XNYS:WRC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

OR

 

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

COMMISSION FILE NUMBER 1-10857

 

 

THE WARNACO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4032739

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

501 Seventh Avenue

New York, New York 10018

(Address of registrant’s principal executive offices)

Registrant’s telephone number, including area code: (212) 287-8000

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  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).     x  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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of April 27, 2012 is as follows: 41,040,875.

 

 

 


Table of Contents

THE WARNACO GROUP, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

 

     PAGE
NUMBER
 
PART I — FINANCIAL INFORMATION   

Item 1. Financial Statements:

  

Consolidated Condensed Balance Sheets as of March 31, 2012, December 31, 2011 and April  2, 2011

     1   

Consolidated Condensed Statements of Operations for the Three Months Ended March  31, 2012 and for the Three Months Ended April 2, 2011

     2   

Consolidated Statements of Redeemable Non-Controlling Interest and Stockholders’ Equity for the Three Months Ended March 31, 2012 and for the Three Months Ended April 2, 2011

     3   

Consolidated Statements of Comprehensive Income for the Three Months Ended March  31, 2012 and for the Three Months Ended April 2, 2011

     4   

Consolidated Condensed Statements of Cash Flows for the Three Months Ended March  31, 2012 and for the Three Months Ended April 2, 2011

     5   

Notes to Consolidated Condensed Financial Statements

     6   

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

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4. Controls and Procedures

     49   
PART II – OTHER INFORMATION   

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     50   

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

     50   

Item 3. Defaults Upon Senior Securities

     50   

Item 4. Mine Safety Disclosures

     51   

Item 5. Other Information

     51   

Item 6. Exhibits

     51   

SIGNATURES

     52   


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, excluding per share data)

(Unaudited)

 

     March 31, 2012     December 31, 2011     April 2, 2011  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 224,227      $ 232,531      $ 174,095   

Accounts receivable, net of reserves of $97,461, $94,739 and $87,648 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively

     346,941        322,976        396,035   

Inventories

     380,074        350,835        364,320   

Assets of discontinued operations

     —          —          108   

Prepaid expenses and other current assets (including deferred income taxes of $59,436, $58,602, and $62,362 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively)

     159,514        158,288        161,115   
  

 

 

   

 

 

   

 

 

 

Total current assets

     1,110,756        1,064,630        1,095,673   

Property, plant and equipment, net

     131,651        133,022        132,829   

Other assets:

      

Licenses, trademarks and other intangible assets, net

     322,870        320,880        380,708   

Goodwill

     144,026        139,948        120,880   

Other assets (including deferred income taxes of $24,136, $21,885, and $14,792 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively)

     92,859        89,370        61,480   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,802,162      $ 1,747,850      $ 1,791,570   
  

 

 

   

 

 

   

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Short-term debt

   $ 79,443      $ 47,513      $ 146,423   

Accounts payable

     143,798        141,797        164,721   

Accrued liabilities

     174,813        212,655        193,675   

Liabilities of discontinued operations

     3,973        6,797        3,660   

Accrued income taxes payable (including deferred income taxes of $1,253, $1,476 and $1,105 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively)

     31,284        43,238        31,975   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     433,311        452,000        540,454   

Long-term debt

     207,407        208,477        —     

Other long-term liabilities (including deferred income taxes of $38,712, $37,000, and $79,694 as of March 31, 2012, December 31, 2011, and April 2, 2011, respectively)

     174,619        174,973        221,890   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     815,337        835,450        762,344   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Redeemable non-controlling interest

     15,849        15,200        —     

Stockholders’ equity:

      

Preferred stock

     —          —          —     

Common stock: $0.01 par value, 112,500,000 shares authorized, 52,923,949, 52,184,730 and 52,038,223 shares issued as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively

     529        522        520   

Additional paid-in capital

     746,897        721,356        691,670   

Accumulated other comprehensive income

     34,179        16,242        69,618   

Retained earnings

     661,676        625,760        545,425   

Treasury stock, at cost 11,887,658, 11,790,428 and 8,041,540 shares as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively

     (472,305     (466,680     (278,007
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     970,976        897,200        1,029,226   
  

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable non-controlling interest and stockholders’ equity

   $ 1,802,162      $ 1,747,850      $ 1,791,570   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands, excluding per share amounts)

(Unaudited)

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Net revenues

   $ 615,541      $ 662,161   

Cost of goods sold

     348,056        367,023   
  

 

 

   

 

 

 

Gross profit

     267,485        295,138   

Selling, general and administrative expenses

     212,621        222,637   

Amortization of intangible assets

     2,699        3,159   

Pension income

     (54     (312
  

 

 

   

 

 

 

Operating income

     52,219        69,654   

Other income

     (269     (644

Interest expense

     4,449        2,696   

Interest income

     (873     (746
  

 

 

   

 

 

 

Income from continuing operations before provision for income taxes and redeemable non-controlling interest

     48,912        68,348   

Provision for income taxes

     15,991        23,816   
  

 

 

   

 

 

 

Income from continuing operations before redeemable non-controlling interest

     32,921        44,532   

Income (Loss) from discontinued operations, net of taxes

     3,034        (501
  

 

 

   

 

 

 

Net income

     35,955        44,031   

Less: income attributable to redeemable non-controlling interest

     39        —     
  

 

 

   

 

 

 

Net income attributable to Warnaco Group

   $ 35,916      $ 44,031   
  

 

 

   

 

 

 

Amounts attributable to Warnaco Group common shareholders:

    

Income from continuing operations, net of taxes

   $ 32,882      $ 44,532   

Income (Loss) from discontinued operations, net of taxes

     3,034        (501
  

 

 

   

 

 

 

Net Income

   $ 35,916      $ 44,031   
  

 

 

   

 

 

 

Basic income per common share (see Note 17):

    

Income from continuing operations

   $ 0.80      $ 1.00   

Income (Loss) from discontinued operations

     0.07        (0.01
  

 

 

   

 

 

 

Net income

   $ 0.87      $ 0.99   
  

 

 

   

 

 

 

Diluted income per common share (see Note 17):

    

Income from continuing operations

   $ 0.78      $ 0.98   

Income (Loss) from discontinued operations

     0.08        (0.01
  

 

 

   

 

 

 

Net income

   $ 0.86      $ 0.97   
  

 

 

   

 

 

 

Weighted average number of shares outstanding used in computing income per common share (see Note 17):

    

Basic

     40,530,667        43,891,868   
  

 

 

   

 

 

 

Diluted

     41,417,952        44,790,731   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

THE WARNACO GROUP, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE NON-CONTROLLING INTEREST

AND STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

 

            Warnaco Group Stockholders’ Equity        
    

Redeemable

Non-controlling
Interest

     Common
Stock
     Additional
Paid-in
Capital
    

Accumulated

Other
Comprehensive
Income

     Retained
Earnings
     Treasury
Stock
    Total  

Balance at January 1, 2011

   $ —         $ 517       $ 674,508       $ 43,048       $ 501,394       $ (246,861   $ 972,606   

Net income

                 44,031           44,031   

Other comprehensive income

              26,570              26,570   

Stock issued in connection with stock compensation plans

        3         5,815                 5,818   

Compensation expense in connection with employee stock compensation plans

           11,347                 11,347   

Purchase of treasury stock related to stock compensation plans

                    (1,996     (1,996

Repurchases of common stock

                    (29,150     (29,150
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at April 2, 2011

   $ —         $ 520       $ 691,670       $ 69,618       $ 545,425       $ (278,007   $ 1,029,226   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
    

 

     Warnaco Group Stockholders’ Equity        
     Redeemable
Non-controlling
Interest
     Common
Stock
     Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Income
     Retained
Earnings
     Treasury
Stock
    Total  

Balance at December 31, 2011

   $ 15,200       $ 522       $ 721,356       $ 16,242       $ 625,760       $ (466,680   $ 897,200   

Net income

     39                  35,916           35,916   

Other comprehensive income

     610               17,937              17,937   

Tax benefit related to exercise of equity awards

           6,993                 6,993   

Stock issued in connection with stock compensation plans

        7         13,125                 13,132   

Compensation expense in connection with employee stock compensation plans

           5,423                 5,423   

Purchase of treasury stock related to stock compensation plans

                    (5,625     (5,625
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at March 31, 2012

   $ 15,849       $ 529       $ 746,897       $ 34,179       $ 661,676       $ (472,305   $ 970,976   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

THE WARNACO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Net income

   $ 35,955      $ 44,031   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Foreign currency translation adjustments

     20,266        28,254   

Change in cash flow hedges

     (1,708     (1,683

Other

     (11     (1
  

 

 

   

 

 

 

Other comprehensive income

     18,547        26,570   
  

 

 

   

 

 

 

Total comprehensive income

     54,502        70,601   

Less: comprehensive income attributable to redeemable non-controlling interest

     (649     —     
  

 

 

   

 

 

 

Total comprehensive income attributable to Warnaco Group

   $ 53,853      $ 70,601   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Cash flows from operating activities:

    

Net income

   $ 35,955      $ 44,031   

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

    

Foreign exchange gain

     (2,860     (3,400

(Income) Loss from discontinued operations

     (3,034     501   

Depreciation and amortization

     14,922        14,447   

Stock compensation

     5,423        11,347   

Provision for trade and other bad debts

     130        1,377   

Inventory writedown

     5,119        3,157   

Other

     (11     (39

Changes in operating assets and liabilities:

    

Accounts receivable

     (17,894     (70,428

Inventories

     (26,855     (46,574

Prepaid expenses and other assets

     (868     3,296   

Accounts payable, accrued expenses and other liabilities

     (38,493     (28,409

Accrued income taxes

     (9,335     3,197   
  

 

 

   

 

 

 

Net cash (used in) operating activities from continuing operations

     (37,801     (67,497

Net cash (used in) operating activities from discontinued operations

     —          (16,284
  

 

 

   

 

 

 

Net cash (used in) operating activities

     (37,801     (83,781
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds on disposal of assets

     410        56   

Purchases of property, plant & equipment

     (10,327     (12,258

Business acquisitions, net of cash acquired

     (1,362     (1,083
  

 

 

   

 

 

 

Net cash (used in) investing activities from continuing operations

     (11,279     (13,285

Net cash (used in) investing activities from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (11,279     (13,285
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in short-term notes payable

     14,973        15,340   

Change in revolving credit loans

     16,171        96,707   

Payments on 2011 Term Loan

     (500     —     

Payment of deferred premium on Interest Rate Cap Agreement

     (489     —     

Proceeds from the exercise of employee stock options

     13,132        5,818   

Tax benefit related to exercise of equity awards

     6,993        —     

Purchase of treasury stock

     (5,625     (31,146

Contingent payment related to acquisition of non-controlling interest in

    

Brazilian subsidiary

     (7,592     (11,467
  

 

 

   

 

 

 

Net cash provided by financing activities from continuing operations

     37,063        75,252   

Net cash provided by financing activities from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     37,063        75,252   

Effect of foreign exchange rate changes on cash and cash equivalents

     3,713        4,682   
  

 

 

   

 

 

 

(Decrease) in cash and cash equivalents

     (8,304     (17,132

Cash and cash equivalents at beginning of period

     232,531        191,227   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 224,227      $ 174,095   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

Note 1—Organization

The Warnaco Group, Inc. (“Warnaco Group” and, collectively with its subsidiaries, the “Company”) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all of the outstanding shares of Warnaco Inc. (“Warnaco”). Warnaco is the principal operating subsidiary of Warnaco Group.

Note 2 — Basis of Consolidation and Presentation

The Consolidated Condensed Financial Statements include the accounts of Warnaco Group and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying unaudited Consolidated Condensed Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for Fiscal 2011 (as defined below). The year-end Consolidated Condensed Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Periods Covered: The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period from January 1, 2012 to December 29, 2012 (“Fiscal 2012”), the period from January 2, 2011 to December 31, 2011 (“Fiscal 2011”) and the period from January 3, 2010 to January 1, 2011 (“Fiscal 2010”) each contained 52 weeks of operations. Additionally, the period from January 1, 2012 to March 31, 2012 (the “Three Months Ended March 31, 2012”) and the period from January 2, 2011 to April 2, 2011 (the “Three Months Ended April 2, 2011”) each contained 13 weeks of operations.

Recent Accounting Pronouncements

There were no accounting pronouncements that were issued through the Three Months Ended March 31, 2012 that were not yet adopted that are expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows in future periods.

Note 3—Acquisitions

Acquisition of Remaining Non-Controlling Interest in Brazil

During the fourth quarter of the fiscal year ended January 2, 2010 (“Fiscal 2009”), the Company acquired the remaining non-controlling interest in a Brazilian subsidiary (“WBR”) and eight retail stores in Brazil, collectively, the “Brazilian Acquisition.” As part of the consideration for the Brazilian Acquisition, the Company was required to make three payments through March 31, 2012, which were contingent on the level of operating income achieved (as specified in the acquisition agreement) by WBR during the fourth quarter of Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively. The Company made the second contingent payment of 18,500 Brazilian real (approximately $11,470 as of March 31, 2011), based on the operating results of WBR for Fiscal 2010, on March 31, 2011. The Company made the third contingent payment of 18,500 Brazilian real (approximately $10,123 as of March 31, 2012), based on the operating results of WBR for Fiscal 2011, in two separate payments: (i) $7,592 on March 30, 2012 and (ii) $2,531 on April 2, 2012. As of March 31, 2012, the amount of the payment that was made on April 2, 2012 was recorded as a current liability in Accrued Liabilities on the Company’s Consolidated Condensed Balance Sheet.

 

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Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Note 4—Discontinued Operations

As disclosed in its Annual Report on Form 10-K for Fiscal 2011, the Company discontinued certain operations in prior periods. Summarized operating results for the discontinued operations are presented in the Consolidated Condensed Statements of Operations as follows:

 

     Three Months Ended  
     March 31,
2012
     April 2,
2011
 

Net revenues

   $ —         $ —     
  

 

 

    

 

 

 

Income (Loss) before income tax (benefit) (a)

   $ 3,034       $ (776

Income tax (benefit)

     —           (275
  

 

 

    

 

 

 

Income (Loss) from discontinued operations

   $ 3,034       $ (501
  

 

 

    

 

 

 

Summarized assets and liabilities of the discontinued operations are presented in the Consolidated Condensed Balance Sheets as follows:

 

     March 31, 2012      December 31,
2011
     April 2,
2011
 

Prepaid expenses and other current assets

   $ —         $ —         $ 108   
  

 

 

    

 

 

    

 

 

 

Assets of discontinued operations

   $ —         $ —         $ 108   
  

 

 

    

 

 

    

 

 

 

Accounts payable

   $ 4       $ 5       $ 15   

Accrued liabilities (a)

     3,969         6,792         3,645   
  

 

 

    

 

 

    

 

 

 

Liabilities of discontinued operations

   $ 3,973       $ 6,797       $ 3,660   
  

 

 

    

 

 

    

 

 

 

 

(a) The increase in income (loss) before income tax (benefit) and the decrease in accrued liabilities between December 31, 2011 and March 31, 2012 is primarily due to the reversal of a reserve related to a French tax liability associated with the Company’s Lejaby discontinued business.

See Note 18 of Notes to Consolidated Condensed Financial Statements – Legal Matters regarding the Company’s Lejaby business.

Note 5—Restructuring Expenses and Other Exit Costs

During the Three Months Ended March 31, 2012, the Company incurred restructuring charges and other exit costs of $6,590, related to (i) the rationalization and consolidation of the Company’s international operations ($2,333); (ii) charges in connection with employee termination and reorganization of management structure ($877); (iii) non-cash impairment charges associated with store closures, including those related to its CK/Calvin Klein “bridge” business ($1,002 ); (iv) severance, lease contract termination and related costs in connection with retail store, office and warehouse closures ($2,210); and (v) legal, professional and other exit costs ($168).

The Company’s license agreement to operate the “bridge” apparel business in Europe (the “CK/Calvin Klein “bridge” Apparel License”) requires the Company to, among other things, meet certain minimum sales thresholds for the two consecutive annual periods of 2010 and 2011. During Fiscal 2010 and Fiscal 2011, the Company did not achieve the aforementioned minimum sales thresholds required under the CK/Calvin Klein “bridge” Apparel License. As a result, the Company and CKI no longer intend for the Company to continue to operate all or part of the “bridge” business. The impairment charge associated with the Company’s CK/Calvin Klein “bridge” business that was recorded during the Three Months Ended March 31, 2012, was the result of the Company’s ongoing discussions with CKI regarding the Company’s transition of its “bridge” business back to CKI and the Company’s decision, as a result of those discussions, to close certain “bridge” retail stores in Europe.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

During the Three Months Ended April 2, 2011, the Company incurred restructuring charges and other exit costs of $6,489 related to (i) the rationalization and consolidation of the Company’s international operations ($3,065); (ii) job eliminations in the U.S. ($1,167); (iii) lease contract termination costs in connection with retail store, office and warehouse closures ($2,224); and (iv) other exit costs ($33).

Restructuring charges and other exit costs have been recorded in the Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, as follows:

 

     Three Months Ended  
     March 31, 2012      April 2, 2011  

Cost of goods sold

   $ 434       $ 667   

Selling, general and administrative expenses

     6,156         5,822   
  

 

 

    

 

 

 
   $ 6,590       $ 6,489   
  

 

 

    

 

 

 

Cash portion of restructuring items

   $ 6,006       $ 6,463   

Non-cash portion of restructuring items

     584         26   

Changes in liabilities related to restructuring expenses and other exit costs for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 are summarized below:

 

Balance at January 1, 2011

   $ 3,582   

Charges for the Three Months Ended April 2, 2011

     6,463   

Cash reductions for the Three Months Ended April 2, 2011

     (1,665

Non-cash changes and foreign currency effects

     88   
  

 

 

 

Balance at April 2, 2011

   $ 8,468   
  

 

 

 

Balance at December 31, 2011

   $ 9,160   

Charges for the Three Months Ended March 31, 2012

     6,006   

Cash reductions for the Three Months Ended March 31, 2012

     (4,206

Non-cash changes and foreign currency effects

     65   
  

 

 

 

Balance at March 31, 2012 (a)

   $ 11,025   
  

 

 

 

 

(a) The balance at March 31, 2012 includes approximately $9,393 recorded in accrued liabilities (part of current liabilities) which amounts are expected to be settled over the next 12 months and approximately $1,632 recorded in other long term liabilities which amounts are expected to be settled over the next two years.

Note 6—Business Segments and Geographic Information

Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group, which groupings reflect the manner in which the Company’s business is managed and the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker, reviews the Company’s business.

The Sportswear Group designs, sources and markets moderate to premium priced men’s and women’s sportswear under the Calvin Klein and Chaps® brands. As of March 31, 2012, the Sportswear Group operated 702 Calvin Klein retail stores worldwide (consisting of 163 full-price free-standing stores, 59 outlet free-standing stores, 479 concession /shop-in-shop stores and, in the U.S., one on-line store). As of March 31, 2012, there were also 392 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

The Intimate Apparel Group designs, sources and markets moderate to premium priced intimate apparel and other products for women and better to premium priced men’s underwear, sleepwear and loungewear under the Calvin Klein, Warner’s®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names. As of March 31, 2012, the Intimate Apparel Group operated 881 Calvin Klein retail stores worldwide (consisting of 100 full-price free-standing stores, 57 outlet free-standing stores and 723 concession /shop-in-shop stores and, in the U.S., one on-line store). As of March 31, 2012, there were also 211 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.

The Swimwear Group designs, licenses, sources and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under the Speedo®, Lifeguard® and Calvin Klein brand names. As of March 31, 2012, the Swimwear Group operated 193 Calvin Klein retail concession /shop-in-shop stores in Europe and one on-line store in the U.S.

Information by business segment is set forth below:

 

     Sportswear
Group
     Intimate
Apparel
Group
     Swimwear
Group
     Group Total      Unallocated
Corporate /
Other
    Total  

Three Months Ended March 31, 2012

                

Net revenues

   $ 300,803       $ 222,877       $ 91,861       $ 615,541       $ —        $ 615,541   

Operating income (loss)

     13,583         29,954         14,837         58,374         (6,155     52,219   

Depreciation and amortization

     9,302         4,537         694         14,533         389        14,922   

Restructuring expense

     3,691         3,029         21         6,741         (151     6,590   

Capital expenditures

     4,512         2,779         122         7,413         1,237        8,650   

Three Months Ended April 2, 2011

                

Net revenues

   $ 339,471       $ 220,994       $ 101,696       $ 662,161       $ —        $ 662,161   

Operating income (loss)

     38,600         30,537         14,068         83,205         (13,551     69,654   

Depreciation and amortization

     9,080         4,439         617         14,136         311        14,447   

Restructuring expense

     1,650         1,443         3,078         6,170         318        6,489   

Capital expenditures

     4,891         6,131         56         11,078         304        11,382   

Balance Sheet

                

Total Assets:

                

March 31, 2012

   $ 1,029,013       $ 480,944       $ 179,174       $ 1,689,131       $ 113,031      $ 1,802,162   

December 31, 2011

     994,425         486,636         148,982         1,630,043         117,807        1,747,850   

April 2, 2011

     1,072,131         410,607         190,672         1,673,410         118,160        1,791,570   

Property, Plant and Equipment:

                

March 31, 2012

   $ 65,026       $ 43,142       $ 2,176       $ 110,344       $ 21,307      $ 131,651   

December 31, 2011

     64,149         43,966         2,220         110,335         22,687        133,022   

April 2, 2011

     64,446         33,380         2,739         100,565         32,264        132,829   

All inter-company revenues and expenses are eliminated in consolidation. Management does not include inter-company sales when evaluating segment performance. Each segment’s operating income is presented in the table above including restructuring charges and allocations of corporate expenses but does not include unallocated corporate/other expenses. The decrease for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 in the amount of unallocated corporate expenses that reconciles total business segment operating income to the Company’s total operating income is related primarily to a reduction in amounts of stock-based employee compensation and in amounts accrued for performance-based employee cash compensation.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

A reconciliation of operating income from business segments to income from continuing operations before provision for income taxes and redeemable non-controlling interest is as follows:

 

     Three Months Ended  
     March 31,
2012
    April 2,
2011
 

Operating income by business segments

   $ 58,374      $ 83,205   

Unallocated corporate/other expenses

     (6,155     (13,551
  

 

 

   

 

 

 

Operating income

     52,219        69,654   

Other income

     (269     (644

Interest expense

     4,449        2,696   

Interest income

     (873     (746
  

 

 

   

 

 

 

Income from continuing operations before provision for income taxes and redeemable non-controlling interest

   $ 48,912      $ 68,348   
  

 

 

   

 

 

 

Geographic Information: Net revenues summarized by geographic region are as follows:

 

     Three Months Ended  
     March 31,
2012
     %     April 2,
2011
     %  

Net revenues:

          

United States

   $ 248,409         40.3   $ 285,143         43.1

Europe

     146,312         23.8     168,469         25.5

Asia

     137,763         22.4     126,776         19.1

Mexico and Central and South America

     53,103         8.6     51,718         7.8

Canada

     29,954         4.9     30,055         4.5
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 615,541         100.0   $ 662,161         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Note 7—Income Taxes

 

The effective tax rates for the Three Months Ended March 31, 2012 and April 2, 2011 were 32.7% and 34.8% respectively. The reduction in the effective tax rate for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011 primarily reflects the effect of establishing uncertain tax positions in certain foreign jurisdictions. The provision for income taxes for the Three Months Ended April 2, 2011 included amounts associated with the aforementioned uncertain tax positions whereas similar tax provisions were not required during the Three Months Ended March 31, 2012.

As of March 31, 2012, the Company remains under audit in various taxing jurisdictions. It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Company’s assessment of many factors, including past experience and future events, it is reasonably possible that within the next 12 months the reserve for uncertain tax positions may decrease between $10,000 and $14,000 due to (i) tax positions the Company expects to take during the next 12 months, (ii) the reevaluation of current uncertain tax positions arising from developments in examinations, (iii) the finalization of tax examinations, or (iv) the closure of tax statutes.

Note 8—Employee Benefit and Retirement Plans

Defined Benefit Pension Plans

The Company has a defined benefit pension plan covering certain full-time non-union domestic employees and certain domestic employees covered by a collective bargaining agreement who have completed service prior to January 1, 2003 (the “Pension Plan”). Participants in the Pension Plan have not earned any additional pension benefits after December 31, 2002. The Company also sponsors defined benefit plans for certain former employees of its United Kingdom and other European entities (the “Foreign Plans”). The Foreign Plans were not considered to be material for any period presented in this Form 10-Q. These pension plans are noncontributory and benefits are based upon years of service. The Company also has health care and life insurance plans that provide post-retirement benefits to certain retired domestic employees (the “Postretirement Plans”). The Postretirement Plans are, in most cases, contributory with retiree contributions adjusted annually.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Each quarter the Company recognizes interest cost of the Pension Plan’s projected benefit obligation offset by the expected return on Pension Plan assets. The Company records pension expense (income) as the effect of actual gains and losses exceeding the expected return on Pension Plan assets (including changes in actuarial assumptions) less changes in the Pension Plan’s projected benefit obligation (including changes in actuarial assumptions) in the fourth quarter of each year. This accounting results in volatility in pension expense or income; therefore, the Company reports pension expense (income) on a separate line of its Statements of Operations in each period.

The Company made contributions of $17,230 and $3,850 to the Pension Plan during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. The Company’s contributions to the Pension Plan are expected to be $20,550 in total for Fiscal 2012 (see Note 7 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2011).

The following table includes only the Pension Plan. The Foreign Plans were not considered to be material for any period presented below. The components of net periodic benefit cost are as follows:

 

     Pension Plan     Postretirement Plans  
     Three Months Ended     Three Months Ended  
     March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Service cost

   $ —        $ —        $ 55      $ 62   

Interest cost

     2,221        2,334        64        70   

Expected return on plan assets

     (2,350     (2,703     —          —     

Amortization of actuarial (gain)

     —          —          (24     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit (income) cost (a)

   $ (129   $ (369   $ 95      $ 107   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) net benefit (income) cost does not include costs related to the Foreign Plans of $75 and $57 for the Three Months Ended March 31, 2012 and April 2, 2011, respectively.

Deferred Compensation Plans

The Company’s liability under the employee deferred compensation plan was $4,812, $4,602 and $4,828 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively. This liability is included in other long-term liabilities. The Company’s cash liability under the director deferred compensation plan was $1,329, $1,237 and $1,132 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively. This liability is included in other long-term liabilities.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Note 9—Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income as of March 31, 2012, December 31, 2011 and April 2, 2011 are summarized below:

 

     March 31,     December 31,     April 2,  
     2012     2011     2011  

Foreign currency translation adjustments (a)

   $ 41,012      $ 21,356      $ 74,236   

Actuarial losses related to post retirement medical plans, net of tax of $1,232 as of March 31, 2012, December 31, 2011 and April 2, 2011

     (1,299     (1,299     (1,099

(Loss) on cash flow hedges, net of taxes of $3,577, $2,930 and $1,340 as of March 31, 2012, December 31, 2011 and April 2, 2011, respectively

     (5,645     (3,937     (3,530

Other

     111        122        11   
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income

   $ 34,179      $ 16,242      $ 69,618   
  

 

 

   

 

 

   

 

 

 

 

(a) Foreign currency translation adjustments related to the Company’s assets and liabilities reflect the change in the U.S. dollar relative to functional currencies in countries where the Company conducts certain of its operations and the fact that the majority of the Company’s assets are related to the Company’s business outside of the U.S.

Note 10—Fair Value Measurement

The Company utilizes the market approach to measure fair value for financial assets and liabilities, which primarily include derivative contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company uses the income approach to measure fair value of the Interest Rate Cap Agreement (see Note 14 of Notes to Consolidated Condensed Financial Statements). The Company classifies its financial instruments in a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:

 

  Level  1— Inputs are quoted prices in active markets for identical assets or liabilities.

 

  Level  2— Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

 

  Level  3— Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Valuation Techniques

The fair value of foreign currency exchange forward contracts was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement dates and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward or spot exchange rate, as applicable. The fair value of these foreign currency exchange contracts is based on quoted prices that include the effects of U.S. and foreign interest rate yield curves and, therefore, meets the definition of Level 2 fair value, as defined above.

The fair value of the Interest Rate Cap Agreement (as defined below) was determined using broker quotes, which use discounted cash flows, an income approach, and the then-applicable forward LIBOR rates and, therefore, meets the definition of Level 2 fair value, as defined above.

The fair value of long-lived assets was based on the Company’s best estimates of future cash flows and, therefore, meets the definition of Level 3 fair value, as defined above.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis, as of March 31, 2012, December 31, 2011 and April 2, 2011:

 

     March 31, 2012      December 31, 2011      April 2, 2011  
     (Level 1)      (Level 2)      (Level 3)      (Level 1)      (Level 2)      (Level 3)      (Level 1)      (Level 2)      (Level 3)  

Assets

                          

Foreign currency exchange contracts

   $ —         $ 1,287       $ —         $ —         $ 5,587       $ —         $ —         $ 376       $ —     

Interest rate cap

     —           6,047         —           —           6,276         —           —           —           —     

Liabilities

                          

Foreign currency exchange contracts

   $ —         $ 1,148       $ —         $ —         $ 532       $ —         $ —         $ 7,133       $ —     

During the Three Months Ended March 31, 2012, the Company recorded non-cash impairment charges totaling $1,002 related to the long-lived assets, consisting of leasehold improvements and furniture and fixtures, of certain retail stores in the Sportswear Group, including its CK/Calvin Klein “bridge” business, which were scheduled to close as part of a restructuring plan (see Note 5 of Notes to Consolidated Condensed Financial Statements – Restructuring Expenses and Other Exit Costs). As of March 31, 2012, those assets, measured on a non-recurring basis, had a fair value of $210, based upon projected future cash flows of those retail stores through the expected dates of closure. There were no assets or liabilities measured on a non-recurring basis for the Three Months Ended April 2, 2011. See Note 1 of Notes to Consolidated Financial Statements – Nature of Operations and Summary of Significant Accounting Policies – Long-Lived Assets in the Company’s Annual Report on Form 10-K for Fiscal 2011 for a description of the testing of retail stores for impairment.

Note 11— Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2012, December 31, 2011 and April 2, 2011 are as follows:

 

          March 31, 2012      December 31, 2011      April 2, 2011  
    

Balance Sheet

Location

   Carrying
Amount
     Fair Value      Level in
Fair Value
Hierarchy
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Assets:

                       

Accounts receivable

   Accounts receivable, net of reserves    $ 346,941       $ 346,941          $ 322,976       $ 322,976       $ 396,035       $ 396,035   

Open foreign currency exchange contracts

   Prepaid expenses and other current assets      1,287         1,287         2         5,587         5,587         376         376   

Interest rate cap

   Other assets      6,047         6,047         2         6,276         6,276         —           —     

Liabilities:

                       

Accounts payable

   Accounts payable    $ 143,798       $ 143,798          $ 141,797       $ 141,797       $ 164,721       $ 164,721   

Short-term debt

   Short-term debt      74,872         74,872         1         43,021         43,021         146,423         146,423   

Open foreign currency exchange contracts

   Accrued liabilities      1,148         1,148         2         532         532         7,133         7,133   

2011 Term Loan, current portion

   Short-term debt      2,000         1,985         2         2,000         1,980         —           —     

2011 Term Loan

   Long-term debt      196,500         195,026         2         197,000         195,030         —           —     

See Note 17 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2011 for the methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments.

Derivative Financial Instruments

Foreign Currency Exchange Forward Contracts

During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, the Company’s Korean, European, Canadian and Mexican subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed to satisfy either up to the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period or payment of 100% of certain minimum royalty and advertising expenses. In addition, during the Three Months Ended March 31, 2012, one of the Company’s Mexican subsidiaries began a program, using foreign exchange forward contracts, to hedge up to 75% of the royalty payments due on net sales of Calvin Klein Jeans and Calvin Klein Underwear apparel. All of the foregoing forward contracts were designated as cash flow hedges, with gains and losses accumulated on the Consolidated Condensed Balance Sheets in Accumulated Other Comprehensive Income (“AOCI”) and recognized in Cost of Goods Sold, with the exception of the Mexican royalty forward contracts, for which gains and losses released from AOCI are recognized in Selling, general and administrative expense, in the Consolidated Condensed Statement of Operations during the periods in which the underlying transactions occur.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, the Company also continued hedging programs, which were accounted for as economic hedges, with gains and losses recorded directly in Other loss (income) in the Consolidated Condensed Statements of Operations in the period in which they are incurred. Those hedging programs included foreign currency exchange forward contracts that were designed to fix the number of Euros, Korean won, Canadian dollars, Mexican pesos or Singaporean dollars required to satisfy either (i) the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period; (ii) 50% of intercompany sales of inventory by a Euro functional currency subsidiary to a British subsidiary, whose functional currency is the British pound; or (iii) U.S. dollar denominated intercompany loans and payables.

Interest Rate Cap Agreement

On July 1, 2011, the Company entered into the Interest Rate Cap Agreement, which is intended to limit the interest rate payable on average over the term of the Interest Rate Cap Agreement to 5.6975% per annum with respect to the portion of the 2011 Term Loan (as defined below) that equals the notional amount of the Interest Rate Cap Agreement. The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%. See Note 14 of Notes to Consolidated Condensed Financial Statements—Interest Rate Cap Agreement.

The following table summarizes the Company’s derivative instruments as of March 31, 2012, December 31, 2011 and April 2, 2011:

 

         

Asset Derivatives

    

Liability Derivatives

 
               Fair Value           Fair Value  
    

Type
(a)

  

Balance Sheet
Location

   March 31,
2012
     December 31,
2011
     April 2,
2011
    

Balance Sheet
Location

   March 31,
2012
     December 31,
2011
     April 2,
2011
 

Derivatives designated as hedging instruments under FASB ASC 815-20

                          

Foreign exchange contracts

   CF    Prepaid expenses and other current assets    $ 75       $ 1,308       $ —         Accrued liabilities    $ 802       $ —         $ 4,191   

Interest rate cap

   CF    Other assets      6,047         6,276         —              —           —           —     
        

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 
         $ 6,122       $ 7,584       $ —            $ 802       $ —         $ 4,191   
        

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments under FASB ASC 815-20

                          

Foreign exchange contracts

      Prepaid expenses and other current assets    $ 1,212       $ 4,279       $ 376       Accrued liabilities    $ 346       $ 532       $ 2,942   
        

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Total derivatives

         $ 7,334       $ 11,863       $ 376          $ 1,148       $ 532       $ 7,133   
        

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

 

(a) CF = cash flow hedge

 

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Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

The following tables summarize the effect of the Company’s derivative instruments on the Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011:

 

Derivatives in
FASB ASC
815-20 Cash
Flow Hedging
Relationships

  Nature of Hedged
Transaction
 

Amount of (Loss) Recognized
in OCI on Derivatives
(Effective Portion)

   

Location of Gain
(Loss) Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

  Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
   

Location of Gain
(Loss) Recognized
in Income on
Derivative
(Ineffective
Portion) (c)

  Amount of (Loss)
Recognized in Income on
Derivative (Ineffective
Portion)
 
        Three Months
Ended
  Three Months
Ended
        Three Months
Ended
    Three Months
Ended
        Three Months
Ended
    Three Months
Ended
 
       

March 31, 2012

  April 2, 2011         March 31,
2012
    April 2, 2011         March 31,
2012
    April 2, 2011  

Foreign exchange contracts

  Minimum
royalty
and
advertising
costs (a)
  $(516)   $ (700   cost of goods sold   $ 176      $ (337   other loss/income   $ (15   $ (22

Foreign exchange contracts

  Purchases
of
inventory
(b)
  (1,561)     (2,538   cost of goods sold     (120     (749   other loss/income     (20     (58

Interest rate cap

  Interest
expense
on 2011
Term
Loan
  (229)     —        interest expense     (7     —        other loss/income     —          —     
   

 

 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total

    $(2,306)   $ (3,238     $ 49      $ (1,086     $ (35   $ (80
   

 

 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

 

(a) At March 31, 2012, the amount of minimum royalty costs hedged was $16,918; contracts expire through March 2013. At April 2, 2011, the amount of minimum royalty costs hedged was $13,366; contracts expire through March 2012.
(b) At March 31, 2012, the amount of inventory purchases hedged was $48,850; contracts expire through March 2013. At April 2, 2011, the amount of inventory purchases hedged was $66,800; contracts expire through August 2012.
(c) No amounts were excluded from effectiveness testing.

 

Derivatives not
designated as
hedging instruments
under FASB ASC
815-20

  

Nature of Hedged
Transaction

  

Instrument

   Amount Hedged      Maturity Date     

Location of Gain
(Loss) Recognized
in Income on
Derivative

   Amount of Gain
(Loss) Recognized in
Income on
Derivative
 
               Three Months Ended      Three Months Ended           Three Months
Ended
 
               March 31,
2012
     April 2,
2011
     March 31,
2012
     April 2,
2011
          March 31,
2012
    April 2,
2011
 

Foreign exchange contracts (d)

   Intercompany sales of inventory    Forward contracts      10,794         10,152        
 
March
2013
  
  
    
 
April
2012
  
  
   other loss/income      (20     268   

Foreign exchange contracts (e)

   Minimum royalty and advertising costs    Forward contracts      10,000         10,000        
 
January
2013
  
  
    
 
January
2012
  
  
   other loss/income      (251     (671

Foreign exchange contracts

   Intercompany payables    Forward contracts      24,500         26,000        
 
October
2012
  
  
    
 
November
2011
  
  
   other loss/income      (769     (1,798

Foreign exchange contracts

   Intercompany loans    Forward contracts      34,500         20,000        
 
September
2012
  
  
    
 
November
2011
  
  
   other loss/income      (939     (1,156

Foreign exchange contracts

   Intercompany loans    Forward contracts      6,000            July 2012          other loss/income      171        —     
                       

 

 

   

 

 

 

Total

                        $ (1,808   $ (3,357
                       

 

 

   

 

 

 

 

(d) Forward contracts used to offset 50% of British Pounds-denominated intercompany sales by a subsidiary whose functional currency is the Euro.
(e) Forward contracts used to offset payment of minimum royalty and advertising costs related to sales of inventory by the Company's foreign subsidiary whose functional currency was the Euro, entered into by Warnaco on behalf of a foreign subsidiary.

A reconciliation of the balance of AOCI during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 related to cash flow hedges is as follows:

 

Balance January 1, 2011

   $ (2,331

Derivative losses recognized

     (3,238

Losses amortized to earnings

     1,086   
  

 

 

 

Balance before tax effect

     (4,483

Tax effect

     953   
  

 

 

 

Balance April 2, 2011, net of tax

   $ (3,530
  

 

 

 

Balance December 31, 2011

   $ (3,937

Derivative losses recognized

     (2,306

Gain amortized to earnings

     (49
  

 

 

 

Balance before tax effect

     (6,292

Tax effect

     647   
  

 

 

 

Balance March 31, 2012, net of tax

   $ (5,645
  

 

 

 

See Note 14 of Notes to Consolidated Condensed Financial Statements—Interest Rate Cap Agreement for a reconciliation of the balance of AOCI related to the Interest Rate Cap Agreement, which is included in the reconciliation above.

 

15


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

During the 12 months following March 31, 2012, the net amount of losses recorded in Other Comprehensive Income as of March 31, 2012 that are estimated to be amortized into earnings is $1,153 on a pre-tax basis. During the Three Months Ended March 31, 2012, the Company expected that all originally forecasted purchases of inventory, payment of minimum royalty and advertising costs, or payment of interest on the 2011 Term Loan, which were covered by cash flow hedges, would occur by the end of the respective originally specified time periods or within two months after that time. Therefore, no amount of gains or losses was reclassified into earnings during the Three Months Ended March 31, 2012 as a result of the discontinuance of those cash flow hedges.

Note 12—Inventories

Inventories are valued at the lower of cost to the Company (using the first-in-first-out method) or market and are summarized as follows:

 

     March 31, 2012      December 31, 2011      April 2, 2011  

Finished goods

   $ 379,854       $ 350,010       $ 362,924   

Raw materials

     220         825         1,396   
  

 

 

    

 

 

    

 

 

 
   $ 380,074       $ 350,835       $ 364,320   
  

 

 

    

 

 

    

 

 

 

In addition to the amounts of inventory noted above, the Company records deposits related to advance payments to certain third-party suppliers for the future purchase of finished goods. Such deposits are recorded in Prepaid and other current assets on the Company’s Consolidated Condensed Balance Sheets. As of March 31, 2012, December 31, 2011 and April 2, 2011, the amount of such deposits was $1,537, $4,385 and $5,660, respectively.

See Note 11 of Notes to Consolidated Condensed Financial Statements for details on the Company’s hedging programs related to purchases of inventory.

Note 13—Intangible Assets and Goodwill

The following tables set forth intangible assets as of March 31, 2012, December 31, 2011 and April 2, 2011 and the activity in the intangible asset accounts for the Three Months Ended March 31, 2012:

 

    March 31, 2012     December 31, 2011     April 2, 2011  
    Gross Carrying
Amount
    Accumulated
Amortization
    Net     Gross Carrying
Amount
    Accumulated
Amortization
    Net     Gross Carrying
Amount
    Accumulated
Amortization
    Net  

Finite-lived intangible assets:

                 

Licenses for a term (Company as licensee)

  $ 327,523      $ 101,103      $ 226,420      $ 323,950      $ 99,229      $ 224,721      $ 336,652      $ 57,213      $ 279,439   

Other

    34,995        15,757        19,238        34,459        14,932        19,527        35,591        12,150        23,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    362,518        116,860        245,658        358,409        114,161        244,248        372,243        69,363        302,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Indefinite-lived intangible assets:

                 

Trademarks

    54,415        —          54,415        53,519        —          53,519        54,715        —          54,715   

Licenses in perpetuity

    22,797        —          22,797        23,113        —          23,113        23,113        —          23,113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    77,212        —          77,212        76,632        —          76,632        77,828        —          77,828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets

  $ 439,730      $ 116,860      $ 322,870      $ 435,041      $ 114,161      $ 320,880      $ 450,071      $ 69,363      $ 380,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

 

     Trademarks      Licenses
in
Perpetuity
    Licenses
for a Term
    Other
Finite-lived
Intangible
Assets
    Total  

Balance at December 31, 2011

   $ 53,519       $ 23,113      $ 224,721      $ 19,527      $ 320,880   

Amortization expense

     —           —          (1,874     (825     (2,699

Translation adjustments

     —           —          4,153        536        4,689   

Tax benefit (a)

     896         (316     (580     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 54,415       $ 22,797      $ 226,420      $ 19,238      $ 322,870   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Relates to the allocation of a tax benefit realized for the excess of tax deductible goodwill over book goodwill in certain jurisdictions.

The following table summarizes the Company’s estimated amortization expense for intangible assets for the next five years:

 

2013

   $ 10,331   

2014

     9,154   

2015

     9,152   

2016

     9,130   

2017

     8,873   

The following table summarizes the changes in the carrying amount of goodwill for the Three Months Ended March 31, 2012:

 

     Sportswear
Group
     Intimate
Apparel Group
     Swimwear
Group
     Total  

Goodwill balance at December 31, 2011

   $ 134,395       $ 4,911       $ 642       $ 139,948   

Translation adjustments

     3,881         197         —           4,078   
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill balance at March 31, 2012

   $ 138,276       $ 5,108       $ 642       $ 144,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Note 14—Debt

Debt was as follows:

 

00000000000 00000000000 00000000000
     March 31,
2012
     December 31,
2011
     April 2,
2011
 

Short-term debt:

        

Current portion of 2011 Term Loan

   $ 2,000       $ 2,000       $ —     

CKJEA Notes payable and Other

     58,701         43,021         38,309   

2008 Credit Agreements

     16,171         —           96,707   

Premium on interest rate cap—current

     2,571         2,492         —     

Italian Note

     —           —           11,407   
  

 

 

    

 

 

    

 

 

 
     79,443         47,513         146,423   
  

 

 

    

 

 

    

 

 

 

Long-term debt:

        

2011 Term Loan

     196,500         197,000         —     

Premium on interest rate cap

     10,907         11,477         —     
  

 

 

    

 

 

    

 

 

 
     207,407         208,477         —     
  

 

 

    

 

 

    

 

 

 

Total Debt

   $ 286,850       $ 255,990       $ 146,423   
  

 

 

    

 

 

    

 

 

 

2011 Term Loan Agreement

On June 17, 2011, Warnaco Group, Warnaco, Calvin Klein Jeanswear Company (“CK Jeans”), an indirect wholly-owned subsidiary of Warnaco Group, and Warnaco Swimwear Products Inc. (“Warnaco Swimwear”), an indirect wholly-owned subsidiary of Warnaco Group, entered into a term loan agreement (the “2011 Term Loan Agreement”) and the term loan thereunder (the “2011 Term Loan”) with the financial institutions which are the lenders thereunder (the “Lenders”). Warnaco, CK Jeans and Warnaco Swimwear are co-borrowers on a joint and several basis under the 2011 Term Loan Agreement (the “Borrowers”). The 2011 Term Loan matures on June 17, 2018. As of March 31, 2012, there was $198,500 in term loans outstanding under the 2011 Term Loan Agreement.

The 2011 Term Loan Agreement provides interest rate options, at the Borrowers’ election, including a base rate (as defined in the 2011 Term Loan Agreement) plus a margin of 1.75% or at LIBOR (with a floor of 1.00%) plus a margin of 2.75%, in each case, on a per annum basis. At March 31, 2012 and December 31, 2011, the interest rate on the entire balance of the 2011 Term Loan was 3.75%, based on three-month LIBOR (with a floor of 1.00%) plus a margin of 2.75%.

Interest Rate Cap Agreement

On July 1, 2011, the Company entered into a deferred premium interest rate cap agreement with HSBC Bank USA (the “Counterparty”), effective July 29, 2011, on a notional amount of $120,000 (the “Interest Rate Cap Agreement”), which is a series of 27 individual caplets that reset and settle quarterly over the period from October 31, 2011 to April 30, 2018. The effect of the Interest Rate Cap Agreement is to limit the interest rate payable on average over the term of the Interest Rate Cap Agreement to 5.6975% per annum with respect to the portion of the 2011 Term Loan that equals the notional amount of the Interest Rate Cap Agreement.

The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%. At the inception of the hedging relationship, the fair value of the Interest Rate Cap Agreement of $14,395 was allocated to the respective caplets within the Interest Rate Cap Agreement on a fair value basis. To the extent that the interest rate cap contracts are effective in offsetting that variability, changes in the Interest Rate Cap Agreement’s fair value will be recorded in AOCI in the Company’s Consolidated Condensed Balance Sheets and subsequently recognized in interest expense in the Consolidated Condensed Statements of Operations as the underlying interest expense is recognized on the 2011 Term Loan.

On March 31, 2012 and December 31, 2011, the fair value of the Interest Rate Cap Agreement was $6,047 and $6,276, respectively, which was recorded in Other assets. On March 31, 2012, Deferred premium on the Interest Rate Cap Agreement was $13,478, of which $2,571 was recorded in Short-term debt and $10,907 was recorded in Long-term debt. On December 31, 2011, Deferred premium on the Interest Rate Cap Agreement was $13,969, of which $2,492 was recorded in Short-term debt and $11,477 was recorded in Long-term debt.

 

18


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

A reconciliation of the balance of AOCI during the Three Months Ended March 31, 2012 related to the Interest Rate Cap Agreement is as follows:

 

0000000000

Balance December 31, 2011, net of tax

   $ (4,848

Change in fair value of interest rate cap

     (229

Initial fair value of maturing caplets

     7   
  

 

 

 

Balance March 31, 2012, pre-tax

     (5,070

Tax effect

     90   
  

 

 

 

Balance March 31, 2012, net of tax

   $ (4,980
  

 

 

 

Interest expense recognized on the Interest Rate Cap Agreement during the Three Months Ended March 31, 2012 is as follows:

 

0000000000

Interest Expense

  

Initial fair value of maturing caplets

   $ 7   

Accretion of deferred premium

     106   
  

 

 

 

Total

   $ 113   
  

 

 

 

2008 Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “2008 Credit Agreement”) and Warnaco of Canada Company, an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “2008 Canadian Credit Agreement” and, together with the 2008 Credit Agreement, the “2008 Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit. On June 17, 2011 and November 8, 2011, the 2008 Credit Agreements were amended (see Note 12 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2011).

As of March 31, 2012, the 2008 Credit Agreement had interest rate options (dependent on the amount borrowed and the repayment period) of (i) 3.75%, based on a base rate plus 0.50%, or (ii) 1.97%, based on LIBOR plus 1.50%. The 2008 Canadian Credit Agreement had interest rate options of (i) 3.50%, based on the prime rate announced by Bank of America (acting through its Canada branch) plus 0.50%, or (ii) 2.67%, based on the BA Rate (as defined below), in each case, on a per annum basis. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

As of March 31, 2012, the Company had $16,171 of loans and approximately $32,205 in letters of credit outstanding under the 2008 Credit Agreement, leaving approximately $179,651 of availability. As of March 31, 2012, there were no loans and $3,462 in letters of credit outstanding under the 2008 Canadian Credit Agreement and the available line of credit was approximately $19,204.

CKJEA Notes and Other Short-Term Debt

One of the Company’s European businesses holds short-term notes payable (the “CKJEA Notes”). The total amounts of CKJEA Notes payable of $44,190 at March 31, 2012, $36,648 at December 31, 2011 and $29,236 at April 2, 2011 each consist of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA Notes payable was 3.49% as of March 31, 2012, 4.00% as of December 31, 2011 and 2.24% as of April 2, 2011. All of the CKJEA Notes payable are short-term and were renewed during the Three Months Ended March 31, 2012 for additional terms of no more than 12 months.

 

19


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

In addition, as of March 31, 2012, December 31, 2011 and April 2, 2011, the Company’s Brazilian subsidiary, WBR, had lines of credit with several banks, with total outstanding balances of $557, $6,373 and $9,073, respectively, recorded in Short-term debt in the Company’s Consolidated Condensed Balance Sheets or Consolidated Balance Sheets, which were secured by approximately equal amounts of WBR’s trade accounts receivable. In addition, as of March 31, 2012, WBR has outstanding short-term loans with several Brazilian banks totaling $13,954, with a weighted average interest rate of 11.69%.

During September 2011, one of the Company’s Asian subsidiaries entered into a short-term $25,000 revolving credit facility with one lender (the “Asian Credit Facility”) to be used for working capital and general corporate purposes. The Asian Credit Facility bears interest of 1.75% over one-month LIBOR, which is due monthly. At the end of each month, amounts outstanding under the Asian Credit Facility may be carried forward for further one-month periods for up to one year. The Asian Credit Facility may be renewed annually. The Asian Credit Facility is subject to certain terms and conditions customary for a credit facility of this type and may be terminated at any time at the discretion of the lender. There were no borrowings as of December 31, 2011 or March 31, 2012 or during the Three Months Ended March 31, 2012.

Italian Note

On September 30, 2010, one of the Company’s Italian subsidiaries entered into a €10,000 loan (the “Italian Note”). As of April 2, 2011, the principal balance of the Italian Note was €8,020 (equal to approximately $11,407 on that date) with an annual interest rate of 3.72%. On June 30, 2011, the Company repaid the full outstanding balance of €6,040 (equal to approximately $8,600 on that date) on the Italian Note with a portion of the proceeds of the 2011 Term Loan (see above).

Note 15—Stockholders’ Equity

Preferred Stock

The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value $0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value $0.01 per share. There were no shares of preferred stock issued and outstanding as of March 31, 2012, December 31, 2011 and April 2, 2011.

Share Repurchase Programs

During September 2011, the Company’s Board of Directors approved a multi-year share repurchase program (the “2011 Share Repurchase Program”) for up to $200,000 of the Company’s outstanding common stock. During the Three Months Ended March 31, 2012, the Company did not repurchase any shares under the 2011 Share Repurchase Program, leaving $188,674 of common stock to be repurchased.

On May 12, 2010, the Company’s Board of Directors authorized a share repurchase program (the “2010 Share Repurchase Program”) for the repurchase of up to 5,000,000 shares of the Company’s common stock. During the Three Months Ended April 2, 2011, the Company repurchased 560,842 shares of its common stock under the 2010 Share Repurchase Program for $29,150 (based on an average of $51.97 per share). There are no shares of the Company’s common stock available for repurchase under the 2010 Share Repurchase Program.

Stock Incentive Plans

The Company granted 295,449 and 342,600 stock options during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. The fair values of stock options granted during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 were estimated as of the dates of grant using the Black-Scholes-Merton option pricing model with the following assumptions:

 

20


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Weighted average risk free rate of return (a)

     0.62     1.66

Dividend yield

              

Expected volatility of the market price of the Company’s common stock

     56.0     57.7

Expected option life (years)

     4.1        4.1   

 

(a) based on the quoted yield for U.S. five-year treasury bonds as of the date of grant.

A summary of stock-based compensation expense is as follows:

 

     Three Months Ended  
     March 31, 2012      April 2, 2011  

Stock-based compensation expense before income taxes:

     

Stock options

   $ 2,028       $ 3,821   

Restricted stock grants

     3,395         7,526   
  

 

 

    

 

 

 

Total

     5,423         11,347   
  

 

 

    

 

 

 

Income tax benefit:

     

Stock options

     682         1,366   

Restricted stock grants

     453         2,263   
  

 

 

    

 

 

 

Total

     1,135         3,629   
  

 

 

    

 

 

 

Stock-based compensation expense after income taxes:

     

Stock options

     1,346         2,455   

Restricted stock grants

     2,942         5,263   
  

 

 

    

 

 

 

Total

   $ 4,288       $ 7,718   
  

 

 

    

 

 

 

A summary of stock option award activity under the Company’s stock incentive plans as of and for the Three Months Ended March 31, 2012 is presented below:

 

     Options     Weighted
Average
Exercise
Price
 

Outstanding as of December 31, 2011

     1,886,925      $ 38.35   

Granted

     295,449        56.53   

Exercised

     (479,112     27.39   

Forfeited / Expired

     (21,335     49.63   
  

 

 

   

Outstanding as of March 31, 2012

     1,681,927      $ 44.52   
  

 

 

   

 

 

 

Options Exercisable as of March 31, 2012

     1,009,827      $ 38.82   
  

 

 

   

 

 

 

 

21


Table of Contents

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

A summary of the activity for unvested restricted share/unit awards under the Company’s stock incentive plans (excluding Performance Awards, defined below) as of and for the Three Months Ended March 31, 2012 is presented below:

 

     Restricted
shares/units
    Weighted Average
Grant Date Fair
Value
 

Unvested as of December 31, 2011

     859,766      $ 39.77   

Granted

     176,847        56.58   

Vested

     (258,101     29.58   

Forfeited

     (17,614     46.80   
  

 

 

   

Unvested as of March 31, 2012

     760,898      $ 46.96   
  

 

 

   

During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, share-based compensation awards granted to certain of the Company’s officers under Warnaco Group’s 2005 Stock Incentive Plan included 55,557 and 80,050 performance-based restricted stock/restricted unit awards, respectively, (“Performance Awards”) in addition to the service-based stock options and restricted stock awards, included in the preceding tables. The Performance Awards include both a performance condition and a market condition (see Note 1 of Notes to Consolidated Financial Statements—Nature of Operations and Summary of Significant Accounting Policies – Stock-Based Compensation in the Company’s Annual Report on Form 10-K for Fiscal 2011 for further details on the Performance Awards).

Under the performance condition, the estimated compensation expense is based on the grant date fair value (the closing price of the Company’s common stock on the date of grant) and the Company’s current expectations of the probable number of Performance Awards that will ultimately be earned. The fair value of the Performance Awards under the market condition on the respective grant dates ($1,893 as of March 6, 2012 and $3,245 as of March 1, 2011) is based upon a Monte Carlo simulation model, which encompasses the Company’s relative total shareholder return (“TSR”) (change in closing price of the Company’s common stock on the New York Stock Exchange compared to that of a peer group of companies (“Peer Companies”)) during the Measurement Period. The Measurement Period includes both:

 

  (i) the period from the beginning of Fiscal 2012 to March 6, 2012 (the grant date) for Performance Awards granted on March 6, 2012, and the period from the beginning of Fiscal 2011 to March 1, 2011 (the grant date) for Performance Awards granted on March 1, 2011, for which actual TSR’s are calculated; and

 

  (ii) the periods from the respective grant dates to the end of the fiscal years ending 2013 or 2014, respectively, a total of 2.82 years and 2.83 years, respectively,(the “Remaining Measurement Period”), for which simulated TSR’s are calculated.

The calculation of simulated TSR’s under the Monte Carlo model for the Remaining Measurement Period for Performance Awards granted on March 6, 2012 and on March 1, 2011 included the following assumptions:

 

     March 6, 2012    March 1, 2011

Weighted average risk free rate of return

   0.38%    1.07%

Dividend yield

     

Expected volatility - Company (a)

   38.26%    61.50%

Expected volatility - Peer Companies

   28.3% - 74.8%    38.2% - 113.4%

Remaining measurement period (years)

   2.82    2.83

 

(a) Expected volatility—Company for Performance Awards granted on March 6, 2012 and on March 1, 2011 is based on a Remaining Measurement Period of 2.82 years and 2.83 years, respectively.

The Company recorded compensation expense for the Performance Awards during the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011 based on the performance condition.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Performance Award activity for the Three Months Ended March 31, 2012 was as follows:

 

     Performance Shares     Weighted Average Grant
Date Fair Value
 

Unvested as of December 31, 2011

     154,500      $ 49.65   

Granted

     55,557        56.54   

Vested

     —          —     

Forfeited

     (1,450     55.57   
  

 

 

   

Unvested as of March 31, 2012

     208,607      $ 51.44   
  

 

 

   

 

 

 

Note 16—Supplemental Cash Flow Information

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Cash paid (received) during the period for:

    

Interest expense

   $ 3,769      $ 2,034   

Interest income

     (368     (455

Income taxes, net of refunds received

     18,334        20,619   

Supplemental non-cash investing and financing activities:

    

Accounts payable for purchase of fixed assets

     5,993        6,130   

Note 17—Income per Common Share

The following table presents the calculation of both basic and diluted income per common share attributable to Warnaco Group common shareholders, giving effect to participating securities. The Company has determined that based on a review of its share-based awards, only its restricted stock awards are deemed participating securities, which participate equally with common shareholders. The weighted average restricted stock outstanding was 545,523 shares and 651,791 shares for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, respectively. Undistributed income allocated to participating securities is based on the proportion of restricted stock outstanding to the sum of weighted average number of common shares outstanding attributable to Warnaco Group common shareholders and restricted stock outstanding for each period presented below.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

 

     Three Months Ended  
     March 31, 2012     April 2, 2011  

Numerator for basic and diluted income per common share:

    

Income from continuing operations attributable to Warnaco Group common shareholders and participating securities

   $ 32,882      $ 44,532   

Less: allocation to participating securities

     (437     (652
  

 

 

   

 

 

 

Income from continuing operations attributable to Warnaco Group common shareholders

   $ 32,445      $ 43,880   
  

 

 

   

 

 

 

Income (Loss) from discontinued operations, net of tax, attributable to Warnaco Group common shareholders and participating securities

   $ 3,034      $ (501

Less: allocation to participating securities

     (40     7   
  

 

 

   

 

 

 

Income (Loss) from discontinued operations attributable to Warnaco Group common shareholders

   $ 2,994      $ (494
  

 

 

   

 

 

 

Net income attributable to Warnaco Group common shareholders and participating securities

   $ 35,916      $ 44,031   

Less: allocation to participating securities

     (477     (645
  

 

 

   

 

 

 

Net income attributable to Warnaco Group common shareholders

   $ 35,439      $ 43,386   
  

 

 

   

 

 

 

Basic income per common share attributable to Warnaco Group common shareholders:

    

Weighted average number of common shares outstanding used in computing income per common share

     40,530,667        43,891,868   
  

 

 

   

 

 

 

Income per common share from continuing operations

   $ 0.80      $ 1.00   

Income (Loss) per common share from discontinued operations

     0.07        (0.01
  

 

 

   

 

 

 

Net income per common share

   $ 0.87      $ 0.99   
  

 

 

   

 

 

 

Diluted income per share attributable to Warnaco Group common shareholders:

    

Weighted average number of common shares outstanding used in computing basic income per common share

     40,530,667        43,891,868   

Effect of dilutive securities:

    

Stock options and restricted stock units

     887,285        898,863   
  

 

 

   

 

 

 

Weighted average number of shares and share equivalents used in computing income per common share

     41,417,952        44,790,731   
  

 

 

   

 

 

 

Income per common share from continuing operations

   $ 0.78      $ 0.98   

Income (Loss) per common share from discontinued operations

     0.08        (0.01
  

 

 

   

 

 

 

Net income per common share

   $ 0.86      $ 0.97   
  

 

 

   

 

 

 

Number of anti-dilutive “out-of-the-money” stock options outstanding (a)

     8,450        331,150   
  

 

 

   

 

 

 

 

(a) options to purchase shares of common stock at an exercise price greater than the average market price of the underlying shares are anti-dilutive and therefore not included in the computation of diluted income per common share from continuing operations.

Note 18—Legal Matters

Lejaby Claims: On August 18, 2009, Palmers Textil AG (“Palmers”) filed an action against the Company in Le Tribunal de Commerce de Paris (The Paris Commercial Court), alleging that the Company made certain misrepresentations in the sale agreement, and seeking to declare the sale null and void, monetary damages in an unspecified amount and other relief (the “Palmers Suit”). On February 13, 2012, Le Tribunal de Commerce de Paris dismissed the Palmers Suit and awarded the Company €100 in costs. On March 12, 2012, Palmers appealed the judgment. In addition, the Company and Palmers have been unable to agree on certain post-closing adjustments to the purchase price, including adjustments for working capital. The dispute regarding the amount of post-closing adjustments is not a subject of the Palmers Suit. As of March 31, 2012, the Company had a reserve of approximately $4,000 in connection with these legal matters.

Lejaby Receivables: As of March 31, 2012, the Company had a loan receivable recorded in Other assets on the Company’s Consolidated Condensed Balance Sheets of $14,300 from Palmers related to the Company’s sale of its Lejaby business to Palmers on March 10, 2008. The Company also had a receivable of $4,000 recorded in Other assets on the Company’s Consolidated Condensed Balance Sheet as of March 31, 2012 related to working capital adjustments associated with such sale. During April 2012, the Company received certain information which indicates the potential that all or a portion of the receivables from Palmers might not be collectible. However, since the Company has not been able to verify the accuracy of the information received, the Company believes that it cannot reliably estimate a probable range of amounts that it may ultimately collect with respect to its receivables from Palmers. Accordingly, as of March 31, 2012, no provision has been recorded against the receivables from Palmers in the Company’s Consolidated Condensed Financial Statements.

 

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THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

 

Other: In addition, from time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or cash flows.

Note 19—Commitments and Contingencies

The contractual obligations and commitments in existence as of March 31, 2012 did not differ materially from those disclosed as of December 31, 2011 in the Company’s Annual Report on Form 10-K for Fiscal 2011, except for the following changes, which occurred during the Three Months Ended March 31, 2012:

 

     2013      2014      2015      2016      2017      Thereafter      Total  

Operating leases

   $ 3,171       $ 2,442       $ 1,857       $ 1,834       $ 1,152       $ 7,888       $ 18,344   

Other contractual obligations

     1,014         544         279         108         163         996         3,104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,185       $ 2,986       $ 2,136       $ 1,942       $ 1,315       $ 8,884       $ 21,448   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2012, in the ordinary course of business, the Company had open purchase orders with suppliers of approximately $318,535, all of which are payable in Fiscal 2012.

As of March 31, 2012, the Company was also party to outstanding hedging instruments (see Note 11 of Notes to the Consolidated Condensed Financial Statements).

As of March 31, 2012, the Company remains under audit in various taxing jurisdictions (see Note 7 of Notes to Consolidated Condensed Financial Statements for a discussion related to the Company’s reserve for uncertain tax positions).

 

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

The Warnaco Group, Inc. (“Warnaco Group” and, collectively with its subsidiaries, the “Company”) is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and that could affect the market value of the Company’s common stock. This Quarterly Report on Form 10-Q, including the following discussion, but except for the historical information contained herein, contains forward-looking statements that involve risks and uncertainties. See “Statement Regarding Forward-Looking Disclosure.”

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the Consolidated Condensed Financial Statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Company’s Annual Report on Form 10-K for Fiscal 2011.

The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period from January 1, 2012 to December 29, 2012 (“Fiscal 2012”), the period from January 2, 2011 to December 31, 2011 (“Fiscal 2011”) and the period from January 3, 2010 to January 1, 2011 (“Fiscal 2010”) each contained 52 weeks of operations. Additionally, the period from January 1, 2012 to March 31, 2012 (the “Three Months Ended March 31, 2012”) and the period from January 2, 2011 to April 2, 2011 (the “Three Months Ended April 2, 2011”) each contained 13 weeks of operations.

The Company has three operating segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group. These groupings reflect the manner in which the Company’s business is managed and the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker, reviews the Company’s business.

References to “Calvin Klein Jeans” refer to jeans, accessories and “bridge” products. References to “Core Intimates” refer to the Intimate Apparel Group’s Warner’s®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names and intimate apparel private labels. References to “Retail” within each operating Group refer to the Company’s owned full-price free-standing stores, owned outlet stores, concession / “shop-in-shop” stores and on-line stores. Results related to stores operated by third parties under retail licenses or distributor agreements are included in “Wholesale” within each operating Group. References to “sales mix” refer to the channels of distribution in which the Company’s products are sold. For example, an unfavorable sales mix in a current period relative to a prior period refers to an increase in the percentage of sales of products in low margin channels of distribution (such as the off-price channel) to total sales. References to “allowances” refer to discounts given to wholesale customers based upon the expected rate of retail sales and general economic and retail forecasts.

References to the effects of fluctuations in foreign currencies are reflective of all of the following factors:

 

  (i) the translation of operating results for the current year period for entities reporting in currencies other than the U.S. dollar into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period);

 

  (ii) a transaction effect related to entities which purchase inventory in currencies other than that entity’s reporting currency. The transaction effect represents the effect of the following differences in the foreign currency exchange rates on cost of goods sold: (a) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the current period and (b) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the comparable prior year period; and

 

  (iii) gains and losses recorded by the Company as a result of fluctuations in foreign currencies and gains and losses related to the Company’s foreign currency hedge programs (see Note 11 of Notes to Consolidated Condensed Financial Statements).

Overview

Introduction

The Company designs, sources, markets, licenses and distributes sportswear, intimate apparel, and swimwear worldwide through highly recognized brand names. The Company’s products are distributed domestically and internationally in over 100 countries, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty, off-price, mass merchandisers and other stores, and to retail customers, through the Company’s owned full-price free standing retail stores, outlet stores, concession/shop-in-shop stores and the internet.

The Company’s mission is to become the premier global, branded apparel company. To accomplish its mission, the Company has identified the following key strategic objectives, which it intends to focus on over the next five years:

 

   

Optimize and grow the international Calvin Klein businesses. The Company intends to continue the global expansion of its Calvin Klein Jeans and Calvin Klein Underwear businesses, particularly in Latin America, Asia and Northern and Eastern Europe. The key driver for this expansion is expected to be achieved via growth in the Company’s retail business through a combination of new store openings and the selective acquisition of stores operated by distributors of the Company’s products. The Company expects to concentrate its investment in new store openings in the faster growing regions of Asia, with a continued focus on the People’s Republic of China, and Latin America. In Europe, the focus will be on improving productivity in existing stores and encouraging development of stores operated by distributors.

During the Three Months Ended March 31, 2012, the Company increased the number of Calvin Klein retail stores in Europe, Asia and South America, net of store closures, by 17 retail stores (consisting of an addition of 19 concession /shop-in-shop stores and a decrease of 2 outlet stores). As of March 31, 2012, the Company operated (i) 1,776 Calvin Klein retail stores worldwide (consisting of 379 free-standing stores (including 263 full price and 116 outlet stores), 1,395 concession /shop-in-shop stores, one Calvin Klein Underwear on-line store and one Calvin Klein Jeans on-line store) and (ii) one Speedo® on-line store.

 

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Retail net revenues increased 6.5% to $179.0 million for the Three Months Ended March 31, 2012 compared to $168.1 million for the Three Months Ended April 2, 2011, and represented 29.1% and 25.4% of the Company’s net revenues for those respective periods.

 

   

Gain market share in heritage businesses. The Company’s heritage businesses include Chaps®, Warner’s and Olga (both of which are included in Core Intimates) and Speedo® brands. During the past five years, the Company has focused on managing the existing product lines of the heritage businesses for profitability. The Company’s strategy over the next five years is to achieve growth of the heritage businesses through gains in market share, while maintaining operating margins. The Company believes it can achieve gains in market share through expansion of the number and style of product lines, channels and the customer base in which the heritage brands are sold.

 

   

Better alignment of organization with strategies. The Company believes that in order to achieve its strategic objectives it must build a more consumer-centric culture, with strong customer relationships and an increased focus on product quality and style. To that end, the Company has recently made key organizational changes. Specifically, the Company created the positions of Chief Merchandising Officer and Chief Commercial Officer for its Calvin Klein businesses. In addition, the Company is in the process of centralizing its design and merchandising functions and streamlining its planning and production operations.

Net Revenues

The Company’s net revenues decreased $46.7 million, or 7.0%, to $615.5 million for the Three Months Ended March 31, 2012 compared to $662.2 million for the Three Months Ended April 2, 2011. The decrease in net revenues includes the unfavorable effect of foreign currency fluctuations, which resulted in a decrease in net revenues of $7.6 million.

On a business segment basis, the decrease in net revenues was due to:

 

   

a decrease of $38.7 million in the Company’s Sportswear Group (which primarily reflects continued weakness in the Company’s U.S and European operations, partially offset by increases in other regions (primarily Asia)); and

 

   

a decrease of $9.8 million in the Swimwear Group (which primarily reflects the Company’s strategy of reducing sales of certain swimwear lines to lower margin customers);

 

   

partially offset by a $1.9 million increase in the Intimate Apparel Group.

On a channel basis, the decline in net revenues includes decreases in:

 

   

the wholesale channel of $57.6 million, primarily in the Sportswear Group and the Swimwear Group in the U.S. and Europe; and

 

   

the retail channel of $2.5 million (1.6%) in comparable store sales, primarily as a result of decreases in Korea due to the effect of warmer weather on winter offerings and, the Company believes, a general decline in the retail apparel industry;

 

   

partially offset by an increase in retail net revenues of $13.4 million due to the addition of 192,000 net square feet of retail space in the period subsequent to April 2, 2011 through March, 31, 2012, bringing the total of the Company’s retail space to 1.1 million square feet worldwide as of March 31, 2012. The increase in retail space includes space for both the Sportswear Group and the Intimate Apparel Group and includes the opening of additional Calvin Klein international retail stores and the acquisition of a controlling interest in the business of the Company’s distributor in India during the third quarter of Fiscal 2011.

Operating Income

The Company’s operating income decreased $17.5 million, or 25.1%, to $52.2 million for the Three Months Ended March 31, 2012 compared to $69.7 million for the Three Months Ended April 2, 2011, reflecting declines in the Sportswear Group ($25.0 million) and in the Intimate Apparel Group ($0.6 million), partially offset by an increase in the Swimwear Group ($0.7 million) and expense reductions (primarily associated with reductions in equity and incentive –based compensation expenses) in Corporate/other ($7.4 million). Operating income includes restructuring charges and other exit costs of $6.6 million for the Three Months Ended March 31, 2012 and $6.5 million for the Three Months Ended April 2, 2011 (see Liquidity and Capital Resources – Restructuring and Note 5 of Notes to Consolidated Condensed Financial Statements).

 

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During the Three Months Ended March 31, 2012, although the decline in operating income was primarily related to a decrease in net revenues, certain of the Company’s businesses, particularly in the U.S., Asia and Europe, continued to experience an increase in product and freight costs, which adversely affected the operating margins of the Company’s businesses. The Company expects that product costs will stabilize or decline during Fiscal 2012. During the Three Months Ended March 31, 2012, the Company was able to partially mitigate the cost increases described above in certain geographic markets in Asia by selectively increasing the selling prices of its goods, making early purchases of product and implementing other sourcing initiatives.

Earnings per Share

For the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, income from continuing operations per diluted share decreased 20.4% to $0.78 per diluted share (from $0.98 per diluted share), including an increase of $0.03 per diluted share due to the fluctuations in foreign currencies.

Balance Sheet

As of March 31, 2012, the Company’s balance sheet included cash and cash equivalents of $224.2 million and total debt of $286.9 million compared to $174.1 million and $146.4 million, respectively, as of April 2, 2011.

Non-GAAP Measures

The Company’s reported financial results are presented in accordance with GAAP. The reported operating income, income from continuing operations and diluted earnings per share from continuing operations reflect certain items which affect the comparability of those reported results. Those financial results are also presented on a non-GAAP basis, as defined by Regulation S-K section 10(e) of the Securities and Exchange Commission (“SEC”), to exclude the effect of these items. The Company’s computation of these non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measure to which they are reconciled, as presented in the following table:

 

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     Three Months Ended  
     March 31, 2012      April 2, 2011  

Operating income, as reported (GAAP)

   $ 52,219       $ 69,654   

Restructuring charges and pension income (a)

     6,536         6,177   
  

 

 

    

 

 

 

Operating income, as adjusted (non-GAAP)

   $ 58,755       $ 75,831   
  

 

 

    

 

 

 

Income from continuing operations attributable to Warnaco Group common shareholders, as reported (GAAP)

   $ 32,882       $ 44,532   

Restructuring charges and pension, net of income tax (a)

     4,648         4,121   

Taxation adjustment (b)

     357         1,130   
  

 

 

    

 

 

 

Income from continuing operations attributable to Warnaco Group common shareholders, as adjusted (non-GAAP)

   $ 37,887       $ 49,783   
  

 

 

    

 

 

 

Diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders, as reported (GAAP)

   $ 0.78       $ 0.98   

Restructuring charges and pension , net of income tax (a)

     0.11         0.09   

Taxation adjustment (b)

     0.01         0.03   
  

 

 

    

 

 

 

Diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders, as adjusted (non-GAAP)

   $ 0.90       $ 1.10   
  

 

 

    

 

 

 

 

a) For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of restructuring charges and pension income. Restructuring charges (on a pre-tax basis) were $6,590 and $6,489 for the Three Months Ended March 31, 2012 and Three Months Ended April 2, 2011, respectively. Pension income (on a pre-tax basis) was $(54) and $(312) for the Three Months Ended March 31, 2012 and Three Months Ended April 2, 2011, respectively. The income tax rates used to compute the income tax effect related to this adjustment correspond to the local statutory tax rates of the reporting entities that incurred restructuring charges or recognized pension income.
b) For the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, this adjustment reflects an additional amount required in order to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders at the Company’s forecasted normalized tax rates for Fiscal 2012 (31.6%) and Fiscal 2011 (33.2%), respectively. The Company’s forecasted normalized tax rates for both Fiscal 2012 and Fiscal 2011 exclude the effects of restructuring charges, pension income and certain tax adjustments related to either changes in estimates in prior period tax provisions or adjustments for certain discrete tax items. Adjustments for discrete items reflect the federal, state and foreign tax effects related to: 1) income taxes associated with legal entity reorganizations and restructurings; 2) tax provision or benefit resulting from statute expirations or the finalization of income tax examinations; and 3) other adjustments not considered part of the Company’s core business activities.

The Company believes it is valuable for users of its financial statements to be made aware of the non-GAAP financial information, as such measures are used by management to evaluate the operating performance of the Company’s continuing businesses on a comparable basis and to make operating and strategic decisions. Such non-GAAP measures will also enhance users’ ability to analyze trends in the Company’s business. In addition, the Company uses performance targets based on non-GAAP operating income and diluted earnings per share from continuing operations as a component of the measurement of incentive compensation.

Earnings per Share – As Adjusted

On an adjusted (non-GAAP) basis, for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011, income from continuing operations per diluted share decreased 18.2% to $0.90 per diluted share (from $1.10 per diluted share).

Net Revenues on a Constant Currency Basis

The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company when the Company translates its foreign revenues into U.S. dollars. These rate fluctuations can have a significant effect on reported net revenues. As a supplement to its reported net revenues, the Company presents net revenues on a constant currency basis, which is a non-GAAP financial measure. The Company uses constant currency information to provide a framework to assess net revenue performance excluding the effects of changes in foreign currency exchange rates. Management believes this information is useful to investors to facilitate comparisons of net revenues and better identify trends in the Company’s businesses.

To calculate the increase in net revenues on a constant currency basis, net revenues for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

These constant currency net revenues should be viewed in addition to, and not in isolation from, or as a substitute to, the Company’s net revenues calculated in accordance with GAAP. The constant currency information presented in the following table for net revenues may not be comparable to similarly titled measures reported by other companies.

 

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NET REVENUES ON A CONSTANT CURRENCY BASIS

(Dollars in thousands)

 

     Three Months Ended March 31, 2012  
     GAAP
As Reported
     Impact of  Foreign
Currency Exchange
    Non-GAAP
Constant  Currency
 

By Segment:

       

Sportswear Group

   $ 300,803       $ (4,601   $ 305,404   

Intimate Apparel Group

     222,877         (2,364     225,241   

Swimwear Group

     91,861         (674     92,535   
  

 

 

    

 

 

   

 

 

 

Net revenues

   $ 615,541       $ (7,639   $ 623,180   
  

 

 

    

 

 

   

 

 

 

By Region:

       

United States

   $ 248,409       $ —        $ 248,409   

Europe

     146,312         (4,418     150,730   

Asia

     137,763         1,079        136,684   

Mexico and Central and South America

     53,103         (3,771     56,874   

Canada

     29,954         (529     30,483   
  

 

 

    

 

 

   

 

 

 

Total

   $ 615,541       $ (7,639   $ 623,180   
  

 

 

    

 

 

   

 

 

 

Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in its consolidated condensed financial statements and accompanying notes. Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. During the Three Months Ended March 31, 2012, there were no significant changes to the Company’s critical accounting policies from those described in the Company’s Annual Report on Form 10-K for Fiscal 2011.

Recent Accounting Pronouncements

There were no accounting pronouncements that were issued through the Three Months Ended March 31, 2012 that were not yet adopted that are expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows in future periods.

 

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Results of Operations

Statement of Operations (Selected Data)

The following tables summarize the historical results of operations of the Company for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011. The results of the Company’s discontinued operations are included in “Income (Loss) from discontinued operations, net of taxes” for all periods presented.

 

     Three Months
Ended  March
31, 2012
    % of Net
Revenues
    Three Months
Ended April  2,
2011
    % of Net
Revenues
 
     (in thousands of dollars)  

Net revenues

   $ 615,541        100.0   $ 662,161        100.0

Cost of goods sold

     348,056        56.5     367,023        55.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     267,485        43.5     295,138        44.6

Selling, general and administrative expenses

     212,621        34.5     222,637        33.6

Amortization of intangible assets

     2,699        0.4     3,159        0.5

Pension income

     (54     0.0     (312     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     52,219        8.5     69,654        10.5

Other (income)

     (269       (644  

Interest expense

     4,449          2,696     

Interest income

     (873       (746  
  

 

 

     

 

 

   

Income from continuing operations before provision for income taxes and redeemable non-controlling interest

     48,912          68,348     

Provision for income taxes

     15,991          23,816     
  

 

 

     

 

 

   

Income from continuing operations before redeemable non-controlling interest

     32,921          44,532     

Income (Loss) from discontinued operations, net of taxes

     3,034          (501  
  

 

 

     

 

 

   

Net income

     35,955          44,031     

Less: income attributable to redeemable non-controlling interest

     39          —       
  

 

 

     

 

 

   

Net income attributable to Warnaco Group

   $ 35,916        $ 44,031     
  

 

 

     

 

 

   

Net Revenues

Net revenues by segment were as follows:

 

     Three Months
Ended  March
31, 2012
     Three Months
Ended April  2,
2011
     Increase
(Decrease)
    %
Change
 
     (in thousands of dollars)  

Sportswear Group

   $ 300,803       $ 339,471       $ (38,668     -11.4

Intimate Apparel Group

     222,877         220,994         1,883        0.9

Swimwear Group

     91,861         101,696         (9,835     -9.7
  

 

 

    

 

 

    

 

 

   

Net revenues

   $ 615,541       $ 662,161       $ (46,620     -7.0
  

 

 

    

 

 

    

 

 

   

 

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Table of Contents

Net revenues by channel of distribution were as follows:

 

     Three Months
Ended  March
31, 2012
     Three Months
Ended  April
2, 2011
 

United States—wholesale

     

Department stores and independent retailers

     8%         9%   

Specialty stores

     8%         8%   

Chain stores

     7%         7%   

Mass merchandisers

     2%         1%   

Membership clubs

     7%         8%   

Off price and other

     8%         10%   
  

 

 

    

 

 

 

Total United States—wholesale

     40%         43%   

International—wholesale

     31%         32%   

Retail (a)

     29%         25%   
  

 

 

    

 

 

 

Net revenues—consolidated

     100%         100%   
  

 

 

    

 

 

 

 

(a) for the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, 98.4% and 98.2%, respectively, of retail net revenues were derived from the Company’s international operations.

 

     Net Revenues  
     Three Months
Ended March  31,
2012
     Three Months
Ended April  2,
2011
     Increase /
(Decrease)
    % Change  
     (in thousands of dollars)  

Wholesale

   $ 436,518       $ 494,084       $ (57,566     -11.7

Retail

     179,023         168,077         10,946        6.5
  

 

 

    

 

 

    

 

 

   

Total

   $ 615,541       $ 662,161       $ (46,620     -7.0
  

 

 

    

 

 

    

 

 

   

Net revenues by geography were as follows:

 

     Net Revenues  
     Three Months
Ended March 31,
2012
     Three Months
Ended April  2,
2011
     Increase /
(Decrease)
    % Change     Constant $ %
Change (a)
 
     (in thousands of dollars)  

United States

   $ 248,409       $ 285,143       $ (36,734     -12.9     -12.9

Europe

     146,312         168,469         (22,157     -13.2     -10.5

Asia

     137,763         126,776         10,987        8.7     7.8

Mexico and Central and South America

     53,103         51,718         1,385        2.7     10.0

Canada

     29,954         30,055         (101     -0.3     1.4
  

 

 

    

 

 

    

 

 

     
   $ 615,541       $ 662,161       $ (46,620     -7.0     -5.9
  

 

 

    

 

 

    

 

 

     

 

(a) constant dollar percentage change is a non-GAAP measure. See Non-GAAP Measures, above.

 

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Table of Contents

The number of retail stores operated by the Company at March 31, 2012, December 31, 2011 and April 2, 2011 was as follows:

 

     March 31, 2012      December 31, 2011      April 2, 2011  
Segments / Brands    Asia      Europe      Americas      Total      Asia      Europe      Americas      Total      Asia      Europe      Americas      Total  

Sportswear - Calvin Klein Jeans

                                   

Number of Owned Full Price Stores

     86         54         23         163         80         55         23         158         49         44         16         109   

Number of Owned Outlet Stores

     11         45         3         59         11         44         2         57         10         43         1         54   

Number of Concession / Shop-in-shop Stores

     275         134         70         479         280         123         62         465         250         86         —           336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Number of Stores

     372         233         96         701         371         222         87         680         309         173         17         499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intimate Apparel - Calvin Klein Underwear

                                   

Number of Owned Full Price Stores

     53         24         23         100         50         25         30         105         40         19         31         90   

Number of Owned Outlet Stores

     8         43         6         57         8         42         11         61         6         41         18         65   

Number of Concession / Shop-in-shop Stores

     254         469         —           723         259         459         —           718         73         390         —           463   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Number of Stores

     315         536         29         880         317         526         41         884         119         450         49         618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Swimwear - Calvin Klein Swimwear

                                   

Number of Owned Full Price Stores

     —           —           —           —           —           —           —           —           —           —           —           —     

Number of Owned Outlet Stores

     —           —           —           —           —           —           —           —           —           —           —           —     

Number of Concession / Shop-in-shop Stores

     —           193         —           193         —           193         —           193         133         191         —           324   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Number of Stores

     —           193         —           193         —           193         —           193         133         191         —           324   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Company*

                                   

Number of Owned Full Price Stores

     139         78         46         263         130         80         53         263         89         63         47         199   

Number of Owned Outlet Stores

     19         88         9         116         19         86         13         118         16         84         19         119   

Number of Concession / Shop-in-shop Stores

     529         796         70         1,395         539         775         62         1,376         456         667         —           1,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Number of Stores

     687         962         125         1,774         688         941         128         1,757         561         814         66         1,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Square Footage (thousands)

     485.6         515.3         95         1095.9         449.2         516.4         121.4         1087.0         319.0         466.9         122.4         908.3   

 

* In addition to the stores above, the Company operated one Calvin Klein Jeans on-line store, one Calvin Klein Underwear on-line store and one Speedo on-line store as of March 31, 2012, December 31, 2011 and April 2, 2011.

The effect of fluctuations in foreign currency exchange rates on net revenues was a decrease of $7.6 million for the Three Months Ended March 31, 2012 compared to the Three Months Ended April 2, 2011. See Overview, above.

During the Three Months Ended March 31, 2012, the Company’s top five customers accounted for $124.9 million (20.3% of Company net revenue) as compared to $136.1 million (20.5% of Company net revenue) for the Three Months Ended April 2, 2011. During the Three Months Ended March 31, 2012 and the Three Months Ended April 2, 2011, no one customer accounted for 10% or more of the Company’s net revenues.

Sportswear Group

Sportswear Group net revenues were as follows:

 

     Three Months
Ended March  31,
2012
     Three Months
Ended April  2,
2011
     Increase
(Decrease)
    %
Change
 
     (in thousands of dollars)  

Calvin Klein Jeans

   $ 141,972       $ 184,146       $ (42,174     -22.9

Chaps

     48,714         54,879         (6,165     -11.2
  

 

 

    

 

 

    

 

 

   

Sportswear wholesale