PVH Corp. — Form 10-K Summary
Reporting period: Fiscal year 2011, the 52 weeks ended January 29, 2012. Although the request metadata says “2010 Q4,” this filing is an annual report for fiscal 2011; it also provides unaudited quarterly data. PVH designs, markets, sells and licenses apparel and related products, including Calvin Klein, Tommy Hilfiger and heritage brands. Tommy Hilfiger, acquired in May 2010, was included for a full year in 2011.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $5.891 billion | $4.637 billion |
| Gross profit / margin | $3.056 billion / 51.9% | $2.422 billion / 52.2% |
| Income before interest and taxes | $559.7 million | $203.4 million |
| Net income | $317.9 million | $53.8 million |
| Diluted earnings per share | $4.36 | $0.80 |
| Cash provided by operating activities | $490.7 million | $359.2 million |
| Capital expenditures | $169.8 million | $101.0 million |
Revenue increased 27% year over year, reflecting the full-year contribution from Tommy Hilfiger and growth in multiple businesses. Net income rose substantially, but the comparison is affected by significant Tommy Hilfiger acquisition and integration costs recorded in 2010. Gross margin declined 30 basis points, principally due to higher product costs, increased promotional selling and a lower proportion of high-margin royalty revenue. SG&A was 42.1% of revenue, down from 44.7%, reflecting expense leverage and lower one-time costs as a share of revenue. Operating margin was approximately 9.5%; net margin was approximately 5.4%.
Cash and cash equivalents were $233.2 million at year-end, down from $498.7 million. Current assets were $1.739 billion and current liabilities $1.044 billion, yielding working capital of $695.4 million and a current ratio of 1.7. Long-term debt was $1.903 billion including its current portion; short-term borrowings were $13.0 million. PVH repaid $450.7 million of credit facilities during the year. The filing reports total debt to total capital of 41.7% and net debt to net capital of 38.6%. Approximately 75% of total debt was fixed-rate or capped. Operating cash flow less capital expenditures was approximately $320.9 million.
Material developments and unusual items
- Tommy Hilfiger and Calvin Klein together generated approximately 70% of revenue; about 40% of total revenue was generated internationally.
- Tommy Hilfiger’s acquisition expanded international operations and increased leverage. PVH reported approximately $1.2 billion of term-loan borrowings, $600 million of senior notes and $100 million of debentures, and stated that it intended to continue deleveraging.
- 2011 included $69.5 million of Tommy Hilfiger integration and restructuring costs, a $20.7 million expense related to reacquiring Tommy Hilfiger trademark rights in India, $16.2 million of credit-facility modification costs and $8.1 million of costs associated with planned business exits. A $5.4 million tax benefit resulted from a Japanese tax-rate change.
- PVH is exiting Timberland men’s sportswear and IZOD women’s wholesale sportswear in 2012. The filing attributes approximately $100 million of projected 2012 revenue impact to these exits.
- PVH agreed to reacquire European Tommy Hilfiger tailored-apparel rights effective December 31, 2012, and announced that it would take back certain European ck Calvin Klein apparel, accessories and retail rights in 2013.
- Reported litigation was not expected by management to have a material adverse effect. The company reported compliance with its debt covenants at year-end and effective disclosure controls and internal control over financial reporting.
Outlook, risks and contingencies
Management projected 2012 revenue to be relatively flat to up 2% versus 2011, including an approximately 4% negative impact from currency translation and the Timberland and IZOD exits. Tommy Hilfiger revenue was projected flat to up 2%; Calvin Klein revenue growth was projected at 5% to 7%; Heritage Brand revenue was projected to decline 3% to 4%. Management expected gross margin to improve, SG&A as a percentage of revenue to decline, net interest expense of $115 million to $117 million, and an effective tax rate of 23.5% to 24.0%. PVH expected approximately $250 million of capital expenditures and planned approximately $300 million of additional term-loan repayments in the second half of 2012. These are forward-looking estimates, not reported results.
Key disclosed risks include leverage and debt-service needs; reliance on large retail customers, including Macy’s, which accounted for 9.4% of 2011 revenue; the Tommy Hilfiger North American wholesale alliance with Macy’s; consumer demand, fashion trends and promotional activity; foreign-exchange exposure; dependence on overseas manufacturers and sourcing partners; licensing-partner performance and brand protection; and execution of acquisition integration and international growth plans. Contractual obligations included $5.181 billion of specified future cash commitments, including debt, interest, leases and inventory purchase commitments. This total excludes, among other items, Calvin Klein contingent purchase-price payments, certain Indian contingent payments, pension contributions and potential cash obligations associated with unrecognized tax benefits.
Important facts for investors to verify
- Confirm the intended period: the filing covers FY2011 ended January 29, 2012, not a standalone 2010 fourth quarter.
- Review the audited statements and segment disclosures to distinguish organic growth from the full-year Tommy Hilfiger contribution and foreign-exchange effects.
- Assess debt repayment capacity, covenant terms, interest-rate exposure and the effect of planned capital expenditures and contingent payments on liquidity.
- Compare 2012 guidance with subsequent reported results, particularly currency assumptions, planned business exits, gross-margin recovery and Calvin Klein growth.
- Examine the magnitude and recurrence of acquisition, restructuring, pension and tax items when evaluating normalized earnings and cash flow.