Business context and reporting period
PVH Corp. is a global branded apparel company whose principal businesses are Calvin Klein, Tommy Hilfiger and Heritage Brands. The filing is a Form 10-K for fiscal 2013, the 52 weeks ended February 2, 2014, with comparisons to fiscal 2012 (53 weeks ended February 3, 2013). This does not match the request metadata of “2012 Q4”; the filing includes unaudited quarterly data, including fourth-quarter figures.
PVH acquired Warnaco on February 13, 2013, bringing Calvin Klein jeanswear and underwear, Speedo, Warner’s and Olga into the company. It also sold substantially all Bass assets on November 4, 2013. About 45% of fiscal 2013 revenue was international, and Calvin Klein and Tommy Hilfiger together generated about 75%.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $8.186 billion | $6.043 billion |
| Gross profit / gross margin | $4.219 billion / 51.5% | $3.249 billion / 53.8% |
| Income before interest and taxes | $513 million | $660 million |
| Net income attributable to PVH | $144 million | $434 million |
| Diluted earnings per share | $1.74 | $5.87 |
| Cash from operating activities | $412 million | $570 million |
| Capital expenditures | $237 million | $211 million |
Revenue rose about 35%, primarily from the Warnaco acquisition. Reported earnings declined sharply: gross margin fell 230 basis points, SG&A rose to 44.9% of revenue from 42.9%, and interest expense increased to $192 million from $119 million. The effective tax rate was 56.4%, compared with 20.1%, largely reflecting an increased provision for uncertain tax positions.
At February 2, 2014, cash and cash equivalents were $593 million, working capital was $1.446 billion and the current ratio was 1.9. Long-term debt, including its current portion, was $3.963 billion; short-term borrowings were $7 million and capital lease obligations were $25 million. The filing reports total debt to total capital of 48.0%, versus 41.9% in 2012. Operating cash flow declined year over year, partly due to acquisition, integration and restructuring payments and $60 million of pension contributions.
Subsequent to year-end, PVH amended and restated its credit facilities in March 2014, borrowed an additional $600 million in term loans and redeemed $600 million of 7⅜% senior notes. The refinancing and redemption generated about $90 million of pre-tax costs, including a $68 million make-whole premium. The company said approximately 55% of debt was fixed-rate as of April 1, 2014, after swaps.
Material changes and unusual items
- Warnaco contributed $2.085 billion of revenue from acquisition through fiscal year-end and a $45 million net loss after acquisition-related valuation adjustments and integration costs.
- PVH recorded $470 million of pre-tax Warnaco acquisition, integration and restructuring costs, plus $40 million of debt modification and extinguishment costs. It expected about $100 million of additional integration and restructuring costs in 2014.
- Fiscal 2013 included a $20 million pre-tax net loss on the Bass sale, a $24 million gain from amending an unfavorable Tommy Hilfiger contract, and a $53 million pension and postretirement actuarial gain.
- Fourth-quarter 2013 revenue was $2.052 billion and net loss attributable to PVH was $37 million; the comparable 2012 quarter had revenue of $1.636 billion and net income of $81 million. The 2012 fourth quarter included 14 weeks versus 13 weeks in 2013. Quarterly results also reflected substantial acquisition-related costs and a $120 million tax expense for uncertain transfer-pricing positions.
- Calvin Klein International reported a $61 million operating loss, including significant acquisition and integration costs. Management described 2013 as a transition and investment year for the acquired jeanswear and underwear businesses; the European business faced weak conditions and distribution restructuring.
Outlook, risks and contingencies
Management projected fiscal 2014 revenue of approximately $8.5 billion, about 3% growth, including a $176 million negative impact from the Bass exit. It expected Calvin Klein revenue to increase 5%, Tommy Hilfiger revenue to increase 7%, and Heritage Brands revenue to decrease 5%. PVH expected gross margin to improve and SG&A as a percentage of revenue to decline, partly because acquisition-related valuation adjustments and integration costs were expected to ease. Net interest expense was projected at approximately $145 million, and capital expenditures at approximately $300 million. These are management expectations, not guarantees.
Key risks include high leverage and debt-service requirements; execution and synergy realization from Warnaco integration; exposure to major wholesale customers, including Tommy Hilfiger’s U.S. relationship with Macy’s; fashion, discounting and inventory risks; reliance on foreign suppliers and third-party licensees; foreign exchange and variable-rate debt exposure; and brand, labor, sourcing and information-technology risks. PVH disclosed $541 million of net potential cash obligations associated with uncertain tax positions, which were excluded from its contractual-obligations table. Calvin Klein contingent purchase-price payments were $53 million in 2013 and were expected to be about $55 million in 2014.
Management and the auditor reported effective internal control over financial reporting, but Warnaco was excluded from the assessment; its assets and revenue represented 40% and 25% of PVH’s consolidated totals, respectively. The auditor gave an unqualified opinion on the consolidated financial statements. Management said pending litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether Warnaco integration delivers expected cost savings and restores growth and profitability in Calvin Klein jeanswear and underwear.
- Debt balances, refinancing costs, repayment capacity, interest-rate exposure and compliance with financial covenants.
- Whether operating cash flow and margins recover as acquisition costs decline, while inventory and working capital remain controlled.
- The outcome and cash implications of the European and U.S. transfer-pricing tax positions and other uncertain tax matters.
- Whether fiscal 2014 revenue and margin guidance is achieved, particularly given the Bass exit, pressure in Calvin Klein Europe and the weak reported Heritage Brands retail results.