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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 001-38854
kontoorlogotmpurplea07.jpg
KONTOOR BRANDS, INC.
(Exact name of registrant as specified in its charter)
North Carolina
83-2680248
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

400 N. Elm Street
Greensboro, North Carolina 27401
(Address of principal executive offices)

(336) 332-3400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:      
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, no par value
KTB
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No þ 
The number of shares of Common Stock of the registrant outstanding as of April 24, 2020 was 57,104,887.



KONTOOR BRANDS, INC.
Table of Contents
 
Page
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Kontoor Brands, Inc. Q1 FY20 Form 10-Q 2



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)



KONTOOR BRANDS, INC.
Consolidated and Combined Balance Sheets
(Unaudited)
(In thousands)
 
March 2020
 
 
December 2019
 
March 2019
ASSETS
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and equivalents
 
$
479,366

 
 
$
106,808

 
$
102,945

Accounts receivable, net
 
213,080

 
 
228,459

 
299,328

Due from former parent, current
 

 
 

 
291,127

Notes receivable from former parent
 

 
 

 
517,940

Inventories
 
488,750

 
 
458,101

 
519,006

Prepaid expenses and other current assets
 
78,597

 
 
84,235

 
50,671

Total current assets
 
1,259,793

 
 
877,603

 
1,781,017

Due from former parent, noncurrent
 

 
 

 
370

Property, plant and equipment, net
 
129,884

 
 
132,192

 
138,972

Operating lease assets
 
83,022

 
 
86,582

 
77,305

Intangible assets, net
 
16,914

 
 
17,293

 
51,913

Goodwill
 
211,739

 
 
212,836

 
213,623

Other assets
 
200,443

 
 
190,650

 
122,210

TOTAL ASSETS
 
$
1,901,795

 
 
$
1,517,156

 
$
2,385,410

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Short-term borrowings
 
$
3,487

 
 
$
1,070

 
$
8,368

Accounts payable
 
149,922

 
 
147,347

 
147,403

Due to former parent, current
 

 
 

 
3,865

Notes payable to former parent
 

 
 

 
241,867

Accrued liabilities
 
180,538

 
 
194,744

 
206,517

Operating lease liabilities, current
 
32,781

 
 
35,389

 
29,156

Total current liabilities
 
366,728

 
 
378,550

 
637,176

Operating lease liabilities, noncurrent
 
54,150

 
 
54,746

 
51,533

Other liabilities
 
110,666

 
 
101,334

 
117,719

Long-term debt
 
1,388,736

 
 
913,269

 

Commitments and contingencies
 

 
 

 

Total liabilities
 
1,920,280

 
 
1,447,899

 
806,428

Equity
 
 
 
 
 
 
 
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at March 2020, December 2019 and March 2019
 

 
 

 

Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 56,930,737 at March 2020; 56,811,198 at December 2019 and no shares outstanding at March 2019
 

 
 

 

Additional paid-in capital
 
153,966

 
 
150,673

 

Former parent investment
 

 
 

 
1,723,406

Accumulated deficit
 
(38,989
)
 
 
(1,718
)
 

Accumulated other comprehensive loss
 
(133,462
)
 
 
(79,698
)
 
(144,424
)
Total (deficit) equity
 
(18,485
)
 
 
69,257

 
1,578,982

TOTAL LIABILITIES AND EQUITY
 
$
1,901,795

 
 
$
1,517,156

 
$
2,385,410

See accompanying notes to unaudited consolidated and combined financial statements.


3 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Consolidated and Combined Statements of Operations
(Unaudited)
 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands, except per share amounts)
 
2020
 
 
2019
Net revenues
 
$
504,498

 
 
$
648,344

Costs and operating expenses
 
 
 
 
 
Cost of goods sold
 
313,734

 
 
401,025

Selling, general and administrative expenses
 
190,928

 
 
222,124

Total costs and operating expenses
 
504,662

 
 
623,149

Operating (loss) income
 
(164
)
 
 
25,195

Interest income from former parent, net
 

 
 
2,339

Interest expense
 
(10,939
)
 
 
(98
)
Interest income
 
416

 
 
1,423

Other expense, net
 
(450
)
 
 
(971
)
(Loss) income before income taxes
 
(11,137
)
 
 
27,888

Income taxes
 
(8,425
)
 
 
12,475

Net (loss) income
 
$
(2,712
)
 
 
$
15,413

(Loss) earnings per common share
 
 
 
 
 
Basic
 
$
(0.05
)
 
 
$
0.27

Diluted
 
$
(0.05
)
 
 
$
0.27

Weighted average shares outstanding
 
 
 
 
 
Basic
 
56,875

 
 
56,648

Diluted
 
57,947

 
 
56,648


See accompanying notes to unaudited consolidated and combined financial statements.




Kontoor Brands, Inc. Q1 FY20 Form 10-Q 4



KONTOOR BRANDS, INC.
Consolidated and Combined Statements of Comprehensive (Loss) Income
(Unaudited)
 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands)
 
2020
 
 
2019
Net (loss) income
 
$
(2,712
)
 
 
$
15,413

Other comprehensive (loss) income
 

 
 

Foreign currency translation
 

 
 

(Losses) gains arising during the period
 
(27,210
)
 
 
758

Defined benefit pension plans
 

 
 

Amortization of net deferred actuarial losses
 
29

 
 

Derivative financial instruments
 
 
 
 
 
Losses arising during the period
 
(23,655
)
 
 

Reclassification to net (loss) income for gains realized
 
(2,928
)
 
 

Total other comprehensive (loss) income, net of related taxes
 
(53,764
)
 
 
758

Comprehensive (loss) income
 
$
(56,476
)
 
 
$
16,171


See accompanying notes to unaudited consolidated and combined financial statements.



5 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Consolidated and Combined Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands)
 
2020
 
 
2019
OPERATING ACTIVITIES
 
 
 
 
 
Net (loss) income
 
$
(2,712
)
 
 
$
15,413

Adjustments to reconcile net (loss) income to cash (used) provided by operating activities:
 
 
 
 
 
Depreciation and amortization
 
7,385

 
 
7,703

Stock-based compensation
 
2,466

 
 
7,685

Provision for doubtful accounts
 
9,339

 
 
2,730

Other
 
(12,600
)
 
 
(512
)
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
 
(1,765
)
 
 
(48,473
)
Inventories
 
(36,566
)
 
 
(44,926
)
Due from former parent
 

 
 
256,803

Accounts payable
 
3,664

 
 
12,935

Income taxes
 
(3,676
)
 
 
1,311

Accrued liabilities
 
(15,049
)
 
 
9,426

Due to former parent
 

 
 
(12,268
)
Other assets and liabilities
 
4,097

 
 
(1,340
)
Cash (used) provided by operating activities
 
(45,417
)
 
 
206,487

INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
 
(10,423
)
 
 
(5,300
)
Software purchases
 
(8,781
)
 
 

Other
 
(3,104
)
 
 
(20
)
Cash used by investing activities
 
(22,308
)
 
 
(5,320
)
FINANCING ACTIVITIES
 
 
 
 
 
Borrowings under revolving credit facility
 
512,500

 
 

Repayments under revolving credit facility
 
(37,500
)
 
 

Repayment of notes payable to former parent
 

 
 
(27,245
)
Net transfers to former parent
 

 
 
(173,485
)
Dividends paid
 
(31,877
)
 
 

Proceeds from issuance of Common Stock, net of shares withheld for taxes
 
(1,855
)
 
 

Other
 
2,566

 
 
5,081

Cash provided (used) by financing activities
 
443,834

 
 
(195,649
)
Effect of foreign currency rate changes on cash and cash equivalents
 
(3,551
)
 
 
651

Net change in cash and cash equivalents
 
372,558

 
 
6,169

Cash and cash equivalents – beginning of period
 
106,808

 
 
96,776

Cash and cash equivalents – end of period
 
$
479,366

 
 
$
102,945



See accompanying notes to unaudited consolidated and combined financial statements.


Kontoor Brands, Inc. Q1 FY20 Form 10-Q 6



KONTOOR BRANDS, INC.
Consolidated and Combined Statements of (Deficit) Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total (Deficit) Equity
 
 
 
 
 
 
 
 (In thousands)
 
Shares
 
Amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 2019
 
56,812

 
$

 
$
150,673

 
$
(1,718
)
 
$
(79,698
)
 
$
69,257

 
Net loss
 

 

 

 
(2,712
)
 

 
(2,712
)
 
Stock-based compensation, net
 
119

 

 
3,293

 
(2,682
)
 

 
611

 
Foreign currency translation
 

 

 

 

 
(27,210
)
 
(27,210
)
 
Defined benefit pension plans
 

 

 

 

 
29

 
29

 
Derivative financial instruments
 

 

 

 

 
(26,583
)
 
(26,583
)
 
Dividends on Common Stock ($0.56 per share)
 

 

 

 
(31,877
)
 

 
(31,877
)
 
Balance, March 2020
 
56,931

 
$

 
$
153,966

 
$
(38,989
)
 
$
(133,462
)
 
$
(18,485
)
 

 
 
Former Parent Investment
 
Accumulated Other Comprehensive Loss
 
Total Equity
 
 (In thousands)
 
 
 
 
Balance, December 2018
 
$
1,868,634

 
$
(145,182
)
 
$
1,723,452

 
Adoption of new accounting standard (ASU 2016-02)
 
(2,713
)
 

 
(2,713
)
 
Net income
 
15,413

 

 
15,413

 
Foreign currency translation
 

 
758

 
758

 
Net transfers to former parent
 
(157,928
)
 

 
(157,928
)
 
Balance, March 2019
 
$
1,723,406

 
$
(144,424
)
 
$
1,578,982

 

See accompanying notes to unaudited consolidated and combined financial statements.


7 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 


NOTE 1 — BASIS OF PRESENTATION
Description of Business
Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company headquartered in the United States ("U.S."). The Company designs, produces, procures, markets and distributes apparel primarily under the brand names Wrangler® and Lee®. The Company's products are sold in the U.S. through mass merchants, specialty stores, mid-tier and traditional department stores, company-operated stores and online. The Company's products are also sold internationally, primarily in Europe and Asia, through department, specialty, company-operated, concession retail and independently operated partnership stores and online. VF Outlet™ stores carry Wrangler® and Lee® branded products, as well as merchandise that is specifically purchased for sale in these stores.
Fiscal Year
The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. Accordingly, this Form 10-Q presents the first quarter of the Company's fiscal year ending January 2, 2021 ("fiscal 2020"), which is a 53-week fiscal year. For presentation purposes herein, all references to periods ended March 2020, December 2019 and March 2019 correspond to the fiscal periods ended March 28, 2020, December 28, 2019 and March 30, 2019, respectively.
Spin-Off Transaction
On May 22, 2019, VF Corporation ("VF" or "former parent") completed the spin-off of its Jeanswear business (the "Separation"), which included the Wrangler®, Lee® and Rock & Republic® brands, as well as the VF OutletTM business. Kontoor began to trade as a standalone public company (NYSE: KTB) on May 23, 2019. Accordingly, the Company’s financial statements for periods through the Separation date of May 22, 2019 were combined financial statements prepared on a "carve-out" basis as discussed below, and the Company’s financial statements for periods from May 23, 2019 were consolidated financial statements based on the reported results of Kontoor Brands, Inc. as a standalone company. The Company’s unaudited consolidated and combined financial statements for all periods presented are referred to throughout this document as “financial statements.”
Impact of COVID-19
During the first quarter of 2020, the novel coronavirus (“COVID-19”) pandemic has significantly impacted global economic conditions, as well as the Company's operations. Given the uncertainties of COVID-19 and the associated potential impact on future results of operations and liquidity, the Company implemented strategic actions to reduce expenses and enhance liquidity, including a $475.0 million draw on the Revolving Credit Facility (as defined in Note 6 to the Company's financial statements), temporary suspension of the payment of a dividend, targeted reductions in operating expenses and capital expenditures, temporary reduction of fees for the Board of Directors, reduction of payroll costs through restructuring, furloughs and temporary salary reductions, reduced production in owned manufacturing facilities, and focused management of working capital. 
Additionally, on May 5, 2020, the Company entered into an amendment to the Credit Agreement (as defined in Note 6 to the Company's financial statements) to provide relief for potential financial covenant compliance issues during future reporting periods. As of March 2020, the Company was in compliance with all covenants and expects to maintain compliance with the applicable financial covenants for at least one year from the issuance of these financial statements for the period ended March 2020. See Note 6 to the Company's financial statements for additional information.
The Company considered the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements including, but not limited to, our allowance for credit losses, inventory valuations, liabilities for variable consideration, deferred tax valuation allowances, fair value measurements, asset impairment charges, the effectiveness of the Company’s hedging instruments, and expected compliance with financial covenants in our Credit Agreement. These assumptions and estimates may change as new events occur and additional information is obtained. If economic conditions caused by COVID-19 do not recover as currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position and liquidity.
Basis of Presentation - Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the U.S. ("GAAP") for complete financial statements. In the opinion of management, the accompanying financial statements contain all normal and recurring adjustments necessary to fairly state the financial position, results of operations and cash flows of the Company for the interim periods presented. The financial statements may not be indicative of the Company's future performance and do not necessarily reflect what the financial position, results of operations and cash flows would have been had it operated as a standalone company for all periods presented. Additionally, operating results for the three months ended March 2020 are not necessarily indicative of results that may be expected for any other interim period or for fiscal 2020. The unaudited financial statements should be read in conjunction with the audited consolidated and combined financial statements for the fiscal year ended December 28, 2019 included in the Company's 2019 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission ("SEC") on March 11, 2020 ("2019 Annual Report on Form 10-K").


Kontoor Brands, Inc. Q1 FY20 Form 10-Q 8



KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

Basis of Presentation - Carve Out Accounting
Through the Separation date in 2019, the Company's combined financial statements were prepared on a carve-out basis under GAAP, which reflected the historical financial position, results of operations and cash flows of the Company as historically managed within VF. The unaudited combined financial statements were derived from the consolidated financial statements and accounting records of VF.
The combined statement of operations included costs for certain centralized functions and programs provided and administered by VF that were charged directly to the Company. These centralized functions and programs included, but were not limited to, information technology, human resources, accounting shared services, supply chain and insurance.
In addition, for purposes of preparing these combined financial statements on a carve-out basis, a portion of VF's total corporate expenses were allocated to the Company. These expense allocations included the cost of corporate functions and resources provided by or administered by VF including, but not limited to, executive management, finance, accounting, legal, human resources and related benefit costs associated with such functions, such as stock-based compensation and pension. Allocations also included the cost of operating VF's corporate headquarters located in Greensboro, North Carolina.
Costs were allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional revenues, cost of goods sold or square footage, as applicable. Management considered the basis on which the expenses were allocated to reasonably reflect the utilization of services provided to, or benefit received by, the Company during the period presented. However, the allocations may not reflect the expenses that would have been incurred if the Company had been a standalone company for the period presented.
The combined balance sheet included certain assets and liabilities that were historically held at the VF corporate level but were specifically identifiable or otherwise attributable to the Company. VF's third-party long-term debt and the related interest expense were not allocated to the Company as the Company was not the legal obligor of such debt.
All intracompany transactions were eliminated. All transactions between the Company and VF were included in the combined financial statements. For those transactions between the Company and VF that were historically settled in cash, the Company reflected such balances in the balance sheet within "due from former parent" or "due to former parent." The aggregate net effect of transactions between the Company and VF that were not historically settled in cash were reflected in the balance sheet within "former parent investment" and in the statement of cash flows within "net transfers to former parent." Subsequent to the Separation, the Company continued to service commercial arrangements with VF, which included sales of VF-branded products at VF Outlet™ stores, as well as sales to VF for products manufactured in our plants, use of our transportation fleet and fulfillment of a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018. None of these arrangements with VF have continued in 2020.
Income Taxes Prior to the Separation, the Company's operations were included in VF’s U.S. federal consolidated and certain state income tax returns and certain foreign tax returns. For periods prior to the Separation, the income tax expense and deferred tax balances presented in the financial statements were calculated on a carve-out basis, which applied accounting guidance as if the Company filed its own tax returns in each jurisdiction and included tax losses and tax credits that may not reflect tax positions taken by VF. Certain tax attributes reported by the Company on a carve-out basis were not transferred to the Company as part of the Separation. These attributes primarily related to losses in certain Central America and South America jurisdictions.
Reclassifications
Certain prior year amounts in the Company's financial statements and related disclosures have been reclassified to conform with the current year presentation.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and has since issued additional updates to provide further clarification. This guidance requires use of the current expected credit loss ("CECL") model, thus replacing the existing incurred credit loss model. The CECL model requires an entity to recognize an allowance for credit losses at each reporting period that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The Company determined this guidance primarily applied to trade accounts receivable from customers and licensees, and adopted it on the first day of fiscal 2020 using the modified retrospective approach. There was no cumulative-effect adjustment to retained (deficit) earnings required upon adoption. See Note 4 to the Company's financial statements for additional disclosures on credit losses.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement," which modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This guidance was adopted by the Company during the first quarter of 2020 using a prospective approach and did not have a significant impact on the Company's financial statement disclosures.


9 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans," which modifies the disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. This guidance was adopted by the Company during the first quarter of 2020 using a prospective approach and did not have a significant impact on the Company's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance was adopted by the Company during the first quarter of 2020 using a prospective approach and did not have a significant impact on the Company's financial statements as the new guidance is generally consistent with the Company's historical accounting policies.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which amends and simplifies the accounting for income taxes by removing certain exceptions in existing guidance and providing new guidance to reduce complexity in certain areas. This guidance is effective for the Company beginning in the first quarter of 2021 with early adoption permitted. The Company is currently evaluating the impact that adoption of this guidance will have on its financial statements and related disclosures, which is not expected to be significant.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which is intended to provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective upon issuance and generally can be applied through December 31, 2022. The impact of this guidance on the Company's financial statements and related disclosures is not expected to be significant.

NOTE 2 — REVENUES
The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied based on the transfer of control of promised goods or services.
Performance Obligations
Disclosure is required for the aggregate transaction price allocated to performance obligations that are unsatisfied at the end of a reporting period, unless the optional practical expedients are applicable. The Company elected the practical expedients that do not require disclosure of the transaction price allocated to remaining performance obligations for (i) variable consideration related to sales-based royalty arrangements and (ii) contracts with an original expected duration of one year or less.
As of March 2020, there were no arrangements with transaction price allocated to remaining performance obligations other than (i) contracts for which the Company has applied the practical expedients discussed above and (ii) fixed consideration related to future minimum guarantees.
For the three months ended March 2020, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not significant.
Contract Balances
Accounts receivable represent the Company's unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less estimated allowances.
The Company's primary contract assets relate to sales-based royalty arrangements and the Company's primary contract liabilities relate to gift cards, loyalty programs and sales-based royalty arrangements.
The following table presents information about contract balances recorded in the Company's balance sheets:
(In thousands)
 
March 2020
 
 
December 2019
 
March 2019
Accounts receivable, net
 
$
213,080

 
 
$
228,459

 
$
299,328

Contract assets (a)
 
5,715

 
 
10,679

 
1,930

Contract liabilities (b)
 
1,690

 
 
1,775

 
1,995

(a) Included within "prepaid expenses and other current assets" in the Company's balance sheets.


Kontoor Brands, Inc. Q1 FY20 Form 10-Q 10



KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

(b) Included within "accrued liabilities" in the Company's balance sheets.
For the three months ended March 2020 and March 2019, the Company recognized revenue of $1.1 million and $1.3 million that was included in contract liabilities as of December 2019 and December 2018, respectively. The changes in the contract asset and contract liability balances primarily result from timing differences between the Company's satisfaction of performance obligations and the customer's payment.
The Company has licensing agreements for its symbolic intellectual property, most of which include minimum guaranteed royalties. As of March 2020, the Company expects to recognize $24.6 million of fixed consideration related to the future minimum guarantees in effect under its licensing agreements and expects such amounts to be recognized over time through December 2024. The variable consideration is not disclosed as a remaining performance obligation as the licensing arrangements qualify for the sales-based royalty exemption.
Disaggregation of Revenue
The following tables present revenues disaggregated by channel and geography, which provides a meaningful depiction of how the nature, timing and uncertainty of revenues are affected by economic factors. Revenues from licensing arrangements have been included within the U.S. or Non-U.S. Wholesale channels, based on the respective region covered by the agreement. Branded Direct-to-Consumer revenues include the distribution of our products via concession retail locations internationally, Wrangler® and Lee® branded full-price stores globally and Company-owned outlet stores globally. The Branded Direct-to-Consumer channel also includes sales of our branded products in U.S.-based VF Outlet™ stores and digital sales via www.wrangler.com and www.lee.com.
The Other channel includes sales of third-party branded merchandise at VF Outlet™ stores and sales of products manufactured for third-parties. Sales of Wrangler® and Lee® branded products at VF Outlet™ stores are not included in Other and are reported in the Branded Direct-to-Consumer channel discussed above. Prior to 2020, the Other channel also included transactions with VF for pre-Separation activities, none of which continued in 2020. These transactions included sales of VF-branded products at VF Outlet™ stores, as well as sales to VF for products manufactured in our plants, use of our transportation fleet and fulfillment of a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018.
 
Three Months Ended March 2020
 
 
 
 
 
 
 
 
 
 
(In thousands)
Wrangler
 
Lee
 
Other
 
Total
 
 
 
 
 
 
 
 
 
Channel revenues

 

 

 

 
U.S. Wholesale
$
236,282

 
$
92,578

 
$
4,061

 
$
332,921

 
Non-U.S. Wholesale
46,937

 
59,853

 
304

 
107,094

 
Branded Direct-To-Consumer
20,167

 
30,325

 
2

 
50,494

 
Other

 

 
13,989

 
13,989

 
Total
$
303,386

 
$
182,756

 
$
18,356

 
$
504,498

 
 
 
 
 
 
 
 
 
 
Geographic revenues

 

 

 

 
U.S.
$
252,584

 
$
107,968

 
$
18,052

 
$
378,604

 
International
50,802

 
74,788

 
304

 
125,894

 
Total
$
303,386

 
$
182,756

 
$
18,356

 
$
504,498

 



11 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

 
Three Months Ended March 2019
 
 
 
 
 
 
 
 
 
 
(In thousands)
Wrangler
 
Lee
 
Other
 
Total
 
Channel revenues

 

 

 

 
U.S. Wholesale
$
276,825

 
$
100,859

 
$
6,725

 
$
384,409

 
Non-U.S. Wholesale
68,655

 
100,896

 

 
169,551

 
Branded Direct-To-Consumer
24,455

 
39,776

 

 
64,231

 
Other

 

 
30,153

 
30,153

 
Total
$
369,935

 
$
241,531

 
$
36,878

 
$
648,344

 
 
 
 
 
 
 
 
 
 
Geographic revenues

 

 

 

 
U.S.
$
293,869

 
$
119,120

 
$
36,878

 
$
449,867

 
International
76,066

 
122,411

 

 
198,477

 
Total
$
369,935

 
$
241,531

 
$
36,878

 
$
648,344

 


NOTE 3 — BUSINESS SEGMENT INFORMATION
The Company has two reportable segments:
Wrangler — Wrangler® branded denim, apparel and accessories.
Lee — Lee® branded denim, apparel and accessories.
The chief operating decision maker allocates resources and assesses performance based on a global brand view which determines the Company's operating segments. Operating segments are the basis for the Company's reportable segments.
In addition, we report an "Other" category in order to reconcile segment revenues and segment profit to the Company's operating results, but the Other category is not considered a reportable segment based on evaluation of aggregation criteria. Other includes sales of third-party branded merchandise at VF Outlet™ stores, sales and licensing of Rock & Republic® branded apparel, and sales of products manufactured for third parties. Sales of Wrangler® and Lee® branded products at VF Outlet™ stores are not included in Other and are reported in the respective segments discussed above. Prior to 2020, the Other category also included transactions with VF for pre-Separation activities, none of which continued in 2020. These transactions included sales of VF-branded products at VF Outlet™ stores, as well as sales to VF for products manufactured in our plants, use of our transportation fleet and fulfillment of a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018.
Accounting policies utilized for internal management reporting at the individual segments are consistent with those included in Note 1 to the Company's financial statements included in the Company's 2019 Annual Report on Form 10-K, except as noted below.
After the Separation, as a standalone public company, the Company has allocated costs for certain centralized functions and programs to the Lee® and Wrangler® segments based on appropriate metrics such as usage or production of net revenues. These centralized functions and programs include, but are not limited to, information technology, human resources, supply chain, insurance and related benefit costs associated with those functions.
Through the Separation date, the Company's statements of operations included costs for certain centralized functions and programs provided and administered by VF that were charged directly to VF's businesses, including the Company. These centralized functions and programs included, but were not limited to, information technology, human resources, accounting shared services, supply chain, insurance and the related benefits. These historical allocations were included in the measurement of segment profit below. In addition, for purposes of preparing these financial statements on a carve-out basis, a portion of VF's total corporate expenses were allocated to the Company. These expense allocations included the cost of corporate functions and resources provided by or administered by VF including, but not limited to, executive management, finance, accounting, legal, human resources and related benefit costs associated with such functions. Allocations also included the cost of operating VF's corporate headquarters located in Greensboro, North Carolina. These additional allocations were reported as "corporate and other expenses" in the table below.
Corporate and other expenses and interest income and expense are not controlled by segment management and therefore are excluded from the measurement of segment profit.


Kontoor Brands, Inc. Q1 FY20 Form 10-Q 12



KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

The following table presents financial information for the Company's reportable segments and (loss) income before income taxes:
 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands)

2020
 
 
2019
Segment revenues:
 
 
 
 
 
Wrangler
 
$
303,386

 
 
$
369,935

Lee
 
182,756

 
 
241,531

Total reportable segment revenues
 
486,142

 
 
611,466

Other revenues
 
18,356

 
 
36,878

Total net revenues
 
$
504,498

 
 
$
648,344

Segment profit:
 
 
 
 
 
Wrangler
 
$
33,863

 
 
$
23,665

Lee
 
973

 
 
17,633

Total reportable segment profit
 
$
34,836

 
 
$
41,298

Corporate and other expenses
 
(33,222
)
 
 
(13,989
)
Interest income from former parent, net
 

 
 
2,339

Interest expense
 
(10,939
)
 
 
(98
)
Interest income
 
416

 
 
1,423

Loss related to other revenues
 
(2,228
)
 
 
(3,085
)
(Loss) income before income taxes
 
$
(11,137
)
 
 
$
27,888



NOTE 4 — ACCOUNTS RECEIVABLE
Allowance for Doubtful Accounts
The Company is exposed to credit losses primarily through trade accounts receivable from customers and licensees which are generally short-term in nature. The Company maintains an allowance for doubtful accounts that will result from the inability of customers to make required payments of outstanding balances. In estimating this allowance, accounts receivable are evaluated on a pooled basis at each reporting date and aggregated on the basis of similar risk characteristics, including current and forecasted industry trends and economic conditions, aging status of accounts, and the financial strength and credit standing of customers, including payment and default history. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.
Upon adoption of the CECL accounting standard in fiscal 2020, the Company reviewed the estimates used to calculate the allowance for doubtful accounts as of December 28, 2019. Based on the current and expected conditions at that time, the Company determined that the allowance was sufficient and no transition adjustment was required. At March 2020, given the current and expected impact of COVID-19, the Company updated the assumptions used and recorded an increase in the allowance for doubtful accounts.
The following table presents a rollforward of the allowance for doubtful accounts:
(In thousands)
 
Three Months Ended March 2020
 
 
 
 
Balance, December 2019
 
$
11,852

 
Provision for expected credit losses
 
9,339

 
Other (1)
 
(1,058
)
 
Balance, March 2020
 
$
20,133

 
(1) Other includes impact of foreign currency translation, accounts receivable balances written-off against the allowance and recoveries of amounts previously written-off, none of which were individually significant.
Sale of Trade Accounts Receivable
On April 1, 2019, the Company entered into an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under this agreement, up to $377.5 million of the Company’s trade accounts receivable may be sold to the financial institution and remain outstanding at any point in time. The Company removes the sold balances from "accounts receivable" in its balance sheet at the time of sale. The Company does not retain any interests in the sold trade accounts receivable but continues to service and collect outstanding trade accounts receivable on behalf of the financial institution.


13 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

Prior to April 1, 2019, the Company had a separate agreement with VF, pursuant to which the Company’s trade accounts receivable were sold as part of VF’s agreement with a financial institution. Under this agreement, the Company did not retain any interests in the sold trade accounts receivable but continued to service and collect outstanding trade accounts receivable on behalf of VF. Prior to the Separation, the amount due from VF for these sales was separately reflected in the Company's balance sheets within "due from former parent." Refer to Note 14 to the Company's financial statements for additional information.
During the three months ended March 2020 and March 2019, the Company sold total trade accounts receivable of $220.5 million and $245.0 million, respectively. As of March 2020 and December 2019, $164.4 million and $188.1 million, respectively, of the sold trade accounts receivable had been removed from the Company's balance sheets but remained outstanding with the financial institution. As of March 2019, $286.8 million of the sold trade accounts receivable had been removed from "accounts receivable" and reflected in the Company's balance sheet within "due from former parent."
The funding fees charged by the financial institution for these programs are reflected in the Company's statements of operations within "other expense, net" and were $0.8 million and $1.4 million for the three months ended March 2020 and March 2019, respectively. Net proceeds of these programs are reflected as operating activities in the Company's statements of cash flows.

NOTE 5 — INVENTORIES
The following table presents components of inventories recorded in the Company's balance sheets:
(In thousands)
 
March 2020
 
 
December 2019
 
March 2019
Finished products
 
$
430,719

 
 
$
383,643

 
$
454,763

Work-in-process
 
24,176

 
 
34,783

 
37,872

Raw materials
 
33,855

 
 
39,675

 
26,371

Total inventories
 
$
488,750

 
 
$
458,101

 
$
519,006



NOTE 6 — SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Credit Facilities
On May 17, 2019, the Company entered into a $1.55 billion senior secured credit facility (the "Credit Agreement") under which it incurred $1.05 billion of indebtedness, the proceeds of which were used primarily to finance a cash transfer to VF in connection with the Separation. At inception, this facility consisted of a five-year $750.0 million term loan A facility (“Term Loan A”), a seven-year $300.0 million term loan B facility (“Term Loan B”) and a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”) (collectively, the “Credit Facilities”) with the lenders and agents party thereto.
The Credit Agreement contained certain affirmative and negative covenants customary for financings of this type, including maintenance of ratios as defined in the Credit Agreement for consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to consolidated debt (the "Total Leverage Ratio") of 4.00 to 1.00 and EBITDA to consolidated interest expense (the "Consolidated Interest Coverage Ratio") of 3.00 to 1.00, both as measured over the most recent four consecutive fiscal quarters. As of March 2020, the Company was in compliance with all covenants.
On May 5, 2020, given the uncertainties of COVID-19 and the associated impact on future results of operations, the Company entered into an amendment to the Credit Agreement (the “Amendment”) to address potential covenant compliance issues during future reporting periods. The Amendment establishes a temporary relief period for the Company (the "Relief Period") for certain provisions regarding financial covenants including (i) increase of the maximum Total Leverage Ratio, (ii) addition of a minimum liquidity floor of $200.0 million, (iii) addition of a $250.0 million limit on available cash, and (iv) imposition of stricter limitations on investments, acquisitions, restricted payments (including dividends) and the incurrence of indebtedness. The Relief Period is effective until the earlier of (i) the date on which a compliance certificate is delivered for the Company's quarter ended June 2021 or (ii) the date on which a compliance certificate is delivered in respect of any previous fiscal quarter demonstrating that the Company is in full compliance with all financial covenants that were in effect prior to the Amendment and upon the Company's written notification to the administrative agent that the Relief Period should end on such date. For quarterly measurement periods subsequent to the Amendment, the Company is required to maintain a Total Leverage Ratio not to exceed 5.50 to 1.00, 5.50 to 1.00, 5.00 to 1.00 and 4.50 to 1.00 for the periods ended June 2020, September 2020, December 2020 and March 2021, respectively.


Kontoor Brands, Inc. Q1 FY20 Form 10-Q 14



KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

The Company expects to maintain compliance with the applicable financial covenants for at least one year from the issuance of our financial statements for the period ended March 2020. If economic conditions caused by COVID-19 do not recover as currently estimated by management, this could impact the Company’s ability to maintain compliance with the applicable financial covenants and require the Company to seek additional amendments to the Credit Agreement. If the Company is not able to enter into such amendments, this would lead to an event of default which, if not cured timely, could require the Company to repay its outstanding debt. In that situation, the Company may not be able to generate sufficient liquidity, through new or refinanced debt, equity financing or asset sales, to repay its outstanding debt.
Short-term Borrowings
At March 2020, December 2019 and March 2019, the Company had $46.4 million, $47.8 million and $36.1 million, respectively, of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. Total outstanding balances under these arrangements were $3.5 million, $1.1 million and $8.4 million at March 2020, December 2019 and March 2019, respectively, and primarily consist of letters of credit that are non-interest bearing to the Company.
Long-term Debt
The following table presents the components of long-term debt as recorded in the Company's balance sheet:
(In thousands)
 
March 2020
 
 
December 2019
Revolving Credit Facility
 
$
475,000

 
 
$

Term Loan A
 
695,389

 
 
695,111

Term Loan B
 
218,347

 
 
218,158

Total long-term debt
 
1,388,736

 
 
913,269

Less: current portion
 

 
 

Long-term debt, due beyond one year
 
$
1,388,736

 
 
$
913,269


The Revolving Credit Facility may be used to borrow funds in both U.S. dollar and certain non-U.S. dollar currencies, and has a $75.0 million letter of credit sublimit. As of March 2020, the Company had $475.0 million of outstanding borrowings under the Revolving Credit Facility and $1.3 million of outstanding standby letters of credit issued on behalf of the Company, leaving $23.7 million available for borrowing against this facility. The outstanding borrowings under the Revolving Credit Facility as of March 2020 were the result of drawdowns taken by the Company as a precautionary measure to provide increased financial flexibility, strengthen the Company’s near-term cash position and provide additional funding for working capital in response to COVID-19, and were repaid at the closing of the Amendment in May 2020 to the extent required to comply with the available cash limitation.
The interest rate per annum applicable to the Revolving Credit Facility and Term Loan A is either a base rate plus a margin of 75 basis points or 175 basis points over the applicable LIBOR benchmark, at the Company's election. During the Relief Period, these rates will either be 225 basis points over the base rate or 325 basis points over the applicable LIBOR benchmark, at the Company’s election. The Company is also required to pay a facility fee to the lenders, currently equal to 30 basis points of the undrawn amount of the facility. During the Relief Period, this facility fee will be equal to 50 basis points of the undrawn amount of the facility. Outside of the Relief Period, these credit spreads and facility fees are subject to adjustments based on the Company's credit ratings.
Additionally, the interest rate per annum applicable to Term Loan B is either a base rate plus a margin of 325 basis points or 425 basis points over the applicable LIBOR benchmark, at the Company's election. The LIBOR rate for both loans is subject to a "floor" of 0%. Interest payments are due quarterly on both Term Loan A and Term Loan B.
Term Loan A had an outstanding principal amount of $700.0 million at March 2020 and December 2019, which is recorded net of unamortized debt issuance costs. As of March 2020, interest expense on this facility was being recorded at an effective annual interest rate of 3.2%, including the amortization of debt issuance costs and the impact of the Company’s interest rate swap agreements.
Term Loan B had an outstanding principal amount of $223.0 million at March 2020 and December 2019, which is recorded net of unamortized original issue discount and debt issuance costs. As of March 2020, interest expense on this facility was being recorded at an effective annual interest rate of 5.9%, including the amortization of original issue discount, debt issuance costs and the impact of the Company’s interest rate swap agreements.
 


15 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

NOTE 7 — FAIR VALUE MEASUREMENTS
Certain assets and liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. Categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company's own data and judgments about assumptions that market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The following tables present financial assets and financial liabilities that are measured and recorded in the Company's financial statements at fair value on a recurring basis:
 
 
 
Fair Value Measurement Using
(In thousands)
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
March 2020
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
445,467

 
$
445,467

 
$

 
$

Time deposits
2,352

 
2,352

 

 

Foreign currency exchange contracts
6,988

 

 
6,988

 

Investment securities
51,133

 
46,185

 
4,948

 

Financial liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts
15,080

 

 
15,080

 

Interest rate swap agreements
17,528

 

 
17,528

 

Deferred compensation
51,350

 

 
51,350

 

 
 
 
Fair Value Measurement Using
(In thousands)
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
December 2019
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
25,706

 
$
25,706

 
$

 
$

Time deposits
4,788

 
4,788

 

 

Foreign currency exchange contracts
5,563

 

 
5,563

 

Investment securities
59,922

 
56,437

 
3,485

 

Financial liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts
2,795

 

 
2,795

 

Interest rate swap agreements
3,089

 

 
3,089

 

Deferred compensation
60,129

 

 
60,129

 




Kontoor Brands, Inc. Q1 FY20 Form 10-Q 16



KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

The Company's cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of foreign currency exchange contracts and interest rate swap agreements, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies and observable interest rate yield curves for interest rate swap agreements. Investment securities are held in the Company's deferred compensation plans as an economic hedge of the related deferred compensation liabilities. These investments are primarily comprised of mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to the Company's deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments (Level 2).
Additionally, at March 2020, the carrying value of the Company's long-term debt was $1,388.7 million compared to a fair value of $1,141.0 million. At December 2019, the carrying value of the Company's long-term debt was $913.3 million compared to a fair value of $906.1 million. The fair value of long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
All other financial assets and financial liabilities are recorded in the Company's financial statements at cost. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable, and accrued liabilities. At March 2020 and December 2019, their carrying values approximated fair value due to the short-term nature of these instruments.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant and equipment, operating lease assets, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment when events or circumstances indicate that the carrying value may not be recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event that an impairment is required, the asset is adjusted to fair value, using market-based assumptions. As a result of temporary retail store closures due to COVID-19, the Company assessed certain related assets for impairment as of March 2020. No significant impairment charges were recorded during the three months ended March 2020 or March 2019.

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Summary of Derivative Financial Instruments
On April 24, 2019, the Company began entering into derivative contracts with external counterparties to hedge certain foreign currency transactions. The notional amount of all outstanding foreign currency exchange contracts was $318.0 million at March 2020 and $341.6 million at December 2019, consisting primarily of contracts hedging exposures to the euro, Mexican peso, Canadian dollar, British pound, Polish zloty and Swedish krona. Foreign currency exchange contracts have maturities up to 20 months.
On July 24, 2019, the Company entered into "floating to fixed" derivative agreements to mitigate exposure to volatility in LIBOR rates on the Company's future interest payments. The notional amount of the interest rate swap agreements was $400.0 million at March 2020 and $475.0 million at December 2019. Because these interest rate swap agreements meet the criteria for hedge accounting, all related gains and losses are deferred within accumulated other comprehensive loss ("AOCL") and are being amortized through April 18, 2024.
The Company's outstanding derivative financial instruments met the criteria for hedge accounting at the inception of the hedging relationship, although a limited number of foreign currency exchange contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. At each reporting period, the Company assesses whether the hedging relationships continue to be highly effective in offsetting changes in cash flows of hedged items. If it was determined that the hedging relationship ceased to be highly effective, the Company would discontinue hedge accounting. All designated hedging relationships were determined to be highly effective as of March 2020.


17 Kontoor Brands, Inc. Q1 FY20 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated and Combined Financial Statements
(Unaudited)

 

The following table presents the fair value of outstanding derivatives on an individual contract basis:
 
 
Fair Value of Derivatives with Unrealized Gains
 
 
Fair Value of Derivatives with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
March 2020
 
 
December 2019
 
 
March 2020
 
 
December 2019
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
5,717

 
 
$
5,199

 
 
$
(14,603
)
 
 
$
(2,690
)
Interest rate swap agreements
 

 
 

 
 
(17,528
)
 
 
(3,089
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
1,271

 
 
364

 
 
(477
)
 
 
(105
)
Total derivatives