PVH Corp. — Form 10-K Summary
Reporting period: Fiscal 2012, ended February 3, 2013 (53 weeks), compared with fiscal 2011, ended January 29, 2012 (52 weeks). The request metadata says “2011 Q4,” but the supplied filing is the annual report for fiscal 2012. Warnaco was acquired on February 13, 2013, after year-end, and is not included in reported 2012 results.
Business context and financial performance
PVH designs, markets and licenses apparel and related products through Calvin Klein, Tommy Hilfiger and Heritage Brands businesses. In fiscal 2012, the two global designer brands generated approximately 72% of revenue; approximately 39% of revenue came from international operations.
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $6.043 billion | $5.891 billion |
| Net sales | $5.541 billion | $5.410 billion |
| Gross profit / margin | $3.249 billion / 53.8% | $3.056 billion / 51.9% |
| Income before interest and taxes | $660.4 million | $491.2 million |
| Net income | $433.8 million | $275.7 million |
| Diluted EPS | $5.87 | $3.78 |
| Cash from operations | $569.5 million | $490.7 million |
| Capital expenditures | $210.6 million | $169.8 million |
Gross margin increased 190 basis points, primarily from a more favorable mix as Calvin Klein and Tommy Hilfiger grew and PVH exited lower-margin sportswear businesses. SG&A was $2.594 billion, or 42.9% of revenue, versus 43.3% in 2011. Net margin was approximately 7.2% in 2012. Operating cash flow less capital expenditures was approximately $359 million.
Revenue rose 2.6%; management cited a negative impact of approximately $210 million from foreign currency translation and exited businesses. Tommy Hilfiger and Calvin Klein Apparel grew, while Heritage Brand wholesale sportswear and dress furnishings declined. The fiscal-year comparison includes an extra week in 2012.
Liquidity, debt and capital
At February 3, 2013, cash was $892.2 million, working capital was $1.275 billion and the current ratio was 2.1. Long-term debt, including its current portion, was $2.300 billion; short-term borrowings were $10.8 million and capital lease obligations were $31.1 million. PVH reported approximately $900 million of term-loan borrowings and no revolving-credit borrowings under its then-existing facility. Cash included $700 million of proceeds from notes issued in preparation for the Warnaco transaction.
After year-end, PVH completed the Warnaco acquisition for approximately $3.148 billion in total consideration, including $2.181 billion cash and approximately 7.7 million common shares. It drew $3.075 billion of term loans under new secured facilities; a $750 million revolving facility was also established, with no revolving borrowings outstanding as of February 13, 2013. The new facilities impose leverage and interest-coverage covenants, mandatory repayments and restrictions on dividends, acquisitions and other actions.
Outlook, commentary and material risks
- Management estimated 2013 revenue of approximately $8.2 billion, including approximately $2.15 billion from acquired Warnaco operations. Pro forma revenue, assuming the acquisition had occurred earlier, was $8.292 billion for fiscal 2012.
- Management expects 2013 gross margin to decline as high-margin Calvin Klein licensing revenue from Warnaco is replaced by directly operated product sales and acquisition-related inventory adjustments. Net interest expense is expected to rise to approximately $200 million; the estimated effective tax rate is 25.5%–26.5%. Capital expenditures are expected to increase.
- PVH expects approximately $175–$200 million of additional pre-tax acquisition, integration and restructuring charges over four years, including approximately $125 million in 2013. It targets approximately $100 million of annual synergies in full by the end of 2016. Management described 2013 as an investment and transition year for the acquired Calvin Klein jeanswear and underwear businesses.
- Warnaco integration, elevated leverage and debt service, variable interest rates, foreign-exchange exposure, consumer demand and promotional pricing, customer concentration, sourcing and supply-chain disruptions, and protection of brand value are significant risks. Macy’s accounted for 8.7% of 2012 revenue; the five largest customers accounted for 18.7%.
- PVH changed its pension accounting in 2012 to recognize actuarial gains and losses immediately in earnings and to use fair value for plan assets. Prior periods were retrospectively adjusted; the change recorded a $28.1 million actuarial loss in 2012 and makes earnings more exposed to pension-related volatility. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions.
- Management said pending litigation was not expected to have a material adverse effect. The filing identifies $189.1 million of potential cash obligations for unrecognized tax benefits, with timing uncertain, and approximately $30 million of expected 2013 pension contributions before Warnaco plans.
Key facts for investors to verify
- Whether Warnaco integration, expected revenue, margin recovery and the targeted $100 million of synergies are achieved on schedule.
- Post-acquisition debt, interest expense, covenant headroom, required repayments and the effect of variable rates on cash flow.
- Underlying revenue and comparable-store performance after separating the 53rd week, currency effects, exited businesses and acquisition-related changes.
- Actual restructuring charges, capital spending, pension contributions and cash generation versus management expectations.
- The full acquisition-date allocation of Warnaco assets and liabilities, which PVH said was not yet available in this filing and would be provided in a subsequent quarterly report.