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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - PERRY ELLIS INTERNATIONAL, INCd485823dex321.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - PERRY ELLIS INTERNATIONAL, INCd485823dex322.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - PERRY ELLIS INTERNATIONAL, INCd485823dex312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - PERRY ELLIS INTERNATIONAL, INCd485823dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended April 29, 2017

OR

 

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

Commission File Number: 0-21764

 

 

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida   59-1162998

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3000 N.W. 107 Avenue

Miami, Florida

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

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.   ☐

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

The number of shares outstanding of the registrant’s common stock is 15,685,000 (as of June 1, 2017).

 

 

 


Table of Contents

PERRY ELLIS INTERNATIONAL, INC.

INDEX

 

     PAGE  
PART I: FINANCIAL INFORMATION   
Item 1:   

Condensed Consolidated Balance Sheets (Unaudited) as of April  29, 2017 and January 28, 2017

     1  

Condensed Consolidated Statements of Income (Unaudited) for the three months ended April 29, 2017 and April 30, 2016

     2  

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended April 29, 2017 and April 30, 2016

     3  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 29, 2017 and April 30, 2016

     4  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  
Item 2:   

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

     21  
Item 3:   

Quantitative and Qualitative Disclosures About Market Risk

     28  
Item 4:   

Controls and Procedures

     29  
PART II: OTHER INFORMATION   
Item 2:   

Unregistered Sales of Equity Securities and Use of Proceeds

     30  
Item 6:   

Exhibits

     31  


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     April 29,
2017
    January 28,
2017
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 26,404     $ 30,695  

Investments, at fair value

     16,515       10,921  

Accounts receivable, net

     183,668       140,240  

Inventories

     139,632       151,251  

Prepaid income taxes

     —         1,647  

Prepaid expenses and other current assets

     6,287       6,462  
  

 

 

   

 

 

 

Total current assets

     372,506       341,216  
  

 

 

   

 

 

 

Property and equipment, net

     60,668       61,835  

Other intangible assets, net

     186,842       187,051  

Deferred income tax

     461       334  

Other assets

     2,278       2,269  
  

 

 

   

 

 

 

TOTAL

   $ 622,755     $ 592,705  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 60,224     $ 92,843  

Accrued expenses and other liabilities

     27,537       20,861  

Accrued interest payable

     543       1,450  

Accrued income taxes payable

     1,748       —    

Unearned revenues

     2,896       2,710  
  

 

 

   

 

 

 

Total current liabilities

     92,948       117,864  
  

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,709       49,673  

Senior credit facility

     64,128       22,504  

Real estate mortgages

     33,369       33,591  

Unearned revenues and other long-term liabilities

     19,281       18,271  

Deferred income taxes

     35,453       37,115  
  

 

 

   

 

 

 

Total long-term liabilities

     201,940       161,154  
  

 

 

   

 

 

 

Total liabilities

     294,888       279,018  
  

 

 

   

 

 

 

Commitment and contingencies

    

Equity:

    

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

     —         —    

Common stock $.01 par value; 100,000,000 shares authorized; 15,734,117 shares issued and outstanding as of April 29, 2017 and 15,530,273 shares issued and outstanding as of January 28, 2017

     157       155  

Additional paid-in-capital

     148,784       147,300  

Retained earnings

     189,098       176,327  

Accumulated other comprehensive loss

     (10,172     (10,095
  

 

 

   

 

 

 

Total equity

     327,867       313,687  
  

 

 

   

 

 

 

TOTAL

   $ 622,755     $ 592,705  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, except per share data)

 

     Three Months Ended  
     April 29,      April 30,  
     2017      2016  

Revenues:

     

Net sales

   $ 233,823      $ 250,875  

Royalty income

     8,267        10,419  
  

 

 

    

 

 

 

Total revenues

     242,090        261,294  

Cost of sales

     151,002        166,210  
  

 

 

    

 

 

 

Gross profit

     91,088        95,084  
  

 

 

    

 

 

 

Operating expenses:

     

Selling, general and administrative expenses

     71,199        69,934  

Depreciation and amortization

     3,468        3,467  
  

 

 

    

 

 

 

Total operating expenses

     74,667        73,401  
  

 

 

    

 

 

 

Operating income

     16,421        21,683  

Interest expense

     1,956        2,025  
  

 

 

    

 

 

 

Net income before income taxes

     14,465        19,658  

Income tax provision

     1,694        5,408  
  

 

 

    

 

 

 

Net income

   $ 12,771      $ 14,250  
  

 

 

    

 

 

 

Net income per share:

     

Basic

   $ 0.85      $ 0.96  
  

 

 

    

 

 

 

Diluted

   $ 0.83      $ 0.95  
  

 

 

    

 

 

 

Weighted average number of shares outstanding

     

Basic

     15,009        14,810  

Diluted

     15,303        15,060  

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(amounts in thousands)

 

     Three Months Ended  
     April 29,     April 30,  
     2017     2016  

Net income

   $ 12,771     $ 14,250  

Other Comprehensive income:

    

Foreign currency translation adjustments, net

     279       1,663  

Unrealized gain on pension liability, net of tax

     —         155  

Unrealized loss on forward contract

     (362     —    

Unrealized gain on investments

     6       7  
  

 

 

   

 

 

 

Total other comprehensive (loss) income

     (77     1,825  
  

 

 

   

 

 

 

Comprehensive income

   $ 12,694     $ 16,075  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Three Months Ended  
     April 29,     April 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 12,771     $ 14,250  

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     3,554       3,565  

Provision for bad debts

     759       404  

Amortization of debt issue cost

     101       103  

Amortization of premiums and discounts

     20       14  

Amortization of unrealized (gain) loss on pension liability

     —         155  

Deferred income taxes

     (1,789     406  

Share-based compensation

     1,843       1,336  

Changes in operating assets and liabilities, net of acquisitions

    

Accounts receivable, net

     (43,816     (41,451

Inventories

     11,910       30,226  

Prepaid income taxes

     1,737       1,878  

Prepaid expenses and other current assets

     331       1,194  

Other assets

     (72     16  

Accounts payable and accrued expenses

     (27,044     (53,081

Accrued interest payable

     (907     (920

Income taxes payable

     1,570       2,157  

Unearned revenues and other liabilities

     1,265       667  

Deferred pension obligation

     —         81  
  

 

 

   

 

 

 

Net cash used in operating activities

     (37,767     (39,000
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (1,901     (4,098

Purchase of investments

     (10,256     (2,455

Proceeds from investments maturities

     4,655       1,965  
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,502     (4,588
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings from senior credit facility

     98,764       123,995  

Payments on senior credit facility

     (57,140     (84,881

Payments on real estate mortgages

     (220     (212

Payments on capital leases

     (69     (64

Proceeds from exercise of stock options

     23       —    
  

 

 

   

 

 

 

Net cash provided by financing activities

     41,358       38,838  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (380     (199
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (4,291     (4,949

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     30,695       31,902  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 26,404     $ 26,953  
  

 

 

   

 

 

 

CONTINUED

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Three Months Ended  
     April 29,      April 30,  
     2017      2016  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

   $ 2,742      $ 2,828  
  

 

 

    

 

 

 

Income taxes

   $ 19      $ 150  
  

 

 

    

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

     

Accrued purchases of property and equipment

   $ 208      $ 39  
  

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which requires inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption, during the first quarter of fiscal 2018, of ASU No. 2015-11 did not have a material impact on the Company’s results of operations or the Company’s financial position.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is currently evaluating the effect that the adoption will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which is part of the FASB’s Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the provisions of ASU 2016-09 in the first quarter of fiscal 2018 using a modified retrospective approach. For the three months ended April 29, 2017, the Company recognized all excess

 

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tax benefits and tax deficiencies as income tax expense or benefit as a discrete item. Given the Company’s valuation allowance position, there was no net tax expense or benefit recognized as a result of the adoption of ASU 2016-09. Furthermore, there was no change to retained earnings with respect to excess tax benefits due to the Company’s valuation allowance position.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, “Revenue from Contracts with Customers”, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments clarify when promised goods or services are separately identifiable (i.e., distinct within the context of a contract), an important step in determining whether goods and services should be accounted for as separate performance obligations. In addition, the amendments allow entities to disregard goods or services that are immaterial in the context of a contract and provide an accounting policy election for accounting for certain shipping and handling activities. The amendments also clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property (IP), which will determine whether the entity recognizes revenue over time or at a point in time. The amendments revise the guidance to address how entities should apply the exception for sales- and usage-based royalties to licenses of IP, recognize revenue for licenses that are not separate performance obligations and evaluate different types of license restrictions (e.g., time-based, geography-based). The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain aspects of the new revenue standard, ASU 2014-09, “Revenue from Contracts with Customers”. The amendments are intended to provide clarifying guidance in a few narrow areas such as collectability, contract modifications, completed contracts at transition, and non-cash considerations. The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which provides guidance for the accounting for credit losses on instruments within its scope. The amendments guide on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains

 

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unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company has chosen to early adopt the provisions of ASU 2016-16 in the first quarter of fiscal 2018. The adoption of ASU 2016-16 resulted in a decrease to prepaid income taxes of $1.7 million and a decrease to deferred tax liabilities of $1.7 million.

3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of:

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Trade accounts

   $ 197,735      $ 151,370  

Royalties

     6,105        6,659  

Other receivables

     1,257        712  
  

 

 

    

 

 

 

Total

     205,097        158,741  

Less: Allowances

     (21,429      (18,501
  

 

 

    

 

 

 

Total

   $ 183,668      $ 140,240  
  

 

 

    

 

 

 

4. INVENTORIES

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

Inventories consisted of the following as of:

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Finished goods

   $ 139,632      $ 151,251  

5. INVESTMENTS

The Company’s investments include marketable securities and certificates of deposit at April 29, 2017 and January 28, 2017. Marketable securities are classified as available-for-sale and consist of corporate and government bonds with maturity dates less than one year. Certificates of deposit are classified as available-for-sale with maturity dates less than one year. Investments are stated at fair value. The estimated fair value of the marketable securities is based on quoted prices in an active market.

Investments consisted of the following as of April 29, 2017:

 

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

Marketable securities

   $ 12,031      $ —        $ (5    $ 12,026  

Certificates of deposit

     4,490        —          (1      4,489  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 16,521      $ —        $ (6    $ 16,515  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Investments consisted of the following as of January 28, 2017:

 

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

Marketable securities

   $ 3,258      $ —        $ (8    $ 3,250  

Certificates of deposit

     7,675        —          (4      7,671  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 10,933      $ —        $ (12    $ 10,921  
  

 

 

    

 

 

    

 

 

    

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 92,879      $ 91,639  

Buildings and building improvements

     21,623        21,359  

Vehicles

     523        523  

Leasehold improvements

     47,943        48,799  

Land

     9,430        9,430  
  

 

 

    

 

 

 

Total

     172,398        171,750  

Less: accumulated depreciation and amortization

     (111,730      (109,915
  

 

 

    

 

 

 

Total

   $ 60,668      $ 61,835  
  

 

 

    

 

 

 

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

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Furniture, fixtures and equipment

   $ 810      $ 810  

Less: accumulated depreciation and amortization

     (519      (452
  

 

 

    

 

 

 

Total

   $ 291      $ 358  
  

 

 

    

 

 

 

For the three months ended April 29, 2017 and April 30, 2016, depreciation and amortization expense relating to property and equipment amounted to $3.3 million for each of the periods. These amounts include amortization expense for leased property under capital leases.

7. OTHER INTANGIBLE ASSETS

Trademarks

Trademarks included in other intangible assets, net, are considered indefinite-lived assets and totaled $184.1 million at April 29, 2017 and January 28, 2017.

 

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Other

Other intangible assets represent customer lists as of:

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Customer lists

   $ 8,450      $ 8,450  

Less: accumulated amortization

     (5,754      (5,545
  

 

 

    

 

 

 

Total

   $ 2,696      $ 2,905  
  

 

 

    

 

 

 

For the three months ended April 29, 2017 and April 30, 2016, amortization expense relating to customer lists amounted to approximately $0.2 million for each of the periods. Other intangible assets are amortized over their estimated useful lives of 10 years. Assuming no impairment, the table sets forth the estimated amortization expense for future periods based on recorded amounts as of January 28, 2017:

 

     (in thousands)  

2018

   $ 835  

2019

     793  

2020

     734  

2021

     543  

8. LETTER OF CREDIT FACILITIES

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

 

     April 29,
2017
     January 28,
2017
 
     (in thousands)  

Total letter of credit facilities

   $ 30,000      $ 30,000  

Outstanding letters of credit

     (10,788      (10,788
  

 

 

    

 

 

 

Total credit available

   $ 19,212      $ 19,212  
  

 

 

    

 

 

 

9. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $4.0 million and $4.3 million for the three months ended April 29, 2017 and April 30, 2016, respectively, and are included in selling, general and administrative expenses.

10. NET INCOME PER SHARE

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

 

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

 

     Three Months Ended  
     April 29,
2017
     April 30,
2016
 
     (in thousands, except per
share data)
 

Numerator:

     

Net income

   $ 12,771      $ 14,250  

Denominator:

     

Basic-weighted average shares

     15,009        14,810  

Dilutive effect: equity awards

     294        250  
  

 

 

    

 

 

 

Diluted-weighted average shares

     15,303        15,060  
  

 

 

    

 

 

 

Basic income per share

   $ 0.85      $ 0.96  
  

 

 

    

 

 

 

Diluted income per share

   $ 0.83      $ 0.95  
  

 

 

    

 

 

 

Antidilutive effect:(1)

     392        804  
  

 

 

    

 

 

 

 

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

11. EQUITY

The following table reflects the changes in equity:

 

     Changes in Equity  
     (in thousands)  

Equity at January 30, 2017

   $ 313,687  

Comprehensive income

     12,694  

Share transactions under employee equity compensation plans

     1,486  
  

 

 

 

Equity at April 29, 2017

   $ 327,867  
  

 

 

 

Equity at January 30, 2016

   $ 291,481  

Comprehensive income

     16,075  

Share transactions under employee equity compensation plans

     454  
  

 

 

 

Equity at April 30, 2016

   $ 308,010  
  

 

 

 

 

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12. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

 

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

Balance, January 28, 2017

   $ —        $ (9,902   $ (12   $ (181   $ (10,095

Other comprehensive loss (income) before reclassifications

     —          279       6       (321     (36

Amounts reclassified from accumulated other comprehensive loss

     —          —         —         (41     (41
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 29, 2017

   $ —        $ (9,623   $ (6   $ (543   $ (10,172
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Balance, January 30, 2016

   $ (7,368    $ (7,131    $ (9    $ (14,508

Other comprehensive income before reclassifications

     —          1,663        7        1,670  

Amounts reclassified from accumulated other comprehensive income

     155        —          —          155  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, April 30, 2016

   $ (7,213    $ (5,468    $ (2    $ (12,683
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of the impact on the condensed consolidated statement of income line items is as follows:

 

    

Statement of Operations Location

   Three Months Ended  
        April 29,
2017
    April 30,
2016
 

Amortization of defined benefit pension items actuarial gains

   Selling, general and administrative expenses    $ —       $ 155  

Forward contract gain reclassified from accumulated other comprehensive loss to income

   Cost of goods sold      (41     —    

Tax provision

   Income tax provision      —         —    
     

 

 

   

 

 

 

Total, net of tax

      $ (41   $ 155  
     

 

 

   

 

 

 

13. DERIVATIVE FINANCIAL INSTRUMENT – Cash Flow Hedges

The Company has a risk management policy to manage foreign currency risk relating to inventory purchases by its subsidiaries that are denominated in foreign currencies. As such, the Company may employ hedging and derivative strategies to limit the effects of changes in foreign currency on its operating income and cash flows. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. The Company achieves this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. The Company does not use derivative instruments for trading or speculative purposes.

For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents at inception the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company will formally assess at

 

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least quarterly whether the financial instruments used in hedging are “highly effective” at offsetting changes in cash flows of the related underlying exposures. For purposes of assessing hedge effectiveness, the Company uses the forward method, and assesses effectiveness based on the changes in both spot and forward points of the hedging instrument. If and when a derivative is no longer expected to be “highly effective,” hedge accounting is discontinued and hedge ineffectiveness, if any, is included in current period earnings. As of April 29, 2017, there was no hedge ineffectiveness.

The Company’s United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, the Company entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These are formally designated and “highly effective” as cash flow hedges. The Company will hedge approximately 45% of its U.S. dollar denominated purchases. All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. The Company records the foreign currency forward exchange contracts at fair value in its Consolidated Balance Sheets. The cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. The Company considers the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. The Company classifies derivative instrument cash flows from hedges of foreign currency risk on the settlement of inventory as operating activities.

The Company’s Hedging Instruments were classified within Level 2 of the fair value hierarchy. The following table summarizes the effects, fair value and balance sheet classification of the Company’s Hedging Instruments.

 

Derivatives Designated As Hedging Instruments

  

Balance sheet
location

   April 29,
2017
     January 28,
2017
 
          (in thousands)  

Foreign currency forward exchange contract (inventory purchases)

   Accounts Payable    $ 543      $ 181  
     

 

 

    

 

 

 

Total

      $ 543      $ 181  
     

 

 

    

 

 

 

The following table summarizes the effect and classification of the Company’s Hedging Instruments.

 

    

Statement of
Operations Location

   Three Months Ended  

Derivatives Designated As Hedging Instruments

      April 29,
2017
     April 30,
2016
 
          (in thousands)  

Foreign currency forward exchange contract (inventory purchases):

        

Gain reclassified from accumulated other comprehensive loss to income

   Cost of goods sold    $ (41    $ —    
     

 

 

    

 

 

 
      $ (41   
     

 

 

    

 

 

 

The notional amounts outstanding of foreign exchange forward contracts were $12.5 million and $15.0 million at April 29, 2017 and January 28, 2017, respectively. Such contracts expire through January 2018.

Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.5 million and $0.2 million at April 29, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

 

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14. INCOME TAXES

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s U.S. federal income tax returns for fiscal 2011 through fiscal 2017 are open tax years. The Company’s state tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to open tax years from fiscal 2006 through fiscal 2017, depending on each state’s particular statute of limitation. As of April 29, 2017, the examination by the Internal Revenue Service for the Company’s 2011, 2012, and 2013 U.S. federal tax years is still ongoing. During fiscal 2017, the Company received a Notice of Proposed Adjustment from the Internal Revenue Service, which proposed adjustments to taxable income for fiscal 2011, 2012 and 2013 of $6.1 million, $5.3 million and $6.8 million, respectively. The Company has not established uncertain tax position reserves related to this matter as the Company believes its positions will be sustained upon appeal or, if necessary, through litigation. Furthermore, various other state and local income tax returns are also under examination by taxing authorities.

The Company has a $1.2 million liability recorded for unrecognized tax benefits as of January 28, 2017, which includes interest and penalties of $0.3 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. All of the unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. During the three months ended April 29, 2017, the total amount of unrecognized tax benefits increased by approximately $38,000. The change to the total amount of the unrecognized tax benefit for the three months ended April 29, 2017 included an increase in interest and penalties of approximately $16,000.

The Company does not currently anticipate a resolution within the next twelve months for any of the remaining unrecognized tax benefits as of April 29, 2017. The statute of limitations related to the Company’s fiscal 2011, 2012 and 2013 U.S. federal tax years has been extended as part of the examination and is not expected to lapse within the next twelve months.

At the end of fiscal 2017, the Company maintained a $38.6 million valuation allowance against its remaining domestic deferred tax assets; including, but not limited to, the federal net operating loss carryforward and the U.S. state net operating loss carryforwards, whose utilization is not restricted by factors beyond the Company’s control. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pretax losses is considered strong negative evidence in that evaluation. Although the Company recognized pretax earnings in the first quarter of fiscal 2018, by itself that does not represent sufficient positive evidence that deferred tax assets will be realized to warrant removing the valuation allowances established against the U.S. deferred tax assets. Additionally, the Company’s cumulative pretax results for the past 36 months still remain in a loss position. The Company will be able to remove the valuation allowances in future periods when positive evidence outweighs the negative evidence from the relevant look-back period. Deferred tax assets without valuation allowances remain in certain foreign tax jurisdictions, where supported by the evidence.

15. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED SHARES

During the three months ended April 29, 2017, the Company granted an aggregate of 72,307 shares of restricted stock to certain key employees, which vest primarily over a three-year period, at an estimated value of $1.5 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the three months ended April 29, 2017, the Company granted performance based restricted stock to certain key employees. Such stock generally vests 100% in April 2020, provided that each employee is still an employee of the Company on such date, and the Company has met certain performance criteria. A total of 154,401 shares of performance-based restricted stock were issued at an estimated value of $3.3 million.

During the three months ended April 29, 2017, the Company granted an aggregate of 10,953 shares of restricted stock units to a key employee, which vest primarily over a three-year period, at an estimated value of $0.2 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

 

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During the three months ended April 29, 2017, a total of 77,655 shares of restricted stock vested, of which 25,241 shares were withheld to cover the employees’ statutory income tax requirements. The estimated value of the withheld shares was $0.5 million.

16. SEGMENT INFORMATION

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

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

 

     Three Months Ended  
     April 29,
2017
     April 30,
2016
 
     (in thousands)  

Revenues:

     

Men’s Sportswear and Swim

   $ 185,866      $ 197,925  

Women’s Sportswear

     29,739        32,489  

Direct-to-Consumer

     18,218        20,461  

Licensing

     8,267        10,419  
  

 

 

    

 

 

 

Total revenues

   $ 242,090      $ 261,294  
  

 

 

    

 

 

 

Depreciation and amortization:

     

Men’s Sportswear and Swim

   $ 1,851      $ 1,897  

Women’s Sportswear

     795        614  

Direct-to-Consumer

     766        896  

Licensing

     56        60  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 3,468      $ 3,467  
  

 

 

    

 

 

 

Operating income (loss):

     

Men’s Sportswear and Swim

   $ 15,515      $ 16,942  

Women’s Sportswear

     (969      (351

Direct-to-Consumer

     (4,101      (3,372

Licensing

     5,976        8,464  
  

 

 

    

 

 

 

Total operating income

   $ 16,421      $ 21,683  

Total interest expense

     1,956        2,025  
  

 

 

    

 

 

 

Total net income before income taxes

   $ 14,465      $ 19,658  
  

 

 

    

 

 

 

17. BENEFIT PLAN

The Company sponsored two qualified pension plans as a result of the Perry Ellis Menswear acquisition that occurred in June 2003. The plans were frozen and merged as of December 31, 2003.

During fiscal 2015, the Board of Directors resolved to terminate the pension plan. As of January 28, 2017, the Company satisfied the regulatory requirements prescribed by the Internal Revenue Service and the Pension Benefit Guaranty Corporation and the distribution of plan assets was completed.

 

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The following table provides the components of net benefit cost for the plan during the first quarter of fiscal 2017:

 

     Three Months Ended  
     April 30,
2016
 
     (in thousands)  

Service cost

   $ 63  

Interest cost

     124  

Expected return on plan assets

     (87

Amortization of net gain

     155  
  

 

 

 

Net periodic benefit cost

   $ 255  
  

 

 

 

18. FAIR VALUE MEASUREMENTS

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

Investments. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the available-for-sale investments are measured at fair value on a recurring basis in the consolidated balance sheets.

Real estate mortgages. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the real estate mortgages were approximately $34.2 million and $34.5 million at April 29, 2017 and January 28, 2017, respectively. The carrying values of the real estate mortgages at April 29, 2017 and January 28, 2017, approximate their fair values since the interest rates approximate market rates.

Senior credit facility. The carrying amount of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate.

Senior subordinated notes payable. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the 77/8% senior subordinated notes payable were approximately $49.7 million at April 29, 2017 and January 28, 2017. The fair value of the 77/8% senior subordinated notes payable was approximately $50.1 million as of April 29, 2017 and January 28, 2017, based on quoted market prices.

See footnote 13 to the consolidated financial statements for disclosure of the fair value and line item caption of derivative instruments recorded in the consolidated balance sheets.

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

19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company and several of its subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis. These guarantees are subject to release in limited circumstances (only upon the occurrence of certain customary conditions). The following are condensed consolidating financial statements, which present, in separate columns: Perry Ellis International, Inc., (Parent Only), the Guarantors on a combined, or where appropriate, consolidated basis, and the Non-Guarantors on a combined, or where appropriate, consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of April 29, 2017 and January 28, 2017 and for the three months ended April 28, 2017 and April 30, 2016. The combined Guarantors are 100% owned subsidiaries of Perry Ellis International, Inc., and have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis.

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF APRIL 29, 2017

(amounts in thousands)

 

     Parent Only      Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —        $ 3,964      $ 22,440      $ —       $ 26,404  

Investment, at fair value

     —          —          16,515        —         16,515  

Accounts receivable, net

     —          155,542        28,126        —         183,668  

Intercompany receivable, net

     86,882        —          —          (86,882     —    

Inventories

     —          117,645        21,987        —         139,632  

Prepaid income taxes

     —          —          —          —         —    

Prepaid expenses and other current assets

     —          5,322        965        —         6,287  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     86,882        282,473        90,033        (86,882     372,506  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property and equipment, net

     —          58,360        2,308        —         60,668  

Other intangible assets, net

     —          154,510        32,332        —         186,842  

Deferred income taxes

     —          —          461        —         461  

Investment in subsidiaries

     292,004        —          —          (292,004     —    

Other assets

     —          1,765        513        —         2,278  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 378,886      $ 497,108      $ 125,647      $ (378,886   $ 622,755  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —        $ 52,460      $ 7,764      $ —       $ 60,224  

Accrued expenses and other liabilities

     —          22,677        4,860        —         27,537  

Accrued interest payable

     543        —          —          —         543  

Income taxes payable

     767        589        392        —         1,748  

Unearned revenues

     —          2,457        439        —         2,896  

Intercompany payable, net

     —          74,155        20,432        (94,587     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,310        152,338        33,887        (94,587     92,948  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,709        —          —          —         49,709  

Senior credit facility

     —          64,128        —          —         64,128  

Real estate mortgages

     —          33,369        —          —         33,369  

Unearned revenues and other long-term liabilities

     —          19,014        267        —         19,281  

Deferred income taxes

     —          35,453        —          —         35,453  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     49,709        151,964        267        —         201,940  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     51,019        304,302        34,154        (94,587     294,888  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     327,867        192,806        91,493        (284,299     327,867  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 378,886      $ 497,108      $ 125,647      $ (378,886   $ 622,755  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF JANUARY 28, 2017

(amounts in thousands)

 

     Parent Only      Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —        $ 2,578      $ 28,117      $ —       $ 30,695  

Investment, at fair value

     —          —          10,921        —         10,921  

Accounts receivable, net

     —          116,874        23,366        —         140,240  

Intercompany receivable, net

     85,028        —          —          (85,028     —    

Inventories

     —          126,557        24,694        —         151,251  

Prepaid income taxes

     549        —          25        1,073       1,647  

Prepaid expenses and other current assets

     —          5,584        878        —         6,462  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     85,577        251,593        88,001        (83,955     341,216  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property and equipment, net

     —          59,651        2,184        —         61,835  

Other intangible assets, net

     —          154,719        32,332        —         187,051  

Deferred income taxes

     —          —          334        —         334  

Investment in subsidiaries

     279,233        —          —          (279,233     —    

Other assets

     —          1,797        472        —         2,269  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 364,810      $ 467,760      $ 123,323      $ (363,188   $ 592,705  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —        $ 79,600      $ 13,243      $ —       $ 92,843  

Accrued expenses and other liabilities

     —          15,543        5,318        —         20,861  

Accrued interest payable

     1,450        —          —          —         1,450  

Income taxes payable

     —          623        —          (623     —    

Unearned revenues

     —          2,353        357        —         2,710  

Intercompany payable, net

     —          77,398        15,614        (93,012     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,450        175,517        34,532        (93,635     117,864  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Senior subordinated notes payable, net

     49,673        —          —          —         49,673  

Senior credit facility

     —          22,504        —          —         22,504  

Real estate mortgages

     —          33,591        —          —         33,591  

Unearned revenues and other long-term liabilities

     —          17,945        326        —         18,271  

Deferred income taxes

     —          35,419        —          1,696       37,115  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     49,673        109,459        326        1,696       161,154  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     51,123        284,976        34,858        (91,939     279,018  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     313,687        182,784        88,465        (271,249     313,687  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 364,810      $ 467,760      $ 123,323      $ (363,188   $ 592,705  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 29, 2017

(amounts in thousands)

 

     Parent Only     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Net sales

   $ —       $ 206,686      $ 27,137     $ —       $ 233,823  

Royalty income

     —         5,386        2,881       —         8,267  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —         212,072        30,018       —         242,090  

Cost of sales

     —         133,927        17,075       —         151,002  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —         78,145        12,943       —         91,088  

Operating expenses:

           

Selling, general and administrative expenses

     —         61,599        9,600       —         71,199  

Depreciation and amortization

     —         3,210        258       —         3,468  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —         64,809        9,858       —         74,667  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —         13,336        3,085       —         16,421  

Interest expense

     —         1,989        (33     —         1,956  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —         11,347        3,118       —         14,465  

Income tax provision

     —         1,325        369       —         1,694  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     12,771       —          —         (12,771     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     12,771       10,022        2,749       (12,771     12,771  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (77     —          (77     77       (77
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 12,694     $ 10,022      $ 2,672     $ (12,694   $ 12,694  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 30, 2016

(amounts in thousands)

 

     Parent Only      Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

            

Net sales

   $ —        $ 224,905      $ 25,970     $ —       $ 250,875  

Royalty income

     —          7,214        3,205       —         10,419  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —          232,119        29,175       —         261,294  

Cost of sales

     —          148,976        17,234       —         166,210  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          83,143        11,941       —         95,084  

Operating expenses:

            

Selling, general and administrative expenses

     —          61,433        8,501       —         69,934  

Depreciation and amortization

     —          3,191        276       —         3,467  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          64,624        8,777       —         73,401  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     —          18,519        3,164       —         21,683  

Interest expense

     —          2,034        (9     —         2,025  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     —          16,485        3,173       —         19,658  

Income tax provision

     —          4,466        942       —         5,408  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of subsidiaries, net

     14,250        —          —         (14,250     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     14,250        12,019        2,231       (14,250     14,250  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

     1,825        155        1,670       (1,825     1,825  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 16,075      $ 12,174      $ 3,901     $ (16,075   $ 16,075  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 29, 2017

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   $ 445     $ (33,893   $ (4,319   $ —       $ (37,767
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —         (1,578     (323     —         (1,901

Purchase of investments

     —         —         (10,256     —         (10,256

Proceeds from investments maturities

     —         —         4,655       —         4,655  

Intercompany transactions

     (88     —         —         88       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (88     (1,578     (5,924     88       (7,502
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings from senior credit facility

     —         98,764       —         —         98,764  

Payments on senior credit facility

     —         (57,140     —         —         (57,140

Payments on real estate mortgages

     —         (220     —         —         (220

Payments on capital leases

     —         (69     —         —         (69

Proceeds from exercise of stock options

     23       —         —         —         23  

Intercompany transactions

     —         (4,478     4,946       (468     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     23       36,857       4,946       (468     41,358  

Effect of exchange rate changes on cash and cash equivalents

     (380     —         (380     380       (380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —         1,386       (5,677     —         (4,291

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —         2,578       28,117       —         30,695  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —       $ 3,964     $ 22,440     $ —       $ 26,404  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 30, 2016

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   $ 6,192     $ (40,153   $ (7,745   $ 2,706     $ (39,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     —         (3,742     (356     —         (4,098

Purchase of investments

     —         —         (2,455     —         (2,455

Proceeds from investments maturities

     —         —         1,965       —         1,965  

Intercompany transactions

     (5,993     —         —         5,993       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (5,993     (3,742     (846     5,993       (4,588
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings from senior credit facility

     —         123,995       —         —         123,995  

Payments on senior credit facility

     —         (84,881     —         —         (84,881

Payments on real estate mortgages

     —         (212     —         —         (212

Payments on capital leases

     —         (64     —         —         (64

Dividends paid to stockholder

     —         —         2,706       (2,706     —    

Intercompany transactions

     —         7,681       (1,489     (6,192     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     —         46,519       1,217       (8,898     38,838  

Effect of exchange rate changes on cash and cash equivalents

     (199     —         (199     199       (199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —         2,624       (7,573     —         (4,949

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     —         775       31,127       —         31,902  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ —       $ 3,399     $ 23,554     $ —       $ 26,953  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

Forward-Looking Statements

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

 

    general economic conditions,

 

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

 

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

 

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

 

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

 

    our ability to contain costs,

 

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

 

    disruptions due to weather patterns,

 

    our future capital needs and our ability to obtain financing,

 

    our ability to protect our trademarks,

 

    our ability to integrate acquired businesses, trademarks, trade names, and licenses,

 

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

 

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

 

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

 

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

 

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

 

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

 

    the level of consumer spending for apparel and other merchandise,

 

    our ability to compete,

 

    exposure to foreign currency risk and interest rates risk,

 

    the impact to our business resulting from the United Kingdom’s referendum vote to exit the European Union and the uncertainty surrounding the terms and conditions of such a withdrawal, as well as the related impact to global stock markets and currency exchange rates,

 

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

 

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

 

    other factors set forth in Perry Ellis’ filings with the Securities and Exchange Commission.

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

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 28, 2017 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas in which we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets and the measurement of retirement related benefits. We believe that there have been no significant changes to our critical accounting policies during the three months ended April 29, 2017 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 28, 2017.

 

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Table of Contents

Results of Operations

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

 

     Three Months Ended  
     April 29,
2017
    April 30,
2016
 
     (in thousands)  

Revenues by segment:

    

Men’s Sportswear and Swim

   $ 185,866     $ 197,925  

Women’s Sportswear

     29,739       32,489  

Direct-to-Consumer

     18,218       20,461  

Licensing

     8,267       10,419  
  

 

 

   

 

 

 

Total revenues

   $ 242,090     $ 261,294  
  

 

 

   

 

 

 
     Three Months Ended  
     April 29,
2017
    April 30,
2016
 
     (in thousands)  

Reconciliation of operating income to EBITDA

    

Operating income (loss) by segment:

    

Men’s Sportswear and Swim

   $ 15,515     $ 16,942  

Women’s Sportswear

     (969     (351

Direct-to-Consumer

     (4,101     (3,372

Licensing

     5,976       8,464  
  

 

 

   

 

 

 

Total operating income

   $ 16,421     $ 21,683  
  

 

 

   

 

 

 

Add:

    

Depreciation and amortization

    

Men’s Sportswear and Swim

   $ 1,851     $ 1,897  

Women’s Sportswear

     795       614  

Direct-to-Consumer

     766       896  

Licensing

     56       60  
  

 

 

   

 

 

 

Total depreciation and amortization

   $ 3,468     $ 3,467  
  

 

 

   

 

 

 

EBITDA by segment:

    

Men’s Sportswear and Swim

   $ 17,366     $ 18,839  

Women’s Sportswear

     (174     263  

Direct-to-Consumer

     (3,335     (2,476

Licensing

     6,032       8,524  
  

 

 

   

 

 

 

Total EBITDA

   $ 19,889     $ 25,150  
  

 

 

   

 

 

 

EBITDA margin by segment

    

Men’s Sportswear and Swim

     9.3     9.5

Women’s Sportswear

     (0.6 %)      0.8

Direct-to-Consumer

     (18.3 %)      (12.1 %) 

Licensing

     73.0     81.8

Total EBITDA margin

     8.2     9.6

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

 

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Table of Contents

The following is a discussion of the results of operations for the three month period ended April 29, 2017 of the fiscal year ending February 3, 2018 (“fiscal 2018”) compared with the three month period ended April 30, 2016 of the fiscal year ended January 28, 2017 (“fiscal 2017”).

Results of Operations—three months ended April 29, 2017 compared to the three months ended April 30, 2016.

Net sales. Men’s Sportswear and Swim net sales for the three months ended April 29, 2017 were $185.9 million, a decrease of $12.0 million, or 6.1%, from $197.9 million for the three months ended April 30, 2016. The net sales decrease was attributed primarily to our customer’s preference to receive product closer to their needs. The decrease was partially offset by increases in our golf lifestyle apparel business, Nike swim, and other core global brands.

Women’s Sportswear net sales for the three months ended April 29, 2017 were $29.7 million, a decrease of $2.8 million, or 8.6%, from $32.5 million for the three months ended April 30, 2016. The net sales decrease was primarily due to planned reductions in Laundry as we work on the re-launch of the brand. The decrease was partially offset by increases in Rafaella driven by the earlier timing of spring shipments.

Direct-to-Consumer net sales for the three months ended April 29, 2017 were $18.2 million, a decrease of $2.3 million, or 11.2%, from $20.5 million for the three months ended April 30, 2016. The decrease was driven by a retail stores sales decline of 1.9% in comparable same store sales for the direct-to-consumer business, coupled with ten fewer stores as compared to the prior period.

Royalty income. Royalty income for the three months ended April 29, 2017 was $8.3 million, a decrease of $2.1 million, or 20.2%, from $10.4 million for the three months ended April 30, 2016. Royalty income decreases were attributed to the transition of two of our licensed partners; one brought in-house and one to a new licensing partnership. For the remainder of the year, we anticipate even royalty income, compared to prior quarter periods.

Gross profit. Gross profit was $91.1 million for the three months ended April 29, 2017, a decrease of $4.0 million, or 4.2%, from $95.1 million for the three months ended April 30, 2016. This decrease is attributed to the sales reductions described above and the factors described within the gross profit margin section below.

Gross profit margin. As a percentage of total revenue, gross profit margins were 37.6% for the three months ended April 29, 2017, as compared to 36.4% for the three months ended April 30, 2016, an increase of 120 basis points. The increase is attributed to the disciplined management of inventory across channels, increased sales of higher margin core brands and efficiencies garnered within our supply chain infrastructure. Additionally our direct-to-consumer gross profit margin increased due to pricing strategies and a move away from highly promotional events.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended April 29, 2017 were $71.2 million, an increase of $1.3 million, or 1.9%, from $69.9 million for the three months ended April 30, 2016. The increase is attributed to $1.0 million of unanticipated compensation costs that are not expected to continue. Other than these costs, selling, general and administrative expenses were substantial the same as the prior year’s amount.

EBITDA. Men’s Sportswear and Swim EBITDA margin for the three months ended April 29, 2017 decreased by 20 basis points to 9.3% from 9.5% for the three months ended April 30, 2016. The EBITDA margin was essentially flat from last year. Despite the reduction in sales as mentioned above, we were able to increase our gross profit margin and realize favorable leverage in selling, general and administrative expenses, more specifically in advertising expenses.

Women’s Sportswear EBITDA margin for the three months ended April 29, 2017 decreased 140 basis points to (0.6%), from 0.8% for the three months ended April 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in net sales described above. As a result of this decrease in revenue, we were not able to realize favorable leverage in selling, general and administrative expenses.

Direct-to-Consumer EBITDA margin for the three months ended April 29, 2017 decreased 620 basis points to (18.3%), from (12.1%) for the three months ended April 30, 2016. The decrease was attributable to the decrease of revenue from our stores, as described above.

 

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Licensing EBITDA margin for the three months ended April 29, 2017 decreased to 73.0%, from 81.8% for the three months ended April 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in royalty income described above.

Depreciation and amortization. Depreciation and amortization for the three months ended April 29, 2017 and April 30, 2016 remained flat at $3.5 million.

Interest expense. Interest expense for the three months ended April 29, 2017 and April 30, 2016 remained flat at $2.0 million.

Income taxes. The income tax expense for the three months ended April 29, 2017, was $1.7 million, a decrease of $3.7 million, as compared to $5.4 million for the three months ended April 30, 2016. For the three months ended April 29, 2017, our effective tax rate was 11.7% as compared to 27.5% for the three months ended April 30, 2016. The overall change in the effective tax rate is attributed to the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates.

Net income. Net income for the three months ended April 29, 2017 was $12.8 million, a decrease of $1.5 million, or 10.5%, as compared to $14.3 million for the three months ended April 30, 2016. The changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, acquisitions, and capital expenditures. We believe that our working capital requirements will increase slightly for this year as we continue to expand internationally. As of April 29, 2017, our total working capital was $279.6 million as compared to $223.4 million as of January 28, 2017 and $274.5 million as of April 30, 2016. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs and capital expenditure needs over the next year.

We consider the undistributed earnings of our foreign subsidiaries as of April 29, 2017, to be indefinitely reinvested and, accordingly, no United States income taxes have been provided thereon. As of April 29, 2017, the amount of cash and short-term investments associated with indefinitely reinvested foreign earnings was approximately $22.4 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Net cash used in operating activities was $37.8 million for the three months ended April 29, 2017, as compared to cash used in operating activities of $39.0 million for the three months ended April 30, 2016.

The cash used in operating activities for three months ended April 29, 2017, is primarily attributable to an increase in accounts receivable of $43.8 million and a decrease in accounts payable and accrued expenses of $27.0 million. These decreases were partially offset by a decrease in inventory of $11.9 million associated with strong inventory management, a decrease in prepaid income taxes of $1.7 million, an increase in income taxes payable of $1.6 million and an increase in unearned revenue and other liabilities of $1.3 million. Our inventory turnover ratio increased to 3.9 as compared to 3.6 in the prior period because of our continued focus on inventory management.

The cash used in operating activities for three months ended April 30, 2016, is primarily attributable to an increase in accounts receivable of $41.5 million and a decrease in accounts payable and accrued expenses of $53.1 million; which was partially offset by a decrease in inventory of $30.2 million associated with strong inventory management, an increase in income taxes payable of $2.2 million, a decrease in prepaid expenses and other current assets of $1.2 million, and a decrease in prepaid income taxes of $1.9 million. Our inventory turnover ratio remained constant at 3.6 as compared to the prior period because of our continued tight inventory management.

Net cash used in investing activities was $7.5 million for the three months ended April 29, 2017, as compared to cash used in investing activities of $4.6 million for the three months ended April 30, 2016. The net cash used in investing activities during the first three months of fiscal 2018 primarily reflects the purchase of investments of $10.3 million and the purchase of property and equipment of $1.9 million primarily for leaseholds and store fixtures; partially offset by the proceeds from the maturities of investments in the amount of $4.7 million.

 

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We anticipate capital expenditures during the remainder of fiscal 2018 of $15.0 million to $16.0 million in new leasehold improvements, technology, systems, retail stores, and other expenditures.

Net cash used in investing activities was $4.6 million for the three months ended April 30, 2016. The net cash used in investing activities during the first three months of fiscal 2017 primarily reflects the purchase of property and equipment of $4.1 million primarily for leaseholds and the purchase of investments of $2.5 million; partially offset by the proceeds from the maturities of investments in the amount of $2.0 million.

Net cash provided by financing activities was $41.4 million for the three months ended April 29, 2017, as compared to net cash provided by financing activities of $38.8 million for the three months ended April 30, 2016. The net cash provided during the first three months of fiscal 2018 primarily reflects net borrowings on our senior credit facility of $41.6 million; which was partially offset by $0.2 million in payments on our mortgage loans and payments on capital leases of $0.07 million.

Net cash provided by financing activities was $38.8 million for the three months ended April 30, 2016. The net cash provided during the first three months of fiscal 2017 primarily reflects net borrowings on our senior credit facility of $39.1 million; which was partially offset by $0.2 million in payments on our mortgage loans.

Our Board of Directors has authorized us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis.

There have been no open market purchases during fiscal 2018. Total purchases under the plan to date amount to approximately $60.8 million.

Acquisitions

None.

7/8% $150 Million Senior Subordinated Notes Payable

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

On April 6, 2015, we elected to call for the partial redemption of $100 million of our $150 million 7 7/8% senior subordinated notes due 2019 and a notice of redemption was sent to all registered holders of the senior subordinated notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, we completed the redemption of the $100 million of our senior subordinated notes. We incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption, including the redemption premium as well as the write-off of note issuance costs. At April 29, 2017 and January 28, 2017, the balance of the 7 7/8% senior subordinated notes totaled $49.7 million, net of debt issuance costs in the amount of $0.3 million

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

 

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Senior Credit Facility

On April 22, 2015, we amended and restated our existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $200 million. The Credit Facility has been extended through April 30, 2020 (“Maturity Date”). In connection with this amendment and restatement, we paid fees in the amount of $0.6 million. These fees will be amortized over the term of the Credit Facility as interest expense. At April 29, 2017, we had outstanding borrowings of $64.1 million under the Credit Facility. At January 28, 2017, we had outstanding borrowings of $22.5 million under the Credit Facility.

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

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

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

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

Letter of Credit Facilities

As of April 29, 2017, we maintained one U.S. dollar letter of credit facility totaling $30.0 million. Each documentary letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets.

At April 29, 2017 and January 28, 2017, there was $19.2 million available under the existing letter of credit facilities.

Real Estate Mortgage Loans

In November 2016, we paid off our existing real estate mortgage loan and refinanced our main administrative office, warehouse and distribution facility in Miami with a $21.7 million mortgage loan. The loan is

 

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due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $112,000, based on a 25-year amortization with the outstanding principal due at maturity. At April 29, 2017, the balance of the real estate mortgage loan totaled $21.3 million, net of discount, of which $541,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan was due on January 23, 2019. In January 2014, we amended the mortgage loan to modify the interest rate. The interest rate was reduced to 3.25% per annum and the terms were restated to reflect new monthly payments of principal and interest of approximately $68,000, based on a 20-year amortization, with the outstanding principal due at maturity.

In November 2016, we amended the mortgage to increase the amount to $13.2 million. The loan is due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $68,000, based on a 25-year amortization with the outstanding principal due at maturity. At April 29, 2017, the balance of the real estate mortgage loan totaled $13.0 million, net of discount, of which approximately $330,000 is due within one year.

We used the excess funds generated from the new mortgage loans described above to pay down our senior credit facility.

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

Off-Balance Sheet Arrangements

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

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three months ended April 29, 2017.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates or foreign currency. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate and foreign currency.

Cash Flow Hedges

Our United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, we entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These contracts are formally designated and “highly effective” as cash flow hedges.

All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. We record the hedging instruments at fair value in our Consolidated Balance Sheet. The cash flows from such hedges are presented in the same category in our Consolidated Statement of Cash Flows as the items being hedged.

The notional amounts outstanding of foreign exchange forward contracts were $12.5 million and $15.0 million at April 29, 2017 and January 28, 2017, respectively. Such contracts expire through January 2018.

 

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Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.5 million and $0.2 million at April 29, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

The total gain relating to hedging instruments reclassified to earnings during the first quarter of fiscal 2018 was $41,000. There was no gain or loss relating to hedging instruments reclassified to earnings during the first quarter of fiscal 2017.

Commodity Price Risk

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

Other

We have a risk management policy to manage foreign currency risk relating to inventory purchases by our subsidiaries which are denominated in foreign currencies. As such, we may employ hedging and derivative strategies to limit the effects of changes in foreign currency on our operating income and cash flows. However, we consider our current exposure to foreign exchange risk as not significant.

Item 4: Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) of the Securities Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 29, 2017 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Other than the changes noted above there have been no other changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Period

   Total Number
of Shares
Purchased
    Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum
Approximate Dollar
Value that May Yet
Be Purchased under
the Plans or
Programs
 

April 2, 2017 to April 29, 2017

     25,241 (1)    $ 21.12        —        $ 9,215,045  

 

(1) Represents shares withheld to pay statutory income taxes resulting from vesting of restricted shares.

 

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Item 6. Exhibits

Index to Exhibits

 

Exhibit
Number

  

Exhibit Description

  

Where Filed

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

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Perry Ellis International, Inc.
June 6, 2017     By: /S/ DAVID RATTNER
    David Rattner, Chief Financial Officer
    (Principal Financial Officer)

 

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