PVH Corp. 10-Q Summary
Business context and reporting period
This filing covers the thirteen weeks ended May 5, 2013, compared with the thirteen weeks ended April 29, 2012. Although the request metadata labels the period “2012 Q1,” the filing is for 2013 Q1. PVH is a global branded apparel company. Results include Warnaco from its February 13, 2013 acquisition date, so year-over-year comparisons are substantially affected by the acquisition.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $1,910.2 million | $1,427.4 million |
| Net sales | $1,823.0 million | $1,312.8 million |
| Gross profit / margin | $951.9 million / 49.8% | $756.8 million / 53.0% |
| SG&A / share of revenue | $907.0 million / 47.5% | $602.7 million / 42.2% |
| Income before interest and taxes | $6.8 million | $156.1 million |
| Net income (loss) attributable to PVH | $(20.1) million | $95.5 million |
| Diluted earnings (loss) per share | $(0.25) | $1.30 |
| Cash used by operating activities | $117.0 million | $0.5 million |
Q1 2013 included $194.1 million of Warnaco acquisition, integration and restructuring costs in operating segments and corporate expenses, plus $40.4 million of debt modification and extinguishment costs. Warnaco contributed $516.6 million of revenue and a $35.5 million net loss from acquisition through May 5, including non-cash valuation adjustments, amortization and integration costs. Pro forma results, assuming the acquisition had occurred earlier, were revenue of $1,973.2 million and PVH-attributable net income of $75.4 million for Q1 2013; these figures exclude anticipated synergies and are not forecasts.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $746.3 million at May 5, 2013, down from $892.2 million at February 3, 2013.
- Total long-term debt, including its current portion, was $4.461 billion; short-term borrowings were $14.7 million. Cash less these borrowings implies net debt of approximately $3.73 billion, excluding capital leases.
- PVH used $116.9 million of cash in operating and investing activities combined, primarily reflecting Warnaco acquisition cash outlay of $1.815 billion, capital expenditures of $45.7 million and working-capital needs. Financing provided $1.853 billion.
- New facilities included $1.700 billion Term Loan A, $1.375 billion Term Loan B and $750 million of revolving commitments. No revolver borrowings were outstanding; about $92.8 million of letters of credit reduced availability. Approximately 40% of long-term debt was fixed-rate after swaps; the remainder was variable-rate.
- PVH reported compliance with applicable covenants at May 5. Minimum interest coverage and maximum net leverage covenants begin with the quarter ending August 4, 2013. Debt documents restrict, among other things, additional borrowing, dividends, acquisitions and asset dispositions.
Changes, outlook and risks
- Revenue increased largely because Warnaco’s businesses were consolidated. Royalty, advertising and other revenue declined to $87.1 million from $114.6 million, partly because PVH no longer records Warnaco royalties after acquiring the licensee. Management said this shift from licensing to directly operated businesses also weighed on gross margin.
- Gross margin fell 320 basis points. Management attributed about 170 basis points to short-lived acquisition valuation adjustments and about 80 basis points to Warnaco-related sales returns and inventory reduction activity, along with the lower-margin mix of acquired businesses. Q1 included $30 million of sales returns in Calvin Klein International.
- Management expected 2013 revenue of approximately $8.2 billion, gross margin percentage lower than 2012, and higher SG&A as a percentage of revenue due principally to acquisition-related costs. It expected approximately $450 million of 2013 pre-tax acquisition and integration-related charges, including about $225 million of non-cash charges, and full realization of expected synergies by the end of 2016.
- Management forecast approximately $200 million of 2013 net interest expense, about $400 million of long-term debt payments (the majority voluntary), and approximately $300 million of capital expenditures. It expected Calvin Klein contingent purchase-price payments of $53–$55 million for 2013.
- Risks highlighted include substantial new leverage and debt-service requirements, variable interest rates, covenant compliance, Warnaco integration and synergy execution, inventory management and discounting, foreign-exchange exposure, and sensitivity to consumer demand, weather and retail conditions. Approximately $529 million of cash was held by international subsidiaries considered permanently reinvested; repatriation could result in additional U.S. tax.
- Other notable items: foreign-currency translation adjustments reduced comprehensive income by $109.2 million; total comprehensive loss attributable to PVH was $121.7 million. The acquisition purchase-price allocation remained preliminary. Management said pending litigation was not expected to materially affect financial position and reported effective disclosure controls.
Investor verification priorities
- Confirm the acquisition’s final purchase-price allocation and the amount and timing of remaining integration, restructuring and debt-related charges.
- Track Warnaco integration, inventory reductions and returns, segment performance, gross-margin recovery and whether expected synergies are achieved.
- Monitor debt paydown, cash generation, interest-rate exposure and compliance with financial covenants as they take effect.
- Assess the assumptions behind 2013 revenue, interest expense, capital spending and contingent Calvin Klein payments; these are management estimates, not guarantees.