PVH Corp. Form 10-Q Summary
Business context and reporting period. This filing covers the 13 and 26 weeks ended August 4, 2013, compared with periods ended July 29, 2012. The request metadata says “2012 Q2,” but the filing itself reports 2013 Q2. PVH is a global apparel company with Calvin Klein, Tommy Hilfiger and heritage brands. Results include Warnaco from its February 13, 2013 acquisition, making year-over-year comparisons materially affected by the acquisition.
Financial performance and position
| Metric | 13 weeks ended Aug. 4, 2013 | Comparable 2012 period | 26 weeks ended Aug. 4, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Total revenue | $1.965 billion | $1.337 billion | $3.875 billion | $2.764 billion |
| Gross profit / margin | $1.026 billion / 52.2% | $743 million / 55.6% | $1.978 billion / 51.0% | $1.499 billion / 54.3% |
| Income before interest and taxes | $73 million | $153 million | $80 million | $309 million |
| Net income (loss) attributable to PVH | ($16) million | $90 million | ($36) million | $185 million |
| Diluted EPS | ($0.20) | $1.22 | ($0.45) | $2.52 |
- Margins and costs: SG&A was $953 million, or 48.5% of revenue, in the quarter and $1.860 billion, or 48.0%, in the first half. Management attributed lower gross margins and higher SG&A ratios principally to Warnaco-related business mix, acquisition accounting adjustments, integration costs, and restructuring.
- Cash flow: First-half operating cash flow was $62 million, down from $207 million. Investing cash outflow was $1.948 billion, including $1.815 billion for acquisitions; financing cash inflow was $1.633 billion. Cash declined to $629 million from $892 million at fiscal year-end.
- Debt and liquidity: Long-term debt, including its current portion, was $4.280 billion; short-term borrowings were $3 million. Cash was $629 million, and total current assets and liabilities were $3.081 billion and $1.425 billion, respectively. The $750 million revolving facilities had no borrowings outstanding; approximately $79 million was committed to letters of credit. PVH reported compliance with debt covenants.
- PVH reported approximately $477 million of cash held by international subsidiaries whose earnings were considered permanently reinvested. The filing does not provide a single stated net-debt figure.
Material changes versus prior periods
- Warnaco added substantial Calvin Klein jeanswear and underwear operations, plus Speedo, Warner’s and Olga businesses. Acquisition-related net sales drove much of the reported revenue increase; revenue growth is therefore not a like-for-like measure of underlying performance.
- Calvin Klein royalty revenue previously generated by Warnaco ceased to be reported as royalty revenue after the acquisition and was replaced by directly operated sales with product costs. Royalty, advertising and other revenue fell to $80 million in the quarter from $117 million and to $168 million in the first half from $232 million.
- First-half acquisition, integration, restructuring and debt modification/extinguishment charges totaled approximately $375 million, including approximately $208 million of non-cash charges. Separately, the income statement reports $40 million of debt modification and extinguishment costs.
- First-half interest expense rose to $97 million from $58 million, reflecting the financing used for the Warnaco acquisition. First-half income taxes included significant discrete integration-related items; the reported effective tax rate was negative because PVH had a pretax loss.
- Reported first-half revenue and operating results also reflect $30 million of Warnaco customer sales returns in Asia as part of an inventory-reduction initiative.
Outlook, commentary and risks
- Management expected 2013 revenue of approximately $8.22 billion, including the $30 million of Asian customer returns, and expected gross margin to decrease significantly and SG&A as a percentage of revenue to increase significantly versus 2012.
- PVH expected approximately $500 million of 2013 pretax charges related to Warnaco integration and restructuring, including approximately $250 million of non-cash charges. Management expected to realize Warnaco synergies gradually through the end of 2016.
- Management projected 2013 net interest expense of $195–$200 million, capital expenditures of approximately $300 million, and approximately $400 million of long-term debt payments, most of which it expected to be voluntary. It also projected $53–$55 million of 2013 contingent payments tied to Calvin Klein brand sales.
- Debt facilities impose leverage and interest-coverage covenants and restrictions on, among other things, additional debt, dividends, acquisitions and asset sales. PVH warned that its substantial acquisition-related debt requires significant cash for debt service. A new swap was expected to increase the share of debt at fixed rates from approximately 45% to 70%.
- Other cited risks include integration and synergy execution, inventory management, consumer demand and promotional discounting, foreign-exchange exposure, sourcing and shipping costs, and licensee performance. Management said litigation was not expected to have a material adverse effect; it reported no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- How much of revenue growth and future guidance is attributable to Warnaco, and how the acquired businesses perform on a comparable basis.
- Actual integration charges, remaining restructuring liabilities, and delivery and timing of the expected synergies.
- Debt repayment progress, interest expense, covenant headroom, and the effect of variable rates and hedges.
- Inventory levels and the impact of the Warnaco inventory-reduction initiative, including further returns or discounting.
- Whether management’s 2013 revenue, margin, interest, capital expenditure and debt-payment expectations were achieved.