | 26.9 | Property, plant and equipment, net | N/A | N/A | 0.6 | 0.6 | 25.8 | |||||||||||||||||||||||||||||||||||||
| 2020 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | N/A | N/A | 110.5 | 110.5 | 28.2 | ||||||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | Property, plant and equipment, net | N/A | N/A | 2.7 | 2.7 | 53.7 | ||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Goodwill | N/A | N/A | 652.6 | 652.6 | 879.0 | ||||||||||||||||||||||||||||||||||||||||||
| Tradenames | Tradenames | N/A | N/A | 48.7 | 48.7 | 47.2 | ||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets, net | N/A | N/A | 87.4 | 87.4 | 116.4 | Other intangible assets, net | N/A | N/A | — | — | 7.3 | |||||||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | N/A | N/A | 0.6 | 0.6 | 17.9 | |||||||||||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | N/A | N/A | 0.6 | 0.6 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||
| Investments in unconsolidated affiliates | Investments in unconsolidated affiliates | N/A | N/A | — | — | 12.3 | ||||||||||||||||||||||||||||||||||||||||||