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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21764

 

 

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida   59-1162998

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3000 N.W. 107 Avenue

Miami, Florida

  33172
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (305) 592-2830

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock is 15,723,089 (as of December 2, 2015).

 

 

 


Table of Contents

PERRY ELLIS INTERNATIONAL, INC.

INDEX

 

     PAGE  

PART I: FINANCIAL INFORMATION

  

Item 1:

  

Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2015 and January 31, 2015

     1   

Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended October  31, 2015 and November 1, 2014

     2   

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended October 31, 2015 and November 1, 2014

     3   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October  31, 2015 and November 1, 2014

     4   

Notes to Unaudited Condensed Consolidated Financial Statements

     6   

Item 2:

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3:

  

Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4:

  

Controls and Procedures

     34   

PART II: OTHER INFORMATION

     35   

Item 1:

  

Legal Proceedings

     35   

Item 6:

  

Exhibits

     36   


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share data)

 

     October 31,
2015
    January 31,
2015
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 26,016      $ 43,547   

Accounts receivable, net

     130,453        137,432   

Inventories

     145,301        183,734   

Investments, at fair value

     10,291        19,996   

Deferred income taxes

     694        725   

Prepaid income taxes

     2,743        6,384   

Prepaid expenses and other current assets

     7,892        7,124   
  

 

 

   

 

 

 

Total current assets

     323,390        398,942   
  

 

 

   

 

 

 

Property and equipment, net

     67,040        64,633   

Other intangible assets, net

     206,333        210,201   

Goodwill

     6,022        6,022   

Other assets

     3,879        5,191   
  

 

 

   

 

 

 

TOTAL

   $ 606,664      $ 684,989   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 62,946      $ 117,789   

Accrued expenses and other liabilities

     25,594        22,355   

Accrued interest payable

     536        4,045   

Unearned revenues

     4,143        4,856   

Deferred pension obligation

     8,514        8,930   

Deferred income taxes

     172        797   
  

 

 

   

 

 

 

Total current liabilities

     101,905        158,772   
  

 

 

   

 

 

 

Senior subordinated notes payable, net

     50,000        150,000   

Senior credit facility

     60,621        —     

Real estate mortgages

     21,517        22,109   

Unearned revenues and other long-term liabilities

     15,223        15,009   

Deferred income taxes

     40,290        37,082   
  

 

 

   

 

 

 

Total long-term liabilities

     187,651        224,200   
  

 

 

   

 

 

 

Total liabilities

     289,556        382,972   
  

 

 

   

 

 

 

Commitment and contingencies

    

Equity:

    

Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock $.01 par value; 100,000,000 shares authorized; 15,789,519 shares issued and outstanding as of October 31, 2015 and 16,128,775 shares issued and outstanding as of January 31, 2015

     158        161   

Additional paid-in-capital

     149,418        161,336   

Retained earnings

     179,505        169,102   

Accumulated other comprehensive loss

     (11,973     (12,852
  

 

 

   

 

 

 

Total

     317,108        317,747   

Treasury stock at cost; no shares as of October 31, 2015 and 770,753 shares as of January 31, 2015

     —          (15,730
  

 

 

   

 

 

 

Total equity

     317,108        302,017   
  

 

 

   

 

 

 

TOTAL

   $ 606,664      $ 684,989   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

1


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     October 31,
2015
     November 1,
2014
    October 31,
2015
    November 1,
2014
 

Revenues:

         

Net sales

   $ 196,447       $ 203,267      $ 659,342      $ 649,193   

Royalty income

     8,992         8,173        25,810        23,093   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     205,439         211,440        685,152        672,286   

Cost of sales

     132,144         141,133        445,815        443,850   
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     73,295         70,307        239,337        228,436   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Selling, general and administrative expenses

     64,869         64,477        202,731        201,045   

Depreciation and amortization

     3,383         3,008        10,151        8,976   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     68,252         67,485        212,882        210,021   

(Loss) gain on sale of long-lived assets

     —           —          (697     885   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     5,043         2,822        25,758        19,300   

Costs of early extinguishment of debt

     —           —          5,121        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     1,853         3,517        7,423        10,838   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     3,190         (695     13,214        8,462   

Income tax provision (benefit)

     917         (258     2,811        2,740   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,273       $ (437   $ 10,403      $ 5,722   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

         

Basic

   $ 0.15       $ (0.03   $ 0.70      $ 0.38   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.15       $ (0.03   $ 0.68      $ 0.38   
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

         

Basic

     15,148         14,954        14,948        14,881   

Diluted

     15,465         14,954        15,344        15,246   

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(amounts in thousands)

 

     Three Months Ended     Nine Months Ended  
     October 31,
2015
    November 1,
2014
    October 31,
2015
    November 1,
2014
 

Net income (loss)

   $ 2,273      $ (437   $ 10,403      $ 5,722   

Other Comprehensive (loss) income:

        

Foreign currency translation adjustments, net

     (609     (1,228     482        (591

Unrealized gain on pension liability, net of tax (1)

     135        80        405        239   

Unrealized gain on investments

     (1     14        (8     29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (475     (1,134     879        (323
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,798      $ (1,571   $ 11,282      $ 5,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Unrealized gain on pension liability for the three months ended October 31, 2015 and November 1, 2014 is net of tax in the amount of $0 and $50, respectively. Unrealized gain on pension liability for the nine months ended October 31, 2015 and November 1, 2014 is net of tax in the amount of $0 and $151, respectively. See footnote 12 to the consolidated financial statements for further information.

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Nine Months Ended  
     October 31,
2015
    November 1,
2014
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,403      $ 5,722   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     10,632        9,541   

Provision for bad debts

     435        360   

Amortization of debt issue cost

     369        483   

Amortization of premiums and discounts

     124        320   

Amortization of unrealized loss on pension liability

     405        390   

Costs on early extinguishment of debt

     1,158        —     

Deferred income taxes

     2,614        1,764   

Loss (gain) on sale of long-lived assets

     697        (885

Share-based compensation

     3,641        4,424   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     6,507        16,614   

Inventories

     38,380        50,420   

Prepaid income taxes

     3,606        44   

Prepaid expenses and other current assets

     (762     (538

Other assets

     111        (313

Deferred pension obligation

     (416     (2,221

Accounts payable and accrued expenses

     (54,759     (50,297

Accrued interest payable

     (3,509     (2,986

Unearned revenues and other liabilities

     (998     991   
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,638        33,833   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (9,837     (12,525

Purchase of investments

     (8,230     (27,331

Proceeds from investment maturities

     17,845        19,844   

Proceeds on sale of intangible assets

     2,500        —     

Proceeds from note receivable

     250        250   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     2,528        (19,762
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings from senior credit facility

     330,644        220,166   

Payments on senior credit facility

     (270,023     (228,328

Payments on senior subordinated notes

     (100,000     —     

Purchase of treasury stock

     —          (2,222

Payments on real estate mortgages

     (615     (593

Payments on capital leases

     (137     (150

Deferred financing fees

     (574     —     

Proceeds from exercise of stock options

     1,408        360   

Tax benefit from exercise of equity instruments

     —          (134
  

 

 

   

 

 

 

Net cash used in financing activities

     (39,297     (10,901
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     600        243   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (17,531     3,413   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     43,547        26,989   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 26,016      $ 30,402   
  

 

 

   

 

 

 

 

Continued

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Nine Months Ended  
     October 31,
2015
     November 1,
2014
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

   $ 10,439       $ 13,021   
  

 

 

    

 

 

 

Income taxes

   $ 507       $ 616   
  

 

 

    

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

     

Accrued purchases of property and equipment

   $ 1,684       $ 17   
  

 

 

    

 

 

 

Note receivable on sale of intangible asset

   $ —         $ 1,250   
  

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2015, filed with the Securities and Exchange Commission on April 14, 2015.

The information presented reflects all adjustments, which are in the opinion of management of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 amends the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments require expanded disclosures for discontinued operations that would provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations and disclosure of the pretax profit or loss of individually significant components of an entity that do not qualify for discontinued operations reporting. ASU No. 2014-08 is to be applied prospectively to all disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of ASU No. 2014-08 is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. The Company is currently evaluating both methods of adoption and the impact, if any, that the adoption of this ASU will have on the Company’s results of operations or the Company’s financial position.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Earlier adoption is permitted. The amendments can be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards. The adoption of ASU No. 2014-12 is not expected to have a material impact on the Company’s results of operations or the Company’s financial position

 

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Table of Contents

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”, which change the guidance for evaluating whether to consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities. Additionally, the amendments eliminate the presumption that a general partner should consolidate a limited partnership, as well as affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for periods beginning after December 15, 2015 and early adoption is permitted, including adoption during an interim period. Companies have an option of using either a full retrospective or modified retrospective adoption approach. The adoption of ASU No. 2015-02 is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In March 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30)”, which is simplifying the Presentation of Debt Issuance Costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim periods beginning after December 15, 2015. The Company expects the adoption of the standard will result in the presentation of debt issuance costs, which are currently included in other assets, in the condensed consolidated balance sheets, as a direct deduction from the carrying amount of the related debt instrument.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which requires inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption of ASU No. 2015-11 is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Trade accounts

   $ 144,670       $ 150,515   

Royalties

     7,331         6,662   

Other receivables

     1,054         1,034   
  

 

 

    

 

 

 

Total

     153,055         158,211   

Less: allowances

     (22,602      (20,779
  

 

 

    

 

 

 

Total

   $ 130,453       $ 137,432   
  

 

 

    

 

 

 

4. INVENTORIES

Inventories are stated at the lower of cost (weighted moving average cost) or market. Cost principally consists of the purchase price, customs, duties, freight, and commissions to buying agents.

Inventories consisted of the following as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Finished goods

   $ 144,972      $ 183,468   

Raw materials and in process

     329        266   
  

 

 

    

 

 

 

Total

   $ 145,301      $ 183,734   
  

 

 

    

 

 

 

 

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Table of Contents

5. INVESTMENTS

The Company’s investments include marketable securities and certificates of deposit at October 31, 2015 and January 31, 2015. Marketable securities are classified as available-for-sale and consist of corporate bonds with maturity dates less than two years. Certificates of deposit are classified as available-for-sale with $7.3 million with maturity dates within one year. Investments are stated at fair value. The estimated fair value of the marketable securities is based on quoted prices in an active market (Level 1 fair value measures).

Investments consisted of the following as of October 31, 2015:

 

     Cost      Gross
Unrealized Gains
     Gross
Unrealized Losses
     Estimated
Fair Value
 
     (in thousands)  

Marketable securities

   $ 3,030       $ 1       $ —         $ 3,031   

Certificates of deposit

     7,262         1         (3      7,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 10,292       $ 2       $ (3    $ 10,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments consisted of the following as of January 31, 2015:

 

     Cost      Gross
Unrealized Gains
     Gross
Unrealized Losses
     Estimated
Fair Value
 
     (in thousands)  

Marketable securities

   $ 12,247       $ 9       $ —         $ 12,256   

Certificates of deposit

     7,742         1         (3      7,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 19,989       $ 10       $ (3    $ 19,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 86,174       $ 79,225   

Buildings and building improvements

     22,431         19,719   

Vehicles

     560         569   

Leasehold improvements

     48,568         47,807   

Land

     9,488         9,488   
  

 

 

    

 

 

 

Total

     167,221         156,808   

Less: accumulated depreciation and amortization

     (100,181      (92,175
  

 

 

    

 

 

 

Total

   $ 67,040       $ 64,633   
  

 

 

    

 

 

 

 

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Table of Contents

The above table of property and equipment includes assets held under capital leases as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 810       $ 888   

Less: accumulated depreciation and amortization

     (114      (791
  

 

 

    

 

 

 

Total

   $ 696       $ 97   
  

 

 

    

 

 

 

For the three months ended October 31, 2015 and November 1, 2014, depreciation and amortization expense relating to property and equipment amounted to $3.4 million and $3.1 million, respectively. For the nine months ended October 31, 2015 and November 1, 2014, depreciation and amortization expense relating to property and equipment amounted to $10.0 million and $8.9 million, respectively. These amounts include amortization expense for leased property under capital leases.

7. OTHER INTANGIBLE ASSETS

Trademarks

Trademarks included in other intangible assets, net, are considered indefinite-lived assets and totaled $202.3 million and $205.5 million at October 31, 2015 and January 31, 2015.

On March 19, 2015, the Company entered into an agreement to sell the intellectual property of its C&C California brand to a third party. The sales price was $2.5 million, which was collected during the first quarter of fiscal 2016. In connection with this transaction, the Company recorded a loss of ($0.7) million in the licensing segment.

On August 1, 2014, the Company entered into a sales agreement, in the amount of $1.3 million, for the sale of Australian, Fiji and New Zealand trademark rights with respect to Jantzen. Payments on the purchase price are due in five installments of $250,000 over a five year period. Interest on the purchase price that remains unpaid will accrue at a rate of 3.5% per annum calculated on an annual basis. The first payment was due within four days of the completion date and has been paid. The second payment has also been received. The remaining three payments are to be paid annually commencing on August 1, 2016 with the final payment to be made on August 1, 2018. As a result of this transaction, the Company recorded a gain of $0.9 million in the licensing segment.

Other

Other intangible assets represent as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Customer lists

   $ 8,450       $ 8,450   

Less: accumulated amortization

     (4,453      (3,782
  

 

 

    

 

 

 

Total

   $ 3,997       $ 4,668   
  

 

 

    

 

 

 

For the three months ended October 31, 2015 and November 1, 2014, amortization expense relating to customer lists amounted to $0.3 million and $0.2 million, respectively, for each period. For the nine months ended October 31, 2015 and November 1, 2014, amortization expense relating to customer lists amounted to $0.7 million, respectively, for each period. Other intangible assets are amortized over their estimated useful lives of 10 years. Assuming no impairment, the estimated amortization expense for future periods based on recorded amounts as of October 31, 2015, will be approximately $0.9 million a year from fiscal 2016 through fiscal 2017, approximately $0.8 million a year from fiscal 2018 through fiscal 2019, approximately $0.7 million for fiscal 2020 and approximately $0.5 million for fiscal 2021.

 

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8. LETTER OF CREDIT FACILITIES

Borrowings and availability under letter of credit facilities consisted of the following as of:

 

     October 31,
2015
     January 31,
2015
 
     (in thousands)  

Total letter of credit facilities

   $ 30,307       $ 45,301   

Outstanding letters of credit

     (11,395      (11,595
  

 

 

    

 

 

 

Total credit available

   $ 18,912       $ 33,706   
  

 

 

    

 

 

 

During the first quarter of fiscal 2016, a $15 million line of credit expired and was not renewed.

9. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $4.1 million and $4.4 million for the three months ended October 31, 2015 and November 1, 2014, respectively, and $11.1 million and $12.2 million for the nine months ended October 31, 2015 and November 1, 2014, respectively, and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

10. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares of outstanding common stock. The calculation of diluted net income (loss) per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock. The potentially dilutive common stock included in the Company’s computation of diluted net income (loss) per share includes the effects of stock options, stock appreciation rights (“SARS”), and unvested restricted shares as determined using the treasury stock method.

The following table sets forth the computation of basic and diluted income (loss) per share:

 

     Three Months Ended      Nine Months Ended  
     October 31,
2015
     November 1,
2014
     October 31,
2015
     November 1,
2014
 
     (in thousands, except per share data)  

Numerator:

           

Net income (loss)

   $ 2,273       $ (437    $ 10,403       $ 5,722   

Denominator:

           

Basic-weighted average shares

     15,148         14,954         14,948         14,881   

Dilutive effect: equity awards

     317         —           396         365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted-weighted average shares

     15,465         14,954         15,344         15,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic income (loss) per share

   $ 0.15       $ (0.03    $ 0.70       $ 0.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income (loss) per share

   $ 0.15       $ (0.03    $ 0.68       $ 0.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive effect:(1)

     530         1,778         693         886   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents weighted average of stock options to purchase shares of common stock, SARS and restricted stock that were not included in computing diluted income (loss) per share because their effects were antidilutive for the respective periods.

 

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11. EQUITY

The following table reflects the changes in equity:

 

     Changes in Equity  
     (in thousands)  

Equity at January 31, 2015

   $ 302,017   

Comprehensive income

     11,282   

Share transactions under employee equity compensation plans

     3,809   
  

 

 

 

Equity at October 31, 2015

   $ 317,108   
  

 

 

 

Equity at February 1, 2014

   $ 347,533   

Comprehensive income

     5,399   

Share transactions under employee equity compensation plans

     4,362   

Purchase of treasury stock

     (2,222
  

 

 

 

Equity at November 1, 2014

   $ 355,072   
  

 

 

 

During the second quarter of fiscal 2016, the Company retired 770,753 shares of treasury stock recorded at a cost of approximately $15.7 million. Accordingly, during the second quarter of fiscal 2016, the Company reduced common stock and additional paid in capital by $7,000 and $15.7 million, respectively.

During the three months ended November 1, 2014, the Company repurchased shares of its common stock at a cost of $2.2 million.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss by component, net of tax:

 

     Unrealized
(Loss) Gain on
Pension Liability
     Foreign
Currency Translation
Adjustments, Net
     Unrealized
(Loss) Gain on
Investments
     Total  
     (in thousands)  

Balance, January 31, 2015

   $ (8,085    $ (4,774    $ 7       $ (12,852

Other comprehensive loss (income) before reclassifications

     —           482         (8      474   

Amounts reclassified from accumulated other comprehensive loss

     405         —           —           405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, October 31, 2015

   $ (7,680    $ (4,292    $ (1    $ (11,973
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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A summary of the impact on the condensed consolidated statements of operations line items is as follows:

 

    Three Months Ended      
  October 31, 2015     November 1, 2014      
    (in thousands)      

Amortization of defined benefit pension items

     

Actuarial gains

  $ 135      $ 130      Selling, general and administrative expenses

Tax provision

    —          (50   Income tax provision
 

 

 

   

 

 

   

Total, net of tax

  $ 135      $ 80     
 

 

 

   

 

 

   
    Nine Months Ended      
    October 31, 2015     November 1, 2014      
    (in thousands)      

Amortization of defined benefit pension items

     

Actuarial gains

  $ 405      $ 390      Selling, general and administrative expenses

Tax provision

    —          (151   Income tax provision
 

 

 

   

 

 

   

Total, net of tax

  $ 405      $ 239     
 

 

 

   

 

 

   

13. INCOME TAXES

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s U.S. federal income tax returns for fiscal 2011 through fiscal 2015 are open tax years. The Company’s state tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to open tax years from fiscal 2005 through fiscal 2016, depending on each state’s particular statute of limitation. As of October 31, 2015, the fiscal 2011, 2012 and 2013 U.S. federal income tax returns are under examination as well as various state, local, and foreign income tax returns by various taxing authorities.

The Company has a $1.0 million liability recorded for unrecognized tax benefits as of January 31, 2015, which includes interest and penalties of $0.2 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. All of the unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. During the three months and nine months ended October 31, 2015, the total amount of unrecognized tax benefits decreased by approximately $81,000 and increased by $29,000, respectively. The change to the total amount of the unrecognized tax benefits for the three and nine months ended October 31, 2015 included a decrease in interest and penalties of approximately $29,000 and $2,000, respectively.

The Company finalized amounts due to New York City as a corollary to the recently resolved New York State examination during the three months ended October 31, 2015. Within the next twelve months the accepted look back period associated with various state and local tax jurisdictions will close. This event could result in a reduction of the unrecognized tax benefit of up to approximately $47,000. The Company does not currently anticipate a resolution within the next twelve months for any of the other remaining unrecognized tax benefits as of October 31, 2015. The statute of limitations related to the Company’s fiscal 2011, 2012, and 2013 U.S. federal tax years has been extended as part of the examination and will not be expected to lapse within the next twelve months.

During the fourth quarter of fiscal 2015, the Company recognized a valuation allowance of $42.4 million against the remaining deferred tax assets, whose utilization is not restricted by factors beyond the Company’s control. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. While the Company recognized pretax earnings through the nine months ended October 31, 2015, by itself that does not represent sufficient positive evidence of deferred tax asset realizability to warrant removing the valuation allowances established against the U.S. deferred tax assets. Deferred tax assets without valuation allowances remain in certain foreign tax jurisdictions, where supported by the evidence.

 

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14. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED SHARES

In 2002, the Company adopted the 2002 Stock Option Plan (the “2002 Plan”). The 2002 Plan was amended in 2003 to increase the number of shares reserved for issuance thereunder, among other changes. As amended, the 2002 Plan allowed the Company to grant Options to purchase up to an aggregate of 1,500,000 shares of the Company’s common stock. In 2005, the Company adopted the 2005 Long-Term Incentive Compensation Plan (the “2005 Plan”). The 2005 Plan allowed the Company to grant Options and other awards to purchase or receive up to an aggregate of 2,250,000 shares of the Company’s common stock, reduced by any awards outstanding under the 2002 Plan. On March 13, 2008, the Board of Directors unanimously adopted an amendment and restatement of the 2005 Plan that increased the number of shares available for grants by an additional 2,250,000 shares to an aggregate of 4,750,000 shares of common stock. On March 17, 2011, the Board of Directors unanimously adopted the second amendment and restatement of the 2005 Plan, which increased the number of shares available for grants by an additional 500,000 shares to an aggregate of 5,250,000 shares of common stock. On May 20, 2015, the Board of Directors unanimously adopted, subject to shareholder approval at the annual meeting, the Perry Ellis International, Inc. 2015 Long Term Incentive Compensation Plan, which is an amendment and restatement of the 2005 Plan (the “2015 Plan, and collectively with the 2002 and 2005 Plans, as amended, the “Stock Plan”). The amendment was approved by the shareholders at the Company’s 2015 annual meeting.

The 2015 Plan extends the existing term until July 17, 2025 as well as increases the number of shares of common stock reserved for issuance by an additional 1,000,000 shares to an aggregate of 6,250,000 shares.

The Stock Plan is designed to serve as an incentive for attracting and retaining qualified and competent employees, officers, directors, consultants, and other persons who provide services to the Company.

The 2015 Plan provides for the grants of Incentive Stock Options and Nonstatutory Stock Options. An Incentive Stock Option is an option to purchase common stock, which meets the requirements set forth under Section 422 of the Internal Revenue Code of 1986, as amended (“Section 422”). A Nonstatutory Stock Option is an option to purchase common stock, which meets the requirements of the 2015 Plan, but does not meet the definition of an “incentive stock option” under Section 422.

The 2015 Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which is comprised of two or more non-employee directors. Subject to the terms of the 2015 Plan, the Committee determines the participants, the allotment of shares to participants, and the term of the options. The Committee also determines the exercise price and certain other terms of the options; provided, however that the per share exercise price of options granted under the 2015 Plan may not be less than the fair market value of the common stock on the date of grant, and in the case of an Incentive Stock Option granted to a 10% shareholder, the per share exercise price will not be less than 110% of the fair market value of the common stock on the date of grant.

Under the 2015 Plan, restricted stock awards are granted subject to restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, or as otherwise provided in the 2015 Plan, covering a period of time specified by the Committee. The terms of any restricted stock awards granted under the 2015 Plan are set forth in a written award agreement, which contains provisions determined by the Committee that are not inconsistent with the 2015 Plan. The restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the 2015 Plan and any award agreement relating to a restricted stock award, a participant granted restricted stock shall have all of the rights of a shareholder, including the right to vote the restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). During the Restriction Period (as defined in the 2015 Plan), the restricted stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the participant.

During the second quarter of fiscal 2016, the Company granted an aggregate of 8,130 SARs, to be settled in shares of common stock to two new directors. The SARs have an exercise price of $23.38 and generally vest over a three-year period and have a seven-year term, at an estimated value, based on the Black-Scholes Option Pricing Model, of approximately $0.1 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the first and second quarters of fiscal 2016, the Company granted an aggregate of 73,489 and 141,613 shares of restricted stock to certain key employees, which vest primarily over a three-year period, at an estimated value of $1.8 million and $3.5 million, respectively. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

 

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Also, during the second quarter of fiscal 2016, the Company awarded to five directors an aggregate of 12,840 shares of restricted stock. The restricted stock awarded vests primarily over a three-year period, at an estimated value of $0.3 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

In April 2015, a total of 91,083 shares of restricted stock vested, of which 27,325 shares were withheld to cover the employees’ statutory income tax requirements. The estimated value of the withheld shares was $0.7 million.

15. SEGMENT INFORMATION

The Company has four reportable segments: Men’s Sportswear and Swim, Women’s Sportswear, Direct-to-Consumer and Licensing. The Men’s Sportswear and Swim and Women’s Sportswear segments derive revenues from the design, import and distribution of apparel to department stores and other retail outlets, principally throughout the United States. The Direct-to-Consumer segment derives its revenues from the sale of the Company’s branded and licensed products through its retail stores and e-commerce platform. The Licensing segment derives its revenues from royalties associated with the use of the Company’s brand names, principally Perry Ellis, Original Penguin, Laundry by Shelly Segal, Ben Hogan, Jantzen, John Henry, Gotcha, Farah, Pro Player and Manhattan.

The Company allocates certain corporate selling, general and administrative expenses based primarily on the revenues generated by each segment.

 

     Three Months Ended      Nine Months Ended  
     October 31,      November 1,      October 31,      November 1,  
     2015      2014      2015      2014  
     (in thousands)  

Revenues:

           

Men’s Sportswear and Swim

   $ 141,512       $ 145,732       $ 490,453       $ 487,906   

Women’s Sportswear

     33,421         36,721         102,126         97,448   

Direct-to-Consumer

     21,514         20,814         66,763         63,839   

Licensing

     8,992         8,173         25,810         23,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 205,439       $ 211,440       $ 685,152       $ 672,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Men’s Sportswear and Swim

   $ 1,771       $ 1,606       $ 5,509       $ 4,804   

Women’s Sportswear

     589         487         1,655         1,444   

Direct-to-Consumer

     976         880         2,851         2,615   

Licensing

     47         35         136         113   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

   $ 3,383       $ 3,008       $ 10,151       $ 8,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income:

           

Men’s Sportswear and Swim

   $ 2,392       $ (2,091    $ 14,544       $ 7,163   

Women’s Sportswear

     (109      1,324         222         (249

Direct-to-Consumer

     (4,038      (2,937      (8,051      (5,915

Licensing (1)

     6,798         6,526         19,043         18,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 5,043       $ 2,822       $ 25,758       $ 19,300   

Costs on early extinguishment of debt

     —           —           5,121         —     

Total interest expense

     1,853         3,517         7,423         10,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income (loss) before income taxes

   $ 3,190       $ (695    $ 13,214       $ 8,462   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Operating income for the licensing segment for the nine months ended October 31, 2015, includes a loss on sale of long-lived assets in the amount of $0.7 million. Operating income for the licensing segment for the nine months ended November 1, 2014 includes a gain on sale of long-lived assets in the amount of $0.9 million. See footnote 7 to the consolidated financial statements for further information.

 

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16. BENEFIT PLAN

The Company sponsors a qualified pension plan. The following table provides the components of net benefit cost for the plan during the three and nine months ended fiscal 2016 and 2015:

 

     Three Months Ended      Nine Months Ended  
     October 31,      November 1,      October 31,      November 1,  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 63       $ 63       $ 189       $ 189   

Interest cost

     337         433         1,011         1,299   

Expected return on plan assets

     (658      (508      (1,974      (1,524

Amortization of net loss

     135         130         405         390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ (123    $ 118       $ (369    $ 354   
  

 

 

    

 

 

    

 

 

    

 

 

 

17. SENIOR CREDIT FACILITY

On April 22, 2015, the Company amended and restated its existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $200 million. The Credit Facility has been extended through April 30, 2020 (“Maturity Date”). In connection with this amendment and restatement, the Company paid fees in the amount of $0.6 million. These fees will be amortized over the term of the credit facility as interest expense. At October 31, 2015, The Company had outstanding borrowings of $60.6 million under the Credit Facility. At January 31, 2015, the Company had no outstanding borrowings under the Credit Facility.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require the Company to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. The Company is not aware of any non-compliance with any of its covenants in this Credit Facility. These covenants may restrict its ability and the ability of its subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. The Company may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of a default. The Company could be materially harmed if it violates any covenants, as the lenders under the Credit Facility could declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If the Company is unable to repay those amounts, the lenders could proceed against its assets and the assets of its subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of its other outstanding indebtedness, such as the indenture relating to its 7 78% senior subordinated notes due April 1, 2019, its letter of credit facilities, or its real estate mortgage loans. Such a cross-default could result in all of its debt obligations becoming immediately due and payable, which it may not be able to satisfy.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables plus (b) 87.5% of eligible foreign accounts up to $1.5 million plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, (ii) a maximum of 70.0% of eligible finished goods inventory with an inventory limit not to exceed $125 million, or 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues at the prime rate and at the rate quoted by the agent for Eurodollar loans. The margin adjusts quarterly, in a range of 0.50% to 1.00% for prime rate loans and 1.50% to 2.00% for Eurodollar loans, based on the previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

Security. As security for the indebtedness under the Credit Facility, the Company granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of its existing and future assets, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries, and real estate but excluding its non-U.S. subsidiaries and all of its trademark portfolio.

 

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18. SENIOR SUBORDINATED NOTES PAYABLE

In March 2011, the Company issued $150 million 7 78% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 8 78% senior subordinated notes due September 15, 2013 and to repay a portion of the outstanding balance on the senior credit facility. The proceeds to the Company were $146.5 million yielding an effective interest rate of 8.0%.

On April 6, 2015, the Company elected to call for the partial redemption of $100 million of its $150 million 7 78% senior subordinated notes due 2019 and a notice of redemption was sent to all registered holders of the senior subordinated notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, the Company completed the redemption of the $100 million of its senior subordinated notes. The Company incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption, including the redemption premium as well as the write-off of note issuance costs.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict the Company’s ability and the ability of its subsidiaries to, among other things, incur additional indebtedness in certain circumstances, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. The Company is not aware of any non-compliance with any of its covenants in this indenture. The Company could be materially harmed if it violated any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which the Company may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of the Company’s debt obligations becoming immediately due and payable, which it may not be able to satisfy.

19. FAIR VALUE MEASUREMENTS

Accounts receivable, accounts payable, accrued interest payable and accrued expenses. The carrying amounts reported in the balance sheets approximate fair value due to the short-term nature of these instruments.

Real estate mortgages. (classified within Level 2 of the valuation hierarchy) - The carrying amounts of the real estate mortgages were approximately $23.0 million at October 31, 2015 and January 31, 2015, respectively. The carrying values of the real estate mortgages at October 31, 2015 and January 31, 2015, approximate their fair values since the interest rates approximate market.

Senior credit facility. (classified within Level 2 of the valuation hierarchy) - The carrying amount of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate.

Senior subordinated notes payable. (classified within Level 1 of the valuation hierarchy) - The carrying amounts of the 7 78% senior subordinated notes payable were approximately $50.0 million and $150.0 million at October 31, 2015 and January 31, 2015, respectively. The fair value of the 7 78% senior subordinated notes payable was approximately $51.7 and $157.0 million as of October 31, 2015 and January 31, 2015, respectively, based on quoted market prices.

These estimated fair value amounts have been determined using available market information and appropriate valuation methods.

20. COMMITMENTS AND CONTINGENCIES

The Company is a defendant in Joseph T. Cook v. Perry Ellis International, Inc. and Oscar Feldenkreis, Case No. 15-cv-08290 (U.S. District Court, Southern District of New York), involving claims of unlawful employment practices, including unlawful discrimination and retaliation, which was filed on October 21, 2015 by an employee in the New York offices. The plaintiff seeks an unspecified amount of damages. The Company believes that the allegations are without merit and intends to vigorously defend against them.

 

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21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company and several of its subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis. These guarantees are subject to release in limited circumstances (only upon the occurrence of certain customary conditions). The following are condensed consolidating financial statements, which present, in separate columns: Perry Ellis International, Inc., (Parent Only), the Guarantors on a combined, or where appropriate, consolidated basis, and the Non-Guarantors on a combined, or where appropriate, consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of October 31, 2015 and January 31, 2015 and for the three and nine months ended October 31, 2015 and November 1, 2014. The combined Guarantors are 100% owned subsidiaries of Perry Ellis International, Inc., and have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis.

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF OCTOBER 31, 2015

(amounts in thousands)

 

     Parent Only      Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —         $ 2,532       $ 23,484       $ —        $ 26,016   

Accounts receivable, net

     —           104,425         26,028         —          130,453   

Intercompany receivable, net

     79,334         —           —           (79,334     —     

Inventories

     —           123,145         22,156         —          145,301   

Investment, at fair value

     —           —           10,291         —          10,291   

Deferred income taxes

     —           —           694         —          694   

Prepaid income taxes

     2,726         —           —           17        2,743   

Prepaid expenses and other current assets

     —           6,766         1,126         —          7,892   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     82,060         236,868         83,779         (79,317     323,390   

Property and equipment, net

     —           62,750         4,290         —          67,040   

Other intangible assets, net

     —           172,695         33,638         —          206,333   

Goodwill

     —           6,022         —           —          6,022   

Investment in subsidiaries

     285,117         —           —           (285,117     —     

Other assets

     467         2,281         1,131         —          3,879   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 367,644       $ 480,616       $ 122,838       $ (364,434   $ 606,664   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —         $ 56,192       $ 6,754       $ —        $ 62,946   

Accrued expenses and other liabilities

     —           20,865         4,729         —          25,594   

Accrued interest payable

     536         —           —           —          536   

Income taxes payable

     —           451         1,228         (1,679     —     

Unearned revenues

     —           2,725         1,418         —          4,143   

Deferred pension obligation

     —           8,433         81         —          8,514   

Deferred income taxes

     —           172         —           —          172   

Intercompany payable, net

     —           62,709         21,528         (84,237     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     536         151,547         35,738         (85,916     101,905   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     50,000         —           —           —          50,000   

Senior credit facility

     —           60,621         —           —          60,621   

Real estate mortgages

     —           21,517         —           —          21,517   

Unearned revenues and other long-term liabilities

     —           14,749         474         —          15,223   

Deferred income taxes

     —           38,591         3         1,696        40,290   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     50,000         135,478         477         1,696        187,651   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     50,536         287,025         36,215         (84,220     289,556   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     317,108         193,591         86,623         (280,214     317,108   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 367,644       $ 480,616       $ 122,838       $ (364,434   $ 606,664   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 31, 2015

(amounts in thousands)

 

     Parent Only      Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —         $ 30,055       $ 13,492       $ —        $ 43,547   

Accounts receivable, net

     —           114,325         23,107         —          137,432   

Intercompany receivable, net

     174,264         —           —           (174,264     —     

Inventories

     —           156,107         27,627         —          183,734   

Investments, at fair value

     —           —           19,996         —          19,996   

Deferred income taxes

     —           —           725         —          725   

Prepaid income taxes

     5,275         —           314         795        6,384   

Prepaid expenses and other current assets

     —           6,159         965         —          7,124   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     179,539         306,646         86,226         (173,469     398,942   

Property and equipment, net

     —           60,216         4,417         —          64,633   

Other intangible assets, net

     —           176,563         33,638         —          210,201   

Goodwill

     —           6,022         —           —          6,022   

Investment in subsidiaries

     274,714         —           —           (274,714     —     

Other assets

     1,809         1,926         1,456         —          5,191   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 456,062       $ 551,373       $ 125,737       $ (448,183   $ 684,989   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —         $ 105,046       $ 12,743       $ —        $ 117,789   

Accrued expenses and other liabilities

     —           17,945         4,410         —          22,355   

Accrued interest payable

     4,045         —           —           —          4,045   

Income taxes payable

     —           901         —           (901     —     

Unearned revenues

     —           3,023         1,833         —          4,856   

Deferred pension obligation

     —           8,878         52         —          8,930   

Deferred income taxes

     —           797         —           —          797   

Intercompany payable, net

     —           156,438         23,211         (179,649     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     4,045         293,028         42,249         (180,550     158,772   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     150,000         —           —           —          150,000   

Real estate mortgages

     —           22,109         —           —          22,109   

Unearned revenues and other long-term liabilities

     —           13,620         1,389         —          15,009   

Deferred income taxes

     —           35,383         3         1,696        37,082   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     150,000         71,112         1,392         1,696        224,200   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     154,045         364,140         43,641         (178,854     382,972   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     302,017         187,233         82,096         (269,329     302,017   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 456,062       $ 551,373       $ 125,737       $ (448,183   $ 684,989   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED OCTOBER 31, 2015

(amounts in thousands)

 

     Parent Only     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Net sales

   $ —        $ 174,315       $ 22,132      $ —        $ 196,447   

Royalty income

     —          5,495         3,497        —          8,992   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —          179,810         25,629        —          205,439   

Cost of sales

     —          118,154         13,990        —          132,144   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          61,656         11,639        —          73,295   

Operating expenses:

           

Selling, general and administrative expenses

     —          55,570         9,299        —          64,869   

Depreciation and amortization

     —          3,096         287        —          3,383   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          58,666         9,586        —          68,252   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —          2,990         2,053        —          5,043   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense, net

     —          1,857         (4     —          1,853   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —          1,133         2,057        —          3,190   

Income tax provision

     —          344         573        —          917   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     2,273        —           —          (2,273     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     2,273        789         1,484        (2,273     2,273   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (475     135         (610     475        (475
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,798      $ 924       $ 874      $ (1,798   $ 1,798   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED NOVEMBER 1, 2014

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations      Consolidated  

Revenues:

           

Net sales

   $ —        $ 182,512      $ 20,755      $ —         $ 203,267   

Royalty income

     —          4,995        3,178        —           8,173   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

     —          187,507        23,933        —           211,440   

Cost of sales

     —          128,438        12,695        —           141,133   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     —          59,069        11,238        —           70,307   

Operating expenses:

           

Selling, general and administrative expenses

     —          55,639        8,838        —           64,477   

Depreciation and amortization

     —          2,735        273        —           3,008   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     —          58,374        9,111        —           67,485   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     —          695        2,127        —           2,822   

Interest expense

     —          3,531        (14     —           3,517   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) before income taxes

     —          (2,836     2,141        —           (695

Income tax (benefit) provision

     —          (1,320     1,062        —           (258
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Equity in earnings of subsidiaries, net

     (437     —          —          437         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

     (437     (1,516     1,079        437         (437
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income

     (1,134     80        (1,214     1,134         (1,134
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive loss

   $ (1,571   $ (1,436   $ (135   $ 1,571       $ (1,571
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

21


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2015

(amounts in thousands)

 

     Parent Only      Guarantors     Non-
Guarantors
     Eliminations     Consolidated  

Revenues:

            

Net sales

   $ —         $ 586,515      $ 72,827       $ —        $ 659,342   

Royalty income

     —           15,693        10,117         —          25,810   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     —           602,208        82,944         —          685,152   

Cost of sales

     —           399,813        46,002         —          445,815   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     —           202,395        36,942         —          239,337   

Operating expenses:

            

Selling, general and administrative expenses

     —           172,690        30,041         —          202,731   

Depreciation and amortization

     —           9,258        893         —          10,151   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     —           181,948        30,934         —          212,882   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Loss on sale of long-lived assets

     —           (697     —           —          (697
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     —           19,750        6,008         —          25,758   

Costs of early extinguishment of debt

     —           5,121        —           —          5,121   

Interest expense

     —           7,363        60         —          7,423   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income before income taxes

     —           7,266        5,948         —          13,214   

Income tax provision

     —           908        1,903         —          2,811   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     10,403         —          —           (10,403     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     10,403         6,358        4,045         (10,403     10,403   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income

     879         405        474         (879     879   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 11,282       $ 6,763      $ 4,519       $ (11,282   $ 11,282   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 1, 2014

(amounts in thousands)

 

     Parent Only     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Net sales

   $ —        $ 581,632       $ 67,561      $ —        $ 649,193   

Royalty income

     —          14,085         9,008        —          23,093   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —          595,717         76,569        —          672,286   

Cost of sales

     —          400,997         42,853        —          443,850   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          194,720         33,716        —          228,436   

Operating expenses:

           

Selling, general and administrative expenses

     —          173,069         27,976        —          201,045   

Depreciation and amortization

     —          8,256         720        —          8,976   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          181,325         28,696        —          210,021   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gain on sale of long-lived assets

     —          —           885        —          885   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —          13,395         5,905        —          19,300   

Interest expense

     —          10,831         7        —          10,838   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —          2,564         5,898        —          8,462   

Income tax provision

     —          1,281         1,459        —          2,740   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     5,722        —           —          (5,722     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     5,722        1,283         4,439        (5,722     5,722   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (323     239         (562     323        (323
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 5,399      $ 1,522       $ 3,877      $ (5,399   $ 5,399   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2015

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ 382      $ 15,691      $ 2,565      $ —        $ 18,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —          (8,913     (924     —          (9,837

Purchase of investments

     —          —          (8,230     —          (8,230

Proceeds from investment maturities

     —          —          17,845        —          17,845   

Proceeds on sale of intangible assets

     —          2,500        —          —          2,500   

Proceeds from note receivable

     —          —          250        —          250   

Intercompany transactions

     97,610        —          —          (97,610     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     97,610        (6,413     8,941        (97,610     2,528   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Payments on senior subordinated notes

     (100,000     —          —          —          (100,000

Borrowings from senior credit facility

     —          330,644        —          —          330,644   

Payments on senior credit facility

     —          (270,023     —          —          (270,023

Payments on real estate mortgages

     —          (615     —          —          (615

Payments on capital leases

     —          (137     —          —          (137

Deferred financing fees

     —          (574     —          —          (574

Proceeds from exercise of stock options

     1,408        —          —          —          1,408   

Intercompany transactions

     —          (96,096     (2,114     98,210        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (98,592     (36,801     (2,114     98,210        (39,297

Effect of exchange rate changes on cash and cash equivalents

     600        —          600        (600     600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     —          (27,523     9,992        —          (17,531

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —          30,055        13,492        —          43,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —        $ 2,532      $ 23,484        —        $ 26,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 1, 2014

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES:

   $ (3,859   $ 33,000      $ 1,693      $ 2,999      $ 33,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —          (11,860     (665     —          (12,525

Purchase of investments

     —          —          (27,331     —          (27,331

Proceeds from investment maturities

     —          —          19,844        —          19,844   

Proceeds from note receivable

     —          —          250        —          250   

Intercompany transactions

     5,612        —          —          (5,612     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     5,612        (11,860     (7,902     (5,612     (19,762
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings from senior credit facility

     —          220,166        —          —          220,166   

Payments on senior credit facility

     —          (228,328     —          —          (228,328

Payments on real estate mortgages

     —          (593     —          —          (593

Purchase of treasury stock

     (2,222     —          —          —          (2,222

Payments on capital leases

     —          (150     —          —          (150

Proceeds from exercise of stock options

     360        —          —          —          360   

Tax benefit from exercise of equity instruments

     (134     —          —          —          (134

Intercompany transactions

     —          (3,039     (2,816     5,855        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (1,996     (11,944     (2,816     5,855        (10,901

Effect of exchange rate changes on cash and cash equivalents

     243        —          243        (243     243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —          9,196        (8,782     2,999        3,413   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —          —          29,988        (2,999     26,989   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —        $ 9,196      $ 21,206      $ —        $ 30,402   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 31, 2015, filed with the Securities and Exchange Commission on April 14, 2015.

Forward–Looking Statements

We caution readers that this report includes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology. Such forward-looking statements include, but are not limited to, statements regarding Perry Ellis’ strategic operating review, growth initiatives and internal operating improvements intended to drive revenues and enhance profitability, the implementation of Perry Ellis’ profitability improvement plan and Perry Ellis’ plans to exit underperforming, low growth brands and businesses. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are as set forth below and in various places in this report. These factors include, but are not limited to:

 

    general economic conditions,

 

    a significant decrease in business from or loss of any of our major customers or programs,

 

    anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,

 

    recent and future economic conditions, including turmoil in the financial and credit markets,

 

    the effectiveness of our planned advertising, marketing and promotional campaigns,

 

    our ability to contain costs,

 

    disruptions in the supply chain, including, but not limited to those caused by port disruptions,

 

    our future capital needs and our ability to obtain financing,

 

    our ability to protect our trademarks,

 

    our ability to integrate acquired businesses, trademarks, tradenames, and licenses,

 

    our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

 

    the termination or non-renewal of any material license agreements to which we are a party,

 

    changes in the costs of raw materials, labor and advertising,

 

    our ability to carry out growth strategies including expansion in international and direct-to-consumer retail markets,

 

    our plans, strategies, objectives, expectations and intentions, which are subject to change at any time at our discretion,

 

    potential cyber risk and technology failures that could disrupt operations or result in a data breach,

 

    the level of consumer spending for apparel and other merchandise,

 

    our ability to compete,

 

    exposure to foreign currency risk and interest rate risk,

 

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    possible disruption in commercial activities due to terrorist activity and armed conflict,

 

    actions of activist investors and the cost and disruption of responding to those actions, and

 

    other factors set forth in this report and in our other Securities and Exchange Commission (“SEC”) filings.

You are cautioned that all forward-looking statements involve risks and uncertainties detailed in our filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2015 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas in which we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks and goodwill, the recoverability of deferred tax assets and the measurement of retirement related benefits. We believe that there have been no significant changes to our critical accounting policies during the three and nine months ended October 31, 2015 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 31, 2015.

 

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Results of Operations

The following table sets forth, for the periods indicated, selected financial data expressed by segments and includes a reconciliation of EBITDA to operating income by segment, the most directly comparable GAAP financial measure:

 

     Three Months Ended     Nine Months Ended  
     October 31,
2015
    November 1,
2014
    October 31,
2015
    November 1,
2014
 
     (in thousands)  

Revenues by segment:

        

Men’s Sportswear and Swim

   $ 141,512      $ 145,732      $ 490,453      $ 487,906   

Women’s Sportswear

     33,421        36,721        102,126        97,448   

Direct-to-Consumer

     21,514        20,814        66,763        63,839   

Licensing

     8,992        8,173        25,810        23,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 205,439      $ 211,440      $ 685,152      $ 672,286   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Nine Months Ended  
     October 31,
2015
    November 1,
2014
    October 31,
2015
    November 1,
2014
 
     (in thousands)  

Reconciliation of operating income to EBITDA

        

Operating (loss) income by segment:

        

Men’s Sportswear and Swim

   $ 2,392      $ (2,091   $ 14,544      $ 7,163   

Women’s Sportswear

     (109     1,324        222        (249

Direct-to-Consumer

     (4,038     (2,937     (8,051     (5,915

Licensing

     6,798        6,526        19,043        18,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 5,043      $ 2,822      $ 25,758      $ 19,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Add:

        

Depreciation and amortization

        

Men’s Sportswear and Swim

   $ 1,771      $ 1,606      $ 5,509      $ 4,804   

Women’s Sportswear

     589        487        1,655        1,444   

Direct-to-Consumer

     976        880        2,851        2,615   

Licensing

     47        35        136        113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   $ 3,383      $ 3,008      $ 10,151      $ 8,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA by segment:

        

Men’s Sportswear and Swim

   $ 4,163      $ (485   $ 20,053      $ 11,967   

Women’s Sportswear

     480        1,811        1,877        1,195   

Direct-to-Consumer

     (3,062     (2,057     (5,200     (3,300

Licensing

     6,845        6,561        19,179        18,414   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 8,426      $ 5,830      $ 35,909      $ 28,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA margin by segment

        

Men’s Sportswear and Swim

     2.9     (0.3 %)      4.1     2.5

Women’s Sportswear

     1.4     4.9     1.8     1.2

Direct-to-Consumer

     (14.2 %)      (9.9 %)      (7.8 %)      (5.2 %) 

Licensing

     76.1     80.3     74.3     79.7

Total EBITDA margin

     4.1     2.8     5.2     4.2

EBITDA consists of earnings before interest, depreciation and amortization, costs on early extinguishment of debt and income taxes. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. The most directly comparable GAAP financial measure, presented above, is operating income. EBITDA and EBITDA margin are presented solely as a supplemental disclosure because management believes that they are a common measure of operating performance in the apparel industry.

The following is a discussion of the results of operations for the three and nine month periods ended October 31, 2015 of the fiscal year ending January 30, 2016 (“fiscal 2016”) compared with the three and nine month periods ended November 1, 2014 of the fiscal year ended January 31, 2015 (“fiscal 2015”).

 

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Results of Operations - three and nine months ended October 31, 2015 compared to the three and nine months ended November 1, 2014.

Net sales. Men’s Sportswear and Swim net sales for the three months ended October 31, 2015 were $141.5 million, a decrease of $4.2 million, or 2.9%, from $145.7 million for the three months ended November 1, 2014. The net sales decrease was attributed to the exit of private and retailer exclusive branded products, partially offset by strength in Perry Ellis, Original Penguin and golf lifestyle apparel.

Men’s Sportswear and Swim net sales for the nine months ended October 31, 2015 were $490.5 million, an increase of $2.6 million, or 0.5%, from $487.9 million for the nine months ended November 1, 2014. The net sales increase was attributed primarily to increases in the Perry Ellis and Original Penguin collections and golf lifestyle apparel, partially offset by decreases in our mid-tier sportswear as we reduced penetration of our exclusive branded products.

Women’s Sportswear net sales for the three months ended October 31, 2015 were $33.4 million, a decrease of $3.3 million, or 9.0%, from $36.7 million for the three months ended November 1, 2014. The net sales decrease was attributed to the sale of C&C California, which occurred during the first quarter of fiscal 2016. The decrease was partially offset by increased sales in Rafaella.

Women’s Sportswear net sales for the nine months ended November 1, 2014 were $102.1 million, an increase of $4.7 million, or 4.8%, from $97.4 million for the nine months ended November 1, 2014. The net sales increase was primarily due to increases in our contemporary Laundry by Shelli Segal dresses and Rafaella sportswear, driven by strong performance at retail. These increases were partially offset by the sale of C&C California in the first quarter.

Direct-to-Consumer net sales for the three months ended October 31, 2015 were $21.5 million, an increase of $0.7 million, or 3.4%, from $20.8 million for the three months ended November 1, 2014. The net sales increase was attributed to a 28.1% increases in e-commerce comparable sales over the same period last year, as well as a comparable store sales increase of 1% in Perry Ellis retail stores. This increase was partially offset by a decrease of comparable same store sales of 13.1% in Original Penguin retail stores.

Direct-to-Consumer net sales for the nine months ended November 1, 2014 were $66.8 million, an increase of $3.0 million, or 4.7%, from $63.8 million for the nine months ended November 1, 2014. The increase was driven by e-commerce, which posted a 34.6% increase in comparable sales, while retail store sales were slightly down.

Royalty income. Royalty income for the three months ended October 31, 2015 was $9.0 million, an increase of $0.8 million, or 9.8%, from $8.2 million for the three months ended November 1, 2014. The net sales increase was attributed to new licenses signed during fiscal 2015 and through the first part of fiscal 2016 as well as strong performance in existing licenses for our core brands.

Royalty income for the nine months ended October 31, 2015 was $25.8 million, an increase of $2.7 million, or 11.7%, from $23.1 million for the nine months ended November 1, 2014. Royalty income increases were attributed to increases in our Perry Ellis, Original Penguin and Laundry businesses as well as the new licenses signed during fiscal 2015 and through the first part of fiscal 2016.

Gross profit. Gross profit was $73.3 million for the three months ended October 31, 2015, an increase of $3.0 million, or 4.3%, from $70.3 million for the three months ended November 1, 2014. During the three months ended October 31, 2015, we continued to focus and emphasize higher margin channels and geographies. This expansion was realized across our core domestic collections principally in Perry Ellis, Original Penguin and golf lifestyle, as well as through our growth of higher margin licensing and direct to consumer revenues.

Gross profit was $239.3 million for the nine months ended October 31, 2015, an increase of $10.9 million, or 4.8%, from $228.4 million for the nine months ended November 1, 2014. This increase is attributed to the sales mix composition described above and the factors described within the gross profit margin section below.

Gross profit margin. As a percentage of total revenue, gross profit margins were 35.7% for the three months ended October 31, 2015, as compared to 33.3% for the three months ended November 1, 2014 which represents an expansion of 240 basis points. The increase was primarily attributed to the factors described above as well as cost savings associated with consolidation in our foreign sourcing offices.

 

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For the nine months ended October 31, 2015, gross profit margins were 34.9% as a percentage of total revenue as compared to 34.0% for the nine months ended November 1, 2014, an increase of 90 basis points. This increase was primarily associated with expansion across our licensing and core domestic collections; partially offset by the exit of the Elite component of our Nike licensed business, the inventory liquidation of divested C&C California, as well as the consolidation of our foreign sourcing offices.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended October 31, 2015 were $64.9 million, an increase of $0.4 million, or 0.6%, from $64.5 million for the three months ended November 1, 2014. The increase reflects our continued investment in our growth strategies related to international, licensing and direct-to-consumer. These increases were partially offset by $400,000 in cost savings this quarter as a result of the initiatives implemented during fiscal 2015.

Selling, general and administrative expenses for the nine months ended October 31, 2015 were $202.7 million, an increase of $1.7 million, or 0.8%, from $201.0 million for the nine months ended November 1, 2014. The increase reflects costs primarily related to the activist campaign as well as restructuring costs related to exited businesses and exit costs associated with the consolidation of our N.Y. corporate office space. We benefitted favorably from reduced headcount and tighter expense control across our infrastructure.

EBITDA. Men’s Sportswear and Swim EBITDA margin for the three months ended October 31, 2015 increased 320 basis points to 2.9%, from (0.3)% for the three months ended November 1, 2014. The EBITDA margin increase was driven principally by the expansion in gross margin in our Perry Ellis and Original Penguin collection businesses. Additionally during fiscal 2015, EBITDA margin was negatively impacted by the reduced leverage due to the decrease in net sales during the period.

Men’s Sportswear and Swim EBITDA margin for the nine months ended October 31, 2015 increased 160 basis points to 4.1%, from 2.5% for the nine months ended November 1, 2014. The EBITDA margin increase was driven principally by the expansion in gross margin in our Perry Ellis and Original Penguin collection businesses. We also realized favorable leverage in selling, general and administrative expenses, most notably in employee related expenses, which was partially offset by the planned increased infrastructure expenditures in this segment, as well as exit costs associated with the Elite component of our licensed Nike business.

Women’s Sportswear EBITDA margin for the three months ended October 31, 2015 decreased 350 basis points to 1.4%, from 4.9% for the three months ended November 1, 2014. Women’s Sportswear EBITDA margin for the nine months ended October 31, 2015 increased 60 basis points to 1.8% from 1.2% for the nine months ended November 1, 2014. The EBITDA margin for the nine months ended October 31, 2015 was favorably impacted by the expansion in the Rafaella collection business coupled with favorable leverage in selling, general and administrative expenses, most notably in employee expenses and other overhead. This was partially offset by exit costs associated with C&C California.

Direct-to-Consumer EBITDA margin for the three months ended October 31, 2015 decreased 430 basis points to (14.2%), from (9.9%) for the three months ended November 1, 2014. Direct-to-Consumer EBITDA margin for the nine months ended October 31, 2015 decreased 260 basis points to (7.8%), from (5.2%) for the nine months ended November 1, 2014. The decrease was primarily due to an increase in occupancy costs attributable to renewal contracts coupled with additional costs associated with freight and professional fees.

Licensing EBITDA margin for the three months ended October 31, 2015 decreased 420 basis points to 76.1%, from 80.3% for the three months ended November 1, 2014. The decrease is primarily due to the unfavorable leverage attributed to increased employee costs. Licensing EBITDA margin for the nine months ended October 31, 2015 decreased to 74.3%, from 79.7% for the nine months ended November 1, 2014. During the nine months ended October 31, 2015, we realized a loss on the sale of the C&C California brand while in the prior year we realized a gain in the nine months ended November 1, 2014 from the sale of the Jantzen rights described below.

Depreciation and amortization. Depreciation and amortization for the three months ended October 31, 2015, was $3.4 million, an increase of $0.4 million, or 13.3%, from $3.0 million for the three months ended November 1, 2014. Depreciation and amortization for the nine months ended October 31, 2015, was $10.2 million, an increase of $1.2 million, or 13.3%, from $9.0 million for the nine months ended November 1, 2014. The increase is attributed to depreciation related to our capital expenditures and leaseholds, primarily in the men’s sportswear and swim segment, as well as the direct-to-consumer segment.

 

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(Loss) gain on sale of long-lived assets. During the first quarter of fiscal 2016, we entered into an agreement to sell the intellectual property of our C&C California brand to a third party. As a result of this transaction, we recorded a loss of ($0.7) million in the licensing segment. During the second quarter of fiscal 2015, we entered into a sales agreement, in the amount of $1.3 million, for the sale of the Australian, Fiji and New Zealand trademark rights with respect to Jantzen. As a result of this transaction, we recorded a gain of $0.9 million in the licensing segment.

Cost on early extinguishment of debt. On April 6, 2015, we called for partial redemption $100 million of our $150 million outstanding 7 78% Senior Subordinated Notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, we completed the redemption of $100 million of our senior subordinated notes. We incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption premium and the write-off of note issuance costs.

Interest expense. Interest expense for the three months ended October 31, 2015, was $1.9 million, a decrease of $1.6 million, or 45.7%, from $3.5 million for the three months ended November 1, 2014. Interest expense for the nine months ended October 31, 2015 was $7.4 million, a decrease of $3.4 million, or 31.5%, from $10.8 million for the nine months ended November 1, 2014. The decrease was primarily attributable to a decrease in interest resulting from the partial redemption of $100 million of our senior subordinated notes. This decrease was partially offset by a higher average amount borrowed on our credit facility as compared to the comparable period of the prior year. The increase in the credit facility was due to its use for the redemption of the notes as discussed above.

Income taxes. The income tax expense for the three months ended October 31, 2015, was $0.9 million, an increase of $1.2 million, as compared to a benefit of $0.3 million for the three months ended November 1, 2014. For the three months ended October 31, 2015, our effective tax rate was 28.7% as compared to 37.1% for the three months ended November 1, 2014. The income tax expense for the nine months ended October 31, 2015, was $2.8 million, an increase of $0.1 million, as compared to $2.7 million for the nine months ended November 1, 2014. For the nine months ended October 31, 2015, our effective tax rate was 21.3% as compared to 32.4% for the nine months ended November 1, 2014. The overall change in the effective tax rate is attributed to the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates.

Net (loss) income. Net income (loss) for the three months ended October 31, 2015 was $2.3 million, an improvement of $2.7 million, as compared to ($0.4) million for the three months ended November 1, 2014. Net income for the nine months ended October 31, 2015 was $10.4 million, an increase of $4.7 million, or 82.5%, as compared to $5.7 million for the nine months ended November 1, 2014. The changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, pension funding requirements, acquisitions, and capital expenditures. We believe that our working capital requirements will increase for next year as we continue to expand internationally. As of October 31, 2015, our total working capital was $221.5 million as compared to $240.2 million as of January 31, 2015 and $277.2 million as of November 1, 2014. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs and capital expenditure needs over the next year. We also believe that our real estate assets, which had a net book value of $25.0 million at October 31, 2015, have a higher market value. These real estate assets may provide us with additional capital resources. Additional borrowings against these real estate assets, however, would be subject to certain loan to value criteria established by lending institutions. As of October 31, 2015, we had mortgage loans on these properties totaling $22.3 million.

We consider the undistributed earnings of our foreign subsidiaries as of October 31, 2015, to be indefinitely reinvested and, accordingly, no United States income taxes have been provided thereon. As of

 

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October 31, 2015, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $23.5 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Net cash provided by operating activities was $18.6 million for the nine months ended October 31, 2015, as compared to cash provided by operating activities of $33.8 million for the nine months ended November 1, 2014.

The cash provided by operating activities for the nine months ended October 31, 2015, is primarily attributable to a decrease in accounts receivable of $6.5 million, a decreased inventory of $38.4 million due to improved inventory management, as well as a reduction in prepaid taxes of 3.6 million. This was partially offset by a decrease in accounts payable and accrued expenses of $54.8 million as well as decreased accrued interest payable of $3.5 million. For the nine months ended October 31, 2015, our inventory turnover ratio increased to 3.7 as compared to 3.3 for the comparable period in fiscal 2015.

The cash provided by operating activities for the nine months ended November 1, 2014, is primarily attributable to a decrease in accounts receivable of $16.6 million and a decrease in inventory of $50.4 million associated with improved inventory management. This was partially offset by decreases in accounts payable and accrued expenses of $50.3 million deferred pension of $2.2 million and accrued interest payable of $3.0 million. For the nine months ended November 1, 2014, our inventory turnover ratio decreased slightly to 3.3 as compared to 3.7 for the comparable period in fiscal 2014. While the turnover decreased, inventory levels declined as noted above resulting from tighter inventory management.

Net cash provided by investing activities was $2.5 million for the nine months ended October 31, 2015, as compared to cash used in investing activities of $19.8 million for the nine months ended November 1, 2014. The net cash provided by investing activities during the first nine months of fiscal 2016 primarily reflects the proceeds from the maturities of investments in the amount of $17.8 million, the proceeds on the sale of the C&C California brand in the amount of $2.5 million and the proceeds from notes receivable associated with the sale of the Australian, Fiji and New Zealand Jantzen trademark rights in the amount of $0.3 million; partially offset by the purchase of investments of $8.2 million and the purchase of property and equipment of $9.8 million primarily for leasehold improvements and store fixtures. We anticipate capital expenditures during fiscal 2016 of $14.0 million to $16.0 million in technology, retail stores and other expenditures. The net cash used during the first nine months of fiscal 2015 primarily reflects the purchase of investments of $27.3 million and the purchase of property and equipment of $12.5 million, primarily for leasehold improvements and store fixtures; which was partially offset by proceeds from maturities of investments in the amount of $19.8 million and the proceeds from notes receivable associated with the sale of the Australian, Fiji and New Zealand Jantzen trademark rights in the amount of $0.3 million.

Net cash used in financing activities was $39.3 million for the nine months ended October 31, 2015, as compared to $10.9 million for the nine months ended November 1, 2014. The net cash used during the first nine months of fiscal 2016 primarily reflects payments for the partial redemption on our senior subordinated notes of $100 million, payments of $0.6 million on our mortgage loans, payments of deferred financing fees on the senior credit facility of $0.6 million and payments on capital leases of $0.1 million; partially offset by net borrowings on our senior credit facility of $60.6 million and the proceeds from exercises of stock options of $1.4 million. We financed the redemption of the subordinated notes through our senior credit facility. The net cash used during the first nine months of fiscal 2015 primarily reflects net payments on our senior credit facility of $8.2 million, purchases of treasury stock of $2.2 million, payments on real estate mortgages of $0.6 million and payments on capital leases of $0.2 million; partially offset by proceeds from exercises of stock options of $0.4 million.

Our Board of Directors has authorized us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2016. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis.

 

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During the second quarter of fiscal 2016, we retired 770,753 shares of treasury stock recorded at a cost of approximately $15.7 million. Accordingly, during the second quarter of fiscal 2016, we reduced common stock and additional paid in capital by $7,000 and $15.7 million, respectively.

During fiscal 2015, we repurchased shares of our common stock at a cost of $8.8 million. There have been no open market purchases during the first nine months of fiscal 2016. Total purchases under the plan, through October 31, 2015, were approximately $51.7 million. As of October 31, 2015, there were no treasury shares outstanding and as of January 31, 2015, there were 770,753 shares of treasury stock outstanding at a cost of approximately $15.7 million.

Acquisitions

None.

7 78% $150 Million Senior Subordinated Notes Payable

In March 2011, we issued $150 million 7 78% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 8 78% senior subordinated notes due September 15, 2013 and to repay a portion of the outstanding balance on our senior credit facility. The proceeds to us were $146.5 million yielding an effective interest rate of 8.0%.

On April 6, 2015, we elected to call for partial redemption $100 million of our $150 million outstanding 7 78% Senior Subordinated Notes due April 1, 2019 and a notice of redemption was sent to all registered holders of the notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, we completed the redemption of $100 million of our senior subordinated notes. We incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption premium and the write-off of note issuance costs.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. We are not aware of any non-compliance with any of our covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Senior Credit Facility

On April 22, 2015, we amended and restated our existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $200 million. The Credit Facility has been extended through April 30, 2020 (“Maturity Date”). In connection with this amendment and restatement, we paid fees in the amount of $0.6 million. These fees will be amortized over the term of the credit facility as interest expense. At October 31, 2015, we had borrowings of $60.6 million under the Credit Facility. At January 31, 2015, we had no outstanding borrowings under the Credit Facility.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require us to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. We are not aware of any non-compliance with any of our covenants in this Credit Facility. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. We may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of a default. We could be materially harmed if we violate any covenants, as the lenders under the Credit Facility could declare all amounts outstanding, together with accrued

 

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interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets and the assets of our subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of our other outstanding indebtedness, such as the indenture relating to our 7 78% senior subordinated notes due April 1, 2019, our letter of credit facilities, or our real estate mortgage loans. Such a cross-default could result in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables plus (b) 87.5% of eligible foreign accounts up to $1.5 million plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, (ii) a maximum of 70.0% of eligible finished goods inventory with an inventory limit not to exceed $125 million, or 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues at the prime rate and at the rate quoted by the agent for Eurodollar loans. The margin adjusts quarterly, in a range of 0.50% to 1.00% for prime rate loans and 1.50% to 2.00% for Eurodollar loans, based on the previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

Security. As security for the indebtedness under the Credit Facility, we granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of our existing and future assets, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries, and real estate but excluding our non-U.S. subsidiaries and all of our trademark portfolio.

Letter of Credit Facilities

As of October 31, 2015, we maintained one U.S. dollar letter of credit facility totaling $30.0 million and one letter of credit facility totaling $0.3 million utilized by our United Kingdom subsidiary. Each documentary letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets.

During the first quarter of fiscal 2016, a $15 million line of credit expired and was not renewed. During fiscal 2014, we decreased the letter of credit sublimit in our Senior Credit Facility to $30.0 million. At October 31, 2015 and January 31, 2015, there was $18.9 million and $33.7 million, respectively, available under the existing letter of credit facilities.

Real Estate Mortgage Loans

In July 2010, we paid off our then existing real estate mortgage loan and refinanced our main administrative office, warehouse and distribution facility in Miami with a $13.0 million mortgage loan. The loan is due on August 1, 2020. The interest rate has been modified since the refinancing date. The interest rate was 4.25% per annum and monthly payments of principal and interest of $71,000 were due, based on a 25-year amortization with the outstanding principal due at maturity. In July 2013, we amended the mortgage loan agreement to modify the interest rate. The interest rate was reduced to 3.9% per annum and the terms were restated to reflect new monthly payments of principal and interest of $69,000, based on a 25-year amortization with the outstanding principal due at maturity. At October 31, 2015, the balance of the real estate mortgage loan totaled $11.1 million, net of discount, of which $354,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan is due on January 23, 2019. The mortgage loan has been refinanced and the interest rate has been modified since such date. The interest rate was 4.00% per annum and quarterly payments of principal and interest of approximately $248,000 were due, based on a 20-year amortization with the outstanding principal due at maturity. In January 2014, we again amended the mortgage loan to modify the interest rate. The interest rate was reduced to 3.25% per annum and the terms were restated to reflect new monthly payments of principal and interest of approximately $68,000, based on a 20-year amortization with the outstanding principal due at maturity. At October 31, 2015, the balance of the real estate mortgage loan totaled $11.2 million, net of discount, of which approximately $456,000 is due within one year.

 

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The real estate mortgage loans contain certain covenants. We are not aware of any non-compliance with any of the covenants. If we violate any covenants, the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. A covenant violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements,” as defined by applicable GAAP and SEC rules.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and nine months ended October 31, 2015.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate. We currently do not have any derivative financial instruments for identifiable market risk.

Commodity Price Risk

We are exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. Fabric is a portion of the overall product cost, which includes various components. We manage our fabric prices by using a combination of different strategies including the utilization of sophisticated logistics and supply chain management systems, which allow us to maintain maximum flexibility in our global sourcing of products. This provides us with the ability to re-direct our sourcing of products to the most cost-effective jurisdictions. In addition, we may modify our product offerings to our customers based on the availability of new fibers, yield enhancement techniques and other technological advances that allow us to utilize more cost effective fibers. Finally, we also have the ability to adjust our price points of such products, to the extent market conditions allow. These factors, along with our foreign-based sourcing offices, allow us to procure product from lower cost countries or capitalize on certain tariff-free arrangements, which help mitigate any commodity price increases that may occur. We have not historically managed, and do not currently intend to manage, commodity price exposures by using derivative instruments.

Other

Our current exposure to foreign exchange risk is not significant and accordingly, we have not entered into any transactions to hedge against those risks.

Item 4: Controls and Procedures

Evaluation of Disclosures Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) of the Securities Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2015 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f), during the quarter ended October  31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

We were a defendant in Humberto Ordaz v. Perry Ellis International, Inc., Case No. BC490485 (Cal. Sup. Ct. 2012), involving claims for unpaid wages, missed breaks and related claims, which was originally filed on August 17, 2012 by a former employee in our California administrative offices. The plaintiff sought an unspecified amount of damages. The lawsuit was pleaded but not certified as a class action. The parties reached a settlement on August 12, 2015. The settlement amount was provided for in the Company’s results of operations for fiscal 2015.

We are a defendant in Joseph T. Cook v. Perry Ellis International, Inc. and Oscar Feldenkreis, Case No. 15-cv-08290 (U.S. District Court, Southern District of New York), involving claims of unlawful employment practices, including unlawful discrimination and retaliation, which was filed on October 21, 2015 by an employee in our New York offices. The plaintiff seeks an unspecified amount of damages. We believe that the allegations are without merit and intend to vigorously defend against them.

 

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Item 6. Exhibits

Index to Exhibits

 

Exhibit
Number

  

Exhibit Description

  

Where Filed

 
  31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)      Filed herewith.   
  31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)      Filed herewith.   
  32.1    Certification of Principal Executive Officer pursuant to Section 1350      Filed herewith.   
  32.2    Certification of Principal Financial Officer pursuant to Section 1350      Filed herewith.   
101.INS    XBRL Instance Document      Filed herewith.   
101.SCH    XBRL Taxonomy Extension Schema      Filed herewith.   
101.CAL    XBRL Taxonomy Extension Calculation Linkbase      Filed herewith.   
101.DEF    XBRL Taxonomy Extension Definition Linkbase      Filed herewith.   
101.LAB    XBRL Taxonomy Extension Label Linkbase      Filed herewith.   
101.PRE    XBRL Taxonomy Extension Presentation Linkbase      Filed herewith.   

 

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SIGNATURE

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.

 

    Perry Ellis International, Inc.
December 8, 2015     By:  

/S/ ANITA BRITT

    Anita Britt, Chief Financial Officer
    (Principal Financial Officer)

 

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Exhibit Index

 

Exhibit
Number

  

Exhibit Description

  31.1    Certification of Principal Executive Officer pursuant to Rule13a-14(a)/15d-14(a)
  31.2    Certification of Principal Financial Officer pursuant to Rule13a-14(a)/15d-14(a)
  32.1    Certification of Principal Executive Officer pursuant to Section 1350
  32.2    Certification of Principal Financial Officer pursuant to Section 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase

 

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