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EX-32.2 - EXHIBIT 32.2 - PVH CORP. /DE/ex32220162q10q.htm
EX-32.1 - EXHIBIT 32.1 - PVH CORP. /DE/ex32120162q10q.htm
EX-31.2 - EXHIBIT 31.2 - PVH CORP. /DE/ex31220162q10q.htm
EX-31.1 - EXHIBIT 31.1 - PVH CORP. /DE/ex31120162q10q.htm
EX-10.2 - EXHIBIT 10.2 - PVH CORP. /DE/ex10220162q10q.htm
EX-10.1 - EXHIBIT 10.1 - PVH CORP. /DE/ex10120162q10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
July 31, 2016
 

OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 


Commission File Number 001-07572
PVH CORP.
(Exact name of registrant as specified in its charter)

Delaware
 
13-1166910
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
200 Madison Avenue, New York, New York
 
10016
(Address of principal executive offices)
 
(Zip Code)

(212) 381-3500
(Registrant’s telephone number, including area code)

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 o

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 o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x     Accelerated filer  o     Non-accelerated filer  o     Smaller reporting company  o
(do not check if a 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 o No x

The number of outstanding shares of common stock, par value $1.00 per share, of the registrant as of August 26, 2016 was 80,228,987.




PVH CORP.
INDEX

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Forward-looking statements in this Quarterly Report on Form 10-Q including, without limitation, statements relating to our future revenue, earnings and cash flows, plans, strategies, objectives, expectations and intentions are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated, including, without limitation, (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) we may be considered to be highly leveraged and we use a significant portion of our cash flows to service our indebtedness, as a result of which we might not have sufficient funds to operate our businesses in the manner we intend or have operated in the past; (iii) the levels of sales of our apparel, footwear and related products, both to our wholesale customers and in our retail stores, the levels of sales of our licensees at wholesale and retail, and the extent of discounts and promotional pricing in which we and our licensees and other business partners are required to engage, all of which can be affected by weather conditions, changes in the economy, fuel prices, reductions in travel, fashion trends, consolidations, repositionings and bankruptcies in the retail industries, repositionings of brands by our licensors and other factors; (iv) our plans and results of operations will be affected by our ability to manage our growth and inventory, including our ability to realize benefits from acquisitions; (v) our operations and results could be affected by quota restrictions and the imposition of safeguard controls (which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and technical expertise needed), the availability and cost of raw materials, our ability to adjust timely to changes in trade regulations and the migration and development of manufacturers (which can affect where our products can best be produced), changes in available factory and shipping capacity, wage and shipping cost escalation, and civil conflict, war or terrorist acts, the threat of any of the foregoing, or political and labor instability in any of the countries where our or our licensees’ or other business partners’ products are sold, produced or are planned to be sold or produced; (vi) disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas, as well as reduced consumer traffic and purchasing, as consumers become ill or limit or cease shopping in order to avoid exposure; (vii) acquisitions and divestitures and issues arising with acquisitions, divestitures and proposed transactions, including, without limitation, the ability to integrate an acquired entity or business into us with no substantial adverse effect on the acquired entity’s, the acquired business’s or our existing operations, employee relationships, vendor relationships, customer relationships or financial performance, and the disposal of the net assets of a divested entity; (viii) the failure of our licensees to market successfully licensed products or to preserve the value of our brands, or their misuse of our brands; (ix) our results could be adversely affected by the strengthening of the United States dollar against foreign currencies in which we transact significant levels of business; (x) our retirement plan expenses recorded throughout the year are calculated using actuarial valuations that incorporate assumptions and estimates about financial market, economic and demographic conditions, and differences between estimated and actual results give rise to gains and losses that are recorded immediately in earnings, generally in the fourth quarter of the year; and (xi) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

We do not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimate regarding revenue, earnings or cash flows, whether as a result of the receipt of new information, future events or otherwise.

PART I -- FINANCIAL INFORMATION

Item 1 - Financial Statements





PART II -- OTHER INFORMATION





PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

PVH Corp.
Consolidated Income Statements
Unaudited
(In millions, except per share data)

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 31,
 
August 2,
 
July 31,
 
August 2,
 
2016
 
2015
 
2016
 
2015
Net sales    
$
1,845.4

 
$
1,765.9

 
$
3,663.1

 
$
3,551.0

Royalty revenue    
69.9

 
75.4

 
147.0

 
149.6

Advertising and other revenue    
18.0

 
22.7

 
41.0

 
42.7

Total revenue    
1,933.3

 
1,864.0

 
3,851.1

 
3,743.3

Cost of goods sold (exclusive of depreciation and amortization)
899.5

 
861.9

 
1,810.4

 
1,755.6

Gross profit    
1,033.8

 
1,002.1

 
2,040.7

 
1,987.7

Selling, general and administrative expenses    
874.7

 
850.5

 
1,739.9

 
1,665.4

Debt modification and extinguishment costs
15.8

 

 
15.8

 

Gain to write-up equity investment in joint venture to fair value

 

 
153.1

 

Equity in net (loss) income of unconsolidated affiliates
(0.3
)
 
2.5

 
(0.5
)
 
8.6

Income before interest and taxes
143.0

 
154.1

 
437.6

 
330.9

Interest expense    
29.2

 
29.2

 
59.1

 
60.1

Interest income    
1.1

 
1.2

 
2.0

 
2.3

Income before taxes
114.9

 
126.1

 
380.5

 
273.1

Income tax expense
24.4

 
23.9

 
58.4

 
56.8

Net income
90.5

 
102.2

 
322.1

 
216.3

Less: Net loss attributable to redeemable non-controlling interest

 

 

 

Net income attributable to PVH Corp.
$
90.5

 
$
102.2

 
$
322.1

 
$
216.3

Basic net income per common share attributable to PVH Corp.
$
1.12

 
$
1.24

 
$
3.98

 
$
2.62

Diluted net income per common share attributable to PVH Corp.
$
1.11

 
$
1.22

 
$
3.95

 
$
2.59

Dividends declared per common share    
$
0.0375

 
$
0.0375

 
$
0.1125

 
$
0.1125


See accompanying notes.

1



PVH Corp.
Consolidated Statements of Comprehensive Income (Loss)
Unaudited
(In millions)


 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 31,
 
August 2,
 
July 31,
 
August 2,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
90.5

 
$
102.2

 
$
322.1

 
$
216.3

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $(0.1); $(0.4); $(0.1) and $(0.4)
(99.6
)
 
(124.8
)
 
84.7

 
(140.1
)
Amortization of prior service credit related to pension and postretirement plans, net of tax benefit of $(0.1); $(0.1); $(0.1) and $(0.1)
(0.0
)
 
(0.0
)
 
(0.1
)
 
(0.1
)
Net unrealized and realized gain (loss) related to effective cash flow hedges, net of tax expense (benefit) of $2.1; $0.4; $(3.8) and $(0.5)
16.9

 
(6.3
)
 
(38.0
)
 
(23.2
)
Net gain on net investment hedge, net of tax expense of $2.9, $0.0, $2.9 and $0.0
4.9

 

 
4.9

 

Total other comprehensive (loss) income
(77.8
)
 
(131.1
)
 
51.5

 
(163.4
)
Comprehensive income (loss)
12.7

 
(28.9
)
 
373.6

 
52.9

Less: Comprehensive loss attributable to redeemable non-controlling interest

 

 

 

Total comprehensive income (loss) attributable to PVH Corp.
$
12.7

 
$
(28.9
)
 
$
373.6

 
$
52.9


See accompanying notes.


2




PVH Corp.
Consolidated Balance Sheets
(In millions, except share and per share data)
 
July 31,
 
January 31,
 
August 2,
 
2016
 
2016
 
2015
 
UNAUDITED
 
AUDITED
 
UNAUDITED
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents    
$
741.7

 
$
556.4

 
$
466.7

Trade receivables, net of allowances for doubtful accounts of $15.4, $18.1 and $18.8
569.6

 
657.2

 
590.2

Other receivables    
24.7

 
28.7

 
27.6

Inventories, net    
1,412.1

 
1,322.3

 
1,402.6

Prepaid expenses    
156.0

 
150.5

 
147.1

Other
34.9

 
89.4

 
81.5

Total Current Assets
2,939.0

 
2,804.5

 
2,715.7

Property, Plant and Equipment, net
736.0

 
744.6

 
708.9

Goodwill    
3,536.1

 
3,219.3

 
3,220.2

Tradenames    
2,818.0

 
2,802.6

 
2,806.4

Other Intangibles, net
934.0

 
843.8

 
894.2

Other Assets, including deferred taxes of $11.4, $12.2 and $15.7
216.7

 
259.0

 
286.7

Total Assets
$
11,179.8

 
$
10,673.8

 
$
10,632.1

 
 
 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
Current Liabilities:
 
 
 
 
 
Accounts payable    
$
631.8

 
$
636.1

 
$
551.0

Accrued expenses
703.2

 
696.3

 
667.2

Deferred revenue    
33.8

 
32.3

 
31.0

Short-term borrowings    
19.4

 
25.9

 
8.1

Current portion of long-term debt    

 
136.6

 
111.7

Total Current Liabilities    
1,388.2

 
1,527.2

 
1,369.0

Long-Term Debt
3,358.2

 
3,031.7

 
3,236.8

Other Liabilities, including deferred taxes of $872.5, $836.4 and $889.4
1,629.8

 
1,562.6

 
1,616.5

Redeemable Non-Controlling Interest
0.1

 

 

Stockholders’ Equity:
 
 
 
 
 
Preferred stock, par value $100 per share; 150,000 total shares authorized    

 

 

Common stock, par value $1 per share; 240,000,000 shares authorized; 83,872,364; 83,545,818 and 83,479,689 shares issued
83.9

 
83.5

 
83.5

Additional paid in capital - common stock    
2,844.8

 
2,822.5

 
2,797.1

Retained earnings    
2,874.1

 
2,561.2

 
2,208.2

Accumulated other comprehensive loss
(652.7
)
 
(704.2
)
 
(579.9
)
Less: 3,540,949; 2,057,850 and 843,305 shares of common stock held in treasury, at cost
(346.6
)
 
(210.7
)
 
(99.1
)
Total Stockholders’ Equity    
4,803.5

 
4,552.3

 
4,409.8

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity
$
11,179.8

 
$
10,673.8

 
$
10,632.1



See accompanying notes.

3




PVH Corp.
Consolidated Statements of Cash Flows
Unaudited
(In millions)
 
Twenty-Six Weeks Ended
 
July 31,
 
August 2,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
322.1

 
$
216.3

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization    
153.2

 
124.0

Equity in net loss (income) of unconsolidated affiliates
0.5

 
(8.6
)
Deferred taxes    
(3.8
)
 
(0.8
)
Stock-based compensation expense    
19.5

 
20.4

Impairment of long-lived assets

 
1.6

Debt modification and extinguishment costs
15.8

 

Gain to write-up equity investment in joint venture to fair value

(153.1
)
 

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net    
97.7

 
106.0

Inventories, net    
(55.6
)
 
(164.6
)
Accounts payable, accrued expenses and deferred revenue    
(15.9
)
 
(45.0
)
Prepaid expenses    
(0.8
)
 
(16.4
)
Other, net    
29.1

 
90.1

Net cash provided by operating activities
408.7

 
323.0

INVESTING ACTIVITIES(1)
 
 
 
Business acquisitions, net of cash acquired
(157.7
)
 

Purchase of property, plant and equipment    
(102.8
)
 
(100.9
)
Proceeds from sale of building
16.7

 

Contingent purchase price payments
(25.2
)
 
(23.9
)
Change in restricted cash

 
20.2

Investments in unconsolidated affiliates
(1.5
)
 
(22.6
)
Net cash used by investing activities
(270.5
)
 
(127.2
)
FINANCING ACTIVITIES(1)
 
 
 
Net payments on short-term borrowings
(6.5
)
 
(0.4
)
Proceeds from 2016 facilities, net of related fees
571.1

 

Repayment of Term Loan B in connection with amendment to 2014 facilities
(582.0
)
 

Repayment of 2016/2014 facilities
(201.2
)
 
(165.7
)
Proceeds from 3 5/8% senior notes, net of related fees
389.6

 

Net proceeds from settlement of awards under stock plans
10.3

 
5.3

Excess tax benefits from awards under stock plans    
0.5

 
3.4

Cash dividends    
(9.2
)
 
(9.4
)
Acquisition of treasury shares    
(133.9
)
 
(26.8
)
Payments of capital lease obligations
(3.6
)
 
(3.8
)
Net cash provided (used) by financing activities
35.1

 
(197.4
)
Effect of exchange rate changes on cash and cash equivalents    
12.0

 
(11.0
)
Increase (decrease) in cash and cash equivalents
185.3

 
(12.6
)
Cash and cash equivalents at beginning of period    
556.4

 
479.3

Cash and cash equivalents at end of period    
$
741.7

 
$
466.7


(1) See Note 17 for information on Noncash Investing and Financing Transactions.

See accompanying notes.

4



PVH CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. GENERAL

PVH Corp. and its consolidated subsidiaries (collectively, the “Company”) constitute a global apparel company whose brand portfolio consists of nationally and internationally recognized brand names, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner’s and Olga, which are owned, and Speedo, which is licensed in perpetuity for North America and the Caribbean, as well as various other owned, licensed and private label brands. The Company designs and markets branded dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products, handbags, footwear and other related products and licenses its owned brands over a broad range of products. References to the aforementioned and other brand names are to registered trademarks owned by the Company or licensed to the Company by third parties and are identified by italicizing the brand name.

The consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation. Investments in entities that the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting. The Company’s Consolidated Income Statements include its proportionate share of the net income or loss of these entities. Please see Note 6, “Investments in Unconsolidated Affiliates,” for a further discussion. During the second quarter of 2016, the Company, along with its minority interest partner, formed a joint venture in Ethiopia. The joint venture is consolidated and the minority shareholder’s proportionate share (25%) of the equity in this joint venture is accounted for as a redeemable non-controlling interest. Please see Note 5, “Redeemable Non-Controlling Interest,” for a further discussion.

The Company’s fiscal years are based on the 52-53 week periods ending on the Sunday closest to February 1 of each calendar year and are designated by the calendar year in which the fiscal year commences. References to a year are to the Company’s fiscal year, unless the context requires otherwise.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not contain all disclosures required by accounting principles generally accepted in the United States for complete financial statements. Reference is made to the Company’s audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2016.

The preparation of interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

The results of operations for the thirteen and twenty-six weeks ended July 31, 2016 and August 2, 2015 are not necessarily indicative of those for a full fiscal year due, in part, to seasonal factors. The data contained in these financial statements are unaudited and are subject to year-end adjustments. However, in the opinion of management, all known adjustments (which consist of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods.

The Company records warehousing and distribution expenses as a component of selling, general and administrative expenses in its Consolidated Income Statements. Warehousing and distribution expenses totaled $57.4 million and $53.2 million in the thirteen weeks ended July 31, 2016 and August 2, 2015, respectively, and totaled $115.7 million and $110.7 million in the twenty-six weeks ended July 31, 2016 and August 2, 2015, respectively.

Certain reclassifications have been made to the consolidated financial statements for the prior year periods to present that information on a basis consistent with the current year. 


5



2. INVENTORIES

Inventories are comprised principally of finished goods and are stated at the lower of cost or market. Cost for principally all wholesale inventories in North America and certain wholesale and retail inventories in Asia and Latin America is determined using the first-in, first-out method. Cost for all other inventories is determined using the weighted average cost method. The Company reviews current business trends, inventory aging and discontinued merchandise categories to determine adjustments that it estimates will be needed to liquidate existing clearance inventories and record inventories at the lower of cost or market.

3. ACQUISITIONS

The Company acquired on April 13, 2016 the 55% of the ownership interests in TH Asia, Ltd. (“TH China”), its joint venture for Tommy Hilfiger in China, that it did not already own. Prior to April 13, 2016, the 45% interest in TH China owned by the Company was accounted for under the equity method of accounting. Following the acquisition of the 55% interest, the results of TH China’s operations were consolidated in the Company’s consolidated financial statements.

TH China began operating the Tommy Hilfiger wholesale and retail distribution businesses in China in 2011 and licensed from a subsidiary of the Company the Tommy Hilfiger trademarks for use in connection with these businesses.

The carrying value of the Company’s 45% interest in TH China prior to the acquisition was $52.5 million. In connection with the acquisition, this investment was remeasured to a fair value of $205.6 million, resulting in the recognition of a pre-tax noncash gain of $153.1 million during the first quarter of 2016. Such fair value was estimated based on the fair value of TH China using future operating cash flow projections discounted at a rate of return that accounted for the relative risks of the estimated future cash flows and included an estimated discount for a lack of marketability.

The acquisition date fair value of the consideration for the 55% interest that the Company did not already own was $265.8 million, consisting of $263.0 million paid in cash and the elimination of a $2.8 million pre-acquisition receivable owed to the Company by TH China. Together with the fair value of the Company’s 45% interest, the total fair value of TH China was $471.4 million. The estimated fair value of assets acquired and liabilities assumed included net assets of $99.2 million (including $105.3 million of cash acquired), $110.6 million of other intangible assets and $261.6 million of goodwill. The goodwill of $261.6 million was assigned to the Company’s Tommy Hilfiger International segment. Goodwill is not expected to be deductible for tax purposes.
 
The other intangible assets of $110.6 million as of April 13, 2016 included reacquired license rights of $72.0 million, order backlog of $26.2 million and customer relationships of $12.4 million, which are subject to amortization on a straight-line basis over 2.7 years, 0.8 years and 10.0 years, respectively. The Company is still in the process of finalizing the valuation of the assets acquired and liabilities assumed; thus, the allocation of the acquisition consideration is subject to change.

4. ASSETS HELD FOR SALE

During 2015, one of the Company’s European subsidiaries entered into an agreement to sell an owned building in Amsterdam, the Netherlands. The Company classified the building as held for sale beginning in the fourth quarter of 2015 and ceased recording depreciation on the building at that time. The building had a carrying value of $14.7 million as of January 31, 2016, which was determined to be lower than the fair value, less costs to sell, and was included in other current assets in the Company’s Consolidated Balance Sheet in the Calvin Klein International segment.
The Company completed the sale of the building on July 4, 2016 for proceeds of €15.0 million (approximately $16.7 million based on the exchange rate in effect on that date) and recorded a gain of $1.5 million, which represented the excess of the proceeds, less costs to sell, over the carrying value on that date. The gain was recorded in selling, general and administrative expenses in the Company’s Consolidated Income Statement during the second quarter of 2016 and was included in the Calvin Klein International segment.

5. REDEEMABLE NON-CONTROLLING INTEREST

On June 29, 2016, the Company and Arvind Limited (“Arvind”) formed a joint venture in Ethiopia, PVH Arvind Manufacturing Private Limited Company (“PVH Ethiopia”), in which the Company owns a 75% interest. The Company made an initial contribution of $0.2 million to PVH Ethiopia at formation and has consolidated the joint venture in its consolidated financial statements. PVH Ethiopia was formed to operate a manufacturing facility that will produce finished products for the Company for distribution primarily in the United States. The Company expects the manufacturing facility will begin operations in 2017.


6



The shareholders agreement entered into by the parties to the joint venture (the “Shareholders Agreement”) contains a put
option under which the non-controlling shareholder can require the Company to purchase all of its shares in the
joint venture during various future periods as specified in the Shareholders Agreement. The first such period immediately precedes the ninth anniversary of the date of incorporation of PVH Ethiopia. The Shareholders Agreement also contains call options under which the Company can require the non-controlling shareholder to sell to the Company (i) all or a portion of its shares during various future periods as specified in the Shareholders Agreement; (ii) all of its shares in the event of a change of control of the non-controlling shareholder; or (iii) all of its shares in the event that the non-controlling shareholder ceases to hold at least ten percent of the outstanding shares. The Company’s first call option referred to in clause (i) immediately follows the fifth anniversary of the date of incorporation of PVH Ethiopia. The put and call prices are the fair market value of the shares on the redemption date based upon a multiple of the joint venture’s earnings before interest, taxes, depreciation and amortization for the prior 12 months, less the joint venture’s net debt.

The fair value of the non-controlling interest as of the date of formation of the joint venture was $0.1 million. The carrying amount of the redeemable non-controlling interest is adjusted to equal the redemption amount at the end of each reporting period, provided that this amount at the end of each reporting period cannot be lower than the initial fair value. Such changes in the redemption amount of the redeemable non-controlling interest are recognized immediately as they occur, since it is probable that the non-controlling interest will become redeemable in the future based on the passage of time. Any adjustment to the redemption amount of the redeemable non-controlling interest is determined after attribution of net income of the redeemable non-controlling interest and will be recognized immediately in retained earnings of the Company. The carrying amount of the redeemable non-controlling interest as of July 31, 2016 was $0.1 million.

6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Karl Lagerfeld
The Company acquired an economic interest of approximately 10% in the parent company of the Karl Lagerfeld brand (“Karl Lagerfeld”) during 2014 for $18.9 million. During the first quarter of 2016, a third party acquired a minority stake in Karl Lagerfeld, diluting the Company’s economic interest to approximately 8%. The Company has significant influence as defined under FASB guidance with respect to this investment, which is being accounted for under the equity method of accounting.
PVH Australia
The Company formed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), in 2013 in which the Company owns a 50% economic interest. The joint venture has licensed from a subsidiary of the Company since the first quarter of 2014 the rights to distribute and sell certain Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. As part of the transaction, the Company contributed to PVH Australia its subsidiaries that were operating the Calvin Klein Jeans businesses in Australia and New Zealand.

During the first quarter of 2015, the Company completed a transaction in which the Tommy Hilfiger and Van Heusen trademarks in Australia were licensed for certain product categories to subsidiaries of PVH Australia for use in Australia, New Zealand and, in the case of Tommy Hilfiger, other island nations in the South Pacific. The Tommy Hilfiger trademarks had previously been licensed to a third party and the Van Heusen trademarks had previously been licensed to the Company’s joint venture partner in PVH Australia. Additionally, subsidiaries of PVH Australia license other trademarks for certain product categories.

The Company made a net payment of $21.0 million to PVH Australia during the twenty-six weeks ended August 2, 2015, which represented its 50% share of the joint venture funding for the period. This investment is being accounted for under the equity method of accounting.

CK India

The Company acquired in 2013 a 51% economic interest in a Calvin Klein joint venture in India that has since been renamed Calvin Klein Arvind Fashion Private Limited (“CK India”). CK India licenses from a subsidiary of the Company the rights to the Calvin Klein trademarks in India for certain product categories. CK India was consolidated in the Company’s financial statements during 2013. During the first quarter of 2014, Arvind purchased the Company’s prior joint venture partners’ shares in CK India and, as a result of the entry into a shareholder agreement with different governing arrangements between the Company and Arvind, the Company no longer was deemed to hold a controlling interest in the joint venture. CK India was deconsolidated as a result and the Company began reporting its 51% interest as an equity method investment in the first quarter of 2014.

7




The Company made a payment of $1.6 million to CK India during the twenty-six weeks ended August 2, 2015 to contribute its 51% share of the joint venture funding for the period.

TH Brazil

The Company formed a joint venture, Tommy Hilfiger do Brasil S.A. (“TH Brazil”), in Brazil in 2012, in which the Company owns a 40% economic interest. TH Brazil licenses from a subsidiary of the Company the rights to the Tommy Hilfiger trademarks in Brazil for certain product categories. This investment is being accounted for under the equity method of accounting.

The Company made a payment of $1.5 million to TH Brazil during the twenty-six weeks ended July 31, 2016 to contribute its 40% share of the joint venture funding for the period.

TH India

The Company acquired in 2011 a 50% economic interest in a company that has since been renamed Tommy Hilfiger Arvind Fashion Private Limited (“TH India”). TH India licenses from a Company subsidiary the rights to the Tommy Hilfiger trademarks in India for certain product categories. This investment is being accounted for under the equity method of accounting. Arvind, the Company’s joint venture partner in PVH Ethiopia and in CK India, is also the Company’s joint venture partner in TH India.

TH China

The Company formed TH China as a joint venture in 2010. This investment was accounted for under the equity method of accounting until April 13, 2016, on which date the Company acquired the 55% of the ownership interests in TH China that it did not already own. Please see Note 3, “Acquisitions,” for a further discussion.

Total Investments in Unconsolidated Affiliates

Included in other assets in the Company’s Consolidated Balance Sheets as of July 31, 2016, January 31, 2016 and August 2, 2015 is $94.6 million, $140.7 million (of which $52.9 million related to TH China) and $134.7 million (of which $47.4 million related to TH China), respectively, related to these investments in unconsolidated affiliates.


8



7. GOODWILL

The changes in the carrying amount of goodwill for the twenty-six weeks ended July 31, 2016, by segment (please see Note 18, “Segment Data,” for a further discussion of the Company’s reportable segments), were as follows:
(In millions)
Calvin Klein North America
 
Calvin Klein International
 
Tommy Hilfiger North America
 
Tommy Hilfiger International
 
Heritage Brands Wholesale
 
Heritage Brands Retail
 
Total
Balance as of January 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
$
728.0

 
$
841.5

 
$
204.4

 
$
1,208.4

 
$
237.0

 
$
11.9

 
$
3,231.2

Accumulated impairment losses    

 

 

 

 

 
(11.9
)
 
(11.9
)
Goodwill, net    
728.0

 
841.5

 
204.4

 
1,208.4

 
237.0

 

 
3,219.3

Contingent purchase price payments to Mr. Calvin Klein
13.9

 
9.7

 

 

 

 

 
23.6

Acquisition of TH China

 

 

 
261.6

 

 

 
261.6

Currency translation
0.2

 
16.7

 

 
14.9

 
(0.2
)
 

 
31.6

Balance as of July 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, gross    
742.1

 
867.9

 
204.4

 
1,484.9

 
236.8

 
11.9

 
3,548.0

Accumulated impairment losses    

 

 

 

 

 
(11.9
)
 
(11.9
)
Goodwill, net    
$
742.1

 
$
867.9

 
$
204.4

 
$
1,484.9

 
$
236.8

 
$

 
$
3,536.1


The Company is required to make contingent purchase price payments to Mr. Calvin Klein in connection with the Company’s acquisition in 2003 of all of the issued and outstanding stock of Calvin Klein, Inc. and certain affiliated companies (collectively, “Calvin Klein”). Such payments are based on 1.15% of total worldwide net sales, as defined in the acquisition agreement (as amended), of products bearing any of the Calvin Klein brands and are required to be made with respect to sales made through February 12, 2018. A significant portion of the sales on which the payments to Mr. Klein are made are wholesale sales by the Company and its licensees and other partners to retailers.

8. RETIREMENT AND BENEFIT PLANS

The Company has five qualified defined benefit pension plans as of July 31, 2016 covering substantially all employees resident in the United States who meet certain age and service requirements. The plans provide monthly benefits upon retirement generally based on career average compensation and years of credited service. Vesting in plan benefits generally occurs after five years of service. The Company refers to these five noncontributory plans as its “Pension Plans.”

The Company also has for certain members of Tommy Hilfiger’s domestic senior management a supplemental executive retirement plan, which is an unfunded non-qualified supplemental defined benefit pension plan. Such plan is frozen and, as a result, participants do not accrue additional benefits. In addition, the Company has a capital accumulation program, which is an unfunded non-qualified supplemental defined benefit plan. Under the individual participants’ agreements, the participants in this plan will receive a predetermined amount during the 10 years following the attainment of age 65, provided that prior to the termination of employment with the Company, the participant has been in the plan for at least 10 years and has attained age 55. The Company also has for certain employees resident in the United States who meet certain age and service requirements an unfunded non-qualified supplemental defined benefit pension plan, which provides benefits for compensation in excess of Internal Revenue Service earnings limits and requires payments to vested employees upon, or shortly after, employment termination or retirement. The Company refers to these three noncontributory plans as its “SERP Plans.”

The Company also provides certain postretirement health care and life insurance benefits to certain retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. During 2002, the postretirement plan was amended to eliminate the Company contribution, which partially subsidized benefits, for active participants who, as of January 1, 2003, had not attained age 55 and 10 years of service. As a result of the Company’s acquisition of The Warnaco Group, Inc. (“Warnaco”) in 2013, the Company also provides certain postretirement health care and life insurance benefits to certain Warnaco retirees resident in the United States. Retirees contribute to the cost of this plan, which is unfunded. This plan was frozen on January 1, 2014. The Company refers to these two plans as its “Postretirement Plans.”

9





Net benefit cost related to the Company’s Pension Plans was recognized in selling, general and administrative expenses in the Company’s Consolidated Income Statements as follows:

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
 
 
 
 
 
 
 
Service cost, including plan expenses    
$
6.1

 
$
8.2

 
$
12.6

 
$
15.3

Interest cost    
7.4

 
6.8

 
14.9

 
13.9

Expected return on plan assets    
(8.9
)
 
(10.4
)
 
(17.9
)
 
(21.2
)
Total    
$
4.6

 
$
4.6

 
$
9.6

 
$
8.0


Net benefit cost related to the Company’s SERP Plans was recognized in selling, general and administrative expenses in the Company’s Consolidated Income Statements as follows:

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
 
 
 
 
 
 
 
Service cost, including plan expenses
$
0.9

 
$
1.5

 
$
2.2

 
$
2.8

Interest cost
0.9

 
0.9

 
1.9

 
1.8

Total
$
1.8

 
$
2.4

 
$
4.1

 
$
4.6


Net benefit cost related to the Company’s Postretirement Plans was recognized in selling, general and administrative expenses in the Company’s Consolidated Income Statements as follows:

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
 
 
 
 
 
 
 
Interest cost
$
0.1

 
$
0.1

 
$
0.3

 
$
0.3

Amortization of prior service credit
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Total
$
0.0

 
$
0.0

 
$
0.1

 
$
0.1


Currently, the Company expects to make a contribution of approximately $6.9 million to its Pension Plans in 2016. The Company’s actual contributions may differ from planned contributions due to many factors including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.

9. DEBT

Short-Term Borrowings

One of the Company’s Asian subsidiaries has yen-denominated short-term lines of credit and overdraft facilities with a number of Japanese banks at various interest rates that provide for borrowings of up to ¥2,200.0 million (approximately $21.3 million based on exchange rates in effect on July 31, 2016) and are utilized primarily to fund working capital needs. As of July 31, 2016, the Company had $19.4 million of borrowings outstanding under this facility. The weighted average interest rate on the funds borrowed at July 31, 2016 was 0.28%. The maximum amount of borrowings outstanding during the twenty-six weeks ended July 31, 2016 was $19.4 million.

One of the Company’s Asian subsidiaries has a won-denominated overdraft facility with a South Korean bank that provides for borrowings of up to ₩3,500.0 million (approximately $3.1 million based on exchange rates in effect on July 31, 2016) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured and bear interest at the South Korean bank three-month certificate of deposit rate plus 1.50%. There were no borrowings outstanding under this facility as of or during the twenty-six weeks ended July 31, 2016.

One of the Company’s Asian subsidiaries has a United States dollar-denominated short-term revolving credit facility with a bank that provides for borrowings of up to $10.0 million and is utilized primarily to fund working capital needs. Borrowings

10




under this facility bear interest at the one-month London interbank borrowing rate (“LIBOR”) plus 1.50%. At the end of each month, amounts outstanding under this facility may be carried forward for additional one-month periods for up to one year. This facility is subject to certain terms and conditions and may be terminated at any time at the discretion of the bank. There were no borrowings outstanding under this facility as of or during the twenty-six weeks ended July 31, 2016.

One of the Company’s European subsidiaries has euro-denominated short-term revolving notes with a number of banks at various interest rates, as well as overdraft facilities, that provide for borrowings of up to €60.0 million (approximately $66.7 million based on exchange rates in effect on July 31, 2016) and are used primarily to fund working capital needs. There were no borrowings outstanding under these facilities as of or during the twenty-six weeks ended July 31, 2016.

One of the Company’s European subsidiaries has a United States dollar-denominated short-term line of credit facility with a Turkish bank that provides for borrowings of up to $3.7 million and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish overnight lending rate plus 3.00%. As of July 31, 2016, the Company had no borrowings outstanding under this facility. The maximum amount of borrowings outstanding during the twenty-six weeks ended July 31, 2016 was $3.3 million.

One of the Company’s European subsidiaries has a Turkish lira-denominated short-term line of credit facility with a Turkish bank that provides for borrowings of up to lira 3.0 million (approximately $1.0 million based on exchange rates in effect on July 31, 2016) and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Turkish overnight lending rate plus 4.00%. As of July 31, 2016, the Company had no borrowings outstanding under this facility. The maximum amount of borrowings outstanding during the twenty-six weeks ended July 31, 2016 was $0.9 million.

One of the Company’s Mexican subsidiaries has a peso-denominated short-term revolving credit facility with a Mexican bank that provides for borrowings of up to ₱161.1 million (approximately $8.5 million based on exchange rates in effect on July 31, 2016) and is utilized primarily to fund working capital needs. Borrowings under this facility bear interest at the Interbank Equilibrium Interest Rate plus 0.90%. As of July 31, 2016, the Company had no borrowings outstanding under this facility. The maximum amount of borrowings outstanding during the twenty-six weeks ended July 31, 2016 was equal to the maximum amount of borrowings available under this facility.

One of the Company’s Latin American subsidiaries has a Brazilian real-denominated short-term revolving credit facility with a Brazilian bank that provides for borrowings of up to R$25.0 million (approximately $7.6 million based on exchange rates in effect on July 31, 2016) and is utilized primarily to fund working capital needs. Borrowings under this facility are unsecured. There were no borrowings outstanding as of or during the twenty-six weeks ended July 31, 2016.

The Company also has the ability to draw revolving borrowings under its senior secured credit facilities as discussed in the section entitled “2016 Senior Secured Credit Facilities” below. As of July 31, 2016, the Company had no borrowings outstanding under these facilities. The maximum amount of revolving borrowings outstanding under these facilities during the twenty-six weeks ended July 31, 2016 was $15.3 million.

Long-Term Debt

The carrying amounts of the Company’s long-term debt were as follows:
(In millions)
7/31/16
 
8/2/15
 
 
 
 
Senior secured Term Loan A facility due 2021
$
2,187.3

 
$
1,853.3

Senior secured Term Loan B facility

 
707.9

4 1/2% senior unsecured notes due 2022
689.6

 
688.0

7 3/4% debentures due 2023
99.4

 
99.3

3 5/8% senior unsecured notes due 2024
381.9

 

Total    
3,358.2

 
3,348.5

Less: Current portion of long-term debt    

 
111.7

Long-term debt    
$
3,358.2

 
$
3,236.8


Please see Note 12, “Fair Value Measurements,” for the fair value of the Company’s long-term debt as of July 31, 2016 and August 2, 2015.


11




As of July 31, 2016, the Company’s mandatory long-term debt repayments for the next five years were as follows:
(In millions)
 
Remainder of 2016
$

2017
56.1

2018
161.4

2019
220.1

2020
234.7

2021
1,525.8


Total debt repayments for the next five years exceed the carrying amount of the Company’s Term Loan A facility as of July 31, 2016 because the carrying amount reflects the unamortized portions of debt issuance costs and the original issue discounts.

As of July 31, 2016, after taking into account the effect of the Company’s interest rate swap agreements discussed in the section below entitled “2016 Senior Secured Credit Facilities,” which were in effect as of such date, approximately 65% of the Company’s long-term debt had a fixed interest rate, with the remainder at variable interest rates.

2014 Senior Secured Credit Facilities

On March 21, 2014, the Company entered into an amendment to its senior secured credit facilities (as amended, the “2014 facilities”). The 2014 facilities consisted of a $1,986.3 million United States dollar-denominated Term Loan A facility, a $1,188.6 million United States dollar-denominated Term Loan B facility and senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million euro-denominated revolving credit facility available in euro, pounds sterling, Japanese yen or Swiss francs.

On May 19, 2016, the Company amended the 2014 facilities, as discussed in the following section.

2016 Senior Secured Credit Facilities

On May 19, 2016 (the “Amendment Date”), the Company entered into an amendment (the “Amendment”) to the 2014 facilities (as amended by the Amendment, the “2016 facilities”). Among other things, the Amendment provided for an additional $582.0 million principal amount of loans under the Term Loan A facility, the repayment of all outstanding loans under the Term Loan B facility and the termination of the Term Loan B facility. In addition, the Amendment extended the maturity of the Term Loan A and the revolving credit facilities from February 13, 2019 to May 19, 2021. On the Amendment Date, the Company borrowed the additional $582.0 million principal amount of loans under the Term Loan A facility made available pursuant to the Amendment and used the proceeds of such borrowings to repay the $582.0 million principal amount of loans outstanding under the Term Loan B facility under the 2014 facilities.

The 2016 facilities consist of a $2,347.4 million United States dollar-denominated Term Loan A facility and senior secured revolving credit facilities consisting of (a) a $475.0 million United States dollar-denominated revolving credit facility, (b) a $25.0 million United States dollar-denominated revolving credit facility available in United States dollars or Canadian dollars and (c) a €185.9 million euro-denominated revolving credit facility available in euro, pounds sterling, Japanese yen or Swiss francs. In connection with entering into the Amendment, the Company paid debt issuance costs of $10.9 million (of which $4.6 million was expensed as debt modification costs and $6.3 million is being amortized over the term of the related debt agreement) and recorded debt extinguishment costs of $11.2 million to write-off previously capitalized debt issuance costs.

The revolving credit facilities also include amounts available for letters of credit. As of July 31, 2016, the Company had $24.1 million of outstanding letters of credit. There were no borrowings outstanding under the revolving credit facilities. A portion of each of the United States dollar-denominated revolving credit facilities is also available for the making of swingline loans. The issuance of such letters of credit and the making of any swingline loan reduces the amount available under the applicable revolving credit facility. So long as certain conditions are satisfied, the Company may add one or more term loan facilities or increase the commitments under the revolving credit facilities by an aggregate amount not to exceed the sum of (1) the sum of (x) $1,350.0 million plus (y) the aggregate amount of all voluntary prepayments of loans under the Term Loan A and the revolving credit facilities (to the extent, in the case of voluntary prepayments of loans under the revolving credit facilities, there is an equivalent permanent reduction of the revolving commitments) plus (z) an amount equal to the aggregate revolving commitments of any defaulting lender (to the extent the commitments with respect thereto have been terminated) and (2) an

12




additional unlimited amount as long as the ratio of the Company’s senior secured net debt to consolidated adjusted earnings before interest, taxes, depreciation and amortization (in each case calculated as set forth in the documentation relating to the 2016 facilities) would not exceed 3 to 1 after giving pro forma effect to the incurrence of such increase. The lenders under the 2016 facilities are not required to provide commitments with respect to such additional facilities or increased commitments.

The terms of the Term Loan A facility require the Company to make quarterly repayments of amounts outstanding under the 2016 facilities, which commenced with the calendar quarter ended June 30, 2016. Such amounts equal 5.00% per annum of the principal amount outstanding on the Amendment Date for the first eight calendar quarters following the Amendment Date, 7.50% per annum of the principal amount for the four quarters thereafter and 10.00% per annum of the principal amount for the remaining quarters, in each case paid in equal installments and in each case subject to certain customary adjustments, with the balance due on the maturity date of the Term Loan A facility.

The Company made payments of $201.2 million and $165.7 million during the twenty-six weeks ended July 31, 2016 and August 2, 2015, respectively, on its term loans under the 2014 and 2016 facilities. As a result of the voluntary repayments made by the Company, as of July 31, 2016, the Company had satisfied its mandatory long-term debt repayment requirements for the next twelve months. The Company had term loans outstanding of $2,187.3 million, net of original issue discounts and debt issuance costs, as of July 31, 2016.

The Company’s obligations under the 2016 facilities are guaranteed by substantially all of its existing and future direct and indirect United States subsidiaries, with certain exceptions. Obligations of the European borrower under the 2016 facilities are guaranteed by the Company, substantially all of the Company’s existing and future direct and indirect United States subsidiaries (with certain exceptions) and Tommy Hilfiger Europe B.V., one of the Company’s wholly owned subsidiaries. The Company and its United States subsidiary guarantors have pledged certain of their assets as security for the obligations under the 2016 facilities.

The outstanding borrowings under the 2016 facilities are prepayable at any time without penalty (other than customary breakage costs). The terms of the 2016 facilities require the Company to repay certain amounts outstanding thereunder with (a) net cash proceeds of the incurrence of certain indebtedness, (b) net cash proceeds of certain asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds, to the extent such proceeds are not reinvested or committed to be reinvested in the business in accordance with customary reinvestment provisions, and (c) a percentage of excess cash flow that exceeds the voluntary debt payments the Company has made during the applicable year, which percentage is based upon its net leverage ratio during the relevant fiscal period.

The United States dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a base rate determined by reference to the greater of (i) the prime rate, (ii) the United States federal funds rate plus 1/2 of 1.00% and (iii) a one-month adjusted Eurocurrency rate plus 1.00% or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The Canadian dollar-denominated borrowings under the 2016 facilities bear interest at a rate equal to an applicable margin plus, as determined at the Company’s option, either (a) a Canadian prime rate determined by reference to the greater of (i) the rate of interest per annum that Royal Bank of Canada establishes at its main office in Toronto, Ontario as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers and (ii) the sum of (x) the average of the rates per annum for Canadian dollar bankers’ acceptances having a term of one month that appears on the display referred to as “CDOR Page” of Reuters Monitor Money Rate Services as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the administrative agent (and if such screen is not available, any successor or similar service as may be selected by the administrative agent), and (y) 0.75%, or (b) an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The borrowings under the 2016 facilities in currencies other than United States dollars or Canadian dollars bear interest at a rate equal to an applicable margin plus an adjusted Eurocurrency rate, calculated in a manner set forth in the 2016 facilities.

The current applicable margin with respect to the Term Loan A facility and each revolving credit facility is 1.50% for adjusted Eurocurrency rate loans and 0.50% for base rate loans, respectively. After the date of delivery of the compliance certificate and financial statements with respect to each of the Company’s fiscal quarters, the applicable margin for borrowings under the Term Loan A facility and the revolving credit facilities is subject to adjustment based upon the Company’s net leverage ratio.

The 2016 facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as

13




amended; certain events related to certain of the guarantees by the Company and certain of its subsidiaries, and certain pledges of the Company’s assets and those of certain of the Company’s subsidiaries, as security for the obligations under the 2016 facilities; and a change in control (as defined in the 2016 facilities).

During the second quarter of 2014, the Company entered into an interest rate cap agreement for an 18-month term commencing on August 18, 2014. The agreement was designed with the intended effect of capping the interest rate on an initial notional amount of $514.2 million of the Company’s variable rate debt obligation under the 2014 facilities or any replacement facility with similar terms. Under the terms of this agreement, the one-month LIBOR that the Company paid was capped at a rate of 1.50%. Therefore, the maximum amount of interest that the Company would have paid on the then-outstanding notional amount was at the 1.50% capped rate, plus the current applicable margin. The agreement expired on February 17, 2016.

During the second quarter of 2014, the Company entered into an interest rate swap agreement for a two-year term commencing on February 17, 2016. The agreement was designed with the intended effect of converting an initial notional amount of $682.6 million of the Company’s variable rate debt obligation under the 2014 facilities or any replacement facility with similar terms, including the 2016 facilities, to fixed rate debt. Such agreement remains outstanding with a notional amount of $665.3 million as of July 31, 2016, and is now converting a portion of the Company’s variable rate debt obligation under the 2016 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR is eliminated and the Company will pay a weighted average fixed rate of 1.924%, plus the current applicable margin.

During the second quarter of 2013, the Company entered into an interest rate swap agreement for a three-year term commencing on August 19, 2013. The agreement was designed with the intended effect of converting an initial notional amount of $1,228.8 million of the Company’s variable rate debt obligation under the Company’s previously outstanding facilities or any replacement facility with similar terms, including the 2016 facilities, to fixed rate debt. Such agreement remained outstanding with a notional amount of $427.4 million as of July 31, 2016, and was converting a portion of the Company’s variable rate debt obligation under the 2016 facilities to fixed rate debt. Under the terms of the agreement for the then-outstanding notional amount, the Company’s exposure to fluctuations in the one-month LIBOR was eliminated and the Company paid a fixed rate of 0.604%, plus the current applicable margin. The agreement expired on August 17, 2016.

The notional amount of any outstanding interest rate swap will be adjusted according to a pre-set schedule during the term of the applicable swap agreement such that, based on the Company’s projections for future debt repayments, the Company’s outstanding debt under the Term Loan A facility is expected to always equal or exceed the combined notional amount of the then-outstanding interest rate swaps.

The 2016 facilities also contain covenants that restrict the Company’s ability to finance future operations or capital needs, to take advantage of other business opportunities that may be in its interest or to satisfy its obligations under its other outstanding debt. These covenants restrict its ability to, among other things:

incur or guarantee additional debt or extend credit;
make restricted payments, including paying dividends or making distributions on, or redeeming or repurchasing, the Company’s capital stock or certain debt;
make acquisitions and investments;
dispose of assets;
engage in transactions with affiliates;
enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends;
create liens on the Company’s assets or engage in sale/leaseback transactions; and
effect a consolidation or merger, or sell, transfer, or lease all or substantially all of the Company’s assets.

The 2016 facilities require the Company to comply with certain financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the applicable facility. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable which would result in acceleration of its other debt. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral, which also secures some of the Company’s other indebtedness.


14




4 1/2% Senior Notes Due 2022

On December 20, 2012, the Company issued $700.0 million principal amount of 4 1/2% senior notes due December 15, 2022. The Company paid $16.3 million of fees during 2013 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to December 15, 2017 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after December 15, 2017 at specified redemption prices plus any accrued and unpaid interest. The Company’s ability to pay cash dividends and make other restricted payments is limited, in each case, over specified amounts as defined in the indenture governing the notes.

7 3/4% Debentures Due 2023

The Company has outstanding $100.0 million of debentures due November 15, 2023 with a yield to maturity of 7.80%. The debentures accrue interest at the rate of 7 3/4%. Pursuant to the indenture governing the debentures, the Company must maintain a certain level of stockholders’ equity in order to pay cash dividends and make other restricted payments, as defined in the indenture governing the debentures.

3 5/8% Senior Notes Due 2024

On June 20, 2016, the Company issued €350.0 million euro-denominated principal amount of 3 5/8% senior notes due July 15, 2024. Interest on the notes is payable in euros. The Company paid €6.4 million (approximately $7.3 million based on exchange rates in effect on the payment date) of fees during the second quarter of 2016 in connection with the issuance of these notes, which are amortized over the term of the notes. The Company may redeem some or all of these notes at any time prior to April 15, 2024 by paying a “make whole” premium plus any accrued and unpaid interest. In addition, the Company may redeem some or all of these notes on or after April 15, 2024 at their principal amount plus any accrued and unpaid interest.

Substantially all of the Company’s assets have been pledged as collateral to secure the Company’s obligations under its senior secured credit facilities, the 7 3/4% debentures due 2023 and contingent purchase price payments to Mr. Calvin Klein as discussed in Note 7, “Goodwill.”

10. INCOME TAXES

The effective income tax rates for the thirteen weeks ended July 31, 2016 and August 2, 2015 were 21.2% and 19.0%, respectively. The effective income tax rates for the twenty-six weeks ended July 31, 2016 and August 2, 2015 were 15.3% and 20.8%, respectively.
The effective income tax rates for the thirteen and twenty-six weeks ended July 31, 2016 were lower than the United States statutory rate due to the benefit of lower tax rates in international jurisdictions where the Company files tax returns. Also contributing to the lower effective income tax rate for the twenty-six weeks ended July 31, 2016 was the benefit of certain discrete items, including the lower tax rate applicable to the pre-tax gain recorded to write-up the Company’s existing equity investment in TH China to fair value.
The effective income tax rates for the thirteen and twenty-six weeks ended August 2, 2015 were lower than the United States statutory rate due to the benefit of lower tax rates in international jurisdictions where the Company files tax returns.

11. DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges

The Company has exposure to changes in foreign currency exchange rates related to anticipated cash flows associated with certain international inventory purchases. The Company periodically uses foreign currency forward exchange contracts to hedge against a portion of this exposure.

The Company also has exposure to interest rate volatility related to its term loans under the 2016 facilities. The Company has entered into interest rate swap agreements to hedge against a portion of this exposure. The Company had also entered into an interest rate cap agreement, which expired on February 17, 2016. Please see Note 9, “Debt,” for a further discussion of the Company’s facilities and these agreements.


15




The Company records the foreign currency forward exchange contracts and interest rate contracts at fair value in its Consolidated Balance Sheets, and does not net the related assets and liabilities. Changes in fair value of the foreign currency forward exchange contracts associated with certain international inventory purchases and the interest rate contracts that are designated as effective hedging instruments (collectively referred to as “cash flow hedges”) are recorded in equity as a component of accumulated other comprehensive loss (“AOCL”). The cash flows from such hedges are presented in the same category in the Company’s Consolidated Statements of Cash Flows as the items being hedged. No amounts were excluded from effectiveness testing. There was no ineffective portion of cash flow hedges during the twenty-six weeks ended July 31, 2016 and August 2, 2015.

Net Investment Hedge

The Company has exposure to changes in foreign currency exchange rates related to the value of its investments in foreign subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, during the second quarter of 2016, the Company designated the carrying amount of its €350.0 million euro-denominated principal amount of 3 5/8% senior notes due 2024 (the “foreign currency borrowings”) that it had issued in the United States as a net investment hedge of its investments in certain of its foreign subsidiaries that use the euro as their functional currency. Please see Note 9, “Debt,” for a further discussion of the Company’s foreign currency borrowings.

The Company records the foreign currency borrowings at carrying value in its Consolidated Balance Sheets. The carrying value of the foreign currency borrowings is remeasured as of the end of each reporting period to reflect changes in the foreign currency exchange spot rate. Since the foreign currency borrowings are designated as a net investment hedge, such remeasurement is recorded in equity as a component of AOCL. As of July 31, 2016, the fair value and the carrying value of the foreign currency borrowings designated as a net investment hedge was $406.5 million and $381.9 million, respectively. The Company evaluates the effectiveness of its net investment hedge as of the beginning of each quarter. No amounts were excluded from effectiveness testing. There was no ineffective portion of the net investment hedge during the twenty-six weeks ended July 31, 2016.

Undesignated Contracts

The Company records immediately in earnings changes in the fair value of hedges that are not designated as effective hedging instruments (“undesignated contracts”), including all of the foreign currency forward exchange contracts related to intercompany loans that are not of a long-term investment nature. Any gains and losses that are immediately recognized in earnings on such contracts related to intercompany loans are largely offset by the remeasurement of the underlying intercompany loan balances.

In addition, the Company has exposure to changes in foreign currency exchange rates related to the translation of the earnings of its subsidiaries denominated in a currency other than the United States dollar. To hedge against a portion of this exposure, the Company entered into several foreign currency option contracts during the second quarter of 2016. These contracts represent the Company’s purchase of euro put/United States dollar call options. In connection with the foreign currency option contracts, the Company paid a cash premium of $1.1 million during the second quarter of 2016.

The Company’s foreign currency option contracts are also undesignated contracts. As such, the changes in the fair value of these foreign currency option contracts are recognized immediately in earnings. This mitigates the effect of a strengthening United States dollar against the euro on the reporting of the Company’s euro-denominated earnings.

The Company does not use derivative or non-derivative financial instruments for trading or speculative purposes.


16




The following table summarizes the fair value and presentation of the Company’s derivative financial instruments in its Consolidated Balance Sheets:
(In millions)
Assets (Classified in Other Current Assets and Other Assets)
Liabilities (Classified in Accrued Expenses and Other Liabilities)
 
7/31/16
 
1/31/16
 
8/2/15
 
7/31/16
 
1/31/16
 
8/2/15
Contracts designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (inventory purchases)
$
6.8

 
$
24.9

 
$
46.6

 
$
12.5

 
$
1.7

 
$
3.2

Interest rate contracts

 

 
0.3

 
17.0

 
20.6

 
14.4

Total contracts designated as cash flow hedges
6.8

 
24.9

 
46.9

 
29.5

 
22.3

 
17.6

 
 
 
 
 
 
 
 
 
 
 
 
Undesignated contracts:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
1.8

 
19.3

 
18.2

 
0.7

 
0.1

 
0.4

Foreign currency option contracts
1.0

 

 

 

 

 

Total undesignated contracts
2.8

 
19.3

 
18.2

 
0.7

 
0.1

 
0.4

Total
$
9.6

 
$
44.2

 
$
65.1

 
$
30.2

 
$
22.4

 
$
18.0


At July 31, 2016, the notional amount outstanding of foreign currency forward exchange contracts and foreign currency option contracts was $925.9 million and $50.0 million, respectively. Such contracts expire principally between August 2016 and January 2018.

The following table summarizes the effect of the Company’s hedges designated as cash flow and net investment hedging instruments:
 
 
Gain (Loss) Recognized in Other Comprehensive (Loss) Income
 
Gain (Loss) Reclassified from AOCL into Income (Expense)       
(In millions)
 
 
Location
Amount
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
7/31/16
 
8/2/15
 
 
7/31/16
 
8/2/15
Foreign currency forward exchange contracts     (inventory purchases)
 
$
21.2

 
$
23.1

 
Cost of goods sold
$
3.5

 
$
27.5

Interest rate contracts    
 
(1.4
)
 
(2.6
)
 
Interest expense
(2.7
)
 
(1.1
)
Foreign currency borrowings (net investment hedge)
 
7.8

 

 
N/A

 

Total    
 
$
27.6

 
$
20.5

 
 
$
0.8

 
$
26.4

 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
7/31/16
 
8/2/15
 
 
7/31/16
 
8/2/15
Foreign currency forward exchange contracts     (inventory purchases)
 
$
(37.2
)
 
$
23.7

 
Cost of goods sold
$
8.2

 
$
48.1

Interest rate contracts
 
(1.5
)
 
(1.5
)
 
Interest expense
(5.1
)
 
(2.2
)
Foreign currency borrowings (net investment hedge)
 
7.8

 

 
N/A

 

Total
 
$
(30.9
)
 
$
22.2

 
 
$
3.1

 
$
45.9


A net loss in AOCL on foreign currency forward exchange contracts at July 31, 2016 of $1.6 million is estimated to be reclassified in the next 12 months in the Company’s Consolidated Income Statement to costs of goods sold as the underlying inventory hedged by such forward exchange contracts is sold. In addition, a net loss in AOCL for interest rate contracts at July 31, 2016 of $12.5 million is estimated to be reclassified to interest expense within the next 12 months. Amounts recognized in AOCL for foreign currency borrowings would be recognized in earnings only upon the sale or liquidation of the hedged net investment.


17




The following table summarizes the effect of the Company’s undesignated contracts:
(In millions)

 
(Loss) Gain Recognized in (Expense) Income
Thirteen Weeks Ended
 
Location
 
7/31/16
 
8/2/15
Foreign currency forward exchange contracts
 
Selling, general and administrative expenses
 
$
(2.9
)
 
$
1.8

Foreign currency option contracts
 
Selling, general and administrative expenses

 
(0.2
)
 

 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
Location
 
7/31/16
 
8/2/15
Foreign currency forward exchange contracts
 
Selling, general and administrative expenses
 
$
(6.7
)
 
$
4.5

Foreign currency option contracts
 
Selling, general and administrative expenses

 
(0.2
)
 


The Company had no derivative financial instruments with credit risk-related contingent features underlying the related contracts as of July 31, 2016.

12. FAIR VALUE MEASUREMENTS

FASB guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.

Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.


18




In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
(In millions)
7/31/16
 
1/31/16
 
8/2/15
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
8.6

 
N/A
 
$
8.6

 
N/A
 
$
44.2

 
N/A
 
$
44.2

 
N/A
 
$
64.8

 
N/A
 
$
64.8

Interest rate contracts
N/A
 

 
N/A
 

 
N/A
 

 
N/A
 

 
N/A
 
0.3

 
N/A
 
0.3

Foreign currency option contracts
N/A
 
1.0

 
N/A
 
1.0

 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Total Assets
N/A
 
$
9.6

 
N/A
 
$
9.6

 
N/A
 
$
44.2

 
N/A
 
$
44.2

 
N/A
 
$
65.1

 
N/A
 
$
65.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts    
N/A
 
$
13.2

 
N/A
 
$
13.2

 
N/A
 
$
1.8

 
N/A
 
$
1.8

 
N/A
 
$
3.6

 
N/A
 
$
3.6

Interest rate contracts
N/A
 
17.0

 
N/A
 
17.0

 
N/A
 
20.6

 
N/A
 
20.6

 
N/A
 
14.4

 
N/A
 
14.4

Contingent purchase price payments related to reacquisition of the perpetual rights to the Tommy Hilfiger trademarks in India    
N/A
 
N/A
 
$
2.2

 
2.2

 
N/A
 
N/A
 
$
2.2

 
2.2

 
N/A
 
N/A
 
$
4.1

 
4.1

Total Liabilities
N/A
 
$
30.2

 
$
2.2


$
32.4

 
N/A
 
$
22.4

 
$
2.2

 
$
24.6

 
N/A
 
$
18.0

 
$
4.1

 
$
22.1


The fair value of the foreign currency forward exchange contracts is measured as the total amount of currency to be purchased, multiplied by the difference between (i) the forward rate as of the period end and (ii) the settlement rate specified in each contract. The fair values of the interest rate contracts are based on observable interest rate yield curves and represent the expected discounted cash flows underlying the financial instruments. The fair value of the foreign currency option contracts is estimated based on external valuation models, which do not involve management judgment and use the original strike price, current foreign currency exchange rates, the implied volatility in foreign currency exchange rates and length of time to expiration as inputs.

Pursuant to the agreement governing the reacquisition of the rights in India to the Tommy Hilfiger trademarks (which the Company entered into in September 2011 in connection with its acquisition of its 50% ownership of TH India), the Company is required to make annual contingent purchase price payments based on a percentage of sales of Tommy Hilfiger products in India in excess of an agreed upon threshold during each of five consecutive 12-month periods (extended to a sixth consecutive 12-month period if the aggregate payments for the five 12-month periods are not at least $15.0 million, which will be the case). Such payments are subject to a $25.0 million aggregate maximum and are due within 60 days following each one-year period. The Company made annual contingent purchase price payments of $0.6 million, $0.6 million, $0.4 million and $0.2 million during 2015, 2014, 2013 and 2012, respectively. The Company is required to remeasure this liability at fair value on a recurring basis and classifies this as a Level 3 measurement. The fair value of such liability was determined using the discounted cash flow method, based on net sales projections for the Tommy Hilfiger apparel and accessories businesses in India, and was discounted using rates of return that account for the relative risks of the estimated future cash flows. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, changes in the fair value are included within selling, general and administrative expenses in the Company’s Consolidated Income Statements.

The following table presents the change in the Level 3 contingent purchase price payment liability during the twenty-six weeks ended July 31, 2016 and August 2, 2015:
(In millions)
Twenty-Six Weeks Ended
 
7/31/16
 
8/2/15
Beginning Balance
$
2.2

 
$
4.0

Payments

 

Adjustments included in earnings
0.0

 
0.1
Ending Balance
$
2.2

 
$
4.1



19




Additional information with respect to assumptions used to value the contingent purchase price payment liability as of July 31, 2016 is as follows:
Unobservable Inputs
 
Amount
Approximate compounded annual net sales growth rate
 
35.0
%
Approximate
discount rate
 
15.0
%

A five percentage point increase or decrease in the discount rate or the compounded annual net sales growth rate would result in an immaterial change to the liability.

There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.

The following table shows the fair value of the Company’s non-financial assets and liabilities that were required to be remeasured at fair value on a nonrecurring basis during the twenty-six weeks ended August 2, 2015, and the total impairments recorded as a result of the remeasurement process:

(In millions)
Fair Value Measurement Using
 
Fair Value
As Of
Impairment Date
 
Total
 Impairments
 Assets:
Level 1
 
Level 2
 
Level 3
 
 
Property, plant and equipment
N/A
 
N/A
 
$

 
$

 
$
1.6


Long-lived assets with a carrying amount of $1.6 million were written down to a fair value of zero during the twenty-six weeks ended August 2, 2015 in connection with the financial performance in one of the Company’s Calvin Klein retail stores in North America. Fair value was determined based on the estimated future operating results reflecting poor year-to-date performance and sales trends. The impairment charge was included in selling, general and administrative expenses in the Calvin Klein North America segment.

In connection with the Company’s acquisition in April 2016 of the 55% of the ownership interests in TH China that it did not already own, the 45% interest in TH China owned by the Company was remeasured to a fair value of $205.6 million, resulting in the recognition of a pre-tax noncash gain of $153.1 million in the twenty-six weeks ended July 31, 2016. The Company classifies this as a Level 3 measurement. Please see Note 3, “Acquisitions,” for a further discussion.

The Company guaranteed lease payments for substantially all G. H. Bass & Co. (“Bass”) retail stores included in the sale of substantially all of the assets of the Company’s Bass business in the fourth quarter of 2013 pursuant to the terms of noncancelable leases expiring on various dates through 2022. These guarantees include minimum rent payments and relate to leases that commenced prior to the sale of the Bass assets. In certain instances, the Company’s guarantee remains in effect when an option is exercised to extend the term of the lease. The estimated fair value of these guarantee obligations as of July 31, 2016, January 31, 2016 and August 2, 2015 was $1.6 million, $1.9 million and $2.6 million, respectively, which was included in accrued expenses and other liabilities in the Company’s Consolidated Balance Sheets. The Company classifies these as Level 3 measurements. The fair value of such guarantee obligations was determined using the discounted cash flow method, based on the guaranteed lease payments, the estimated probability of lease extensions and estimates of the risk of default by the buyer of the Bass assets, and was discounted using rates of return that account for the relative risks of the estimated future cash flows.


20




The carrying amounts and the fair values of the Company’s cash and cash equivalents, short-term borrowings and long-term debt as of July 31, 2016, January 31, 2016 and August 2, 2015 were as follows:

(In millions)
7/31/16
 
1/31/16
 
8/2/15
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 

 
 

 
 
 
 
 
 

 
 

Cash and cash equivalents
$
741.7

 
$
741.7

 
$
556.4

 
$
556.4

 
$
466.7

 
$
466.7

Short-term borrowings
19.4

 
19.4

 
25.9

 
25.9

 
8.1

 
8.1

Long-term debt (including portion classified as current)
3,358.2

 
3,434.6

 
3,168.3

 
3,190.5

 
3,348.5

 
3,408.6


The fair values of cash and cash equivalents and short-term borrowings approximate their carrying amounts due to the short-term nature of these instruments. The Company estimates the fair value of its long-term debt using quoted market prices as of the last business day of the applicable quarter. The Company classifies the measurement of its long-term debt as a Level 1 measurement. The carrying amounts of long-term debt reflect the unamortized portions of debt issuance costs and the original issue discounts.

13. STOCK-BASED COMPENSATION

The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan replaced certain other prior stock option plans. These other plans terminated upon the 2006 Plan’s initial stockholder approval in June 2006. Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

The Company may grant the following types of incentive awards under the 2006 Plan: (i) non-qualified stock options (“NQs”); (ii) incentive stock options (“ISOs”); (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares and performance share units (“PSUs”); and (vii) other stock-based awards. Each award granted under the 2006 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance periods and performance measures, and such other terms and conditions as the plan committee determines.

Through July 31, 2016, the Company has granted under the 2006 Plan (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable PSUs; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share and each share underlying a restricted stock award, RSU or PSU reduces the number available by two shares. The per share exercise price of options granted under the 2006 Plan cannot be less than the closing price of the common stock on the date of grant.

Net income for the twenty-six weeks ended July 31, 2016 and August 2, 2015 included $19.5 million and $20.4 million, respectively, of pre-tax expense related to stock-based compensation, with recognized income tax benefits of $5.8 million and $5.0 million, respectively.

Stock options currently outstanding are generally exercisable in four equal annual installments commencing one year after the date of grant. The vesting of such options outstanding is also generally accelerated upon retirement (as defined in the 2006 Plan). Such options are granted with a 10-year term.

The Company estimates the fair value of stock options granted at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the options, net of estimated forfeitures, is expensed over the options’ vesting periods.


21




The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during the twenty-six weeks ended July 31, 2016 and August 2, 2015:
 
Twenty-Six Weeks Ended
 
7/31/16
 
8/2/15
Weighted average risk-free interest rate
1.45
%
 
1.54
%
Weighted average expected option term (in years)    
6.25

 
6.25

Weighted average Company volatility
34.64
%
 
36.32
%
Expected annual dividends per share    
$
0.15

 
$
0.15

Weighted average grant date fair value per option
$
35.60

 
$
40.23


The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected option term. The expected option term represents the weighted average period of time that options granted are expected to be outstanding, based on vesting schedules and the contractual term of the options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected option term. Expected dividends are based on the Company’s common stock cash dividend rate at the date of grant.

The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving option grants, mainly due to acquisitions. The Company will continue to evaluate the appropriateness of utilizing such method.

Service-based stock option activity for the twenty-six weeks ended July 31, 2016 was as follows:
(In thousands, except per option data)
Options
 
Weighted Average Exercise Price
Per Option
Outstanding at January 31, 2016
1,443

 
$
70.79

  Granted
228

 
99.27

  Exercised
155

 
65.82

  Cancelled
6

 
106.83

Outstanding at July 31, 2016
1,510

 
$
75.46

Exercisable at July 31, 2016
1,057

 
$
62.29


RSUs granted to employees in 2016 generally vest in four equal annual installments commencing one year after the date of grant. Outstanding RSUs granted to employees prior to 2016 generally vest in three annual installments of 25%, 25% and 50% commencing two years after the date of grant. Service-based RSUs granted to non-employee directors vest in full one year after the date of grant. The underlying RSU award agreements (excluding agreements for non-employee director awards) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of service-based RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed, net of estimated forfeitures, over the RSUs’ vesting periods.

RSU activity for the twenty-six weeks ended July 31, 2016 was as follows:
(In thousands, except per RSU data)
RSUs
 
Weighted Average Grant Date Fair Value Per RSU
Non-vested at January 31, 2016
653

 
$
111.61

  Granted
381

 
97.94

  Vested
150

 
108.67

  Cancelled
45

 
110.16

Non-vested at July 31, 2016
839

 
$
106.00


The Company granted contingently issuable PSUs to certain of the Company’s senior executives during the first quarter of each of 2013 and 2014. These awards were subject to achievement of an earnings per share goal for the two-year performance period beginning with the year of grant and a service period of one year beyond the certification of performance. For the awards granted in the first quarter of 2014, the two-year performance period has ended and the holders did not earn any shares based

22




on earnings per share growth over the performance period. For the awards granted in the first quarter of 2013, the holders earned an aggregate of 26,000 shares, which were paid out in the first quarter of 2016. For such awards, the Company recorded expense ratably over each applicable vesting period based on fair value and the Company’s expectations of the probable number of shares to be issued. The fair value of these contingently issuable PSUs was equal to the closing price of the Company’s common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Company’s common stock during the performance cycle, as these contingently issuable PSUs did not accrue dividends prior to the completion of the performance cycle.

The Company granted contingently issuable PSUs to certain of the Company’s executives during the second quarter of 2013 and to certain of the Company’s senior executives during the first quarter of each of 2015 and 2016 subject to a three-year performance period. For such awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. For the awards granted in the second quarter of 2013, the performance period ended on May 5, 2016 and the holders did not earn any shares, as the Company did not achieve either of the threshold performance levels required for payout. The Company records expense ratably over the applicable vesting period, net of estimated forfeitures, regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in the first quarter of 2016 and 2015 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:

 
2016
 
2015
Risk-free interest rate
1.04
%
 
0.90
%
Expected Company volatility
28.33
%
 
29.10
%
Expected annual dividends per share
$
0.15

 
$
0.15

Weighted average grant date fair value per PSU
$
87.16

 
$
101.23


Certain of the awards granted in the first quarter of 2016 are subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted 12.99% for the restriction of liquidity.

PSU activity for the twenty-six weeks ended July 31, 2016 was as follows:
(In thousands, except per PSU data)
PSUs
 
Weighted Average Grant Date Fair Value Per PSU
Non-vested at January 31, 2016
493

 
$
121.41

  Granted
76

 
87.16

  Vested
26

 
114.77

  Cancelled
421

 
124.01

Non-vested at July 31, 2016
122

 
$
92.42


The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions for the twenty-six weeks ended July 31, 2016 and August 2, 2015 were $5.8 million and $9.0 million, respectively. Of those amounts, $0.5 million and $3.4 million, respectively, were reported as excess tax benefits. Excess tax benefits arise when the actual tax benefit resulting from a stock plan award transaction exceeds the tax benefit associated with the grant date fair value of the related stock award.


23




14. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in AOCL, net of related taxes, by component for the twenty-six weeks ended July 31, 2016:

(In millions)
Foreign currency translation adjustments
 
Retirement liability adjustment
 
Net unrealized and realized gain (loss) on effective cash flow hedges
 
Total
Balance, January 31, 2016
$
(730.5
)
 
$
0.1

 
$
26.2

 
$
(704.2
)
Other comprehensive income (loss) before reclassifications
84.7

 

 
(35.2
)
 
49.5

Less: Amounts reclassified from AOCL

 
0.1

 
2.8

 
2.9

Net gain on net investment hedge
4.9

 

 

 
4.9

Other comprehensive income (loss)
89.6

 
(0.1
)
 
(38.0
)
 
51.5

Balance, July 31, 2016
$
(640.9
)
 
$
0.0

 
$
(11.8
)
 
$
(652.7
)

The following table presents the changes in AOCL, net of related taxes, by component for the twenty-six weeks ended August 2, 2015:

(In millions)
Foreign currency translation adjustments
 
Retirement liability adjustment
 
Net unrealized and realized gain on effective cash flow hedges
 
Total
Balance, February 1, 2015
$
(496.2
)
 
$
0.4

 
$
79.3

 
$
(416.5
)
Other comprehensive (loss) income before reclassifications
(140.1
)
 

 
22.1

 
(118.0
)
Less: Amounts reclassified from AOCL

 
0.1

 
45.3

 
45.4

Other comprehensive loss
(140.1
)
 
(0.1
)
 
(23.2
)
 
(163.4
)
Balance, August 2, 2015
$
(636.3
)
 
$
0.3

 
$
56.1

 
$
(579.9
)

The following table presents reclassifications out of AOCL to earnings for the thirteen and twenty-six weeks ended July 31, 2016 and August 2, 2015:

(In millions)
Amount Reclassified from AOCL
Affected Line Item in the Company’s Consolidated Income Statements
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
Realized gain (loss) on effective cash flow hedges:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
3.5

 
$
27.5

 
$
8.2

 
$
48.1

Cost of goods sold
Interest rate contracts
(2.7
)
 
(1.1
)
 
(5.1
)
 
(2.2
)
Interest expense
Less: Tax effect
0.4

 
0.3

 
0.3

 
0.6

Income tax expense
Total, net of tax
$
0.4

 
$
26.1

 
$
2.8

 
$
45.3

 
 
 
 
 
 
 
 
 
 
Amortization of retirement liability items:
 
 
 
 
 
 
 
 
Prior service credit
$
0.1

 
$
0.1

 
$
0.2

 
$
0.2

Selling, general and administrative expenses
Less: Tax effect
0.1

 
0.1
 
0.1

 
0.1

Income tax expense
Total, net of tax
$
0.0

 
$
0.0

 
$
0.1

 
$
0.1

 



24




15. STOCKHOLDERS’ EQUITY

The Company’s Board of Directors authorized a $500.0 million three-year stock repurchase program effective June 3, 2015. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as the Company deems appropriate. Purchases are made based on a variety of factors, such as price, corporate requirements and overall market conditions, applicable legal requirements and limitations, restrictions under the Company’s debt arrangements, trading restrictions under the Company’s insider trading policy and other relevant factors. The program may be modified, including to increase or decrease the repurchase limitation or extend, suspend, or terminate the program, at any time, without prior notice.

During the twenty-six weeks ended July 31, 2016, the Company purchased approximately 1.4 million shares of its common stock in open market transactions for $129.2 million (2.8 million shares for $255.4 million since inception) under the program. As of July 31, 2016, the repurchased shares were held as treasury stock and $244.6 million of the authorization remained available for future share repurchases.

Treasury stock activity also includes shares that were withheld in conjunction with the settlement of vested RSUs, PSUs and restricted stock to satisfy tax withholding requirements.

16. NET INCOME PER COMMON SHARE

The Company computed its basic and diluted net income per common share as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions, except per share data)
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
 
 
 
 
 
 
 
Net income attributable to PVH Corp.
$
90.5

 
$
102.2

 
$
322.1

 
$
216.3

 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic net income per common share
80.7

 
82.7

 
81.0

 
82.6

Weighted average impact of dilutive securities
0.6

 
0.8

 
0.6

 
0.8

Total shares for diluted net income per common share
81.3

 
83.5

 
81.6

 
83.4

 
 
 
 
 
 
 
 
Basic net income per common share attributable to PVH Corp.
$
1.12

 
$
1.24

 
$
3.98

 
$
2.62

 
 
 
 
 
 
 
 
Diluted net income per common share attributable to PVH Corp.
$
1.11

 
$
1.22

 
$
3.95

 
$
2.59


Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
(In millions)
7/31/16
 
8/2/15
 
7/31/16
 
8/2/15
 
 
 
 
 
 
 
 
Weighted average potentially dilutive securities
1.0

 
0.6

 
1.0

 
0.6


Shares underlying contingently issuable awards that have not met the necessary conditions as of the end of a reporting period are not included in the calculation of diluted net income per common share for that period. The Company had contingently issuable awards outstanding that did not meet the performance conditions as of July 31, 2016 and August 2, 2015 and, therefore, were excluded from the calculation of diluted net income per common share for the thirteen and twenty-six weeks ended July 31, 2016 and August 2, 2015. The maximum number of potentially dilutive shares that could be issued upon vesting for such awards was 0.2 million and 0.8 million as of July 31, 2016 and August 2, 2015, respectively. These amounts were also excluded from the computation of weighted average potentially dilutive securities in the table above.


25



17. NONCASH INVESTING AND FINANCING TRANSACTIONS

During the twenty-six weeks ended July 31, 2016 and August 2, 2015, the Company recorded increases to goodwill of $23.6 million and $22.0 million, respectively, related to liabilities incurred for contingent purchase price payments to Mr. Calvin Klein. Such amounts are not due or paid in cash until 45 days subsequent to the Company’s applicable quarter end. As such, during the twenty-six weeks ended July 31, 2016 and August 2, 2015, the Company paid $25.2 million and $23.9 million, respectively, in cash related to contingent purchase price payments to Mr. Calvin Klein that were recorded as additions to goodwill during the periods the liabilities were incurred.

Omitted from purchases of property, plant and equipment in the Company’s Consolidated Statements of Cash Flows for the twenty-six weeks ended July 31, 2016 and August 2, 2015 are $2.4 million and $3.1 million, respectively, of assets acquired through capital leases.

Omitted from acquisition of treasury shares in the Company’s Consolidated Statement of Cash Flows for the twenty-six weeks ended July 31, 2016 is $2.0 million of shares repurchased under the stock repurchase program for which the trade occurred but remained unsettled as of July 31, 2016.

During the second quarter of 2016, the Company recorded a loss of $11.2 million to write-off previously capitalized debt issuance costs in connection with the amendment of its credit facilities.

During the first quarter of 2016, the Company completed the acquisition of TH China. Included in the acquisition consideration was the elimination of a $2.8 million pre-acquisition receivable owed to the Company by TH China. 

18. SEGMENT DATA

The Company manages its operations through its operating divisions, which are presented as six reportable segments: (i) Calvin Klein North America; (ii) Calvin Klein International; (iii) Tommy Hilfiger North America; (iv) Tommy Hilfiger International; (v) Heritage Brands Wholesale; and (vi) Heritage Brands Retail.

Calvin Klein North America Segment - This segment consists of the Company’s Calvin Klein North America division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale in North America, primarily to department and specialty stores and e-commerce sites operated by key department store customers and pure play e-commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in North America, and e-commerce sites in North America, which sell Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the brand names Calvin Klein, Calvin Klein Collection and Calvin Klein Platinum for a broad array of products and retail services in North America.

Calvin Klein International Segment - This segment consists of the Company’s Calvin Klein International division. This segment derives revenue principally from (i) marketing Calvin Klein branded apparel and related products at wholesale principally in Europe, Asia and Brazil, primarily to department and specialty stores, e-commerce sites operated by key department store customers and pure play e-commerce retailers, franchisees of Calvin Klein, distributors and licensees; (ii) operating retail stores and e-commerce sites in Europe, Asia and Brazil, which sell Calvin Klein branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the brand names Calvin Klein Collection, Calvin Klein Platinum and Calvin Klein for a broad array of products and retail services outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in unconsolidated Calvin Klein foreign affiliates in Australia and India.

Tommy Hilfiger North America Segment - This segment consists of the Company’s Tommy Hilfiger North America division. This segment derives revenue principally from (i) marketing Tommy Hilfiger branded apparel and related products at wholesale in North America, primarily to department stores, principally Macy’s, Inc. and Hudson’s Bay Company, as well as e-commerce sites operated by key department store customers and pure play e-commerce retailers; (ii) operating retail stores, which are primarily located in premium outlet centers in North America, and e-commerce sites in North America, which sell Tommy Hilfiger branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the Tommy Hilfiger brand name for a broad array of products in North America.

Tommy Hilfiger International Segment - This segment consists of the Company’s Tommy Hilfiger International division. This segment derives revenue principally from (i) marketing Tommy Hilfiger branded apparel and related products at wholesale principally in Europe and China, primarily to department and specialty stores, e-commerce sites operated by key department store customers and pure play e-commerce retailers, franchisees of Tommy Hilfiger, distributors and licensees; (ii) operating

26




retail stores in Europe, China and Japan and international e-commerce sites, which sell Tommy Hilfiger branded apparel, accessories and related products; and (iii) licensing and similar arrangements relating to the use by third parties of the Tommy Hilfiger brand name for a broad array of products outside of North America. This segment also includes the Company’s proportionate share of the net income or loss of its investments in unconsolidated Tommy Hilfiger foreign affiliates in Brazil, India and Australia. This segment included the Company’s proportionate share of the net income or loss of its investment in TH China until April 13, 2016, on which date the Company acquired the remaining interests that it did not already own and began to consolidate the operations as a wholly owned subsidiary of the Company. Please see Note 3, “Acquisitions,” for a further discussion.

Heritage Brands Wholesale Segment - This segment consists of the Company’s Heritage Brands Wholesale division. This segment derives revenue primarily from marketing to department, chain and specialty stores and, to a lesser extent, e-commerce sites operated by key department store customers and pure play e-commerce retailers in North America of (i) dress shirts, neckwear and underwear under various owned and licensed brand names, including several private label brands; (ii) men’s sportswear principally under the brand names Van Heusen, IZOD and ARROW; (iii) swimwear, fitness apparel, swim accessories and related products under the brand name Speedo; and (iv) women’s intimate apparel under the brand names Warner’s and Olga. This segment also includes the Company’s proportionate share of the net income or loss of its investment in its unconsolidated Heritage Brands foreign affiliate in Australia.

Heritage Brands Retail Segment - This segment consists of the Company’s Heritage Brands Retail division. This segment derives revenue principally from operating retail stores, primarily located in outlet centers in North America, which primarily sell apparel, accessories and related products under the brand names Van Heusen and IZOD. The Company exited the Izod retail business in the third quarter of 2015 but continues to sell a limited selection of IZOD Golf apparel in some of its Van Heusen retail stores. The Company also sells Warner’s products on a limited basis in some of its Van Heusen retail stores.

27




The following tables present summarized information by segment:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
(In millions)
7/31/16
 
8/2/15
 
7/31/16