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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-4032739 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
501 Seventh Avenue
New York, New York 10018
(Address of registrant’s principal executive offices)
Registrant’s telephone number, including area code: (212) 287-8000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No.
The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of October 26, 2007 is as follows: 45,569,690.
THE WARNACO GROUP, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2007
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, excluding per share data)
(Unaudited)
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
ASSETS | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 188,877 | $ | 166,990 | $ | 113,425 | ||||||||||||
Accounts receivable, net of reserves of $80,981, $87,064 and $75,054 as of September 29, 2007, December 30, 2006 and September 30, 2006, respectively | 288,046 | 294,993 | 310,034 | |||||||||||||||
Assets held for sale | — | — | 52,231 | |||||||||||||||
Inventories | 340,180 | 407,617 | 366,535 | |||||||||||||||
Assets of discontinued operations | 93,063 | 5,657 | — | |||||||||||||||
Prepaid expenses and other current assets (including deferred income taxes of $8,934, $8,413, and $11,747 as of September 29, 2007, December 30, 2006, and September 30, 2006, respectively) | 58,031 | 72,943 | 91,865 | |||||||||||||||
Total current assets | 968,197 | 948,200 | 934,090 | |||||||||||||||
Property, plant and equipment, net | 103,861 | 122,628 | 125,438 | |||||||||||||||
Other assets: | ||||||||||||||||||
Licenses, trademarks and other intangible assets, net | 455,307 | 472,386 | 444,804 | |||||||||||||||
Goodwill | 106,950 | 101,151 | 131,159 | |||||||||||||||
Other assets (including deferred income taxes of $16,847, $17,558, and $5,178 as of September 29, 2007, December 30, 2006, and September 30, 2006, respectively) | 27,398 | 36,610 | 21,057 | |||||||||||||||
Total assets | $ | 1,661,713 | $ | 1,680,975 | $ | 1,656,548 | ||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Short-term debt | $ | 51,927 | $ | 108,739 | $ | 50,938 | ||||||||||||
Accounts payable | 139,615 | 199,310 | 188,182 | |||||||||||||||
Accrued liabilities | 156,209 | 137,573 | 134,751 | |||||||||||||||
Liabilities of discontinued operations | 35,181 | 7,527 | — | |||||||||||||||
Accrued income taxes payable (including deferred income taxes of $980, $980 and $1,595 as of September 29, 2007, December 30, 2006, and September 30, 2006, respectively) | 7,081 | 41,174 | 51,765 | |||||||||||||||
Total current liabilities | 390,013 | 494,323 | 425,636 | |||||||||||||||
Long-term debt | 330,950 | 332,458 | 382,942 | |||||||||||||||
Other long-term liabilities (including deferred income taxes of $131,161, $124,883, and $132,546 as of September 29, 2007, December 30, 2006, and September 30, 2006, respectively) | 185,711 | 171,280 | 188,441 | |||||||||||||||
Commitments and contingencies | ||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||
Preferred stock (See Note 12) | — | — | — | |||||||||||||||
Common stock: $0.01 par value, 112,500,000 shares authorized, 47,947,932, 46,985,925 and 46,621,865 issued as of September 29, 2007, December 30, 2006 and September 30, 2006, respectively | 479 | 470 | 466 | |||||||||||||||
Additional paid-in capital | 578,335 | 555,734 | 547,989 | |||||||||||||||
Accumulated other comprehensive income | 58,652 | 31,453 | 13,794 | |||||||||||||||
Retained earnings | 197,820 | 142,596 | 123,712 | |||||||||||||||
Treasury stock, at cost 3,158,914, 2,161,225 and 1,342,550 shares as of September 29, 2007, December 30, 2006 and September 30, 2006, respectively | (80,247 | ) | (47,339 | ) | (26,432 | ) | ||||||||||||
Total stockholders’ equity | 755,039 | 682,914 | 659,529 | |||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,661,713 | $ | 1,680,975 | $ | 1,656,548 |
See Notes to Consolidated Condensed Financial Statements.
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THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Net revenues | $ | 474,762 | $ | 419,637 | $ | 1,385,374 | $ | 1,207,654 | ||||||||||||||||
Cost of goods sold | 282,783 | 250,130 | 820,240 | 744,138 | ||||||||||||||||||||
Gross profit | 191,979 | 169,507 | 565,134 | 463,516 | ||||||||||||||||||||
Selling, general and administrative expenses | 158,668 | 129,552 | 445,304 | 375,104 | ||||||||||||||||||||
Amortization of intangible assets | 2,997 | 2,695 | 10,047 | 9,739 | ||||||||||||||||||||
Pension income | (345 | ) | (83 | ) | (1,038 | ) | (249 | ) | ||||||||||||||||
Operating income | 30,659 | 37,343 | 110,821 | 78,922 | ||||||||||||||||||||
Other loss (income) | 419 | (4,387 | ) | (6,463 | ) | (3,120 | ) | |||||||||||||||||
Interest expense | 9,177 | 9,451 | 27,983 | 28,578 | ||||||||||||||||||||
Interest income | (1,257 | ) | (797 | ) | (2,293 | ) | (1,984 | ) | ||||||||||||||||
Income from continuing operations before provision for income taxes | 22,320 | 33,076 | 91,594 | 55,448 | ||||||||||||||||||||
Provision for income taxes | 10,966 | 7,288 | 30,898 | 15,646 | ||||||||||||||||||||
Income from continuing operations | 11,354 | 25,788 | 60,696 | 39,802 | ||||||||||||||||||||
Loss from discontinued operations, net of taxes | (6,942 | ) | (11,227 | ) | (4,533 | ) | (7,936 | ) | ||||||||||||||||
Net income | $ | 4,412 | $ | 14,561 | $ | 56,163 | $ | 31,866 | ||||||||||||||||
Basic income per common share: | ||||||||||||||||||||||||
Income from continuing operations | $ | 0.25 | $ | 0.57 | $ | 1.35 | $ | 0.87 | ||||||||||||||||
Loss from discontinued operations | (0.15 | ) | (0.25 | ) | (0.10 | ) | (0.18 | ) | ||||||||||||||||
Net income | $ | 0.10 | $ | 0.32 | $ | 1.25 | $ | 0.69 | ||||||||||||||||
Diluted income per common share: | ||||||||||||||||||||||||
Income from continuing operations | $ | 0.24 | $ | 0.55 | $ | 1.30 | $ | 0.85 | ||||||||||||||||
Loss from discontinued operations | (0.14 | ) | (0.24 | ) | (0.09 | ) | (0.17 | ) | ||||||||||||||||
Net income | $ | 0.10 | $ | 0.31 | $ | 1.21 | $ | 0.68 | ||||||||||||||||
Weighted average number of shares outstanding used in computing income per common share: | ||||||||||||||||||||||||
Basic | 44,762,763 | 45,623,044 | 44,960,238 | 45,951,109 | ||||||||||||||||||||
Diluted | 46,347,574 | 46,465,593 | 46,535,915 | 46,964,889 |
See Notes to Consolidated Condensed Financial Statements.
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THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended | ||||||||||||
September 29, 2007 | September 30, 2006 | |||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 56,163 | $ | 31,866 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Foreign exchange gain | (7,221 | ) | (10,722 | ) | ||||||||
Loss (income) from discontinued operations | 4,533 | 7,936 | ||||||||||
Depreciation and amortization | 51,762 | 36,305 | ||||||||||
Stock-based compensation expense | 10,684 | 10,902 | ||||||||||
Amortization of deferred financing costs | 2,059 | 1,891 | ||||||||||
Provision for bad debt expense | 2,080 | 249 | ||||||||||
Inventory writedown | 28,300 | 16,567 | ||||||||||
Other | 51 | 1,024 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (12,139 | ) | (37,441 | ) | ||||||||
Inventories | (11,089 | ) | (15,302 | ) | ||||||||
Prepaid expenses and other assets | 2,960 | (17,973 | ) | |||||||||
Accounts payable, accrued expenses and other liabilities | (22,092 | ) | 22,856 | |||||||||
Accrued income taxes | (4,468 | ) | (1,370 | ) | ||||||||
Net cash provided by operating activities of continuing operations | 101,583 | 46,788 | ||||||||||
Net cash provided by operating activities of discontinued operations | 25,200 | 27,011 | ||||||||||
Net cash provided by operating activities | 126,783 | 73,799 | ||||||||||
Cash flows from investing activities: | ||||||||||||
Collection of notes receivable | 1,531 | 4,312 | ||||||||||
Purchases of property, plant & equipment | (24,308 | ) | (28,863 | ) | ||||||||
Business acquisitions, net of cash acquired | (1,691 | ) | (208,535 | ) | ||||||||
Other | 3 | — | ||||||||||
Net cash used in investing activities of continuing operations | (24,465 | ) | (233,086 | ) | ||||||||
Net cash used in investing activities of discontinued operations | (443 | ) | (1,064 | ) | ||||||||
Net cash used in investing activities | (24,908 | ) | (234,150 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Debt issued with business acquisition – Term B Note | — | 180,000 | ||||||||||
Repayment of Term B Note | (41,350 | ) | (450 | ) | ||||||||
Payment of debt assumed with business acquisition | — | (44,592 | ) | |||||||||
Payment of deferred financing costs | — | (3,358 | ) | |||||||||
Repayment of Senior Notes due 2013 | — | (5,200 | ) | |||||||||
Increase (decrease) in short-term CKJEA notes payable | (20,866 | ) | 3,826 | |||||||||
Proceeds from the exercise of employee stock options | 11,117 | 2,804 | ||||||||||
Purchase of treasury stock | (32,908 | ) | (25,379 | ) | ||||||||
Other | (255 | ) | — | |||||||||
Net cash provided by (used in) financing activities | (84,262 | ) | 107,651 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 4,274 | 1,924 | ||||||||||
Increase (decrease) in cash and cash equivalents | 21,887 | (50,776 | ) | |||||||||
Cash and cash equivalents at beginning of period | 166,990 | 164,201 | ||||||||||
Cash and cash equivalents at end of period | $ | 188,877 | $ | 113,425 |
See Notes to Consolidated Condensed Financial Statements.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 1 — Nature of Operations and Basis of Presentation
Organization: The Warnaco Group, Inc. (‘‘Warnaco Group’’ and, collectively with its subsidiaries, the ‘‘Company’’) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all of the outstanding shares of Warnaco Inc. (‘‘Warnaco’’). Warnaco is the principal operating subsidiary of Warnaco Group. Warnaco Group, Warnaco and certain of Warnaco’s subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C. Sections 101-1330, as amended, effective February 4, 2003.
Basis of Consolidation and Presentation: The accompanying unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (‘‘SEC’’). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company ’s Annual Report on Form 10-K for the annual period ended December 30, 2006 (‘‘Fiscal 2006’’).
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, results of operations for interim periods are not necessarily indicative of the results for any other interim period or the full year.
All intercompany accounts and transactions have been eliminated in consolidation.
Periods Covered: The period from July 1, 2007 to September 29, 2007 (the ‘‘Three Months Ended September 29, 2007’’), and the period from July 2, 2006 to September 30, 2006 (the ‘‘Three Months Ended September 30, 2006’’) each contained thirteen weeks of operations. The period from December 31, 2006 to September 29, 2007 (the ‘‘Nine Months Ended September 29, 2007’’) and the period from January 1, 2006 to September 30, 2006 (the ‘‘Nine Months Ended September 30, 2006’’) each contained twenty-six weeks of operations.
Reclassifications: Prior period items on the Company’s Consolidated Condensed Statement of Operations have been reclassified to give effect to the Company’s discontinued operations.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Stock-Based Compensation: No stock options were granted during the Three Months Ended September 29, 2007. The fair values of stock options granted during the Nine Months Ended September 29, 2007 and the Three and Nine Months Ended September 30, 2006, respectively, were estimated at the date of grant using a Black-Scholes-Merton option pricing model with the following assumptions:
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, 2006 | September 29, 2007 | September 30, 2006 | ||||||||||||||||
Weighted average risk free rate of return | 4.81 | % | 4.44 | % | 4.63 | % | ||||||||||||
Dividend yield(a) | — | — | — | |||||||||||||||
Expected volatility of the market price of the Company’s common stock | 27.0% | 31.3% | 27.0% | |||||||||||||||
Expected option life | 6 years | 6 years | 6 years |
(a) | The terms of the Company’s Amended and Restated Credit Agreement and the terms of the indenture governing its Senior Notes (each as defined below) limit the Company’s ability to make certain payments, including dividends, and require the Company to meet certain financial covenants. The Company has not paid dividends on its common stock in any of the last three fiscal years. |
A summary of stock-based compensation expense is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Stock-based compensation expense before income taxes: | ||||||||||||||||||||||||
Stock options | $ | 1,647 | $ | 2,109 | $ | 5,112 | $ | 6,519 | ||||||||||||||||
Restricted stock grants | 1,853 | 1,674 | 5,732 | 5,106 | ||||||||||||||||||||
Total(a) | 3,500 | 3,783 | 10,844 | 11,625 | ||||||||||||||||||||
Income tax benefit: | ||||||||||||||||||||||||
Stock options | 583 | 748 | 1,811 | 2,310 | ||||||||||||||||||||
Restricted stock grants | 657 | 593 | 2,031 | 1,809 | ||||||||||||||||||||
Total | 1,240 | 1,341 | 3,842 | 4,119 | ||||||||||||||||||||
Stock-based compensation expense after income taxes: | ||||||||||||||||||||||||
Stock options | 1,064 | 1,361 | 3,301 | 4,209 | ||||||||||||||||||||
Restricted stock grants | 1,196 | 1,081 | 3,701 | 3,297 | ||||||||||||||||||||
Total | $ | 2,260 | $ | 2,442 | $ | 7,002 | $ | 7,506 |
(a) | Stock-based compensation has been reflected in the Company’s consolidated condensed statement of operations as follows: |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Included in income from continuing operations | $ | 3,441 | $ | 3,544 | $ | 10,684 | $ | 10,902 | ||||||||||||||||
Included in loss from discontinued operations | 59 | 239 | 160 | 723 | ||||||||||||||||||||
$ | 3,500 | $ | 3,783 | $ | 10,844 | $ | 11,625 |
Financial Instruments: The Company enters into foreign currency exchange contracts which are designed to fix the number of euros required to satisfy the first one-third of dollar denominated purchases of inventory by certain of the Company’s European subsidiaries. See Note 9. In addition, during the Three Months Ended September 29, 2007, the Company entered into foreign currency exchange contracts which are designed to fix the number of euros required to satisfy certain dollar denominated royalty expenses incurred by certain of the Company’s European subsidiaries. Changes in the fair values of foreign currency exchange contracts that are designated as cash flow hedges are deferred and recorded as a component of other comprehensive income until the associated inventory is sold, at which time the deferred gains or losses are recorded in cost of goods sold. Changes in the fair value of foreign currency exchange contracts that are not designated as cash flow hedges are recorded immediately in selling, general and administrative expenses. Commissions and fees related to foreign currency exchange contracts are expensed as incurred.
Recent Accounting Pronouncements: In February 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 155, Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140 (‘‘SFAS 155’’). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 permits an entity to measure at fair value certain financial instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material effect on the Company’s consolidated condensed financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an Amendment of FASB Statement No. 140 (‘‘SFAS 156’’). SFAS 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement methods for each class of servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS 156 did not have a material effect on the Company’s consolidated condensed financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109 (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax pos itions. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note 6.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (‘‘SFAS 157’’). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands the definition of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS 157 in the first quarter of fiscal 2008. The Company is currently in the process of evaluating the impact, if any, the adoption of SFAS 157 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (‘‘SFAS 159’’). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for co mpanies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which a company has chosen to use fair value on the face of its balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.
In May 2007, the FASB issued FASB Staff Position (‘‘FSP’’) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (‘‘FSP FIN 48-1’’). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The adoption of FSP FIN 48-1 did not have a material effect on the Company’s consolidated condensed financial statements.
Note 2 — Acquisitions
As disclosed in its Annual Report on Form 10-K for Fiscal 2006, on January 31, 2006, the Company acquired 100% of the shares of the companies that operate the wholesale and retail businesses of Calvin Klein® jeanswear and accessories in Europe and Asia and the CK Calvin Klein ‘‘Bridge’’ line of sportswear and accessories in Europe (collectively the ‘‘CKJEA Business’’). Results of operations for the Three Months Ended September 29, 2007 and the Nine Months Ended September 29, 2007 include three months and nine months, respectively, of operating activity of the CKJEA Business, while results of operations for the Three Months Ended September 30, 2006 and the Nine Months Ended September 30, 2006 include three months and eight months, respectively, of operating activity of the CKJEA Business.
During the Nine Months Ended September 29, 2007, the Company purchased a retail store in New York City from a franchisee as well as a business which operates eight retail stores in Shanghai, China from a franchisee for a total consideration of approximately $1,540.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 3 — Discontinued Operations
As disclosed in its Annual Report on Form 10-K for Fiscal 2006, the Company discontinued certain operations in prior periods. These businesses included the OP sportswear, men’s swimwear and licensing businesses (sold in the fourth quarter of 2006), the Company’s J. Lo by Jennifer Lopez® and Lejaby Rose businesses (shutdown in the fourth quarter of 2006) and three of the Company’s Speedo outlet retail stores in the United States (shut down in the fourth quarter of 2006).
On September 18, 2007 the Company announced its intention to exit the Swimwear Group’s private label and designer swimwear businesses (except Calvin Klein swimwear). As part of the September 18, 2007 announcement, the Company also disclosed that it would be exploring strategic alternatives for its Lejaby business and, as of September 29, 2007, it was actively engaged in the marketing of this business for sale. As a result, the OP women’s and junior’s, Anne Cole, Catalina, Cole of California and Lejaby business units have been classified as discontinued operations for the Three and Nine Months Ended September 29, 2007 and September 30, 2006. The Company’s Nautica, Michael Kors and private label swimwear businesses will be classified as discontinued operations when those businesses have ceased operations, which is expected to occur in the first half of 2008.
Summarized operating results for the discontinued operations are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Net revenues | $ | 27,153 | $ | 33,587 | $ | 139,062 | $ | 159,937 | ||||||||||||||||
Loss before provision for income taxes(a) | $ | (9,706 | ) | $ | (10,345 | ) | $ | (4,410 | ) | $ | (5,970 | ) | ||||||||||||
Provision (benefit) for income taxes | (2,764 | ) | 882 | 123 | 1,966 | |||||||||||||||||||
Loss from discontinued operations | $ | (6,942 | ) | $ | (11,227 | ) | $ | (4,533 | ) | $ | (7,936 | ) |
(a) | Includes, among other items, a loss of $809 related to the disposition of the Company’s OP women’s and junior’s business in September 2007. |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Summarized assets and liabilities of the discontinued operations are presented in the consolidated condensed balance sheets as follows:
September 29, 2007(a) | December 30, 2006(b) | |||||||||||
Accounts receivable, net | $ | 19,342 | $ | 3,428 | ||||||||
Inventories | 33,983 | 217 | ||||||||||
Prepaid expenses and other current assets | 4,804 | 1,831 | ||||||||||
Deferred Tax Asset – Current | 1,868 | — | ||||||||||
Property, plant and equipment, net | 3,215 | 181 | ||||||||||
Licenses, trademarks and other intangible assets, net | 27,669 | — | ||||||||||
Deferred Tax Asset – Non Current | 1,870 | — | ||||||||||
Other assets | 312 | — | ||||||||||
Assets of discontinued operations | $ | 93,063 | $ | 5,657 | ||||||||
Accounts payable | 9,974 | $ | 3,315 | |||||||||
Accrued liabilities | 16,728 | 4,212 | ||||||||||
Deferred Tax Liability – Current | 7 | — | ||||||||||
Deferred Tax Liability – Long Term | 3,457 | — | ||||||||||
Other long-term liabilities | 5,015 | — | ||||||||||
Liabilities of discontinued operations | $ | 35,181 | $ | 7,527 |
(a) | Includes assets and liabilities related to both the businesses that were discontinued in 2006 as well as those businesses discontinued in the Three Months Ended September 29, 2007 (approximately 82% of total assets of discontinued operations and approximately 85% of total liabilities of discontinued operation relate to the Company’s Lejaby business as of September 29, 2007). |
(b) | Includes assets and liabilities related to those businesses that were discontinued in 2006. |
Note 4 — Restructuring Expenses
During the Three and Nine Months Ended September 29, 2007, the Company incurred restructuring charges of $17,638 and $21,227, respectively, primarily related to expenses associated with management’s initiatives to increase productivity and profitability in the Swimwear Group. Actions taken to date include the closure of the Company’s swim goggle manufacturing facility in Canada, the rationalization of its swimwear workforce in California and Mexico, the sale of the Company’s Mexican manufacturing facilities and activities related to the exit of the designer swimwear business (excluding Calvin Klein swimwear). The Company expects to incur additional restructuring expenses of approximately $15,700 in the fourth quarter of 2007 of which approximately $13,700 relates to the sale of the Mexican manufacturing facilities and approximately $2,000 relates to further rationalization of its brands and workforce in the Swimwear Group. As relates the sale of the Mexican manufacturing facilities, on October 1, 2007, the Company entered into an agreement with a local business partner (the ‘‘Buyer’’) whereby the Company transferred the facilities to the Buyer. As part of the transfer the Buyer agreed to assume certain liabilities associated with the facilities and the facilities’ employees. The Company estimates that total losses associated with the transfer will be approximately $25,300, of which $11,600 (primarily related to write-down of certain fixed assets), has been recorded in the Three Months Ended September 29, 2007 and approximately $13,700 (primarily related to certain liabilities assumed by the Buyer and reimbursed by the Company), will be recorded in the fourth quarter of fiscal 2007. In addition, the Company entered into a production agreement w ith the Buyer for certain stretch swimwear and other products through June 30, 2011. Total
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
commitments under the production agreement are expected to be approximately $71,500 through June 30, 2011 as follows:
Period October 1, 2007 through December 31, 2007 | $ | 8,500 | ||||
January 1, 2008 through December 31, 2008 | 22,200 | |||||
January 1, 2009 through December 31, 2009 | 15,800 | |||||
January 1, 2010 through December 31, 2010 | 16,600 | |||||
January 1, 2011 through June 30, 2011 | 8,400 |
The table below summarizes the restructuring expenses for the Three and Nine Months Ended September 29, 2007 and Three and Nine Months Ended September 30, 2006:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Employee termination costs and related items(a) | $ | 1,756 | $ | — | $ | 3,568 | $ | — | ||||||||||||||||
Impairment/writedown of property, plant and equipment(b) | 13,149 | 100 | 13,787 | 100 | ||||||||||||||||||||
Inventory write-down(c) | 1,862 | — | 2,617 | — | ||||||||||||||||||||
Costs related to idle manufacturing plant capacity(d) | 489 | — | 489 | — | ||||||||||||||||||||
Lease and contract termination costs | — | — | 269 | — | ||||||||||||||||||||
Legal fees and other | 382 | — | 497 | — | ||||||||||||||||||||
$ | 17,638 | $ | 100 | $ | 21,227 | $ | 100 | |||||||||||||||||
Cash portion of restructuring items | $ | 2,627 | $ | 100 | $ | 4,823 | $ | 100 | ||||||||||||||||
Non-cash portion of restructuring items | 15,011 | — | 16,404 | — |
(a) | Relates to employees whose jobs were eliminated during the Three and Nine Months Ended September 29, 2007 associated with the closure of a swim goggle manufacturing facility located in Canada (92 employees), the rationalization of the Company’s swimwear workforce in California and Mexico (452 employees) and the shutdown of a technical research operation in Rhode Island (five employees). |
(b) | For the Three and Nine Months Ended September 29, 2007 primarily reflects the impairment of property, plant and equipment associated with the transfer of the Company’s Mexican manufacturing plants to the Buyer on October 1, 2007 and the expected shutdown, in the fourth quarter of 2007, of three retail stores. Write-downs during the Nine Months Ended September 29, 2007 also include amounts associated with the closure of a swim goggle manufacturing facility located in Canada and the shutdown of a technical research operation in Rhode Island. |
(c) | Relates to the closure of a swim goggle manufacturing facility located in Canada during the first half of fiscal 2007 and write-downs associated with the Company’s decision to exit its designer swimwear business (excluding Calvin Klein swimwear). |
(d) | Reflects unfavorable manufacturing variances in the Swimwear Group resulting from the underutilization of owned manufacturing plants related to the Company’s decision to exit its designer swimwear business (excluding Calvin Klein swimwear). These plants were transferred to the Buyer on October 1, 2007. |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Restructuring charges have been recorded in the consolidated condensed statement of operations for the Three and Nine Months Ended September 29, 2007 and Three and Nine Months Ended September 30, 2006, as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Cost of goods sold | $ | 9,331 | $ | — | $ | 12,332 | $ | — | ||||||||||||||||
Selling, general and administrative expenses | 8,307 | 100 | 8,895 | 100 | ||||||||||||||||||||
$ | 17,638 | $ | 100 | $ | 21,227 | $ | 100 |
Changes in liabilities related to restructuring expenses for the Nine Months Ended September 29, 2007 are summarized below:
Employee Termination Costs | Legal Fees and Other | Lease and Contract Termination | Total(a) | |||||||||||||||||||||
Balance at December 30, 2006 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Charges for the Nine Months Ended September 29, 2007 | 3,568 | 986 | 269 | 4,823 | ||||||||||||||||||||
Cash reductions for the Nine Months Ended September 29, 2007 | (2,095 | ) | (596 | ) | (39 | ) | (2,730 | ) | ||||||||||||||||
Non-cash changes and foreign currency effects | 49 | 6 | 19 | 74 | ||||||||||||||||||||
Balance at September 29, 2007 | $ | 1,522 | $ | 396 | $ | 249 | $ | 2,167 |
(a) | The Company expects these amounts to be paid within the next 12 months. |
Note 5 — Business Segments and Geographic Information
Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group.
The Sportswear Group designs, sources and markets moderate to premium priced men’s and women’s sportswear under the Calvin Klein and Chaps® brands. As of September 29, 2007, the Sportswear Group operated 293 Calvin Klein retail stores worldwide (consisting of 34 free-standing stores and 259 shop-in-shop/concession stores). As of September 29, 2007, there were a lso 302 retail stores operated by third parties under retail licenses or franchise and distributor agreements. The majority of these Calvin Klein retail stores were acquired as part of the acquisition of the CKJEA Business.
The Intimate Apparel Group designs, manufactures, sources and markets moderate to premium priced intimate apparel and other products for women and better to premium priced men’s underwear and loungewear under the Warner’s®, Olga®, Body Nancy Ganz/Bodyslimmers®and Calvin Klein brand names. As of September 29, 2007, the Intimate Apparel Group operated: (i) 411 Calvin Klein retail stores worldwide (consisting of 79 free-standing stores (including one on-line store) and 332 shop-in-shop/concession stores); and (ii) 79 Lejaby® retail stores (considered held for sale as of September 29, 2007 and included in discontinued operations). As o f September 29, 2007, there were also 63 Calvin Klein retail stores operated by third parties under retail licenses or franchise or distributor agreements.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
The Swimwear Group designs, licenses, sources, manufactures and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under the Speedo®, Lifeguard®, Nautica®, Michael Kors® and Calvin Klein brand names. The Swimwear Group operates one on-line store. During the Three Months Ended September 29, 2007, pursuant to its initiative to exit the designer swimwear business (with the exception of the Calvin Klein swimwear business), the Company’s Catalina, Anne Cole, Cole of California and OP Junior’s swim businesses were classified as discontinued operations for financial reporting purposes. The Company’s Lifeguard, Nautica and Michael Kors businesses are expected to be discontinued by the Company in 2008 and the Company expects to classify these businesses as discontinued operations in 2008.
Information by business group is set forth below:
Sportswear Group | Intimate Apparel Group | Swimwear Group | Group Total | Corporate/ Other | Total | |||||||||||||||||||||||||||||||
Three Months Ended September 29, 2007 | ||||||||||||||||||||||||||||||||||||
Net revenues | $ | 265,098 | $ | 174,509 | $ | 35,155 | $ | 474,762 | $ | — | $ | 474,762 | ||||||||||||||||||||||||
Operating income (loss) | 36,776 | 33,361 | (29,637 | ) | 40,500 | (9,841 | ) | 30,659 | ||||||||||||||||||||||||||||
Depreciation and amortization | 7,614 | 3,622 | 13,758 | 24,994 | 985 | 25,979 | ||||||||||||||||||||||||||||||
Restructuring expense | — | 921 | 16,717 | 17,638 | — | 17,638 | ||||||||||||||||||||||||||||||
Capital expenditures | 5,211 | 2,501 | 131 | 7,843 | 2,172 | 10,015 | ||||||||||||||||||||||||||||||
Three Months Ended September 30, 2006 | ||||||||||||||||||||||||||||||||||||
Net revenues | $ | 232,812 | $ | 146,700 | $ | 40,125 | $ | 419,637 | $ | — | $ | 419,637 | ||||||||||||||||||||||||
Operating income (loss) | 32,239 | 24,243 | (8,575 | ) | 47,907 | (10,564 | ) | 37,343 | ||||||||||||||||||||||||||||
Depreciation and amortization | 8,547 | 2,323 | 2,615 | 13,485 | 986 | 14,471 | ||||||||||||||||||||||||||||||
Restructuring expense | — | — | — | — | 100 | 100 | ||||||||||||||||||||||||||||||
Capital expenditures | 4,596 | 1,261 | 124 | 5,981 | 1,975 | 7,956 | ||||||||||||||||||||||||||||||
Nine Months Ended September 29, 2007 | ||||||||||||||||||||||||||||||||||||
Net revenues | $ | 693,419 | $ | 450,067 | $ | 241,888 | $ | 1,385,374 | $ | — | $ | 1,385,374 | ||||||||||||||||||||||||
Operating income (loss) | 82,624 | 79,372 | (15,477 | ) | 146,519 | (35,698 | ) | 110,821 | ||||||||||||||||||||||||||||
Depreciation and amortization | 20,975 | 9,051 | 18,584 | 48,610 | 3,152 | 51,762 | ||||||||||||||||||||||||||||||
Restructuring expense (income) | 119 | 1,041 | 20,090 | 21,250 | (23 | ) | 21,227 | |||||||||||||||||||||||||||||
Capital expenditures | 12,859 | 5,485 | 416 | 18,760 | 5,189 | 23,949 | ||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2006 | ||||||||||||||||||||||||||||||||||||
Net revenues | $ | 568,306 | $ | 391,634 | $ | 247,714 | $ | 1,207,654 | $ | — | $ | 1,207,654 | ||||||||||||||||||||||||
Operating income (loss) | 41,943 | 52,562 | 9,914 | 104,419 | (25,497 | ) | 78,922 | |||||||||||||||||||||||||||||
Depreciation and amortization | 18,804 | 6,994 | 7,856 | 33,654 | 2,651 | 36,305 | ||||||||||||||||||||||||||||||
Restructuring expense | — | — | — | — | 100 | 100 | ||||||||||||||||||||||||||||||
Capital expenditures | 8,314 | 4,153 | 2,072 | 14,539 | 8,939 | 23,478 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Sportswear Group | Intimate Apparel Group | Swimwear Group | Group Total | Corporate/ Other | Total | |||||||||||||||||||||||||||||||
Balance Sheet | ||||||||||||||||||||||||||||||||||||
Total Assets: | ||||||||||||||||||||||||||||||||||||
September 29, 2007 | $ | 859,453 | $ | 445,147 | $ | 169,664 | $ | 1,474,264 | $ | 187,449 | $ | 1,661,713 | ||||||||||||||||||||||||
December 30, 2006 | 772,154 | 403,500 | 310,206 | 1,485,860 | 195,115 | 1,680,975 | ||||||||||||||||||||||||||||||
September 30, 2006 | 621,041 | 305,088 | 290,803 | 1,216,932 | 439,616 | 1,656,548 | ||||||||||||||||||||||||||||||
Property, Plant and Equipment: | ||||||||||||||||||||||||||||||||||||
September 29, 2007 | $ | 23,253 | $ | 17,090 | $ | 4,069 | $ | 44,412 | $ | 59,449 | $ | 103,861 | ||||||||||||||||||||||||
December 30, 2006 | 16,453 | 18,918 | 13,700 | 49,071 | 73,557 | 122,628 | ||||||||||||||||||||||||||||||
September 30, 2006 | 26,163 | 18,368 | 15,241 | 59,772 | 65,666 | 125,438 |
All intercompany revenues and expenses are eliminated in consolidation. Management does not include intercompany sales when evaluating segment performance. Each segment’s performance is evaluated based upon operating income after restructuring charges but before depreciation and amortization of certain corporate assets, interest, foreign currency gains and losses and income taxes. Certain intangible assets with carrying values of $166,800 and $104,200 were reclassified from Corporate/Other to the Sportswear Group and Intimate Apparel Group, respectively, as of September 30, 2006 to conform to the current presentation.
The table below summarizes corporate/other expenses for each period presented:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Unallocated corporate expenses(a) | $ | 8,856 | $ | 9,478 | $ | 32,569 | $ | 22,746 | ||||||||||||||||
Restructuring expense | — | 100 | (23 | ) | 100 | |||||||||||||||||||
Depreciation and amortization of corporate assets | 985 | 986 | 3,152 | 2,651 | ||||||||||||||||||||
Corporate/other | $ | 9,841 | $ | 10,564 | $ | 35,698 | $ | 25,497 |
(a) | The increase in unallocated corporate expenses for the Nine Months Ended September 30, 2007 was due primarily to an increase in amounts accrued for employee compensation. |
A reconciliation of operating income from business groups to income from continuing operations before provision for income taxes is as follows:
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Operating income by operating group | $ | 40,500 | $ | 47,907 | $ | 146,519 | $ | 104,419 | ||||||||||||||||
Corporate/other | (9,841 | ) | (10,564 | ) | (35,698 | ) | (25,497 | ) | ||||||||||||||||
Operating income | 30,659 | 37,343 | 110,821 | 78,922 | ||||||||||||||||||||
Other loss (income) | 419 | (4,387 | ) | (6,463 | ) | (3,120 | ) | |||||||||||||||||
Interest expense | 9,177 | 9,451 | 27,983 | 28,578 | ||||||||||||||||||||
Interest income | (1,257 | ) | (797 | ) | (2,293 | ) | (1,984 | ) | ||||||||||||||||
Income from continuing operations before provision for income taxes | $ | 22,320 | $ | 33,076 | $ | 91,594 | $ | 55,448 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Geographic Information: Net revenues summarized by geographic region are as follows:
Three Months Ended | ||||||||||||||||||||||||
September 29, 2007 | % | September 30, 2006 | % | |||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
United States | $ | 221,231 | 46.5 | % | $ | 218,924 | 52.1 | % | ||||||||||||||||
Europe | 144,220 | 30.4 | % | 105,518 | 25.1 | % | ||||||||||||||||||
Asia | 68,352 | 14.4 | % | 55,617 | 13.3 | % | ||||||||||||||||||
Canada | 23,597 | 5.0 | % | 23,295 | 5.6 | % | ||||||||||||||||||
Mexico, Central and South America | 17,362 | 3.7 | % | 16,283 | 3.9 | % | ||||||||||||||||||
$ | 474,762 | 100.0 | % | $ | 419,637 | 100.0 | % |
Nine Months Ended | ||||||||||||||||||||||||
September 29, 2007 | % | September 30, 2006 | % | |||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
United States | $ | 737,130 | 53.1 | % | $ | 713,755 | 59.1 | % | ||||||||||||||||
Europe | 345,841 | 25.0 | % | 236,425 | 19.6 | % | ||||||||||||||||||
Asia | 181,173 | 13.1 | % | 139,444 | 11.5 | % | ||||||||||||||||||
Canada | 72,167 | 5.3 | % | 71,224 | 5.9 | % | ||||||||||||||||||
Mexico, Central and South America | 49,063 | 3.5 | % | 46,806 | 3.9 | % | ||||||||||||||||||
$ | 1,385,374 | 100.0 | % | $ | 1,207,654 | 100.0 | % |
Information about Major Customers: For the Three Months Ended September 29, 2007, the Nine Months Ended September 29, 2007, the Three Months Ended September 30, 2006 and the Nine Months Ended September 30, 2006, no one customer accounted for 10% or more of the Company’s net revenues.
Note 6 — Income Taxes
The following presents the domestic and foreign components of the Company’s provision for income taxes included in income from continuing operations:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Provision (benefit) for income taxes included in income from continuing operations | ||||||||||||||||||||||||
Domestic | $ | 1,372 | $ | (1,994 | ) | $ | 7,283 | $ | (3,691 | ) | ||||||||||||||
Foreign | 9,594 | 9,282 | 23,615 | 19,337 | ||||||||||||||||||||
$ | 10,966 | $ | 7,288 | $ | 30,898 | $ | 15,646 |
The provision for income taxes was $10,966, or an effective tax rate of 49.1% for the Three Months Ended September 29, 2007, compared to $7,288, or an effective tax rate of 22% for the Three Months Ended September 30, 2006. The effective tax rate for the Three Months Ended September 29, 2007 reflects the Company’s inability to recognize certain tax benefits related to domestic restructuring
15
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
expenses at this time. The 22% tax rate for the Three Months Ended September 30, 2006 included a domestic benefit from the filing of the Company’s 2005 tax return and the favorable retroactive effect of the Netherlands tax ruling.
The provision for income taxes was $30,898, or an effective tax rate of 33.7% for the Nine Months Ended September 29, 2007, compared to $15,646, or an effective tax rate of 28.2% for the Nine Months Ended September 30, 2006. The effective tax rate for the Nine Months Ended September 29, 2007 reflects the Company’s inability to recognize certain tax benefits related to domestic restructuring expenses at this time.
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities. The Company provides a valuation allowance for its deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be realized. Valuation allowances are determined on a jurisdiction-by-jurisdiction basis. The Company records a full valuation allowance against its net domestic deferred tax assets exclusive of indefinite lived intangible assets. The valuation allowance as of September 29, 2007 was approximately $140,000 of which up to approximately $2,500 will provide an income statement benefit upon the realization of the deferred tax assets to which the valuation allowance applies and the remainder will be applied to reduce other intangible assets.
In foreign jurisdictions, the Company has recorded a valuation allowance against deferred tax assets of approximately $11,000 of which approximately $6,000 will be recorded as an income statement benefit upon the realization of the deferred tax assets to which the valuation allowance applies and the remainder will be applied to reduce other intangible assets.
The Company is required to file tax returns in multiple domestic and foreign jurisdictions and these tax returns are subject to audit by taxing authorities. Taxing authorities may challenge the Company’s interpretation of tax law and additional tax may be assessed. The Company and its subsidiaries generally file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999. The IRS has not commenced examinations of the Company’s U.S. income tax returns for the 1999 through 2006 tax years. The Company has been examined in various state and local and foreign jurisdictions in the last several years and has a variety of open tax years remaining in those jurisdictions. Management does not believe the outcome of any examinations will be material to the Compa ny’s financial statements.
The Company adopted the provisions of FIN 48 as of December 31, 2006 (the beginning of fiscal 2007). In accordance with FIN 48, the Company recognized, as of December 31, 2006, the cumulative-effect adjustment of decreasing unrecognized tax benefits by $500 and reducing retained earnings and intangible assets by approximately $1,000 and $1,500 respectively. Additionally, the Company’s deferred tax assets and related valuation allowance was reduced by approximately $41,000. As of December 31, 2006, the Company had unrecognized tax benefits of approximately $65,000, of which $7,000 will reduce the effective income tax rate when recognized.
Also upon the adoption of FIN 48, the Company reclassified approximately $17,000 from current tax liabilities to non-current tax liabilities. The Company believes that it is reasonably possible that the amount of unrecognized tax benefits will be reduced by between $2,000 and $4,000 by the end of 2007 due to the expiration of statutes of limitations and the resolution of tax examinations.
The Company recognizes penalties and interest related to uncertain tax positions in income tax expense and had accrued interest and penalties as of September 29, 2007 and December 31, 2006 of approximately $900 and $500, respectively.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
For the Three Months Ended September 29, 2007 the Company reduced uncertain tax positions by approximately $500 resulting from the settlement of an audit in one of the Company’s foreign jurisdictions. This uncertain tax position was initially recorded as an increase to other intangible assets. For the Three Months Ended September 29, 2007 the Company increased uncertain tax positions by $400, also in a foreign jurisdiction, and this amount has been recorded to income tax expense.
Note 7 — Employee Benefit and Retirement Plans
Defined Benefit Pension Plans
The Company has a defined pension benefit plan which covers substantially all full-time domestic employees, a defined benefit plan for certain of its Lejaby employees and a defined benefit plan for certain of its United Kingdom employees (‘‘Pension Plans’’). The Company follows SFAS No. 87, Employers’ Accounting for Pensions (‘‘SFAS 87’’) and SFAS No. 158, Employer’s Accounting for Pensions, in regard to accounting for its Pension Plans. Pursuant to SFAS 87, each quar ter the Company recognizes interest cost offset by the expected return on Pension Plan assets. In addition, the Company obtains a report from the Pension Plan actuaries to measure Pension Plan assets and liabilities at year-end. The Company records the effect of actual gains and losses exceeding the expected return on Pension Plan assets and any other changes determined by the actuaries (including changes in actuarial assumptions) in the fourth quarter of each year. This accounting results in volatility in pension expense or income; therefore, the Company reports pension expense/income on a separate line of its statement of operations in each period.
The components of net periodic benefit cost are as follows:
Pension Plans | Postretirement Plans | |||||||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Service cost | $ | — | $ | — | $ | 49 | $ | 75 | ||||||||||||||||
Interest cost | 2,199 | 2,249 | 110 | 102 | ||||||||||||||||||||
Expected return on plan assets | (2,544 | ) | (2,332 | ) | — | — | ||||||||||||||||||
Amortization of actuarial loss | — | — | 36 | 31 | ||||||||||||||||||||
Net benefit (income) cost | $ | (345 | ) | $ | (83 | ) | $ | 195 | $ | 208 |
Pension Plans | Postretirement Plans | |||||||||||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Service cost | $ | — | $ | — | $ | 147 | $ | 225 | ||||||||||||||||
Interest cost | 6,594 | 6,747 | 330 | 306 | ||||||||||||||||||||
Expected return on plan assets | (7,632 | ) | (6,996 | ) | — | — | ||||||||||||||||||
Amortization of actuarial loss | — | — | 108 | 93 | ||||||||||||||||||||
Net benefit (income) cost | $ | (1,038 | ) | $ | (249 | ) | $ | 585 | $ | 624 |
The Company’s contributions to the domestic plan were $10,600 during the Nine Months Ended September 29, 2007 and are expected to be $13,700 in total for the fiscal year ended December 29, 2007.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Deferred Compensation Plan
The Company’s deferred compensation plan was adopted on April 25, 2005. The Company’s liability for employee contributions and investment activity was $1,324, $745 and $702 as of September 29, 2007, December 30, 2006 and September 30, 2006, respectively. This liability is included in other long-term liabilities.
Note 8 — Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 29, 2007 | September 30, 2006 | September 29, 2007 | September 30, 2006 | |||||||||||||||||||||
Net income | $ | 4,412 | $ | 14,561 | $ | 56,163 | $ | 31,866 | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 23,329 | (7,461 | ) | 27,385 | 9,500 | |||||||||||||||||||
Other | (291 | ) | (29 | ) | (186 | ) | (374 | ) | ||||||||||||||||
Total comprehensive income | $ | 27,450 | $ | 7,071 | $ | 83,362 | $ | 40,992 |
The components of accumulated other comprehensive income as of September 29, 2007, December 30, 2006 and September 30, 2006 are summarized below:
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
Foreign currency translation adjustments(a) | $ | 61,462 | $ | 34,077 | $ | 14,005 | ||||||||||||
Adjustment to initially apply SFAS 158 | (2,350 | ) | (2,350 | ) | — | |||||||||||||
Other | (460 | ) | (274 | ) | (211 | ) | ||||||||||||
Total accumulated other comprehensive income | $ | 58,652 | $ | 31,453 | $ | 13,794 |
(a) | The foreign currency translation adjustments reflect the change in the U.S. dollar relative to functional currencies where the Company conducts certain of its operations. |
The Company’s Annual Report on Form 10-K for Fiscal 2006 included the effect of adopting SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans (‘‘SFAS 158’’) as a component of Other Comprehensive Income for Fiscal 2006. The effect of adopting SFAS 158 should have been classified as a separate component of Accumulated Other Comprehensive Income, not as a component of Other Comprehensive Income within the Company’s Consolidated Statement of Stockholders’ Equity for Fiscal 2006. The cumulative effect of adopting SFAS 158 was $2,350. Other Comprehensive Income for Fiscal 2006 should have been reported as $79,885, not $77,535 as originally reported. The Company will correct its presentation of Other Comprehensive Income for Fiscal 20 06 in its Annual Report on Form 10-K for the year ending December 29, 2007. The correction of Other Comprehensive Income for Fiscal 2006 has no effect on Accumulated Other Comprehensive Income, Stockholders’ Equity, Total Assets or Net Income for any period previously reported.
18
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 9 — Inventories
Inventories are valued at the lower of cost to the Company (using the first-in-first-out method) or market and are summarized as follows:
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
Finished goods | $ | 271,701 | $ | 308,043 | $ | 281,531 | ||||||||||||
Work in process/in transit | 51,594 | 63,965 | 51,638 | |||||||||||||||
Raw materials | 16,885 | 35,609 | 33,366 | |||||||||||||||
$ | 340,180 | $ | 407,617 | $ | 366,535 |
As of September 29, 2007, the Company was party to outstanding foreign currency exchange contracts to purchase approximately $7,702 for a total of approximately €5,620 at a weighted average exchange rate of $1.3705 to €1.00. The foreign currency exchange contracts mature through March 2008 and are designed to fix the number of euros required to satisfy the first one-third of dollar denominated purchases of inventory by certain of the Company’s European subsidiaries. These foreign currency exchange contracts were not designated as cash flow hedges for financial reporting purposes and the Company recorded approximately $360 and $560 in losses for the Three and Nine Months Ended September 29, 2007, respectively.
Note 10 — Intangible Assets and Goodwill
The following tables set forth intangible assets as of September 29, 2007, December 30, 2006 and September 30, 2006 and the activity in the intangible asset accounts for the Nine Months Ended September 29, 2007:
September 29, 2007 | December 30, 2006 | September 30, 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Licenses for a term (Company as licensee) | $ | 333,518 | $ | 27,097 | $ | 306,421 | $ | 314,810 | $ | 18,824 | $ | 295,986 | $ | 278,345 | $ | 16,740 | $ | 261,605 | |||||||||||||||||||||||||||||||||||||||
Licenses for a term (Company as licensor) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales order backlog | 1,600 | 1,600 | — | 1,600 | 1,600 | — | 1,900 | 1,900 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Other(a) | 16,575 | 3,777 | 12,798 | 15,007 | 2,003 | 13,004 | 13,517 | 1,257 | 12,260 | ||||||||||||||||||||||||||||||||||||||||||||||||
351,693 | 32,474 | 319,219 | 331,417 | 22,427 | 308,990 | 293,762 | 19,897 | 273,865 | |||||||||||||||||||||||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trademarks | 96,074 | — | 96,074 | 120,153 | — | 120,153 | 125,439 | — | 125,439 | ||||||||||||||||||||||||||||||||||||||||||||||||
Licenses in perpetuity | 40,014 | — | 40,014 | 43,243 | — | 43,243 | 45,500 | — | 45,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
136,088 | — | 136,088 | 163,396 | — | 163,396 | 170,939 | — | 170,939 | |||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets | $ | 487,781 | $ | 32,474 | $ | 455,307 | $ | 494,813 | $ | 22,427 | $ | 472,386 | $ | 464,701 | $ | 19,897 | $ | 444,804 |
(a) | In connection with the purchase of a business which operates eight retail stores in Shanghai, China, the Company recorded an intangible asset of approximately $500 during the Nine Months Ended September 30, 2007 related to a non-compete agreement with the seller. See Note 2. |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Trademarks | Licenses in Perpetuity | Finite-lived Intangible Assets | Other | Total | ||||||||||||||||||||||||||
Balance at December 30, 2006 | $ | 120,153 | $ | 43,243 | $ | 295,986 | $ | 13,004 | $ | 472,386 | ||||||||||||||||||||
Acquisition of Shanghai stores | — | — | — | 500 | 500 | |||||||||||||||||||||||||
Amortization expense | — | — | (8,273 | ) | (1,774 | ) | (10,047 | ) | ||||||||||||||||||||||
Translation adjustments | — | — | 19,077 | 1,068 | 20,145 | |||||||||||||||||||||||||
Reclassification of items to assets of discontinued operations(a) | (23,272 | ) | (2,926 | ) | — | — | (26,198 | ) | ||||||||||||||||||||||
Adoption of FIN 48(b) | (807 | ) | (303 | ) | (369 | ) | — | (1,479 | ) | |||||||||||||||||||||
Balance at September 29, 2007 | $ | 96,074 | $ | 40,014 | $ | 306,421 | $ | 12,798 | $ | 455,307 |
(a) | Reflects the reclassification of intangible assets held by discontinued operations to the ‘‘Assets of discontinued operations’’ line item on the Company’s Consolidated Condensed Balance Sheet as of September 29, 2007. See Note 3. |
(b) | Reflects the effect of the adoption of FIN 48 on December 31, 2006. See Note 6. |
The following table summarizes the Company’s estimated amortization expense for intangible assets for the next five years:
2008 | $ | 9,513 | ||||
2009 | 9,062 | |||||
2010 | 9,055 | |||||
2011 | 8,515 | |||||
2012 | 8,356 |
The following table summarizes the changes in the carrying amount of goodwill for the Nine Months Ended September 29, 2007:
Sportswear Group | Intimate Apparel Group | Swimwear Group | Total | |||||||||||||||||||||
Balance at December 30, 2006 | $ | 100,150 | $ | 359 | $ | 642 | 101,151 | |||||||||||||||||
Adjustment: | ||||||||||||||||||||||||
Translation adjustments | 5,629 | 29 | — | 5,658 | ||||||||||||||||||||
Other | 141 | — | — | 141 | ||||||||||||||||||||
Balance at September 29, 2007 | $ | 105,920 | $ | 388 | $ | 642 | $ | 106,950 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 11 — Debt
Debt was as follows:
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
Short-term debt: | ||||||||||||||||||
CKJEA notes payable | $ | 49,803 | $ | 66,461 | $ | 48,783 | ||||||||||||
Current portion of Term B Note due 2013 | 1,800 | 41,800 | 1,800 | |||||||||||||||
Other | 324 | 478 | 355 | |||||||||||||||
51,927 | 108,739 | 50,938 | ||||||||||||||||
Long-term debt: | ||||||||||||||||||
87/8% Senior Notes due 2013 | 205,000 | 205,000 | 205,000 | |||||||||||||||
Term B Note due 2013 | 125,950 | 127,300 | 177,750 | |||||||||||||||
Other | — | 158 | 192 | |||||||||||||||
330,950 | 332,458 | 382,942 | ||||||||||||||||
Total Debt | $ | 382,877 | $ | 441,197 | $ | 433,880 |
Senior Notes
The terms of the Company’s 87/8% Senior Notes due 2013 (‘‘Senior Notes’’) limit the Company’s ability to make certain payments, including dividends, and require the Company to meet certain financial covenants. The Company is not aware of any non-compliance with the covenants of the Senior Notes as of September 29, 2007, December 30, 2006 and September 30, 2006.
Interest Rate Swap Agreements
As a result of the interest rate swap agreements entered into on September 18, 2003 (the ‘‘2003 Swap Agreement’’) and November 5, 2004 (the ‘‘2004 Swap Agreement’’), the weighted average effective interest rate of the Senior Notes was 9.14% as of September 29, 2007, 9.12% as of December 30, 2006 and 9.14% as of September 30, 2006.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
The fair value of the Company’s outstanding interest rate swap agreements reflect the termination premium (unrealized loss) or termination discount (unrealized gain) that the Company would realize if such swaps were terminated on the valuation date. Since the provisions of the Company’s 2003 Swap Agreement and 2004 Swap Agreement match the provisions of the Company’s outstanding Senior Notes (the ‘‘Hedged Debt’’), changes in the fair value of the outstanding swaps do not have any effect on the Company’s results of operations but are recorded in the Company’s consolidated balance sheets. Unrealized gains on the outstanding interest rate swap agreements are included in other assets with a corresponding increase in the Hedged Debt. Unrealized losses on the outstanding interest rate swap agreements are included as a component of long-term debt with a corresponding decrease in the Hedged Debt. The table below summ arizes the unrealized loss of the Company’s outstanding swap agreements:
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
Unrealized loss: | ||||||||||||||||||
2003 Swap Agreement | $ | (1,352 | ) | $ | (1,622 | ) | $ | (1,801 | ) | |||||||||
2004 Swap Agreement | (932 | ) | (1,091 | ) | (1,203 | ) | ||||||||||||
Net unrealized loss | $ | (2,284 | ) | $ | (2,713 | ) | $ | (3,004 | ) |
Revolving Credit Facility; Amended and Restated Credit Agreement
On January 31, 2006, the Company’s revolving credit facility was amended and restated in connection with the closing of the acquisition of the CKJEA Business (as further amended on November 6, 2006 in connection with the sale of the Company’s OP business, the ‘‘Amended and Restated Credit Agreement’’). The Company is not aware of any non-compliance with the covenants under the Company’s Amended and Restated Credit Agreement as of September 29, 2007, December 30, 2006 and September 30, 2006. Terms of the Amended and Restated Credit Agreement restrict the Company’s ability to make certain payments, including dividends.
As of September 29, 2007, under the Amended and Restated Credit Agreement, the Company had $127,750 outstanding under the Term B Note and no amounts outstanding under the revolving credit facility. As of September 29, 2007, the Company had $243,568 of credit available under the revolving credit facility of the Amended and Restated Credit Agreement which included available borrowings of $208,084 (based upon the current borrowing base calculations) plus $85,465 of cash collateral, less outstanding letters of credit of $49,981.
CKJEA Notes Payable
As of September 29, 2007 and September 30, 2006, the weighted average interest rate for the outstanding CKJEA notes payable was approximately 4.81% and 3.62%, respectively. All of the CKJEA notes payable were renewed for an additional one-year term in February 2007.
Foreign Revolving Credit Facility
During fiscal 2005, certain of the Company’s foreign subsidiaries entered into a $25,000 revolving credit facility with Bank of America, N.A. (the ‘‘Foreign Revolving Credit Facility’’). As of September 29, 2007, the Company had no borrowings outstanding under the Foreign Revolving Credit Facility. The Company is not aware of any non-compliance with the covenants of the Foreign Revolving Credit Facility as of September 29, 2007, December 30, 2006 and September 30, 2006.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 12 — Stockholders’ Equity
Preferred Stock
The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value $0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value $0.01 per share. There were no shares of preferred stock issued and outstanding at September 29, 2007, December 30, 2006 and September 30, 2006.
Share Repurchase Program
In May 2007, the Company’s Board of Directors authorized a new share repurchase program (the ‘‘2007 Share Repurchase Program’’) for the repurchase of up to 3,000,000 shares of the Company’s common stock. The Company expects that, in order to comply with the terms of applicable debt instruments, purchases under this newly authorized program will be made over the next four years. During the Nine Months Ended September 29, 2007, the Company did not repurchase any shares of common stock under the 2007 Share Repurchase Program.
During the Nine Months Ended September 29, 2007, the Company repurchased 911,548 shares of its common stock in the open market at a total cost of $30,500 (an average cost of $33.50 per share) under its prior share repurchase program (which program was approved in July 2005) (the ‘‘2005 Share Repurchase Program’’). During the Three and Nine Months Ended September 30, 2006, the Company repurchased 525,000 and 1,200,000 shares, respectively, of its common stock in the open market at a total cost of approximately $10,948 (an average cost of $20.85 per share) and $23,132 (an average cost of $19.28 per share), respectively, under the 2005 Share Repurchase Program. As of September 29, 2007, the Company had cumulatively purchased an aggregate of 2,932,633 shares of common stock in the open market at a total cost of approximately $74,600 (an average cost of $25.45 per share) under the 2005 Share Repurch ase Program. Both the 2005 and 2007 Share Repurchase Programs may be modified or terminated by the Company’s Board of Directors at any time.
Stock Incentive Plans
A summary of stock option award activity under the Company’s stock incentive plans as of, and for the Nine Months Ended, September 29, 2007 is presented below:
Options | Weighted Average Exercise Price | |||||||||||
Outstanding as of December 30, 2006 | 4,162,328 | $ | 18.01 | |||||||||
Granted | 300,700 | 27.11 | ||||||||||
Exercised | (678,102 | ) | 16.39 | |||||||||
Forfeited Expired | (123,466 | ) | 22.09 | |||||||||
Outstanding as of September 29, 2007 | 3,661,460 | $ | 18.92 | |||||||||
Exercisable as of September 29, 2007 | 2,512,404 | $ | 16.65 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
A summary of the activity for unvested restricted share/unit awards under the Company’s stock incentive plans as of, and for the Nine Months Ended, September 29, 2007 is presented below:
Restricted shares/units | Weighted Average Grant Date Fair Value | |||||||||||
Unvested as of December 30, 2006 | 616,367 | $ | 22.44 | |||||||||
Granted | 565,791 | 27.36 | ||||||||||
Vested | (263,105 | ) | 21.67 | |||||||||
Forfeited | (58,368 | ) | 24.58 | |||||||||
Unvested as of September 29, 2007 | 860,685 | $ | 25.76 |
Note 13 — Supplemental Cash Flow Information
Nine Months Ended | ||||||||||||
September 29, 2007 | September 30, 2006 | |||||||||||
Cash paid (received) during the period for: | ||||||||||||
Interest expense | $ | 20,390 | $ | 18,773 | ||||||||
Interest income | (1,661 | ) | (1,273 | ) | ||||||||
Income taxes, net of refunds received | 37,303 | 21,136 | ||||||||||
Supplemental non-cash investing and financing activities: | ||||||||||||
Accounts payable for purchase of fixed assets | 3,393 | 2,577 |
Note 14 — Income per Common Share
Three Months Ended | ||||||||||||
September 29, 2007 | September 30, 2006 | |||||||||||
Numerator for basic and diluted income per common share: | ||||||||||||
Income from continuing operations | $ | 11,354 | $ | 25,788 | ||||||||
Basic: | ||||||||||||
Weighted average number of shares outstanding used in computing income per common share | 44,762,763 | 45,623,044 | ||||||||||
Income per common share from continuing operations | $ | 0.25 | $ | 0.57 | ||||||||
Diluted: | ||||||||||||
Weighted average number of shares outstanding | 44,762,763 | 45,623,044 | ||||||||||
Effect of dilutive securities: | ||||||||||||
Employee stock options | 1,211,534 | 626,912 | ||||||||||
Unvested employees’ restricted stock | 373,277 | 215,637 | ||||||||||
Weighted average number of shares and share equivalents outstanding | 46,347,574 | 46,465,593 | ||||||||||
Income per common share from continuing operations | $ | 0.24 | $ | 0.55 | ||||||||
Number of anti-dilutive ‘‘out-of-the-money’’ stock options outstanding(a) | — | 2,340,415 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Nine Months Ended | ||||||||||||
September 29, 2007 | September 30, 2006 | |||||||||||
Numerator for basic and diluted income per common share: | ||||||||||||
Income from continuing operations | $ | 60,696 | $ | 39,802 | ||||||||
Basic: | ||||||||||||
Weighted average number of shares outstanding used in computing income per common share | 44,960,238 | 45,951,109 | ||||||||||
Income per common share from continuing operations | $ | 1.35 | $ | 0.87 | ||||||||
Diluted: | ||||||||||||
Weighted average number of shares outstanding | 44,960,238 | 45,951,109 | ||||||||||
Effect of dilutive securities: | ||||||||||||
Employee stock options | 1,168,855 | 759,157 | ||||||||||
Unvested employees’ restricted stock | 406,822 | 254,623 | ||||||||||
Weighted average number of shares and share equivalents outstanding | 46,535,915 | 46,964,889 | ||||||||||
Income per common share from continuing operations | $ | 1.30 | $ | 0.85 | ||||||||
Number of anti-dilutive ‘‘out-of-the-money’’ stock options outstanding(a) | — | 1,783,815 |
(a) | Options to purchase shares of common stock at an exercise price greater than the average market price of the underlying shares are anti-dilutive and therefore not included in the computation of diluted income per common share from continuing operations. |
Note 15 — Legal Matters
SEC Inquiry: As disclosed in its Annual Report on Form 10-K for Fiscal 2006, the Company announced, on August 8, 2006, that it would restate its previously reported financial statements for the fourth quarter of 2005, fiscal 2005 and the first quarter of 2006. The restatements were required as a result of certain irregularities discovered by the Company during the Company’s 2006 second quarter closing review and certain other errors. The irregularities primarily related to the accounting for certain returns and customer allowances at the Company’s Chaps menswear division. These matters were reported to the Company’s Audit Committee, which engaged outside counsel, who in turn retained independent forensic accountants, to investigate and report to the Audit Committee. Based on information obtained in that investigation, and also to correct for an error which resulted from the implementation of the Company’s new systems infrastructure at its Swimwear Group during the first quarter of 2006, and certain immaterial errors, the Audit Committee accepted management’s recommendation that the Company restate its financial statements.
In connection with the restatements, the Company contacted the SEC staff to inform them of the restatements and the Company’s related investigation. The SEC staff has initiated an informal inquiry with respect to such matters. The Company is cooperating fully with the SEC in its informal inquiry.
Other: From time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or business.
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 16 — Supplemental Consolidating Condensed Financial Information
The following tables set forth supplemental consolidating condensed financial information as of September 29, 2007, December 30, 2006 and September 30, 2006 and for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006 for: (i) The Warnaco Group, Inc.; (ii) Warnaco Inc.; (iii) the subsidiaries that guarantee the Senior Notes (the ‘‘Guarantor Subsidiaries’’); (iv) the subsidiaries other than the Guarantor Subsidiaries (the ‘‘Non-Guarantor Subsidiaries’’); and (v) The Warnaco Group, Inc. on a consolidated basis. The Senior Notes are guaranteed by substantially all of Warnaco Inc.’s domestic subsidiaries.
September 29, 2007 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 87,297 | $ | 197 | $ | 101,383 | $ | — | $ | 188,877 | ||||||||||||||||||||||||
Accounts receivable, net | — | — | 110,542 | 177,504 | — | 288,046 | ||||||||||||||||||||||||||||||
Inventories | — | 83,152 | 104,214 | 152,814 | — | 340,180 | ||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | — | 2,176 | 8,470 | 47,385 | — | 58,031 | ||||||||||||||||||||||||||||||
Assets of discontinued operations | — | 1,672 | 14,724 | 76,667 | — | 93,063 | ||||||||||||||||||||||||||||||
Total current assets | — | 174,297 | 238,147 | 555,753 | — | 968,197 | ||||||||||||||||||||||||||||||
Property, plant and equipment, net | — | 55,869 | 7,516 | 40,476 | — | 103,861 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,010,699 | 551,617 | — | — | (1,562,316 | ) | — | |||||||||||||||||||||||||||||
Other assets | — | 19,766 | 218,810 | 351,079 | — | 589,655 | ||||||||||||||||||||||||||||||
Total assets | $ | 1,010,699 | $ | 801,549 | $ | 464,473 | $ | 947,308 | $ | (1,562,316 | ) | $ | 1,661,713 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||
Liabilities of discontinued operations | $ | — | $ | 122 | $ | 4,790 | $ | 30,269 | $ | — | $ | 35,181 | ||||||||||||||||||||||||
Accounts payable, accrued liabilities, short-term debt and accrued taxes | — | 78,324 | 29,533 | 246,975 | — | 354,832 | ||||||||||||||||||||||||||||||
Total current liabilities | — | 78,446 | 34,323 | 277,244 | — | 390,013 | ||||||||||||||||||||||||||||||
Intercompany accounts | 255,660 | (183,770 | ) | (231,822 | ) | 159,932 | — | — | ||||||||||||||||||||||||||||
Long-term debt | — | 330,950 | — | — | — | 330,950 | ||||||||||||||||||||||||||||||
Other long-term liabilities | — | 100,973 | 1,587 | 83,151 | — | 185,711 | ||||||||||||||||||||||||||||||
Stockholders’ equity | 755,039 | 474,950 | 660,385 | 426,981 | (1,562,316 | ) | 755,039 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,010,699 | $ | 801,549 | $ | 464,473 | $ | 947,308 | $ | (1,562,316 | ) | $ | 1,661,713 |
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
December 30, 2006 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 68,255 | $ | 104 | $ | 98,631 | $ | — | $ | 166,990 | ||||||||||||||||||||||||
Accounts receivable, net | — | — | 141,800 | 153,193 | — | 294,993 | ||||||||||||||||||||||||||||||
Inventories | — | 79,181 | 165,827 | 162,609 | — | 407,617 | ||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | — | 9,427 | 11,832 | 57,341 | — | 78,600 | ||||||||||||||||||||||||||||||
Total current assets | — | 156,863 | 319,563 | 471,774 | — | 948,200 | ||||||||||||||||||||||||||||||
Property, plant and equipment, net | — | 43,049 | 35,261 | 44,318 | — | 122,628 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 928,277 | 551,617 | — | — | (1,479,894 | ) | — | |||||||||||||||||||||||||||||
Other assets | — | 26,551 | 237,571 | 346,025 | — | 610,147 | ||||||||||||||||||||||||||||||
Total assets | $ | 928,277 | $ | 778,080 | $ | 592,395 | $ | 862,117 | $ | (1,479,894 | ) | $ | 1,680,975 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||
Accounts payable, accrued liabilities, short-term debt and accrued taxes | $ | — | $ | 154,147 | $ | 55,202 | $ | 284,974 | $ | — | $ | 494,323 | ||||||||||||||||||||||||
Total current liabilities | — | 154,147 | 55,202 | 284,974 | — | 494,323 | ||||||||||||||||||||||||||||||
Intercompany accounts | 245,363 | (269,459 | ) | (135,204 | ) | 159,300 | — | — | ||||||||||||||||||||||||||||
Long-term debt | — | 332,300 | — | 158 | — | 332,458 | ||||||||||||||||||||||||||||||
Other long-term liabilities | — | 89,683 | 1,594 | 80,003 | — | 171,280 | ||||||||||||||||||||||||||||||
Stockholders’ equity | 682,914 | 471,409 | 670,803 | 337,682 | (1,479,894 | ) | 682,914 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 928,277 | $ | 778,080 | $ | 592,395 | $ | 862,117 | $ | (1,479,894 | ) | $ | 1,680,975 |
27
Table of Contents
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
September 30, 2006 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 43,649 | $ | 255 | $ | 69,521 | $ | — | $ | 113,425 | ||||||||||||||||||||||||
Accounts receivable, net | — | — | 141,864 | 168,170 | — | 310,034 | ||||||||||||||||||||||||||||||
Inventories | — | 85,368 | 139,682 | 141,485 | — | 366,535 | ||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | — | 25,531 | 15,333 | 51,001 | — | 91,865 | ||||||||||||||||||||||||||||||
Assets of held for sale | — | 989 | 51,242 | — | — | 52,231 | ||||||||||||||||||||||||||||||
Total current assets | — | 155,537 | 348,376 | 430,177 | — | 934,090 | ||||||||||||||||||||||||||||||
Property, plant and equipment, net | — | 44,807 | 39,655 | 40,976 | — | 125,438 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 891,734 | 551,617 | — | — | (1,443,351 | ) | — | |||||||||||||||||||||||||||||
Other assets | — | 34,537 | 243,475 | 319,008 | — | 597,020 | ||||||||||||||||||||||||||||||
Total assets | $ | 891,734 | $ | 786,498 | $ | 631,506 | $ | 790,161 | $ | (1,443,351 | ) | $ | 1,656,548 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||
Accounts payable, accrued liabilities, short-term debt and accrued taxes | $ | — | $ | 96,210 | $ | 61,358 | $ | 268,068 | $ | — | $ | 425,636 | ||||||||||||||||||||||||
Total current liabilities | — | 96,210 | 61,358 | 268,068 | — | 425,636 | ||||||||||||||||||||||||||||||
Intercompany accounts | 232,205 | (302,664 | ) | (76,219 | ) | 146,678 | — | — | ||||||||||||||||||||||||||||
Long-term debt | — | 382,750 | — | 192 | — | 382,942 | ||||||||||||||||||||||||||||||
Other long-term liabilities | — | 103,783 | 13,421 | 71,237 | — | 188,441 | ||||||||||||||||||||||||||||||
Stockholders’ equity | 659,529 | 506,419 | 632,946 | 303,986 | (1,443,351 | ) | 659,529 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 891,734 | $ | 786,498 | $ | 631,506 | $ | 790,161 | $ | (1,443,351 | ) | $ | 1,656,548 |
28
Table of Contents
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Nine Months Ended September 29, 2007 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
Net revenues | $ | — | $ | 331,933 | $ | 397,465 | $ | 655,976 | $ | — | $ | 1,385,374 | ||||||||||||||||||||||||
Cost of goods sold | — | 231,442 | 277,398 | 311,400 | — | 820,240 | ||||||||||||||||||||||||||||||
Gross profit | — | 100,491 | 120,067 | 344,576 | — | 565,134 | ||||||||||||||||||||||||||||||
SG&A expenses (including amortization of intangible assets) | — | 82,801 | 135,950 | 236,600 | — | 455,351 | ||||||||||||||||||||||||||||||
Pension expense (income) | — | (1,048 | ) | — | 10 | — | (1,038 | ) | ||||||||||||||||||||||||||||
Operating income (loss) | — | 18,738 | (15,883 | ) | 107,966 | — | 110,821 | |||||||||||||||||||||||||||||
Equity in income of subsidiaries | (56,163 | ) | — | — | — | 56,163 | — | |||||||||||||||||||||||||||||
Intercompany | — | (8,393 | ) | (5,309 | ) | 13,702 | — | — | ||||||||||||||||||||||||||||
Other (income) loss | — | 13 | (6 | ) | (6,470 | ) | — | (6,463 | ) | |||||||||||||||||||||||||||
Interest (income) expense, net | — | 22,762 | (6 | ) | 2,934 | — | 25,690 | |||||||||||||||||||||||||||||
Income (loss) from continuing operations before provision for income taxes | 56,163 | 4,356 | (10,562 | ) | 97,800 | (56,163 | ) | 91,594 | ||||||||||||||||||||||||||||
Provision (benefit) for income taxes | — | 1,469 | (3,563 | ) | 32,992 | — | 30,898 | |||||||||||||||||||||||||||||
Income (loss) from continuing operations | 56,163 | 2,887 | (6,999 | ) | 64,808 | (56,163 | ) | 60,696 | ||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | — | 26 | (3,419 | ) | (1,140 | ) | — | (4,533 | ) | |||||||||||||||||||||||||||
Net income (loss) | $ | 56,163 | $ | 2,913 | $ | (10,418 | ) | $ | 63,668 | $ | (56,163 | ) | $ | 56,163 |
Nine Months Ended September 30, 2006 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
Net revenues | $ | — | $ | 318,757 | $ | 390,561 | $ | 498,336 | $ | — | $ | 1,207,654 | ||||||||||||||||||||||||
Cost of goods sold | — | 236,651 | 263,812 | 243,675 | — | 744,138 | ||||||||||||||||||||||||||||||
Gross profit | — | 82,106 | 126,749 | 254,661 | — | 463,516 | ||||||||||||||||||||||||||||||
SG&A expenses (including amortization of intangible assets) | — | 94,712 | 110,461 | 179,670 | — | 384,843 | ||||||||||||||||||||||||||||||
Pension expense (income) | — | (249 | ) | — | — | — | (249 | ) | ||||||||||||||||||||||||||||
Operating income (loss) | — | (12,357 | ) | 16,288 | 74,991 | — | 78,922 | |||||||||||||||||||||||||||||
Equity in income of subsidiaries | (31,866 | ) | — | — | — | 31,866 | — | |||||||||||||||||||||||||||||
Intercompany | — | (4,932 | ) | (5,378 | ) | 10,310 | — | — | ||||||||||||||||||||||||||||
Other (income) loss | — | (255 | ) | (203 | ) | (2,662 | ) | — | (3,120 | ) | ||||||||||||||||||||||||||
Interest (income) expense, net | — | 88,568 | (63,878 | ) | 1,904 | — | 26,594 | |||||||||||||||||||||||||||||
Income (loss) from continuing operations before provision for income taxes | 31,866 | (95,738 | ) | 85,747 | 65,439 | (31,866 | ) | 55,448 | ||||||||||||||||||||||||||||
Provision (benefit) for income taxes | — | (26,844 | ) | 28,264 | 14,226 | — | 15,646 | |||||||||||||||||||||||||||||
Income (loss) from continuing operations | 31,866 | (68,894 | ) | 57,483 | 51,213 | (31,866 | ) | 39,802 | ||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | — | (638 | ) | (9,591 | ) | 2,293 | — | (7,936 | ) | |||||||||||||||||||||||||||
Net income (loss) | $ | 31,866 | $ | (69,532 | ) | $ | 47,892 | $ | 53,506 | $ | (31,866 | ) | $ | 31,866 |
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Table of Contents
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Nine Months Ended September 29, 2007 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | $ | 21,791 | $ | 68,997 | $ | (22,003 | ) | $ | 32,798 | $ | — | $ | 101,583 | |||||||||||||||||||||||
Net cash provided by (used) in operating activities from discontinued operations | — | (1,326 | ) | 23,669 | 2,857 | — | 25,200 | |||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | 21,791 | 67,671 | 1,666 | 35,655 | — | 126,783 | ||||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||
Collection of notes receivable | — | 1,531 | — | — | — | 1,531 | ||||||||||||||||||||||||||||||
Purchase of property, plant and equipment | — | (8,944 | ) | (545 | ) | (14,819 | ) | — | (24,308 | ) | ||||||||||||||||||||||||||
Business acquisitions, net of cash acquired | — | (664 | ) | — | (1,027 | ) | — | (1,691 | ) | |||||||||||||||||||||||||||
Other | — | 741 | (1,028 | ) | 290 | — | 3 | |||||||||||||||||||||||||||||
Net cash used in investing activities from continuing operations | — | (7,336 | ) | (1,573 | ) | (15,556 | ) | — | (24,465 | ) | ||||||||||||||||||||||||||
Net cash used in investing activities from discontinued operations | — | — | — | (443 | ) | — | (443 | ) | ||||||||||||||||||||||||||||
Net cash used in investing activities | — | (7,336 | ) | (1,573 | ) | (15,999 | ) | — | (24,908 | ) | ||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||
Repayment of Term B Note | — | (41,350 | ) | — | — | — | (41,350 | ) | ||||||||||||||||||||||||||||
Decrease in short-term CKJEA notes payable | — | — | — | (20,866 | ) | — | (20,866 | ) | ||||||||||||||||||||||||||||
Proceeds from the exercise of employee stock options | 11,117 | — | — | — | — | 11,117 | ||||||||||||||||||||||||||||||
Purchase of treasury stock | (32,908 | ) | — | — | — | — | (32,908 | ) | ||||||||||||||||||||||||||||
Other | — | 57 | — | (312 | ) | — | (255 | ) | ||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (21,791 | ) | (41,293 | ) | — | (21,178 | ) | — | (84,262 | ) | ||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 4,274 | — | 4,274 | ||||||||||||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | — | 19,042 | 93 | 2,752 | — | 21,887 | ||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | — | 68,255 | 104 | 98,631 | — | 166,990 | ||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 87,297 | $ | 197 | $ | 101,383 | $ | — | $ | 188,877 |
30
Table of Contents
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Nine Months Ended September 30, 2006 | ||||||||||||||||||||||||||||||||||||
The Warnaco Group, Inc. | Warnaco Inc. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Entries | Consolidated | |||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | $ | 22,575 | $ | (12,813 | ) | $ | (22,155 | ) | $ | 59,181 | $ | — | $ | 46,788 | ||||||||||||||||||||||
Net cash provided by (used in) operating activities from discontinued operations | — | 1,307 | 24,052 | 1,652 | — | 27,011 | ||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | 22,575 | (11,506 | ) | 1,897 | 60,833 | — | 73,799 | |||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||
Proceeds from disposal of assets and collection of notes receivable | — | 4,290 | — | 22 | — | 4,312 | ||||||||||||||||||||||||||||||
Purchase of property, plant and equipment | — | (17,365 | ) | (1,784 | ) | (9,714 | ) | — | (28,863 | ) | ||||||||||||||||||||||||||
Business acquisitions, net of cash acquired | — | (208,532 | ) | (3 | ) | — | — | (208,535 | ) | |||||||||||||||||||||||||||
Net cash used in investing activities from continuing operations | — | (221,607 | ) | (1,787 | ) | (9,692 | ) | — | (233,086 | ) | ||||||||||||||||||||||||||
Net cash used in investing activities from discontinued operations | — | — | (436 | ) | (628 | ) | — | (1,064 | ) | |||||||||||||||||||||||||||
Net cash used in investing activities | — | (221,607 | ) | (2,223 | ) | (10,320 | ) | — | (234,150 | ) | ||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||
Debt issued with business acquisition – Term B Note | — | 180,000 | — | — | — | 180,000 | ||||||||||||||||||||||||||||||
Payment of debt assumed with business acquisition | — | — | — | (44,592 | ) | — | (44,592 | ) | ||||||||||||||||||||||||||||
Payment of deferred financing costs | — | (3,358 | ) | — | — | — | (3,358 | ) | ||||||||||||||||||||||||||||
Increase (decrease) in short-term note payable | — | — | — | 3,826 | — | 3,826 | ||||||||||||||||||||||||||||||
Repayment of long-term debt | — | (450 | ) | — | — | — | (450 | ) | ||||||||||||||||||||||||||||
Repayment of Senior Notes due 2013 | — | (5,200 | ) | — | — | — | (5,200 | ) | ||||||||||||||||||||||||||||
Proceeds from the exercise of employee stock options | 2,804 | — | — | — | — | 2,804 | ||||||||||||||||||||||||||||||
Purchase of treasury stock | (25,379 | ) | — | — | — | — | (25,379 | ) | ||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (22,575 | ) | 170,992 | — | (40,766 | ) | — | 107,651 | ||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 1,924 | — | 1,924 | ||||||||||||||||||||||||||||||
Decrease in cash and cash equivalents | — | (62,121 | ) | (326 | ) | 11,671 | — | (50,776 | ) | |||||||||||||||||||||||||||
Cash and cash equivalents, at beginning of period | — | 105,770 | 581 | 57,850 | — | 164,201 | ||||||||||||||||||||||||||||||
Cash and cash equivalents, at end of period | $ | — | $ | 43,649 | $ | 255 | $ | 69,521 | $ | — | $ | 113,425 |
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Table of Contents
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
Note 17 — Commitments
Except as set forth below, the contractual obligations and commitments in existence as of September 29, 2007 did not differ materially from those disclosed as of December 30, 2006 in the Company’s Annual Report on Form 10-K for Fiscal 2006.
Payments Due by Year | ||||||||||||||||||||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||
Operating leases entered into during the Nine Months Ended September 29, 2007 | $ | 5,484 | $ | 9,354 | $ | 8,395 | $ | 6,022 | $ | 4,113 | $ | 18,704 | $ | 52,072 | ||||||||||||||||||||||||||||
Production commitments related to Mexican manufacturing plants (see Note 4) | $ | 8,500 | $ | 22,200 | $ | 15,800 | $ | 16,600 | $ | 8,400 | $ | — | $ | 71,500 | ||||||||||||||||||||||||||||
Other contractual obligations pursuant to agreements entered into during the Nine Months Ended September 29, 2007 | 3,448 | 1,326 | 673 | 120 | 241 | 182 | $ | 5,990 | ||||||||||||||||||||||||||||||||||
Total | $ | 17,432 | $ | 32,880 | $ | 24,868 | $ | 22,742 | $ | 12,754 | $ | 18,886 | $ | 129,562 |
In addition, as of September 29, 2007, the Company was party to the following outstanding foreign currency exchange contracts:
i) | Contracts to purchase approximately $5,790 for a total of approximately €4,296 at a weighted average exchange rate of $1.35 to €1.00. These foreign currency exchange contracts mature through March 2008 and are designed to fix the number of euros required to satisfy certain dollar denominated royalty expenses incurred by certain of the Company’s European subsidiaries. |
ii) | Contracts to purchase approximately $7,702 for a total of approximately €5,620 at a weighted average exchange rate of $1.3705 to €1.00. These foreign currency exchange contracts mature through March 2008 and are designed to fix the number of euros required to satisfy the first one-third of dollar denominated purchases of inventory by certain of the Company’s European subsidiaries. |
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Warnaco Group, Inc. (‘‘Warnaco Group’’ and, collectively with its subsidiaries, the ‘‘Company’’) is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and those expected in the future and that could affect the market value of the Company’s common stock. Except for the historical information contained herein, this Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements that involve risks and uncertainties. See ‘‘Statement Regarding Forward-Looking Disclosure.’’
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the consolidated condensed financial statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (‘‘Fiscal 2006’’).
The period July 1, 2007 to September 29, 2007 (the ‘‘Three Months Ended September 29, 2007’’) and the period July 2, 2006 to September 30, 2006 (the ‘‘Three Months Ended September 30, 2006’’) both contained thirteen weeks of operations. The period December 31, 2006 to September 29, 2007 (the ‘‘Nine Months Ended September 29, 2007’’) and the period January 1, 2006 to September 30, 2006 (the ‘‘Nine Months Ended September 30, 2006’’) both contained thirty-nine weeks of operations. References to ‘‘Core Intimates’’ refer to the Intimate Apparel Group’s Warner’s®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names and intimate apparel private labels. References to ‘‘Designer’’ refer to the Swimwear Group’s fashion brands, including Lifeguard®, Nautica®, Calvin Klein®and Michael Kors®.
Overview
The Company designs, sources, manufactures, markets, licenses and distributes sportswear, intimate apparel, and swimwear worldwide through a broad line of highly recognized brand names. The Company’s products are distributed domestically and internationally, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty and other stores, mass merchandisers and the Internet, including such leading retailers as Macy’s and other units of Federated Department Stores, J.C. Penney, Kohl’s, Sears, Target, Costco and Wal-Mart Stores. As of September 29, 2007, the Company operated: (i) 704 Calvin Klein retail stores worldwide (consisting of 113 free-standing stores (including one on-line sto re) and 591 shop-in-shop/concession stores); (ii) 79 Lejaby® (considered held for sale as of September 29, 2007 and included in discontinued operations) retail stores (consisting of one free-standing store and 78 shop-in-shop stores); and (iii) one Speedo® on-line store. As of September 29, 2007, there were also 365 Calvin Klein retail stores operated by third parties under retail licenses or franchise and distributor agreements.
On September 18, 2007 the Company announced its intention to exit the Swimwear Group’s private label and designer swimwear businesses (except Calvin Klein swimwear). As part of the September 18, 2007 announcement, the Company also disclosed that it would be exploring strategic alternatives for its Lejaby business and, as of September 29, 2007, it was actively engaged in the marketing of this business for sale. As a result, the OP women’s and junior’s, Anne Cole, Catalina, Cole of California and Lejaby business units have been classified as discontinued operations for the Three and Nine Months Ended September 29, 2007 and September 30, 2006. The Company’s Nautica, Lifeguard, Michael Kors and private label swimwear businesses will be classified as discontinued operations when those businesses have ceased operations, which operations are expected to cease in the first half of 2008. In addition, on October 1, 2007, pursuant to its previously disclosed strategy to undertake supply chain initiatives in order to increase efficiencies, the Company transferred the ownership of its Mexican manufacturing facilities to a local business partner. In connection with these and other restructuring activities, the Company has classified all the financial data in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘‘MD&A’’), including all restructuring charges, in accordance with accounting standards generally accepted in the United States (‘‘U.S.’’). Restructuring charges are included in the operating results of the related business segments and are summarized in Note 4 of Notes to Consolidated Condensed Financial Statements and are noted in this MD&A, where applicable.
33
Highlights for the Three and Nine Months Ended September 29, 2007 included:
• | Net revenues increased $55.1 million, or 13.1%, to $474.8 million for the Three Months Ended September 29, 2007, and increased $177.7 million, or 14.7%, to $1.4 billion for the Nine Months Ended September 29, 2007, led primarily by the Company’s Calvin Klein Jeans and Underwear businesses, both domestic and international. |
• | Gross profit increased $22.5 million, or 13.3%, to $192.0 million for the Three Months Ended September 29, 2007, and increased $101.6 million, or 21.9%, to $565.1 million for the Nine Months Ended September 29, 2007, led primarily by the Company’s Calvin Klein Jeans and Underwear businesses, both domestic and international. Gross margin remained flat at 40.4% for the Three Months Ended September 29, 2007, and increased 240 basis points to 40.8% for the Nine Months Ended September 29, 2007. Gross profit for the Three and Nine Months Ended Septem ber 29, 2007 includes $9.3 million and $12.3 million of restructuring charges, respectively. See Note 4 of Notes to Consolidated Condensed Financial Statements. |
• | Operating income decreased $6.7 million, or 17.9%, to $30.7 million for the Three Months Ended September 29, 2007, and increased $31.9 million, or 40.4%, to $110.8 million for the Nine Months Ended September 29, 2007. Operating margin decreased 240 basis points to 6.5% for the Three Months Ended September 29, 2007, and increased 150 basis points to 8.0% for the Nine Months Ended September 29, 2007. Included in operating income for the Three and Nine Months Ended September 29, 2007 are restructuring expenses of $17.6 million and $21.2 million, respectively, primarily related to management initiatives undertaken to improve the profitability of the Swimwear Group. |
• | In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $14.1 million increase in net revenues and a $2.9 million increase in operating income for the Three Months Ended September 29, 2007 and resulted in a $32.6 million increase in net revenues and a $5.5 million increase in operating income for the Nine Months Ended September 29, 2007. |
• | Net income decreased to $4.4 million (or $0.10 per diluted share) for the Three Months Ended September 29, 2007 compared to $14.6 million (or $0.31 per diluted share) for the Three Months Ended September 30, 2006. Included in the net income for the Three Months Ended September 29, 2007 are restructuring charges of $17.5 million (net of income tax benefits of $0.2 million), or $0.38 per diluted share, and losses from discontinued operations of $6.9 million (net of income tax benefits of $2.8 million), or $0.15 per diluted share. Included in net income for The Three Months Ended September 30, 2006 are losses from discontinued operations of $11.2 million (net of an income tax provision of $0.9 mill ion), or $0.24 per diluted share. Net income increased to $56.2 million (or $1.21 per diluted share) for the Nine Months Ended September 29, 2007 compared to $31.9 million (or $0.68 per diluted share) for the Nine Months Ended September 30, 2006. Included in the net income for the Nine Months Ended September 29, 2007 are restructuring charges of $20.2 million (net of income tax benefits of $1.0 million), or $0.44 per diluted share, and losses from discontinued operations of $4.5 million (net of an income tax provision of $0.1 million), or $0.15 per diluted share. Included in net income for The Nine Months Ended September 30, 2006 are losses from discontinued operations of $7.9 million (net of an income tax provision of $2.0 million), or $0.17 per diluted share. The Company notes that the majority of the restructuring expenses incurred during the Three and Nine Months Ended September 29, 2007 do not receive a benefit for tax purposes a t this time. See Note 6 of Notes to Consolidated Condensed Financial Statements. |
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• | Cash and cash equivalents increased from $167.0 million at December 30, 2006 to $188.9 million at September 29, 2007. During the Nine Months Ended September 29, 2007, the Company used $41.4 million to pay down a portion of the outstanding Term B Note (as defined below) and used $30.5 million to repurchase 911,548 shares of the Company’s common stock in the open market under the Company’s 2005 Share Repurchase Program (as defined below). |
Discussion of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in its consolidated condensed financial statements and accompanying notes. See the Company’s Annual Report on Form 10-K for Fiscal 2006 for a discussion of the Company’s critical accounting policies.
As of December 31, 2006, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109. See Note 6 of Notes to Consolidated Condensed Financial Statements.
Results of Operations
Statement of Operations (Selected Data)
The following tables summarize the historical results of operations of the Company for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006 and the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006. The results of the Company’s discontinued operations are included in ‘‘Loss from discontinued operations, net of taxes’’ for all periods presented.
Three Months Ended September 29, 2007 | % of Net Revenues | Three Months Ended September 30, 2006 | % of Net Revenues | Nine Months Ended September 29, 2007 | % of Net Revenues | Nine Months Ended September 30, 2006 | % of Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 474,762 | 100.0 | % | $ | 419,637 | 100.0 | % | $ | 1,385,374 | 100.0 | % | $ | 1,207,654 | 100.0 | % | ||||||||||||||||||||||||||||||||
Cost of goods sold | 282,783 | 59.6 | % | 250,130 | 59.6 | % | 820,240 | 59.2 | % | 744,138 | 61.6 | % | ||||||||||||||||||||||||||||||||||||
Gross profit | 191,979 | 40.4 | % | 169,507 | 40.4 | % | 565,134 | 40.8 | % | 463,516 | 38.4 | % | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 158,668 | 33.4 | % | 129,552 | 30.9 | % | 445,304 | 32.1 | % | 375,104 | 31.1 | % | ||||||||||||||||||||||||||||||||||||
Amortization of intangible assets | 2,997 | 0.6 | % | 2,695 | 0.6 | % | 10,047 | 0.8 | % | 9,739 | 0.8 | % | ||||||||||||||||||||||||||||||||||||
Pension income | (345 | ) | −0.1 | % | (83 | ) | 0.0 | % | (1,038 | ) | -0.1 | % | (249 | ) | 0.0 | % | ||||||||||||||||||||||||||||||||
Operating income | 30,659 | 6.5 | % | 37,343 | 8.9 | % | 110,821 | 8.0 | % | 78,922 | 6.5 | % | ||||||||||||||||||||||||||||||||||||
Other loss (income) | 419 | (4,387 | ) | (6,463 | ) | (3,120 | ) | |||||||||||||||||||||||||||||||||||||||||
Interest expense | 9,177 | 9,451 | 27,983 | 28,578 | ||||||||||||||||||||||||||||||||||||||||||||
Interest income | (1,257 | ) | (797 | ) | (2,293 | ) | (1,984 | ) | ||||||||||||||||||||||||||||||||||||||||
Income from continuing operations before provision for income taxes | 22,320 | 33,076 | 91,594 | 55,448 | ||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 10,966 | 7,288 | 30,898 | 15,646 | ||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | 11,354 | 25,788 | 60,696 | 39,802 | ||||||||||||||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | (6,942 | ) | (11,227 | ) | (4,533 | ) | (7,936 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 4,412 | $ | 14,561 | $ | 56,163 | $ | 31,866 |
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Net Revenues
Net revenues by group were as follows:
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Increase (Decrease) | % Change | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | Increase (Decrease) | % Change | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Sportswear Group | $ | 265,098 | $ | 232,812 | $ | 32,286 | 13.9 | % | $ | 693,419 | $ | 568,306 | $ | 125,113 | 22.0 | % | ||||||||||||||||||||||||||||||||
Intimate Apparel Group | 174,509 | 146,700 | 27,809 | 19.0 | % | 450,067 | 391,634 | 58,433 | 14.9 | % | ||||||||||||||||||||||||||||||||||||||
Swimwear Group | 35,155 | 40,125 | (4,970 | ) | −12.4 | % | 241,888 | 247,714 | (5,826 | ) | −2.4 | % | ||||||||||||||||||||||||||||||||||||
Net revenues(a) | $ | 474,762 | $ | 419,637 | $ | 55,125 | 13.1 | % | $ | 1,385,374 | $ | 1,207,654 | $ | 177,720 | 14.7 | % |
(a) | Includes $357.8 million, $290.2 million, $920.0 million and $719.7 million related to the Company’s total Calvin Klein businesses for the Three Months Ended September 29, 2007, the Three Months Ended September 30, 2006, the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively. |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Net revenues increased $55.1 million, or 13.1%, to $474.8 million for the Three Months Ended September 29, 2007 compared to $419.6 million for the Three Months Ended September 30, 2006. This increase reflects a $32.3 million increase in the Sportswear Group (due primarily to expansion of Calvin Klein Jeans in Europe) and a $27.8 million increase in the Intimate Apparel Group (due primarily to expansion of Calvin Klein Underwear in Europe). Offsetting these increases was a decline in the Swimwear Group’s net revenues of $5.0 million. In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $14.1 million increase in net revenues for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Net revenues increased $177.7 million, or 14.7%, to $1.4 billion for the Nine Months Ended September 29, 2007 compared to $1.2 billion for the Nine Months Ended September 30, 2006. This increase reflects a $125.1 million increase in the Sportswear Group (due primarily to expansion of Calvin Klein Jeans in Europe) and a $58.4 million increase in the Intimate Apparel Group (due primarily to expansion of Calvin Klein Underwear in Europe). Offsetting these increases was a decline in the Swimwear Group’s net revenues of $5.8 million. In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dol lar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $32.6 million increase in net revenues for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006.
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The following table summarizes the Company’s net revenues by channel of distribution for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006:
Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | |||||||||||
United States – wholesale | ||||||||||||
Department stores and independent retailers | 15 | % | 17 | % | ||||||||
Specialty stores | 9 | % | 10 | % | ||||||||
Chain stores | 8 | % | 9 | % | ||||||||
Mass merchandisers | 2 | % | 3 | % | ||||||||
Membership clubs and other | 18 | % | 20 | % | ||||||||
Total United States – wholesale | 52 | % | 59 | % | ||||||||
International – wholesale | 31 | % | 27 | % | ||||||||
Retail/other(a) | 17 | % | 14 | % | ||||||||
Net revenues – consolidated | 100 | % | 100 | % |
(a) | Includes approximately 0.8% and 0.5% for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively, related to domestic retail operations including the Company’s CKU.com and SpeedoUSA.com websites with the remainder related to the Company’s international retail business. |
Sportswear Group
Sportswear Group net revenues were as follows:
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Increase (Decrease) | % Change | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | Increase (Decrease) | % Change | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Calvin Klein Jeans | $ | 169,597 | $ | 142,607 | $ | 26,990 | 18.9 | % | $ | 419,115 | $ | 330,860 | $ | 88,255 | 26.7 | % | ||||||||||||||||||||||||||||||||
Chaps | 45,238 | 50,296 | (5,058 | ) | −10.1 | % | 128,377 | 132,512 | (4,135 | ) | −3.1 | % | ||||||||||||||||||||||||||||||||||||
Mass sportswear licensing(a) | — | 1,131 | (1,131 | ) | −100.0 | % | 233 | 3,419 | (3,186 | ) | −93.2 | % | ||||||||||||||||||||||||||||||||||||
Sportswear wholesale | 214,835 | 194,034 | 20,801 | 10.7 | % | 547,725 | 466,791 | 80,934 | 17.3 | % | ||||||||||||||||||||||||||||||||||||||
Sportswear retail | 50,263 | 38,778 | 11,485 | 29.6 | % | 145,694 | 101,515 | 44,179 | 43.5 | % | ||||||||||||||||||||||||||||||||||||||
Sportswear Group(b) | $ | 265,098 | $ | 232,812 | $ | 32,286 | 13.9 | % | $ | 693,419 | $ | 568,306 | $ | 125,113 | 22.0 | % |
(a) | Mass sportswear licensing revenues relate to design services fees earned in connection with the White Stag women’s sportswear line. The White Stag design service contract expired on January 31, 2007 and the Company will not earn any future revenues associated with White Stag. |
(b) | Includes net revenues of $16.0 million, $10.0 million, $52.9 million and $32.0 million related to the Calvin Klein accessories business in Europe and Asia for the Three Months Ended September 29, 2007, the Three Months Ended September 30, 2006, the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively. |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Calvin Klein Jeans wholesale net revenues increased $27.0 million for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006. Wholesale net revenues related to the CKJEA Business, which was acquired on January 31, 2006, were $87.9 million for the Three Months Ended September 29, 2007 compared to $67.7 million for the Three Months Ended September 30, 2006. The $20.2 million increase in CKJEA Business wholesale net revenues primarily reflects the Company’s expansion initiatives in Europe and Asia and the positive effect of foreign currency translation. The remaining $6.8 million increase in wholesale net revenues reflects a $5.0 million increase in the U.S. and a $1.8 million increase in Mexico. The increase in wholesale net revenues in the U .S. reflects an $8.2 million increase in sales to department stores (due mainly to strong performance of women’s programs), a $2.6 million increase in sales to customers in the
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off-price channel of distribution, a $6.3 million decrease in sales to membership clubs and a $0.5 million increase in all other channels of distribution. The decline in sales to membership clubs relates primarily to timing and the Company expects total sales to membership clubs in fiscal 2007 to be comparable to Fiscal 2006.
Chaps® net revenues decreased $5.1 million reflecting a $2.3 million decrease in Canada, a $2.0 million decrease in Mexico and a $0.8 million decrease in the U.S. The decrease in Canada represents a decline in sales to department stores and membership clubs. The decrease in Mexico primarily represents a decrease in sales to membership clubs due to lower than expected sell through at retail.
Sportswear retail net revenues increased $11.5 million for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006. Net revenues for the Three Months Ended September 29, 2007 include $50.0 million compared to $38.6 million for the Three Months Ended September 30, 2006 related to the CKJEA Business, which was acquired on January 31, 2006. The $11.4 million increase in the CKJEA Business reflects increases related to both new and same store sales and the positive effect of foreign currency translation.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Calvin Klein Jeans wholesale net revenues increased $88.3 million for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006. Wholesale net revenues related to the CKJEA Business, which was acquired on January 31, 2006, were $194.8 million (inclusive of $19.6 million related to January 2007) for the Nine Months Ended September 29, 2007 compared to $129.2 million for the Nine Months Ended September 30, 2006. The $65.6 million increase in CKJEA wholesale business net revenues primarily reflects an additional month of operations, the Company’s expansion initiatives in Europe and Asia and the positive effect of foreign currency translation. The remaining $22.7 million increase in wholesale net revenues reflects a $20.3 million increase in th e U.S., a $1.7 million increase in Canada and a $0.9 million increase in Mexico, partially offset by a $0.2 million decrease in Europe. The increase in wholesale net revenues in the U.S. reflects a $10.8 million increase in sales to department stores (due mainly to strong performance in women’s programs), a $9.0 million increase in sales to membership clubs and a $2.2 million increase in sales to customers in the off-price channel of distribution, partially offset by a $1.7 million decrease in all other channels of distribution. Sales to membership clubs for the full fiscal year 2007 are expected to be comparable to sales to membership clubs in Fiscal 2006.
Chaps® net revenues decreased $4.1 million reflecting a $3.5 million decrease in Canada and a $2.0 million decrease in Mexico, partially offset by a $1.4 million increase in the U.S. The decrease in Canada primarily reflects a decrease in sales to department stores and membership clubs. The decrease in Mexico represents a decrease in sales to membership clubs due to lower than expected sell through at retail.
Sportswear retail net revenues increased $44.2 million for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006. Net revenues for the Nine Months Ended September 29, 2007 include $144.9 million (inclusive of $14.9 million related to January 2007) compared to $101.1 million for the Nine Months Ended September 30, 2006 related to the CKJEA Business, which was acquired on January 31, 2006. The $43.8 million increase in the CKJEA Business primarily reflects an additional month of operations, increases related to both new and same store sales and the positive effect of foreign currency translation.
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Intimate Apparel Group
Intimate Apparel Group net revenues were as follows:
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Increase (Decrease) | % Change | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | Increase (Decrease) | % Change | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Calvin Klein Underwear | $ | 101,506 | $ | 81,642 | $ | 19,864 | 24.3 | % | $ | 247,726 | $ | 208,309 | $ | 39,417 | 18.9 | % | ||||||||||||||||||||||||||||||||
Core Intimates | 39,244 | 40,048 | (804 | ) | -2.0 | % | 115,976 | 118,667 | (2,691 | ) | -2.3 | % | ||||||||||||||||||||||||||||||||||||
Intimate Apparel wholesale | 140,750 | 121,690 | 19,060 | 15.7 | % | 363,702 | 326,976 | 36,726 | 11.2 | % | ||||||||||||||||||||||||||||||||||||||
Calvin Klein Underwear retail | 33,759 | 25,010 | 8,749 | 35.0 | % | 86,365 | 64,658 | 21,707 | 33.6 | % | ||||||||||||||||||||||||||||||||||||||
Intimate Apparel Group | $ | 174,509 | $ | 146,700 | $ | 27,809 | 19.0 | % | $ | 450,067 | $ | 391,634 | $ | 58,433 | 14.9 | % |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
The $19.9 million increase in Calvin Klein Underwear wholesale net revenues reflects an $11.0 million increase in Europe, a $6.3 million increase in the U.S., a $1.3 million increase in Canada, a $1.2 million increase in Mexico and a $0.1 million increase in Asia. The increase in Europe was due mainly to strong performance in both men’s and women’s (driven primarily by the launch of the new Steel line in August 2007) and the positive effect of foreign currency translation. The increase in the U.S. reflects a $2.4 million increase in sales to membership clubs (due primarily to the expansion of women’s programs to th is channel during the fourth quarter of Fiscal 2006), a $1.9 million increase in sales to customers in the off-price channel of distribution (due to a planned inventory initiative), a $1.3 million increase in sales to department stores (due primarily to the launch of Steel in August 2007) and a $1.2 million increase in sales to specialty stores, partially offset by a $0.5 million decrease in sales to chain stores.
The $0.8 million decrease in Core Intimates net revenues reflects a $1.6 million decrease in the U.S., partially offset by a $0.7 million increase in Canada and a $0.2 million increase in Asia. The decrease in the U.S. reflects a $3.1 million decrease in sales to department stores, a $1.5 million decrease in sales to membership clubs, and a $1.4 million decrease in sales to specialty stores, partially offset by a $2.3 million increase in sales to chain stores and a $2.1 million increase in sales to customers in the off-price channel of distribution. The decrease in sales to department stores was due primarily to initial sell-in of products in Fiscal 2006, primarily associated with the launch of Olga’s Christina in June 2006. The increase in sales to chain stores was due primarily to the positive reception of the Olga brand in this channel.
The $8.7 million increase in Calvin Klein Underwear retail net revenues reflects a $6.3 million increase in Europe, a $1.3 million increase in Asia, a $0.7 million increase in the U.S. and a $0.4 million increase in Canada. The increase in net revenues in Europe was driven primarily by the launch of the new Steel line in August 2007, sales associated with new stores and the positive effect of foreign currency translation. The increase in net revenues in Asia reflects sales associated with new stores and an average increase of approximately 27% in same store sales. The increase in the U.S. primarily reflects an increase in sales attributable t o the New York retail store which was opened in Fiscal 2006 and the Company’s Calvin Klein Underwear Internet retail website, CKU.com.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
The $39.4 million increase in Calvin Klein Underwear wholesale net revenues reflects a $20.3 million increase in the U.S., a $17.8 million increase in Europe, a $1.6 million increase in Mexico and a $0.5 million increase in Canada, partially offset by a $0.8 million decrease in Asia. The increase in net revenues in the U.S. reflects a $15.0 million increase in sales to customers in the off-price channel of distribution (due primarily to women’s programs) and a $5.8 million increase in sales to
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department/specialty stores (due primarily to women’s programs such as Perfectly Fit), partially offset by a $0.4 million decrease in sales to membership clubs and a $0.1 million decrease in sales to chain stores. The increase in net revenues in Europe reflects increases in both men’s and women’s programs (due primarily to the strong performance of new products and fashion lines launched in the latter half of Fiscal 2006) and the positive effect of foreign currency translation.
The $2.7 million decrease in Core Intimates net revenues reflects a $3.5 million decrease in the U.S. and a $0.2 million decrease in Mexico, partially offset by a $0.8 million increase in Canada and a $0.2 million increase in Asia. The decrease in net revenues in the U.S. reflects a $6.5 million decrease in sales to department stores, a $3.5 million decrease in sales to chain stores and a $2.8 million decrease in sales to membership clubs, partially offset by a $6.9 million increase in sales to customers in the off-price channel of distribution, a $2.1 million increase in sales to specialty stores and a $0.3 million decrease in all other channels of distribution. The decreases in sales to department and chain stores were due primarily to initial sell-in of products in Fiscal 2006, primarily associated with the launch of Olga into certain chain stores in January 2006 and the launch of Olga’s Christina in June 2006. The increase in sales to the off-price channel of distribution was due primarily to the $2.1 million sale of Speedo sports bras to this channel combined with an increase in sales of Warner’s to this channel. The increase in sales to specialty stores was due primarily to a $2.3 million increase in the Company’s private label business.
The $21.7 million increase in Calvin Klein Underwear retail net revenues reflects a $16.2 million increase in Europe, a $2.5 million increase in the U.S., a $1.9 million increase in Asia, a $0.9 million increase in Canada and a $0.2 million increase in Mexico. The increase in net revenues in Europe was driven primarily by increases in both men’s and women’s programs (associated with new products and fashion lines launched in the latter part of Fiscal 2006), sales associated with new stores and the positive effect of foreign currency translation. The increase in the U.S. reflects an increase in sales attributable to the Company’s Calvin Klein Underwear Internet website, CKU.com and the New York retail store which was opened in Fiscal 2006. The increase in net revenues in Asia reflects sales associated with new stores and an average increase of approximately 14.9% in same store sales.
Swimwear Group
Swimwear Group net revenues were as follows:
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Increase (Decrease) | % Change | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | Increase (Decrease) | % Change | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Speedo | $ | 27,728 | $ | 33,367 | $ | (5,639 | ) | −16.9 | % | $ | 180,529 | $ | 193,689 | $ | (13,160 | ) | −6.8 | % | ||||||||||||||||||||||||||||||
Designer(a) | 4,745 | 4,645 | 100 | 2.2 | % | 53,293 | 48,753 | 4,540 | 9.3 | % | ||||||||||||||||||||||||||||||||||||||
Swimwear wholesale | 32,473 | 38,012 | (5,539 | ) | −14.6 | % | 233,822 | 242,442 | (8,620 | ) | −3.6 | % | ||||||||||||||||||||||||||||||||||||
Swimwear retail | 2,682 | 2,113 | 569 | 26.9 | % | 8,066 | 5,272 | 2,794 | 53.0 | % | ||||||||||||||||||||||||||||||||||||||
Swimwear Group | $ | 35,155 | $ | 40,125 | $ | (4,970 | ) | −12.4 | % | $ | 241,888 | $ | 247,714 | $ | (5,826 | ) | −2.4 | % |
(a) | Includes Calvin Klein of $2.7 million, $2.1 million, $21.1 million and $14.4 million for the Three Months Ended September 29, 2007, the three Months Ended September 30, 2006, the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively. As noted previously, the Company intends to exit its Designer swim brands (except for Calvin Klein swimwear) by the end of the second quarter in fiscal 2008. |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
The $5.6 million decrease in net revenues for Speedo wholesale reflects a $5.8 million decrease in the U.S., partially offset by a $0.2 million increase in Mexico. The decrease in the U.S. reflects a $6.8 million decrease in sales to membership clubs and a $1.0 million decrease in sales to specialty stores, partially offset by a $1.8 million increase in sales to mass merchandisers (due primarily to a customer extending its selling season) and a $0.2 million net increase in all other channels of distribution. The decreases in sales to membership clubs and specialty stores primarily reflect lower than expected sell-through at retail.
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The $0.1 million increase in Designer wholesale net revenues reflects a $1.0 million increase in Europe, partially offset by a $0.9 million decrease in the U.S. The increase in net revenues in Europe reflects the positive reception of current year collections in this market and the positive effect of foreign currency translation. The decrease in the U.S. was due primarily to a $0.7 million decrease in sales to specialty stores. As noted previously, the Company intends to exit its Designer swim brands (except for Calvin Klein swimwear) by the end of the second quarter in fiscal 2008.
The $0.6 million increase in Swimwear retail net revenues reflects an increase in sales attributable to the Company’s Speedo Internet retail website, SpeedoUSA.com.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
The $13.2 million decrease in net revenues for Speedo wholesale reflects a $14.9 million decrease in the U.S., partially offset by a $1.1 million increase in Mexico and a $0.6 million increase in Canada. The decrease in the U.S. reflects a $15.0 million decrease in sales to membership clubs (primarily due to the initial launch of shoes and accessories lines into this channel during the Nine Months Ended September 30, 2006), a $6.4 million decrease in sales to chain stores (primarily due to lower than expected sell-through of the Company’s branded swimwear products at retail), a $0.4 million decrease in sales to mass merchandisers and a $0.3 million decrease in sales to department stores, partially offset by a $5.9 million increase in the off-price channel o f distribution and a $1.3 million increase in sales to specialty stores.
The $4.5 million increase in Designer wholesale net revenues reflects a $6.7 million increase in Europe and a $0.3 million increase in Mexico, partially offset by a $2.3 million decrease in the U.S. and a $0.2 million decrease in Canada. The increase in Europe reflects the positive reception of current year collections in this market and the positive effect of foreign currency translation. As previously disclosed, the Company intends to exit its Designer swim brands (except for Calvin Klein swimwear) by the end of the second quarter in fiscal 2008.
The $2.8 million increase in Swimwear retail net revenues reflects an increase in sales attributable to the Company’s Speedo Internet retail website, SpeedoUSA.com.
Gross Profit
Gross profit was as follows:
Three Months Ended September 29, 2007 | % of Brand Net Revenues | Three Months Ended September 30, 2006 | % of Brand Net Revenues | Nine Months Ended September 29, 2007 | % of Brand Net Revenues | Nine Months Ended September 30, 2006 | % of Segment Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Sportswear Group | $ | 112,960 | 42.6 | % | $ | 93,426 | 40.1 | % | $ | 294,582 | 42.5 | % | $ | 214,942 | 37.8 | % | ||||||||||||||||||||||||||||||||
Intimate Apparel Group | 81,797 | 46.9 | % | 63,218 | 43.1 | % | 203,550 | 45.2 | % | 163,487 | 41.7 | % | ||||||||||||||||||||||||||||||||||||
Swimwear Group | (2,777 | ) | −7.9 | % | 12,863 | 32.1 | % | 67,002 | 27.7 | % | 85,087 | 34.3 | % | |||||||||||||||||||||||||||||||||||
Total gross profit | $ | 191,980 | 40.4 | % | $ | 169,507 | 40.4 | % | $ | 565,134 | 40.8 | % | $ | 463,516 | 38.4 | % |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Gross profit was $192.0 million, or 40.4% of net revenues, for the Three Months Ended September 29, 2007 compared to $169.5 million, or 40.4% of net revenues, for the Three Months Ended September 30, 2006. The $22.5 million increase in gross profit was due to increases in the Sportswear Group and the Intimate Apparel Group, partially offset by a decrease in the Swimwear Group. Included in gross profit for the Three Months Ended September 29, 2007 is $9.3 million of restructuring expenses included in cost of goods sold (see Note 4 of Notes to Consolidated Condensed Financial Statements). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (prim arily the euro in Europe and Canadian dollar in Canada) resulted in a $7.5 million increase in gross profit for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006.
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Sportswear Group gross profit increased $19.5 million and gross margin increased 250 basis points for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006. The increase in gross profit reflects an $11.8 million increase in Calvin Klein Jeans wholesale (including a $9.3 million increase in the CKJEA Business) and a $7.9 million increase in Sportswear retail, partially offset by a $0.2 million decrease in Chaps. The increase in gross margin was due primarily to a decrease in customer allowances related to the Chaps business.
Intimate Apparel Group gross profit increased $18.6 million and gross margin increased 380 basis points for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006. The increase in gross profit reflects an $11.1 million increase in Calvin Klein Underwear wholesale (due primarily to the increase in net revenues, discussed above), a $6.4 million increase in Calvin Klein Underwear retail (due to the increase in net revenues, discussed above) and a $1.1 million increase in Core Intimates (due to a favorable change in sales mix despite a decrease in net revenues, as discussed above). The increase i n gross margin reflects a 330 basis point increase in Core Intimates (due to more favorable inventory markdowns and customer allowances), a 300 basis point increase in Calvin Klein Underwear retail (due primarily to savings experienced as a result of the Company’s sourcing initiatives) and a 250 basis point increase in Calvin Klein Underwear wholesale (due primarily to lower customer allowances and a more favorable product mix).
Swimwear Group gross profit decreased $15.6 million and gross margin decreased from a gain of 32.1% for the Three Months Ended September 30, 2006 to a loss of 7.9% for the Three Months Ended September 29, 2007. Gross profit for the Three Months Ended September 29, 2007 included restructuring expenses of approximately $9.3 million (see Note 4 of Notes to Consolidated Condensed Financial Statements) and $5.0 million of additional inventory markdown expense necessary to sell or dispose of excess inventory. As discussed previously, the Company intends to exit its Designer swim brands (except Calvin Klein swimwear) by the end of the second quarter of fiscal 2008.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Gross profit was $565.1 million, or 40.8% of net revenues, for the Nine Months Ended September 29, 2007 compared to $463.5 million, or 38.4% of net revenues, for the Nine Months Ended September 30, 2006. The $101.6 million increase in gross profit and the 240 basis point increase in gross margin were due to increases in the Sportswear Group and the Intimate Apparel Group, partially offset by a decrease in the Swimwear Group. Included in gross profit for the Nine Months Ended September 29, 2007 is $12.3 million of restructuring expenses included in cost of goods sold (see Note 4 of Notes to Consolidated Condensed Financial Statements). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $17.4 million increase in gross profit for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006.
Sportswear Group gross profit increased $79.6 million and gross margin increased 470 basis points for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006. The increase in gross profit reflects an increase of $44.6 million in Calvin Klein Jeans wholesale (including a $29.7 million increase in the CKJEA Business), a $28.7 million increase in Sportswear retail (primarily due to the CKJEA Business) and a $6.6 million increase in Chaps, partially offset by a $0.3 million decrease in Mass sportswear licensing. The majority of the increase in gross margin was due to increases in the wholesale Calvin Klein Jeans and Chaps businesses. The increase in Calvin Klein Jeans wholesale gross margin primarily reflects a favorable change in product mix and the increase in Chaps gross margin was due primarily to a decrease in customer allowances.
Intimate Apparel Group gross profit increased $40.1 million and gross margin increased 350 basis points for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006. The increase in gross profit reflects a $24.4 million increase in Calvin Klein Underwear wholesale (due primarily to increased net revenues, discussed above) and a $16.1 million increase in Calvin Klein Underwear retail (due primarily to increased net revenues, discussed above), partially offset by a $0.4 million decrease in Core Intimates (due primarily to an unfavorable change
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in sales mix reflecting increased off-price and private label sales, as discussed above). The increase in gross margin reflects a 330 basis point increase in Calvin Klein Underwear wholesale (due primarily to lower customer allowances in the U.S. combined with a more favorable sales mix in Europe), a 300 basis point increase in Calvin Klein Underwear retail (due primarily to savings experienced as a result of the Company’s sourcing initiatives) and a 40 basis point increase in Core Intimates (due to more favorable inventory markdowns and customer allowances).
Swimwear Group gross profit decreased $18.1 million and gross margin decreased from 34.3% for the Nine Months Ended September 30, 2006 compared to 27.7% for the Nine Months Ended September 29, 2007. Gross profit for the Nine Months Ended September 29, 2007 included restructuring expenses of approximately $12.3 million (see Note 4 of Notes to Consolidated Condensed Financial Statements) and $5.0 million of additional inventory markdown expense necessary to sell or dispose of excess inventory. As discussed previously, the Company has determined that it expects to exit its Designer swim brands (except Calvin Klein swimwear) by the end of the second quarter of fiscal 2008.
Selling, General and Administrative Expenses
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Selling, general & administrative (‘‘SG&A’’) expenses increased $29.1 million to $158.7 million (33.4% of net revenues) for the Three Months Ended September 29, 2007 compared to $129.6 million (30.9% of net revenues) for the Three Months Ended September 30, 2006, reflecting a $1.7 million increase in marketing expenses (due primarily to an increase in the Intimate Apparel Group associated with the launch of the new Steel line in August 2007), an $11.5 million increase in selling and distribution expenses (related primarily to increased retail stores net revenues), a $7.7 million increase in administrative expenses (due primarily to a $6.1 million increase in Calvin Klein Jeans in Europe and Asia related to expansion in those areas, and a $3.7 million increase in amounts accrued for employee compensation, partially offset by a $2.7 million decrease in professional services) and an $8.2 million increase in restructuring expenses included in SG&A expenses (see Note 4 of Notes to Consolidated Condensed Financial Statements). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) had a $4.6 million unfavorable effect which increased SG&A expenses for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
SG&A expenses increased $70.2 million to $445.3 million (32.1% of net revenues) for the Nine Months Ended September 29, 2007 compared to $375.1 million (31.1% of net revenues) for the Nine Months Ended September 30, 2006, reflecting a $4.5 million increase in marketing expenses (due primarily to increased spending for Calvin Klein Jeans in Europe and Asia related to expansion in those areas), a $28.7 million increase in selling and distribution expenses (related primarily to increased retail stores net revenues), a $28.3 million increase in administrative expenses (due primarily to a $13.0 million increase in Calvin Klein Jeans in Europe and Asia related to expansion in those areas, an $11.9 million increase in amounts accrued for performance-based employee incentive compensation and increased severance expenses of $0.8 million) and an $8.8 million increase in restructuring expenses included in SG&A expenses (see Note 4 of Notes to Consolidated Condensed Financial Statements). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) had an $11.9 million unfavorable effect which increased SG&A expenses for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006.
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Amortization of Intangible Assets
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Amortization of intangible assets increased to $3.0 million for the Three Months Ended September 29, 2007 compared to $2.7 million for the Three Months Ended September 30, 2006, including $2.3 million and $1.5 million, respectively, of amortization expense related to the CKJEA Business which was acquired on January 31, 2006.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Amortization of intangible assets increased to $10.0 million for the Nine Months Ended September 29, 2007 compared to $9.7 million for the Nine Months Ended September 30, 2006, including $7.0 million and $6.1 million, respectively, of amortization expense related to the CKJEA Business which was acquired on January 31, 2006.
Operating Income
The following table presents operating income by group:
Three Months Ended September 29, 2007 | % of Total Net Revenues | Three Months Ended September 30, 2006 | % of Total Net Revenues | Nine Months Ended September 29, 2007 | % of Total Net Revenues | Nine Months Ended September 30, 2006 | % of Total Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Sportswear Group | $ | 36,776 | $ | 32,239 | $ | 82,624 | $ | 41,943 | ||||||||||||||||||||||||||||||||||||||||
Intimate Apparel Group | 33,361 | 24,243 | 79,372 | 52,562 | ||||||||||||||||||||||||||||||||||||||||||||
Swimwear Group(a) | (29,637 | ) | (8,575 | ) | (15,477 | ) | 9,914 | |||||||||||||||||||||||||||||||||||||||||
Unallocated corporate expenses | (9,841 | ) | −2.1 | % | (10,564 | ) | −2.5 | % | (35,698 | ) | −2.6 | % | (25,497 | ) | −2.1 | % | ||||||||||||||||||||||||||||||||
Operating income | $ | 30,659 | 6.5 | % | $ | 37,343 | 8.9 | % | $ | 110,821 | 8.0 | % | $ | 78,922 | 6.5 | % |
(a) | Includes approximately $16.6 million and $20.1 million for the Three and Nine Months Ended September 29, 2007, respectively, related to restructuring expenses. |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Operating income was $30.7 million (6.5% of net revenues) for the Three Months Ended September 29, 2007 compared to $37.3 million (8.9% of net revenues) for the Three Months Ended September 30, 2006. Included in operating income is operating income of $18.9 million for the Three Months Ended September 29, 2007 and operating income of $17.9 million for the Three Months Ended September 30, 2006 related to the CKJEA Business (acquired on January 31, 2006 and included in the Sportswear Group). In addition to the increase related to the CKJEA Business, operating income for the Intimate Apparel Group increased $9.1 million (led by Calvin Klein Underwear wholesale with a $6.2 million increase), the Sportswear Group (excluding the CKJEA Business) increased $3.4 million (led by Calvin Klein Jeans wholesale with a $2.1 million increase) and unallocated corporate expenses decreased by $0.7 million. More than offsetting these increases was a $21.1 million decrease in operating income of the Swimwear Group (including approximately $16.6 million of restructuring expenses during the Three Months Ended September 29, 2007). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $2.9 million increase in operating income for the Three Months Ended September 29, 2007 compared to the Three Months Ended September 30, 2006.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Operating income was $110.8 million (8.0% of net revenues) for the Nine Months Ended September 29, 2007 compared to $78.9 million (6.5% of net revenues) for the Nine Months Ended
44
September 30, 2006. Operating income related to the CKJEA Business (acquired on January 31, 2006 and included in the Sportswear Group) was $37.5 million and $22.9 million for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively. In addition to the increase related to the CKJEA Business, operating income for the Sportswear Group (excluding the CKJEA Business) increased $26.1 million (led by Calvin Klein Jeans wholesale with a $15.6 million increase) and the Intimate Apparel Group increased $26.8 million (led by Calvin Klein Underwear wholesale with a $19.6 million increase). Partially offsetting these in creases was a $25.4 million decrease in operating income of the Swimwear Group (including approximately $20.1 million of restructuring expenses during the Nine Months Ended September 29, 2007) and a $10.2 million increase in unallocated corporate expenses (due primarily to an increase in incentive-based employee compensation expense). In translating foreign currencies into the U.S. dollar, the weakness of the U.S. dollar relative to the functional currencies where the Company conducts certain of its operations (primarily the euro in Europe and Canadian dollar in Canada) resulted in a $5.5 million increase in operating income for the Nine Months Ended September 29, 2007 compared to the Nine Months Ended September 30, 2006.
Sportswear Group
Sportswear Group operating income was as follows:
Three Months Ended September 29, 2007(b) | % of Brand Net Revenues | Three Months Ended September 30, 2006(b) | % of Brand Net Revenues | Nine Months Ended September 29, 2007(b) | % of Brand Net Revenues | Nine Months Ended September 30, 2006(b) | % of Brand Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Calvin Klein Jeans | $ | 31,022 | 18.3 | % | $ | 27,091 | 19.0 | % | $ | 62,286 | 14.9 | % | $ | 36,336 | 11.0 | % | ||||||||||||||||||||||||||||||||
Chaps | 4,075 | 9.0 | % | 2,852 | 5.7 | % | 7,506 | 5.8 | % | (2,883 | ) | −2.2 | % | |||||||||||||||||||||||||||||||||||
Mass sportswear licensing(a) | (95 | ) | n/m | (164 | ) | −14.5 | % | (233 | ) | −100.0 | % | (176 | ) | −5.1 | % | |||||||||||||||||||||||||||||||||
Sportswear wholesale | 35,002 | 16.3 | % | 29,779 | 15.3 | % | 69,559 | 12.7 | % | 33,277 | 7.1 | % | ||||||||||||||||||||||||||||||||||||
Sportswear retail | 1,774 | 3.5 | % | 2,460 | 6.3 | % | 13,065 | 9.0 | % | 8,666 | 8.5 | % | ||||||||||||||||||||||||||||||||||||
Sportswear Group | $ | 36,776 | 13.9 | % | $ | 32,239 | 13.8 | % | $ | 82,624 | 11.9 | % | $ | 41,943 | 7.4 | % |
(a) | Mass sportswear licensing operating loss relates to the design services business in connection with the White Stag women’s sportswear line. The White Stag design service contract expired on January 31, 2007 and the Company will not earn any future income or incur any future losses associated with White Stag. |
(b) | Includes an allocation of shared services expenses by brand as detailed below: |
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
Calvin Klein Jeans | $ | 3,068 | $ | 2,878 | $ | 9,103 | $ | 8,714 | ||||||||||||||||
Chaps | 2,133 | 2,513 | 6,400 | 7,618 | ||||||||||||||||||||
Mass sportswear licensing | — | 60 | — | 182 | ||||||||||||||||||||
Sportswear wholesale | 5,201 | 5,451 | 15,503 | 16,514 | ||||||||||||||||||||
Sportswear retail | 72 | — | 316 | — | ||||||||||||||||||||
Sportswear Group | $ | 5,273 | $ | 5,451 | $ | 15,819 | $ | 16,514 |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Sportswear Group operating income increased $4.5 million, or 14.1%. Operating income for the Three Months Ended September 29, 2007 includes operating income of $18.9 million compared to operating income of $17.9 million for the Three Months Ended September 30, 2006 related to the
45
CKJEA Business, which was acquired on January 31, 2006. Excluding the CKJEA Business, Sportswear Group operating income increased $3.4 million, or 24.0%, reflecting a $2.1 million increase in Calvin Klein Jeans wholesale, a $1.2 million increase in Chaps and a $0.1 million net increase in all other Sportswear lines. The increase in Calvin Klein Jeans wholesale without the CKJEA Business primarily reflects a $2.5 million increase in gross profit (discussed above), partially offset by a $0.4 million increase in SG&A expenses. The i ncrease in Chaps reflects a $0.2 million decrease in gross profit (discussed above), more than offset by a $1.4 million decrease in SG&A expenses (due primarily to a reduction in selling and distribution expenses associated with the decrease in sales volume).
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Sportswear Group operating income increased $40.7 million, or 97.0%. Operating income for the Nine Months Ended September 30, 2007 includes $37.5 million compared to $22.9 million for the Nine Months Ended September 30, 2006 related to the CKJEA Business, which was acquired on January 31, 2006. Excluding the CKJEA Business, Sportswear Group operating income increased $26.1 million, or 136.8%, reflecting a $15.6 million increase in Calvin Klein Jeans wholesale, a $10.4 million increase in Chaps and a $0.1 million net increase in all other Sportswear lines. The increase in Calvin Klein Jeans wholesale without the CKJEA Business reflects a $14.9 million increase in gross profit (discussed above) combined with a $0.7 million decrease in SG&A expenses (due primarily to a decrease in selling expenses attributable to reduced headcount associated with certain discontinued lines, combined with a reduction in warehousing and distribution expenses associated with an increase in the ratio of ‘‘drop shipments’’ (product shipped directly from a supplier to a customer) to total shipments). The increase in Chaps reflects a $6.6 million increase in gross profit (discussed above), combined with a $3.8 million decrease in SG&A expenses (due primarily to a reduction in selling and distribu tion expenses associated with the decrease in sales volume described in net revenues above).
Intimate Apparel Group
Intimate Apparel Group operating income was as follows:
Three Months Ended September 29, 2007(a) | % of Brand Net Revenues | Three Months Ended September 30, 2006(a) | % of Brand Net Revenues | Nine Months Ended September 29, 2007(a) | % of Brand Net Revenues | Nine Months Ended September 30, 2006(a) | % of Brand Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Calvin Klein Underwear | $ | 21,662 | 21.3 | % | $ | 15,499 | 19.0 | % | $ | 49,519 | 20.0 | % | $ | 29,942 | 14.4 | % | ||||||||||||||||||||||||||||||||
Core Intimates | 3,544 | 9.0 | % | 2,509 | 6.3 | % | 9,275 | 8.0 | % | 8,370 | 7.1 | % | ||||||||||||||||||||||||||||||||||||
Intimate Apparel wholesale | 25,206 | 17.9 | % | 18,008 | 14.8 | % | 58,794 | 16.2 | % | 38,312 | 11.7 | % | ||||||||||||||||||||||||||||||||||||
Calvin Klein Underwear retail | 8,155 | 24.2 | % | 6,235 | 24.9 | % | 20,578 | 23.8 | % | 14,250 | 22.0 | % | ||||||||||||||||||||||||||||||||||||
Intimate Apparel Group | $ | 33,361 | 19.1 | % | $ | 24,243 | 16.5 | % | $ | 79,372 | 17.6 | % | $ | 52,562 | 13.4 | % |
(a) | Includes an allocation of shared services/other expenses by brand as detailed below: |
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Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
Calvin Klein Underwear | $ | 2,438 | $ | 1,904 | $ | 7,317 | $ | 5,768 | ||||||||||||||||
Core Intimates | 1,620 | 1,560 | 4,862 | 4,732 | ||||||||||||||||||||
Intimate Apparel wholesale | 4,058 | 3,464 | 12,179 | 10,500 | ||||||||||||||||||||
Calvin Klein Underwear retail | — | — | — | — | ||||||||||||||||||||
Intimate Apparel Group | $ | 4,058 | $ | 3,464 | $ | 12,179 | $ | 10,500 |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Intimate Apparel Group operating income increased $9.1 million, or 37.6%, over the prior year reflecting a $6.2 million increase in Calvin Klein Underwear wholesale, a $1.9 million increase in Calvin Klein Underwear retail and a $1.0 million increase in Core Intimates. The increase in Calvin Klein Underwear wholesale reflects an $11.1 million increase in gross profit (discussed above), partially offset by a $5.0 million increase in SG&A expenses (due mainly to an increase in marketing expenses associated with the launch of the new Steel line). The increase in Calvin Klein Underwear retail reflects a $6.4 million increase in gross profit (discussed above), partially offset by a $4.4 million increase in SG&A expenses (due primarily to increased selling expenditures related to increased sales and the negative effect of foreign currency translation). The increase in Core Intimates reflects a $1.1 million increase in gross profit (discussed above), partially offset by a $0.1 million increase in SG&A expenses.
Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006
Intimate Apparel Group operating income increased $26.8 million, or 51.0%, over the prior year reflecting a $19.6 million increase in Calvin Klein Underwear wholesale, a $6.3 million increase in Calvin Klein Underwear retail and a $0.9 million increase in Core Intimates. The increase in Calvin Klein Underwear wholesale reflects a $24.4 million increase in gross profit (discussed above), partially offset by a $4.8 million increase in SG&A expenses. The increase in SG&A expenses for Calvin Klein Underwear wholesale was due primarily to an increase in marketing expenditures (due primarily to the launch of the new Steel line) combined with an increase in administrative expenses (mainly in foreign operations due to the negative effect of foreign currency translation). The increase in Calvin Klein retail reflects a $16.0 million increase in gross profit (discussed above), partially offset by a $9.7 million increase in SG&A expenses (due primarily to increased selling expenditures related to increased sales and the negative effect of foreign currency translation). The increase in Core Intimates reflects a $0.4 million decrease in gross profit (discussed above), more than offset by a $1.3 million decrease in SG&A expenses. The decrease in Core Intimates SG&A expenses was due primarily to decreased marketing expenses related to a reduced number of product launches in the current year. The Company notes increased marketing expenses are expected in the fourth quarter of fiscal 2007 compared to the fourth quarter of 2006 in connection with a planned national print advertising campaign.
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Swimwear Group
Swimwear Group operating income (loss) was as follows:
Three Months Ended September 29, 2007(c) | % of Brand Net Revenues | Three Months Ended September 30, 2006(c) | % of Brand Net Revenues | Nine Months Ended September 29, 2007(c) | % of Brand Net Revenues | Nine Months Ended September 30, 2006(c) | % of Brand Net Revenues | |||||||||||||||||||||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||
Speedo(a) | $ | (22,952 | ) | −82.8 | % | $ | (4,641 | ) | −13.9 | % | $ | (8,191 | ) | −4.5 | % | $ | 15,247 | 7.9 | % | |||||||||||||||||||||||||||||
Designer(b) | (7,917 | ) | −166.8 | % | (4,926 | ) | −106.0 | % | (10,814 | ) | −20.3 | % | (7,698 | ) | −15.8 | % | ||||||||||||||||||||||||||||||||
Swimwear wholesale | (30,869 | ) | −95.1 | % | (9,567 | ) | −25.2 | % | (19,005 | ) | -8.1 | % | 7,549 | 3.1 | % | |||||||||||||||||||||||||||||||||
Swimwear retail | 1,232 | 45.9 | % | 992 | 46.9 | % | 3,528 | 43.7 | % | 2,365 | 44.9 | % | ||||||||||||||||||||||||||||||||||||
Swimwear Group | $ | (29,637 | ) | -84.3 | % | $ | (8,575 | ) | −21.4 | % | $ | (15,477 | ) | -6.4 | % | $ | 9,914 | 4.0 | % |
(a) | Includes restructuring charges of $13.7 million and $16.7 million for the Three Months and Nine Months Ended September 29, 2007, respectively. See Note 4 of Notes to Consolidated Condensed Financial Statements. |
(b) | Includes restructuring charges of $3.0 million and $3.4 million for the Three Months and Nine Months Ended September 29, 2007, respectively. See Note 4 of Notes to Consolidated Condensed Financial Statements. |
(c) | Includes an allocation of shared services expenses by brand as detailed below: |
Three Months Ended September 29, 2007 | Three Months Ended September 30, 2006 | Nine Months Ended September 29, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
Speedo | $ | 4,340 | $ | 3,176 | $ | 13,482 | $ | 9,495 | ||||||||||||||||
Designer | 963 | 940 | 3,109 | 2,799 | ||||||||||||||||||||
Swimwear wholesale | 5,303 | 4,116 | 16,591 | 12,294 | ||||||||||||||||||||
Swimwear retail | — | — | — | 5 | ||||||||||||||||||||
Swimwear Group | $ | 5,303 | $ | 4,116 | $ | 16,591 | $ | 12,299 |
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Swimwear Group operating income decreased $21.1 million, or 245.6%, reflecting an $18.3 million decrease in Speedo wholesale and a $3.0 million decrease in Designer wholesale, partially offset by a $0.2 million increase in Swimwear retail. Operating income for the Three Months Ended September 29, 2007 includes restructuring expenses of $16.6 million related to management initiatives undertaken to improve the profitability of the Swimwear Group. See Note 4 of Notes to Consolidated Condensed Financial Statements. The decrease in Speedo operating income reflects a $12.6 million decrease in gross profit (discussed above), combined with a $5.7 million increase in SG&A expenses (including $6.9 million of restructuring costs). The decrease in operating income in Designer reflects a $3.4 million decrease in gross profit (discussed above) and a $0.1 million increase in SG&A expenses (including $0.5 million of restructuring costs), partially offset by a $0.5 million decrease in amortization expense related to intangible assets. The increase in Swimwear retail reflects a $0.4 million increase in gross profit (discussed above), partially offset by a $0.2 million increase in SG&A expenses.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Swimwear Group operating income decreased $25.4 million, or 256.1%, reflecting a $23.4 million decrease in Speedo wholesale and a $3.1 million decrease in Designer wholesale, partially offset by a $1.2 million increase in Swimwear retail. Operating income for the Nine Months Ended September 29, 2007 includes restructuring expenses of $20.1 million related to management initiatives undertaken to improve the profitability of the Swimwear Group. See Note 4 of Notes to Consolidated Condensed Financial Statements. The decrease in Speedo operating income reflects an $18.0 million decrease in gross profit (discussed above), combined with a $5.4 million increase in SG&A expenses
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(including $6.9 million of restructuring costs). The decrease in operating income in Designer reflects a $1.8 million decrease in gross profit (discussed above) and a $1.8 million increase in SG&A expenses (including $0.9 million of restructuring costs), partially offset by a $0.5 million decrease in amortization expense related to intangible assets. The increase in Swimwear retail reflects a $1.8 million increase in gross profit (discussed above), partially offset by a $0.6 million increase in SG&A expenses.
Other (Income) Loss
Other loss of $0.4 million for the Three Months Ended September 29, 2007 primarily reflects net losses on the current portion of intercompany loans denominated in currency other than that of the foreign subsidiaries’ functional currency. Other income of $4.4 million for the Three Months Ended September 30, 2006 primarily reflects a gain of $4.4 million on the current portion of intercompany loans denominated in a currency other than that of the foreign subsidiaries’ functional currency. Other income of $6.5 million for the Nine Months Ended September 29, 2007 primarily reflects net gains on the current portion of intercompany loans denominated in currency other than that of the foreign subsidiaries’ functional currency. Other income of $3.1 million for the Nine Months Ended September 30, 2006 primarily reflects a gain of $5.2 million on the current portion of intercompany loa ns denominated in a currency other than that of the foreign subsidiaries’ functional currency, partially offset by a $1.6 million net currency loss related to the purchase of the CKJEA Business (which price was denominated in euros) combined with a $0.5 million loss on the repurchase of debt (described below).
Interest Expense
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Interest expense decreased $0.3 million to $9.2 million for the Three Months Ended September 29, 2007 from $9.5 million for the Three Months Ended September 30, 2006. The decrease in interest expense was due primarily to lower interest related to the Term B Note (as defined below), partially offset by an increase in interest related to the CKJEA short-term debt (due to an increase in the average interest rate on outstanding debt from 3.62% at September 30, 2006 to 4.81% at September 29, 2007). The Company has paid down approximately $41.4 million against the Term B Note since the end of Fiscal 2006.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Interest expense was $28.0 million for the Nine Months Ended September 29, 2007 compared to $28.6 million for the Nine Months Ended September 30, 2006. The decrease in interest expense was due primarily to lower interest related to the Term B Note (as defined below), partially offset by an increase in interest related to the CKJEA short-term debt (due to an increase in the average interest rate on outstanding debt from 3.62% at September 30, 2006 to 4.81% at September 29, 2007). The Company has paid down approximately $41.4 million against the Term B Note since the end of Fiscal 2006.
Interest Income
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Interest income increased $0.5 million to $1.3 million for the Three Months Ended September 29, 2007 from $0.8 million for the Three Months Ended September 30, 2006. The increase in interest income was due primarily to an increase in interest earned on outstanding cash balances.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Interest income increased $0.3 million to $2.3 million for the Nine Months Ended September 29, 2007 from $2.0 million for the Nine Months Ended September 30, 2006. The increase in interest income was due primarily to an increase in interest earned on outstanding cash balances.
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Income Taxes
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
The provision for income taxes was $11.0 million, or an effective tax rate of 49.1%, for the Three Months Ended September 29, 2007, compared to $7.3 million, or an effective tax rate of 22%, for the Three Months Ended September 30, 2006. The higher effective tax rate for the Three Months Ended September 29, 2007 is primarily driven by the Company’s inability to recognize certain future tax benefits related to domestic restructuring expenses at this time. In contrast, the lower 22% tax rate for the Three Months Ended September 30, 2006 included a domestic benefit from the filing of the Company’s 2005 tax return and the favorable retroactive effect of the Netherlands tax ruling.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
The provision for income taxes was $30.9 million, or an effective tax rate of 33.7%, for the Nine Months Ended September 29, 2007, compared to $15.6 million, or an effective tax rate of 28.2%, for the Nine Months Ended September 30, 2006. The higher effective tax rate for the Nine Months Ended September 29, 2007 is primarily driven by the Company’s inability to recognize certain future tax benefits related to domestic restructuring expenses at this time.
Discontinued Operations
Three Months Ended September 29, 2007 compared to Three Months Ended September 30, 2006
Loss from discontinued operations, net of taxes, was $6.9 million for the Three Months Ended September 29, 2007 compared to $11.2 million for the Three Months Ended September 30, 2006. See Note 3 of Notes to Consolidated Financial Statements.
Nine Months Ended September 29, 2007 compared to Nine Months Ended September 30, 2006
Loss from discontinued operation, net of taxes, was $4.5 million for the Nine Months Ended September 29, 2007 compared to $7.9 million for the Nine Months Ended September 30, 2006. See Note 3 of Notes to Consolidated Financial Statements.
Capital Resources and Liquidity
Financing Arrangements
Senior Notes
On June 12, 2003, Warnaco Inc., the principal operating subsidiary of Warnaco Group, completed the sale of $210.0 million aggregate principal amount of Senior Notes at par value, which notes mature on June 15, 2013 and bear interest at 87/8% payable semi-annually on December 15 and June 15 of each year. No principal payments prior to the maturity date are required. The Senior Notes are unconditionally guaranteed, jointly and severally, by Warnaco Group and substantially all of Warnaco Inc.’s domestic subsidiaries (all of which are 100% owned, either directly or indirectly, by Warnaco Inc.). On June 2, 2006, the Company purchased $5.0 million aggregate principal amount of the outstanding $210.0 ;million Senior Notes for total consideration of $5.2 million in the open market.
The aggregate principal amount outstanding under the Senior Notes was $205.0 million as of September 29, 2007, December 30, 2006 and September 30, 2006.
The indenture pursuant to which the Senior Notes were issued contains covenants which, among other things, restrict the Company’s ability to incur additional debt, pay dividends and make restricted payments, create or permit certain liens, use the proceeds of sales of assets and subsidiaries’ stock, create or permit restrictions on the ability of certain of Warnaco Inc.’s subsidiaries to pay dividends or make other distributions to Warnaco Group or to Warnaco Inc., enter into transactions with affiliates,
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engage in certain business activities, engage in sale and leaseback transactions and consolidate or merge or sell all or substantially all of its assets. The Company is not aware of any non-compliance with the covenants of the Senior Notes as of September 29, 2007, December 30, 2006 and September 30, 2006.
Interest Rate Swap Agreements
On September 18, 2003, the Company entered into an Interest Rate Swap Agreement (the ‘‘2003 Swap Agreement’’) with respect to the Senior Notes for a total notional amount of $50 million. The 2003 Swap Agreement provides that the Company will receive interest at 87/8% and pay a variable rate of interest based upon six month London Interbank Offered Rate (‘‘LIBOR’’) plus 4.11% (9.52% at September 29, 2007). The 2003 Swap Agreement expires on June 15, 2013 (the date on which the Senior Notes mature).
On November 5, 2004, the Company entered into a second Interest Rate Swap Agreement (the ‘‘2004 Swap Agreement’’) with respect to the Company’s Senior Notes for a total notional amount of $25 million. The 2004 Swap Agreement provides that the Company will receive interest of 87/8% and pay a variable rate of interest based upon six months LIBOR plus 4.34% (9.75% at September 29, 2007). The 2004 Swap Agreement expires on June 15, 2013 (the date on which the Senior Notes mature).
As a result of the 2003 and 2004 Swap Agreements, the weighted average effective interest rate of the Senior Notes was 9.14% as of September 29, 2007, 9.12% as of December 30, 2006 and 9.14% as of September 30, 2006.
The fair value of the Company’s outstanding interest rate swap agreements reflect the termination premium (unrealized loss) or termination discount (unrealized gain) that the Company would realize if such swaps were terminated on the valuation date. Since the provisions of the Company’s 2003 Swap Agreement and the 2004 Swap Agreement match the provisions of the Company’s outstanding Senior Notes (the ‘‘Hedged Debt’’), changes in the fair value of the outstanding swaps do not have any effect on the Company’s results of operations but are recorded in the Company’s consolidated balance sheets. Unrealized gains on the outstanding interest rate swap agreements are included in other assets with a corresponding increase in the Hedged Debt. Unrealized losses on the outstanding interest rate swap agreements are included as a component of long-term debt with a corresponding decrease in the Hedged Debt. The table below summarizes the fair value (unrealized gains (losses)) of the Company’s outstanding swap agreements:
September 29, 2007 | December 30, 2006 | September 30, 2006 | ||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||
Unrealized loss: | ||||||||||||||||||
2003 Swap Agreement | $ | (1,352 | ) | $ | (1,622 | ) | $ | (1,801 | ) | |||||||||
2004 Swap Agreement | (932 | ) | (1,091 | ) | (1,203 | ) | ||||||||||||
Net unrealized loss | $ | (2,284 | ) | $ | (2,713 | ) | $ | (3,004 | ) |
Revolving Credit Facility; Amended and Restated Credit Agreement
On February 4, 2003, the date the Company emerged from bankruptcy, the Company entered into a $275 million Senior Secured Revolving Credit Facility, which was amended on November 12, 2003, August 1, 2004 and September 15, 2005. On January 31, 2006, the Senior Secured Revolving Credit Facility was amended and restated (the ‘‘Amended and Restated Credit Agreement’’) in connection with the closing of the acquisition of the CKJEA Business to, among other things, add a $180 million term loan facility (the ‘‘Term B Note’’) which was used to finance a portion of the acquisition of the CKJEA Business. Generally, the loans under the Term B Note bear interest at Citibank N.A.’s base rate plus 0.50% or at LIBOR plus 1.50%, in each case, on a per annum basis. As of September 29, 2007, the weighted average interest rate for the loans outstanding under the Term B Note was 6.89%. The Term B Note matures on January 31, 2013. As of September 29, 2007, principal payments due
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under the Term B Note were: (i) quarterly installments of $0.45 million through March 31, 2012; (ii) $42.3 million on each of June 30, 2012 and September 30, 2012; and (iii) $34.6 million on December 31, 2012. Loans under the Amended and Restated Credit Agreement may be required to be repaid upon the occurrence of certain events, including certain types of asset sales, insurance recoveries, and issuances of debt. In addition, the Term B Note requires the Company to repay term loan principal in amounts equal to 25% of Excess Cash Flow (as defined in the Amended and Restated Credit Agreement), if any, subject to certain conditions.
In addition to the amendments under the Amended and Restated Credit Agreement relating to the Term B Note, on January 31, 2006, the Company also increased the revolving credit facility commitment under the Amended and Restated Credit Agreement to $225 million. The $225 million revolving credit facility commitment under the Amended and Restated Credit Agreement matures on February 3, 2009. The revolving credit facility includes a provision which allows the Company to increase the maximum available borrowings under the revolving credit facility from $225 million to $375 million. Borrowings under the revolving credit facility bear interest at Citibank N.A.’s base rate plus 0.50% (8.75% at December 30, 2006 and September 30, 2006) or at LIBOR plus 1.50% (6.86% at December 30, 2006 and September 30, 2006), in each case, on a per annum basis. In accordance with the Amended and Restat ed Credit Agreement, effective April 3, 2007, rates for the revolving credit facility were adjusted to the Citibank N.A.’s base rate plus 0.25% (8.00% at September 29, 2007) or at LIBOR plus 1.25% (6.48% at September 29, 2007), in each case, on a per annum basis. The rates of interest payable on outstanding borrowings under the revolving credit facility may change based on the Company’s financial ratios. The Company enters into contracts to elect the LIBOR option when it expects borrowings to be outstanding for more than 30 days. The remaining balances bear interest based upon Citibank N.A.’s base rate. The revolving credit facility contains financial covenants that, among other things, require the Company to maintain a fixed charge coverage ratio above a minimum level and a leverage ratio below a maximum level and limit the amount of the Company’s capital expenditures. In addition, the revolving credit facility contains certain covenants that, among othe r things, limit investments and asset sales, prohibit the payment of dividends (subject to limited exceptions) and limit the incurrence of material additional indebtedness. As part of the Amended and Restated Credit Agreement, certain covenants were modified, including financial covenants and the covenants relating to indebtedness, acquisitions, asset sales and investments. Further, certain terms and conditions under which an Event of Default (as defined in the Amended and Restated Credit Agreement) may be declared were amended.
The Amended and Restated Credit Agreement is guaranteed by the Company and its domestic subsidiaries (other than Warnaco Inc.) and the obligations under such guaranty, together with Warnaco Inc.’s obligations under the Amended and Restated Credit Agreement, are secured by a lien for the benefit of the lenders on substantially all the assets of the Company and its domestic subsidiaries.
The Amended and Restated Credit Agreement was amended on November 6, 2006 in connection with the sale of the Company’s OP businesses.
As of September 29, 2007, under the Amended and Restated Credit Agreement, the Company had $127.8 million outstanding under the Term B Note and no borrowings outstanding under the revolving credit facility. The Company is not aware of any non-compliance with the covenants under the Amended and Restated Credit Agreement as of September 29, 2007, December 30, 2006 and September 30, 2006.
Foreign Revolving Credit Facility
During fiscal 2005, certain of the Company’s foreign subsidiaries (the ‘‘Foreign Subsidiaries’’) entered into a $25 million revolving credit facility with Bank of America, N.A. (the ‘‘Foreign Revolving Credit Facility’’). The Foreign Revolving Credit Facility provides for a four year, non-amortizing revolving credit facility. Borrowings under the Foreign Revolving Credit Facility accrue interest at LIBOR or, if applicable, Bank of America, N.A.’s base rate, in each case, plus 2.25% or 2.00% (depending on the level of EBITDA (as defined in the Foreign Revolving Credit Facility) of
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the Foreign Subsidiaries). The Foreign Revolving Credit Facility is secured by first priority security interests on the assets of the Foreign Subsidiaries and the Foreign Subsidiaries guarantee each others’ obligations under the Foreign Revolving Credit Facility. The Company has never had any borrowings outstanding under the Foreign Revolving Credit Facility.
The Foreign Revolving Credit Facility contains covenants that require the Foreign Subsidiaries to maintain certain financial ratios and limit the amount of the Foreign Subsidiaries’ capital expenditures. In addition, the Foreign Revolving Credit Facility contains certain restrictive covenants which, among other things, limit investments by the Foreign Subsidiaries and prohibit the Foreign Subsidiaries from incurring additional indebtedness. The Company’s ability to borrow under the Foreign Revolving Credit Facility is subject to the satisfaction of certain conditions. The Company is not aware of any non-compliance with the covenants of the Foreign Revolving Credit Facility as of September 29, 2007 and September 30, 2006.
CKJEA Notes Payable
The total CKJEA notes payable of $49.8 million at September 29, 2007 consists of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). As of September 29, 2007 and September 30, 2006, the weighted average interest rate for the CKJEA notes payable outstanding was approximately 4.81% and 3.62%, respectively. All of the CKJEA notes payable were renewed for an additional one-year term in February 2007.
Liquidity
As of September 29, 2007, the Company had working capital of $578.2 million, cash and cash equivalents of $188.9 million, short-term debt of $51.9 million and no borrowings under either the revolving credit facility under the Amended and Restated Credit Agreement or the Foreign Revolving Credit Facility. As of September 29, 2007, the Company had $243.6 million of credit available under the revolving credit facility of the Amended and Restated Credit Agreement which included available borrowings of $208.1 million (based upon the borrowing base calculations at September 29, 2007) plus $85.5 million of cash collateral, less outstanding letters of credit of $50.0 million.
The Company’s total debt as of September 29, 2007 was $382.9 million, consisting of $205.0 million of the Senior Notes, $127.8 million of the Term B Note under the Amended and Restated Credit Agreement, $49.8 million of the CKJEA short-term notes payable and $0.3 million of other outstanding debt. The Company repaid $40.0 million of the Term B Note in January 2007 from the proceeds of the sale of the OP businesses (the Company also repaid $10.0 million of the Term B Note in the fourth quarter of Fiscal 2006).
The Company believes that cash available under its Amended and Restated Credit Agreement, cash available under the Foreign Revolving Credit Facility and cash to be generated from future operating activities will be sufficient to fund its operations, including capital expenditures and its share repurchase programs, for the next three years. If the Company requires additional sources of capital, it will consider suspending its share repurchase programs, reducing capital expenditures, seeking additional financing or selling assets to meet such requirements.
Accounts receivable decreased $6.9 million to $288.0 million at September 29, 2007 from $295.0 million at December 30, 2006. The balance at December 30, 2006 includes approximately $28.3 million related to operations discontinued during the Three Months Ended September 29, 2007. Excluding these discontinued operations, accounts receivable increased $21.4 million reflecting a $48.2 million increase in the Sportswear Group (due mainly to Calvin Klein Jeans reflecting the growth in sales both domestically and internationally) and a $16.9 million increase in the Intimate Apparel Group (due mainly to Calvin Klein Underwear reflecting the growth in sales both domestically and internationally), partially offset by a $43.7 million decrease in the Swimwear Group (reflecting the seasonality of sales of swimwear products).
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Accounts receivable decreased $22.0 million to $288.0 million at September 29, 2007 from $310.0 million at September 30, 2006. The balance at September 30, 2006 includes approximately $24.5 million related to operations discontinued during the Three Months Ended September 29, 2007 and the fourth quarter of Fiscal 2006. Excluding these discontinued operations, accounts receivable increased $2.5 million.
Inventories decreased $67.4 million to $340.2 million at September 29, 2007 from $407.6 million at December 30, 2006. The balance at December 30, 2006 includes approximately $64.9 million related to operations discontinued during the Three Months Ended September 29, 2007. Excluding balances related to discontinued operations, inventories decreased approximately $2.5 million.
Inventories decreased $26.4 million to $340.2 million at September 29, 2007 from $366.5 million at September 30, 2006. The balance at September 30, 2006 includes approximately $57.7 million related to operations discontinued during the Three Months Ended September 29, 2007 and the fourth quarter of Fiscal 2006. Excluding these discontinued operations, inventories increased approximately $31.3 million primarily related to the expansion of the Company’s Calvin Klein Jeans business.
Share Repurchase Program
In July 2005, the Company’s Board of Directors authorized a share repurchase program (the ‘‘2005 Share Repurchase Program’’) for the repurchase of up to 3,000,000 shares of common stock. During the Nine Months Ended September 29, 2007, the Company repurchased 911,548 shares of its common stock in the open market at a total cost of $30.5 million (an average cost of $33.5 per share) under its 2005 Share Repurchase Program. During the Nine Months Ended September 30, 2006, the Company repurchased 1,200,000 shares of its common stock in the open market at a total cost of $23.1 million (an average cost of $19.28 per share) under its 2005 Share Repurchase Program. As of September 29, 2007, the Company had purchased an aggregate of 2,932,633 shares of common stock in the open market at a total cost of approximately $74.6 million (an average cost of $25.45 per share) under the 2005 Share Repu rchase Program.
In May 2007, the Company’s Board of Directors authorized a new share repurchase program (the ‘‘2007 Share Repurchase Program’’) for the repurchase of up to an additional 3,000,000 shares of the Company’s common stock. The Company expects that, in order to comply with the terms of applicable debt instruments, purchases under the 2007 Share Repurchase Program will be made over a period of four years from the date the program was approved. During the Nine Months Ended September 29, 2007, the Company did not repurchase any shares of common stock under the 2007 Share Repurchase Program.
Each of the 2005 and 2007 Share Repurchase Programs may be modified or terminated by the Company’s Board of Directors at any time.
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Cash Flows
The following table summarizes the cash flows from the Company’s operating, investing and financing activities for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006:
Nine Months Ended | ||||||||||||
September 29, 2007 | September 30, 2006 | |||||||||||
(in thousands of dollars) | ||||||||||||
Net cash provided by operating activities: | ||||||||||||
Continuing operations | $ | 101,583 | $ | 46,788 | ||||||||
Discontinued operations | 25,200 | 27,011 | ||||||||||
Net cash used in investing activities: | ||||||||||||
Continuing operations | (24,465 | ) | (233,086 | ) | ||||||||
Discontinued operations | (443 | ) | (1,064 | ) | ||||||||
Net cash provided by (used in) financing activities: | ||||||||||||
Continuing operations | (84,262 | ) | 107,651 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 4,274 | 1,924 | ||||||||||
Increase (decrease) in cash and cash equivalents | $ | 21,887 | $ | (50,776 | ) |
Cash provided by operating activities from continuing operations was $101.6 million for the Nine Months Ended September 29, 2007 compared to $46.8 million for the Nine Months Ended September 30, 2006. This $54.8 million increase was due primarily to the $24.3 million increase in net income, a $16.0 million decrease in cash used for net working capital and a $15.5 million increase in depreciation and amortization (which is an adjustment to net income in calculating cash provided by operating activities from continuing operations). The Company experienced net working capital outflows of $16.4 million for the Nine Months Ended September 29, 2007 compared to net working capital outflows of $32.4 million during the Nine Months Ended September 30, 2006. The net working capital outflows for the Nine Months Ended September 29, 2007 were due to a $22.1 million outflow for accounts payable, accrued expenses and other liabilities, a $10.0 million outflow for accounts receivable and a $4.5 million outflow from accrued income taxes, partially offset by a $17.2 million inflow from inventories and a $3.0 million inflow from prepaid expenses. The net working capital outflows for the Nine Months Ended September 30, 2006 were due primarily to a $37.2 million outflow for accounts receivable; a $18.0 million outflow for prepaid expenses and other assets; and a $1.4 million outflow for accrued income taxes, partially offset by a $22.9 million inflow from accounts payable, accrued expenses and other liabilities and a $1.3 million inflow from inventories.
Cash provided by operating activities from discontinued operations was $25.2 million for the Nine Months Ended September 29, 2007 compared to $27.0 million for the Nine Months Ended September 30, 2006. This $1.8 million increase was due primarily to a reduction of accounts payable and accrued liabilities of the discontinued operations during the Nine Months Ended September 29, 2007.
Cash used in investing activities from continuing operations was $24.5 million for the Nine Months Ended September 29, 2007 compared to $233.1 million in the Nine Months Ended September 30, 2006. This $208.6 million decrease was due primarily to $208.5 million used for business acquisitions during the Nine Months Ended September 30, 2006 (primarily the CKJEA Business which was acquired on January 31, 2006).
For the Nine Months Ended September 29, 2007, cash used in financing activities was $84.3 million compared to cash provided by financing activities of $107.7 million in the Nine Months Ended September 30, 2006. The $192.0 million increase in cash used in financing activities was due primarily to $180.0 million of debt issued in connection with the acquisition of the CKJEA Business on January 31, 2006 combined with a $24.7 million net decrease in CKJEA Business short-term notes payable, partially offset by a $8.3 million increase in proceeds from the exercise of employee stock options.
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Cash in operating accounts primarily represents lockbox receipts not yet cleared or available to the Company, cash held by foreign subsidiaries and compensating balances required under various trade, credit and other arrangements.
Significant Contractual Obligations and Commitments
Contractual obligations and commitments as of September 29, 2007 were not materially different from those disclosed in the Company’s Annual Report on Form 10-K for Fiscal 2006, with the exception of certain operating leases and other contractual obligations pursuant to agreements entered into during the Nine Months Ended September 29, 2007 (see Note 17 of Notes to Consolidated Condensed Financial Statements). Please refer to the Company’s Annual Report on Form 10-K for Fiscal 2006 for a description of those obligations and commitments outstanding as of December 30, 2006. In addition, as of September 29, 2007, in connection with the implementation of FIN 48, the Company had a liability of approximately $21.0 million related to uncertain tax positions of which ap proximately $3.0 million is expected to be settled and paid in 2007 and approximately $18.0 million is expected to be settled and paid in 2008 and beyond.
Off-Balance Sheet Arrangements
None.
Statement Regarding Forward-Looking Disclosure
This Quarterly Report on Form 10-Q, as well as certain other written, electronic and oral disclosures made by the Company from time to time, contains ‘‘forward-looking statements’’ that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and reflect, when made, the Company’s estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions, opportunities and expectations. Actual results may differ materially from anticipated results or expectations and investors are cautioned not to place undue reliance on any forward-looking statements. Statements other than statements of historical fact are forward-looking statements. These forward-looking statements may be identified by, among other things, the use of forward-looking language, such as the words ‘‘believe,’’ ‘‘a nticipate,’’ ‘‘expect,’’ ‘‘estimate,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘project,’’ ‘‘scheduled to,’’ ‘‘seek,’’ ‘‘should,’’ ‘‘will be,’’ ‘‘will continue,’’ ‘‘will likely result,’’ or the negative of those terms, or other similar words and phrases or by discussions of intentions or strategies.
The following factors, among others, including those described in the Company’s Annual Report on Form 10-K for Fiscal 2006 (as filed with the SEC on March 7, 2007), under the heading Item 1A. Risk Factors (as such disclosure may be modified or supplemented from time to time), could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by it: the Company’s ability to execute its repositioning and sale initiatives (including achieving enhanced productivity and profitability) announced on September 18, 2007; economic conditions that affect the apparel industry; the Company’s failure to anticipate, identify or promptly react to changing trends, styles, or brand preferences; further declines in prices in the apparel i ndustry; declining sales resulting from increased competition in the Company’s markets; increases in the prices of raw materials; events which result in difficulty in procuring or producing the Company’s products on a cost-effective basis; the effect of laws and regulations, including those relating to labor, workplace and the environment; changing international trade regulation, including as it relates to the imposition or elimination of quotas on imports of textiles and apparel; the Company’s ability to protect its intellectual property or the costs incurred by the Company related thereto; the Company’s dependence on a limited number of customers; the effects of consolidation in the retail sector; the Company’s dependence on license agreements with third parties; the Company’s dependence on the reputation of its brand names, including, in particular, Calvin Klein; the Company’s exposure to conditions in overseas markets in connection with the Company’s foreign operations and the sourcing of products from foreign third-party vendors; the Company’s foreign currency exposure; the Company’s history of insufficient disclosure controls and procedures and internal controls and restated financial statements;
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unanticipated future internal control deficiencies or weaknesses or ineffective disclosure controls and procedures; the effects of fluctuations in the value of investments of the Company’s pension plan; the sufficiency of cash to fund operations, including capital expenditures; the Company’s ability to service its indebtedness, the effect of changes in interest rates on the Company’s indebtedness that is subject to floating interest rates and the limitations imposed on the Company’s operating and financial flexibility by the agreements governing the Company’s indebtedness; the Company’s dependence on its senior management team and other key personnel; disruptions in the Company’s operations caused by difficulties with the new systems infrastructure; the limitations on purchases under the Company’s share repurchase programs contained in the Company’s debt instruments, the number of shares that the Company purchases under such programs and the prices paid f or such shares; the Company’s inability to achieve its strategic objectives, including gross margin, SG&A and operating profit margin goals, as a result of one or more of the factors described above or otherwise; the failure of acquired businesses to generate expected levels of revenues; the failure of the Company to successfully integrate such businesses with its existing businesses (and, as a result, not achieving all or a substantial portion of the anticipated benefits of such acquisitions); and such acquired businesses being adversely affected, including by one or more of the factors described above, and thereby failing to achieve anticipated revenues and earnings growth.
The Company encourages investors to read the section entitled Item 1A. Risk Factors and the discussion of the Company’s critical accounting policies under ‘‘Discussion of Critical Accounting Policies’’ included in the Company’s Annual Report on Form 10-K for Fiscal 2006, as such discussions may be modified or supplemented by subsequent reports that the Company files with the SEC including this Quarterly Report on Form 10-Q. This discussion of forward-looking statements is not exhaustive but is designed to highlight important factors that may affect actual results. Forward-looking statements speak only as of the date on which they are ma de, and, except for the Company’s ongoing obligation under the U.S. federal securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk primarily related to changes in hypothetical investment values under certain of the Company’s employee benefit plans, interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculation or for trading purposes.
Market Risk
During fiscal 2005, the Company adopted a non-qualified deferred compensation plan. Liabilities accrued for the plan’s participants are based on the participants’ contributions and the market values of hypothetical investments approved by the Company that are selected by the participants. Increases and decreases in liabilities attributable to changes in the market values of the participants’ hypothetical investments are reflected in the Company’s statement of operations. The total liability accrued attributable to participants’ accounts was $1.3 million and $0.7 million as of September 29, 2007 and September 30, 2006, respectively. A hypothetical increase of 10% in the value of participants’ hypothetical investment accounts (which would increase the accrued liability related to the deferred compensation plan) would have had an unfavorable effect of $0.1 million for the Nine Months Ended Septe mber 29, 2007 and less than $0.1 million for the Nine Months Ended September 30, 2006 on the Company’s income from continuing operations before provision for income taxes.
Interest Rate Risk
The Company has market risk from exposure to changes in interest rates on its 2003 and 2004 Swap Agreements with notional amounts totaling $75.0 million and the $127.8 million of loans outstanding at September 29, 2007 under the Term B Note. The Company is not exposed to interest
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rate risk on its Senior Notes or revolving credit facility under the Amended and Restated Credit Agreement because the interest rate on the Senior Notes is fixed at 87/8% per annum and the Company had no borrowings outstanding under the revolving credit facility as of September 29, 2007. With respect to the 2003 and 2004 Swap Agreements, a hypothetical 10% increase in interest rates would have had an annual unfavorable impact of $0.6 million during the Nine Months Ended September 29, 2007 and $0.5 million during the Nine Months Ended September 30, 2006 on the Company’s income from continuing operations before provision for income taxes. A hypothetical 10% increase in interest rates for the loans outstanding under the Term B Note would have had an unfavor able effect of $0.7 million for the Nine Months Ended September 29, 2007 and $0.9 million the Nine Months Ended September 30, 2006, on the Company’s income from continuing operations before provision for income taxes.
Foreign Exchange Risk
The Company has foreign currency exposures primarily related to buying in currencies other than the functional currency in which it operates. These exposures are primarily concentrated in the Company’s Canadian, Central and South American and European operations, which collectively accounted for approximately 34.0% of the Company’s total net revenues for the Nine Months Ended September 29, 2007. These foreign operations of the Company purchase products from suppliers denominated in U.S. dollars. Total purchases of products made by foreign subsidiaries denominated in U.S. dollars amounted to approximately $114.5 million and $97.0 million for the Nine Months Ended September 29, 2007 and September 30, 2006, respectively. A hypothetical decrease of 10% in the value of these foreign currencies relative to the U.S. dollar would have increased cost of goods sold (which would decrease operating income) by $11.5 mi llion and $9.7 million for the Nine Months Ended September 29, 2007 and the Nine Months Ended September 30, 2006, respectively.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Three Months Ended September 29, 2007 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Table of Contents
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item 1 of Part II is incorporated herein by reference to Part I, Item 1. Financial Statements, Note 15 Legal Matters.
Item 1A. Risk Factors.
Please refer to Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for Fiscal 2006, filed with the SEC on March 7, 2007, for a description of certain significant risks and uncertainties to which the Company’s business, operations and financial condition are subject. There have been no material changes to these risk factors during the Nine Months Ended September 29, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarizes repurchases of the Company’s common stock during the Nine Months Ended September 29, 2007.
In July 2005, the Company’s Board of Directors authorized the Company to enter into the 2005 Share Repurchase Program for the repurchase of up to 3,000,000 shares of common stock. The 2005 Share Repurchase Program does not have an expiration date. In order to comply with the terms of applicable debt instruments (which contain certain limitations on share repurchases that may be made in a given period), the Company expects that purchases under the 2005 Share Repurchase Program will be made over a period of three years from the date the program was approved. Under the 2005 Share Repurchase Program, the Company has repurchased a total of 2,932,633 shares in the open market, of which 911,548 shares where repurchased during the Three Months Ended September 29, 2007. In May 2007, the Company’s Board of Directors authorized a new 2007 Share Repurchase Program for the repurchase of up to an additional 3,000,000 shares of common stock. The Company did not repurchase any shares under the 2007 Share Repurchase Program during the Nine Months Ended September 29, 2007. The share repurchase programs may be modified or terminated by the Company’s Board of Directors at any time.
An aggregate of 9,096 shares included below as repurchased during the Three Months Ended September 29, 2007 reflect the surrender of shares in connection with the vesting of certain restricted stock awarded by the Company to its employees. At the election of an employee, shares having an aggregate value on the vesting date equal to the employee’s withholding tax obligation may be surrendered to the Company in satisfaction thereof.
Period | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares that May Yet Be Repurchased Under the Announced Plans | ||||||||||||||||||||
July 1, 2007 – July 28, 2007 | 6,253 | $ | 39.93 | — | 3,067,367 | |||||||||||||||||||
July 29, 2007 – August 25, 2007 | 425 | 34.22 | — | 3,067,367 | ||||||||||||||||||||
August 26, 2007 – September 29, 2007 | 2,418 | 34.49 | — | 3,067,367 |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
Exhibit No. | Description of Exhibit | |||||
3 | .1 | Amended and Restated Certificate of Incorporation of The Warnaco Group, Inc. (incorporated by reference to Exhibit 1 to the Form 8-A/A filed by The Warnaco Group, Inc. on February 4, 2003).* | ||||
3 | .2 | Bylaws of The Warnaco Group, Inc. (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by The Warnaco Group, Inc. on April 4, 2003).* | ||||
4 | .1 | Registration Rights Agreement, dated as of June 12, 2003, among Warnaco Inc., the Guarantors (as defined therein) and the Initial Purchasers (as defined therein) (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No. 333-107788) filed by The Warnaco Group, Inc. and certain of its subsidiaries on August 8, 2003).* | ||||
4 | .2 | Indenture, dated as of June 12, 2003, among Warnaco Inc., the Guarantors (as defined therein) and the Trustee (as defined therein) (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 (File No. 333-107788) filed by The Warnaco Group, Inc. and certain of its subsidiaries on August 8, 2003).* | ||||
4 | .3 | Registration Rights Agreement, dated as of February 4, 2003, among The Warnaco Group, Inc. and certain creditors thereof (as described in the Registration Rights Agreement) (incorporated by reference to Exhibit 4.5 to The Warnaco Group, Inc.’s Form 8-K filed February 10, 2003).* | ||||
31 | .1 | Certification of Chief Executive Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.† | ||||
31 | .2 | Certification of Chief Financial Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.† | ||||
32 | Certifications of Chief Executive Officer and Chief Financial Officer of The Warnaco Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith) |
* Previously filed.
† Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE WARNACO GROUP, INC. | |||
Date: November 5, 2007 | /s/ Joseph R. Gromek | ||
Joseph R. Gromek | |||
President and Chief Executive Officer | |||
Date: November 5, 2007 | /s/ Lawrence R. Rutkowski | ||
Lawrence R. Rutkowski | |||
Executive Vice President and Chief Financial Officer |
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