ktb-20210403

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 April 3, 2021


☐			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

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 30, 2021 was 57,631,495.

KONTOOR BRANDS, INC.

Table of Contents


			Page
Part I — Financial Information

Item 1. Financial Statements (Unaudited)			3

Consolidated Balance Sheets: March 2021 , December 20 20 and March 20 2 0			3

Consolidated Statements of Operations: Three months ended March 2021 and March 2020			4

Consolidated Statements of Comprehensive Income (Loss): Three months ended March 2021 and March 2020			5

Consolidated Statements of Cash Flows: Three months ended March 2021 and March 2020			6

Consolidated Statements of Equity (Deficit): Three months ended March 2021 and March 2020			7

Notes to Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22

Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

Item 4. Controls and Procedures			32

Part II — Other Information

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 6. Exhibits			33

Signatures			34

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 2

PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

KONTOOR BRANDS, INC.

Consolidated Balance Sheets

(Unaudited)


(In thousands)	March 2021		December 2020		March 2020
ASSETS
Current assets
Cash and equivalents	$	229,542	$	248,138	$	479,366
Accounts receivable, net	221,031		231,397		213,080


Inventories	350,151		340,732		488,750
Prepaid expenses and other current assets	74,003		81,413		78,597
Total current assets	874,727		901,680		1,259,793

Property, plant and equipment, net	113,693		118,897		129,884
Operating lease assets	65,478		60,443		83,022
Intangible assets, net	15,544		15,991		16,914
Goodwill	212,920		213,392		211,739

Other assets	237,313		235,413		200,443
TOTAL ASSETS	$	1,519,675	$	1,545,816	$	1,901,795
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings	$	947	$	1,114	$	3,487
Current portion of long-term debt	24,375		25,000		—
Accounts payable	194,891		167,240		149,922


Accrued liabilities	184,047		192,952		180,538
Operating lease liabilities, current	28,473		27,329		32,781
Total current liabilities	432,733		413,635		366,728

Operating lease liabilities, noncurrent	42,843		39,806		54,150

Other liabilities	118,905		119,777		110,666
Long-term debt	790,930		887,957		1,388,736

Commitments and contingencies
Total liabilities	1,385,411		1,461,175		1,920,280
Equity
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at March 2021, December 2020 and March 2020	—		—		—
Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 57,513,619 at March 2021; 57,254,611 at December 2020 and 56,930,737 at March 2020	—		—		—
Additional paid-in capital	186,769		172,297		153,966
Retained earnings (accumulated deficit)	44,192		7,151		(38,989)
Accumulated other comprehensive loss	(96,697)		(94,807)		(133,462)
Total equity (deficit)	134,264		84,641		(18,485)
TOTAL LIABILITIES AND EQUITY	$	1,519,675	$	1,545,816	$	1,901,795

See accompanying notes to unaudited consolidated financial statements.

3 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March

(In thousands, except per share amounts)		2021		2020
Net revenues		$	651,762	$	504,498
Costs and operating expenses
Cost of goods sold		351,182		313,734
Selling, general and administrative expenses		207,404		190,928

Total costs and operating expenses		558,586		504,662
Operating income (loss)		93,176		(164)
Interest expense		(11,791)		(10,939)
Interest income		258		416
Other expense, net		(442)		(450)
Income (loss) before income taxes		81,201		(11,137)
Income taxes		16,738		(8,425)
Net income (loss)		$	64,463	$	(2,712)
Earnings (loss) per common share
Basic		$	1.12	$	(0.05)
Diluted		$	1.09	$	(0.05)
Weighted average shares outstanding
Basic		57,344		56,875
Diluted		58,902		56,875

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 4

KONTOOR BRANDS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


	Three Months Ended March

(In thousands)		2021		2020
Net income (loss)		$	64,463	$	(2,712)
Other comprehensive income (loss)
Net change in foreign currency translation		(7,082)		(27,210)
Net change in defined benefit pension plans		74		29
Net change in derivative financial instruments		5,118		(26,583)
Total other comprehensive income (loss), net of related taxes		(1,890)		(53,764)
Comprehensive income (loss)		$	62,573	$	(56,476)

See accompanying notes to unaudited consolidated financial statements.

5 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March

(In thousands)	2021		2020
OPERATING ACTIVITIES
Net income (loss)	$	64,463	$	(2,712)
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities:
Depreciation and amortization	8,993		7,385
Stock-based compensation	10,426		2,466
Provision for doubtful accounts	1,386		9,339

Other	2,977		(12,600)
Changes in operating assets and liabilities:
Accounts receivable	5,871		(1,765)
Inventories	(11,131)		(36,566)
Accounts payable	28,604		3,664
Income taxes	6,983		(3,676)
Accrued liabilities	(191)		(15,049)
Other assets and liabilities	4		4,097
Cash provided (used) by operating activities	118,385		(45,417)
INVESTING ACTIVITIES
Property, plant and equipment expenditures	(1,992)		(10,423)
Capitalized computer software	(9,568)		(8,781)

Other	(201)		(3,104)
Cash used by investing activities	(11,761)		(22,308)
FINANCING ACTIVITIES
Borrowings under revolving credit facility	—		512,500
Repayments under revolving credit facility	—		(37,500)
Repayments of term loans	(100,000)		—
Dividends paid	(22,964)		(31,877)
Proceeds from issuance of Common Stock, net of shares withheld for taxes	(412)		(1,855)
Other	(125)		2,566
Cash (used) provided by financing activities	(123,501)		443,834
Effect of foreign currency rate changes on cash and cash equivalents	(1,719)		(3,551)
Net change in cash and cash equivalents	(18,596)		372,558
Cash and cash equivalents – beginning of period	248,138		106,808
Cash and cash equivalents – end of period	$	229,542	$	479,366

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 6

KONTOOR BRANDS, INC.

Consolidated Statements of Equity (Deficit)

(Unaudited)



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Equity
(In thousands, except per share amounts)	Shares	Amounts

Balance, December 2020	57,255	$	—	$	172,297	$	7,151	$	(94,807)	$	84,641
Net income	—	—		—		64,463		—		64,463
Stock-based compensation, net	259	—		14,472		(4,458)		—		10,014
Other comprehensive loss	—	—		—		—		(1,890)		(1,890)
Dividends on Common Stock ($0.40 per share)	—	—		—		(22,964)		—		(22,964)
Balance, March 2021	57,514	$	—	$	186,769	$	44,192	$	(96,697)	$	134,264


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Equity (Deficit)

(In thousands, except per share amounts)	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
Other comprehensive loss	—	—		—		—		(53,764)		(53,764)
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)

See accompanying notes to unaudited consolidated financial statements.

7 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated 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."). We completed a spin-off transaction from VF Corporation ("VF" or "former parent") on May 22, 2019 (the "Separation") and began to trade as a standalone public company (NYSE: KTB) on May 23, 2019.

The Company designs, produces, procures, markets and distributes apparel and footwear, 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.

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 1, 2022 ("fiscal 2021"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended March 2021, December 2020 and March 2020 correspond to the fiscal periods ended April 3, 2021, January 2, 2021 and March 28, 2020, respectively.

Impact of COVID-19

The novel coronavirus (“COVID-19”) pandemic continues to impact global economic conditions, as well as the Company's operations. 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 doubtful accounts, inventory valuations, liabilities for variable consideration, deferred tax valuation allowances, fair value measurements including asset impairment evaluations, the effectiveness of the Company’s hedging instruments, and expected compliance with all applicable financial covenants in our Credit Agreement (as defined in Note 6 to the Company's financial statements). These assumptions and estimates may change as new events occur and additional information is obtained regarding the impact of COVID-19. 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. Operating results for the three months ended March 2021 are not necessarily indicative of results that may be expected for any other interim period or for fiscal 2021. The unaudited financial statements should be read in conjunction with the audited consolidated and combined financial statements for the fiscal year ended January 2, 2021 included in the Company's 2020 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission ("SEC") on March 3, 2021 ("2020 Annual Report on Form 10-K").

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 Standard

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 and providing new guidance to reduce complexity in certain aspects of the current guidance. This guidance was adopted by the Company during the first quarter of 2021 and did not impact the Company’s financial statements or related disclosures.

Recently Issued Accounting Standard

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 was effective upon issuance and the Company may adopt the guidance and apply it prospectively to contract modifications made or relationships entered into or evaluated any time from the issuance date through December 31, 2022. The Company will continue to evaluate the impact that adoption of this guidance would have on its financial statements and related disclosures, which is not expected to be significant.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 8

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 2 — REVENUES

Performance Obligations

As of March 2021, 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 and (ii) fixed consideration related to future minimum guarantees. For the three months ended March 2021, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not significant.

Contract Balances

The following table presents information about contract balances recorded in the Company's balance sheets:


(In thousands)	March 2021		December 2020		March 2020
Accounts receivable, net	$	221,031	$	231,397	$	213,080
Contract assets (a)	4,359		5,769		5,715
Contract liabilities (b)	786		787		1,690

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

(b) Included within "accrued liabilities" in the Company's balance sheets.

For the three months ended March 2021, revenue recognized that was included in contract liabilities as of December 2020 was not significant. For the three months ended March 2020, $1.1 million of revenue was recognized that was included in contract liabilities as of December 2019.

As of March 2021, the Company has contractual rights under its licensing agreements to receive $26.6 million of fixed consideration related to the future minimum guarantees through December 2025. 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. Revenues from licensing arrangements have been included within the U.S. or Non-U.S. Wholesale channels, based on the respective region where the licensee sells the product. Direct-to-Consumer revenues include the distribution of our products via Wrangler® and Lee® branded full-price stores and Company-operated outlet stores globally, digital sales via www.wrangler.com and www.lee.com globally and concession retail locations internationally.

The Other channel primarily included sales of third-party branded merchandise at VF Outlet™ stores. During 2020, the Company decided to discontinue the sale of third-party branded merchandise. Sales of Wrangler® and Lee® branded products at VF Outlet™ are not included in Other and are reported in the Direct-to-Consumer channel discussed above.


	Three Months Ended March 2021

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	329,699	$	124,582	$	1,726	$	456,007
Non-U.S. Wholesale	47,577		90,800		637		139,014
Direct-to-Consumer	21,546		34,766		5		56,317
Other	—		—		424		424
Total	$	398,822	$	250,148	$	2,792	$	651,762

Geographic revenues
U.S.	$	347,879	$	138,232	$	2,155	$	488,266
International	50,943		111,916		637		163,496
Total	$	398,822	$	250,148	$	2,792	$	651,762

9 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


	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
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

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 and sales and licensing of Rock & Republic® branded apparel. During 2020, the Company decided to discontinue the sale of third-party branded merchandise in conjunction with our decision to exit certain VF Outlet™ stores. 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.

Accounting policies utilized for internal management reporting at the individual segments are consistent with those in Note 1 to the Company's financial statements included in the Company's 2020 Annual Report on Form 10-K, except as noted below.

The Company has allocated costs for certain centralized functions and programs to the Wrangler and Lee 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.

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 FY21 Form 10-Q 10

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents financial information for the Company's reportable segments and income (loss) before income taxes:


	Three Months Ended March

(In thousands)	2021		2020
Segment revenues:
Wrangler	$	398,822	$	303,386
Lee	250,148		182,756
Total reportable segment revenues	648,970		486,142
Other revenues	2,792		18,356
Total net revenues	$	651,762	$	504,498
Segment profit:
Wrangler	$	83,983	$	33,863
Lee	51,123		973
Total reportable segment profit	$	135,106	$	34,836
Corporate and other expenses	(41,551)		(33,222)
Interest expense	(11,791)		(10,939)
Interest income	258		416
Loss related to other revenues	(821)		(2,228)
Income (loss) before income taxes	$	81,201	$	(11,137)

NOTE 4 — ACCOUNTS RECEIVABLE

Allowance for Doubtful Accounts

The Company reviews the estimates used to calculate the allowance for doubtful accounts on a quarterly basis.

The following table presents a rollforward of the allowance for doubtful accounts:


	Three Months Ended March
(In thousands)	2021		2020

Balance, December	$	19,143	$	11,852
Provision for expected credit losses	1,386		9,339
Accounts receivable balances written off	(2,122)		(235)
Other (1)	(735)		(823)
Balance, March	$	17,672	$	20,133

(1) Other primarily includes the impact of foreign currency translation and recoveries of amounts previously written off, neither 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 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, net" 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.

During the three months ended March 2021 and March 2020, the Company sold total trade accounts receivable of $370.5 million and $220.5 million, respectively. As of March 2021, December 2020 and March 2020, $242.1 million, $127.1 million and $164.4 million, respectively, of the sold trade accounts receivable had been removed from the Company's balance sheets but remained outstanding with the financial institution.

The funding fees charged by the financial institution for this program are reflected in the Company's statements of operations within "other expense, net" and were $0.6 million for the three months ended March 2021 and $0.8 million for the three months ended March 2020, respectively. Net proceeds of these programs are reflected as operating activities in the Company's statements of cash flows.

11 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 5 — INVENTORIES

The following table presents components of inventories recorded in the Company's balance sheets:


(In thousands)	March 2021		December 2020		March 2020
Finished products	$	291,972	$	277,164	$	430,719
Work-in-process	29,104		29,921		24,176
Raw materials	29,075		33,647		33,855
Total inventories	$	350,151	$	340,732	$	488,750

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 contains 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. In addition, beginning with the fiscal year ended December 2020, the Company is subject to additional mandatory repayments on Term Loan B if excess cash flow, as defined in the Credit Agreement, exceeds a specified threshold. Based on the fiscal 2020 calculation, no additional repayments were required under this excess cash flow provision.

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 financial covenant compliance issues during future reporting periods. The Amendment established a temporary relief period for the Company (the "Relief Period") for certain provisions regarding financial covenants. Effective February 26, 2021, the Company provided written notification to the administrative agent that it had terminated the temporary Relief Period, thus reverting to the original terms under the Credit Agreement prior to the Amendment.

As of March 2021, the Company was in compliance with all applicable financial covenants and expects to maintain compliance with the applicable financial covenants for at least one year from the issuance of these financial statements. If economic conditions caused by COVID-19 significantly deteriorate for a prolonged period and the Company's operating results and cash flows do not continue to 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 new amendments to the Credit Agreement. If the Company were 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 both March 2021 and December 2020, the Company had $35.9 million, and at March 2020 the Company had $46.4 million, of availability under international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. Short-term borrowings outstanding under these arrangements were $0.1 million, $0.2 million and $3.5 million at March 2021, December 2020 and March 2020, respectively, and primarily consist of letters of credit that are non-interest bearing to the Company. In addition, short-term borrowings at both March 2021 and December 2020 included other debt of $0.9 million.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 12

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Long-term Debt

The following table presents the components of long-term debt as recorded in the Company's balance sheet:


(In thousands)	March 2021		December 2020		March 2020
Revolving Credit Facility	$	—	$	—	$	475,000
Term Loan A	684,741		694,241		695,389
Term Loan B	130,564		218,716		218,347
Total long-term debt	815,305		912,957		1,388,736
Less: current portion	(24,375)		(25,000)		—
Long-term debt, due beyond one year	$	790,930	$	887,957	$	1,388,736

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 2021, the Company had no outstanding borrowings under the Revolving Credit Facility and $6.8 million of outstanding standby letters of credit issued on behalf of the Company, leaving $493.2 million available for borrowing against this facility.

The interest rate per annum applicable to the Revolving Credit Facility and Term Loan A is either a base rate plus a margin or the applicable LIBOR rate plus a margin, at the Company's election. The applicable margins and facility fee are subject to adjustments based on the Company's credit ratings and Total Leverage Ratio. The applicable margin varies from 37.5 to 125 basis points for base rate loans and from 137.5 to 225 basis points for LIBOR loans. The Company is also required to pay a facility fee to the lenders, varying from 20 to 40 basis points of the undrawn amount of the facility.

Additionally, the interest rate per annum applicable to Term Loan B is either a base rate plus a margin of 325 basis points or the applicable LIBOR rate plus a margin of 425 basis points, at the Company's election.

The LIBOR rate for all loans under the Credit Facility is subject to a "floor" of 0%. Interest payments on all loans under the Credit Facility are due at least quarterly, and could be due more frequently based on the Company's interest rate elections.

Term Loan A had an outstanding principal amount of $690.0 million at March 2021, and $700.0 million at December 2020 and March 2020, which is recorded net of unamortized deferred financing costs. As of March 2021, interest expense on Term Loan A was being recorded at an effective annual interest rate of 3.1%, including the remaining amortization of deferred financing costs and the impact of the Company’s interest rate swap agreements.

Term Loan B had an outstanding principal amount of $133.0 million at March 2021 and $223.0 million at both December 2020 and March 2020, which is recorded net of unamortized original issue discount and deferred financing costs. As of March 2021, interest expense on Term Loan B was being recorded at an effective annual interest rate of 5.5%, including the remaining amortization of original issue discount, deferred financing costs and the impact of the Company’s interest rate swap agreements.

In addition, during the three months ended March 2021, the Company recorded interest expense of $1.7 million due to accelerated amortization of original issue discount and debt issuance costs associated with early repayments on term loans under our Credit Facilities.

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.

13 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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 2021
Financial assets:
Cash equivalents:
Money market funds	$	146,018	$	146,018	$	—	$	—
Time deposits	3,650		3,650		—		—
Foreign currency exchange contracts	6,814		—		6,814		—

Investment securities	58,080		58,080		—		—
Financial liabilities:
Foreign currency exchange contracts	4,662		—		4,662		—
Interest rate swap agreements	12,710		—		12,710		—
Deferred compensation	59,255		—		59,255		—


			Fair Value Measurement Using
(In thousands)	Total Fair Value		Level 1		Level 2		Level 3
December 2020
Financial assets:
Cash equivalents:
Money market funds	$	165,751	$	165,751	$	—	$	—
Time deposits	4,978		4,978		—		—
Foreign currency exchange contracts	7,531		—		7,531		—

Investment securities	57,166		57,166		—		—
Financial liabilities:
Foreign currency exchange contracts	8,794		—		8,794		—
Interest rate swap agreements	16,309		—		16,309		—
Deferred compensation	58,035		—		58,035		—

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. As of March 2021, these investments are comprised of mutual funds that are valued based on quoted prices in active markets (Level 1). 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 2021, the carrying value of the Company's long-term debt was $815.3 million compared to a fair value of $814.0 million. At December 2020, the carrying value of the Company's long-term debt was $913.0 million compared to a fair value of $916.0 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 2021 and December 2020, their carrying values approximated fair value due to the short-term nature of these instruments.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 14

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Nonrecurring Fair Value Measurements

Certain non-financial assets, primarily property, plant and equipment, capitalized computer software, operating lease assets and 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.

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Summary of Derivative Financial Instruments

The Company enters into derivative contracts with external counterparties to hedge certain foreign currency transactions. The notional amount of all outstanding foreign currency exchange contracts was $304.3 million at March 2021, $295.0 million at December 2020 and $318.0 million at March 2020, consisting primarily of contracts hedging exposures to the euro, Mexican peso, Canadian dollar, British pound, Polish zloty, Swedish krona, and Indian rupee. Foreign currency exchange contracts have maturities up to 20 months.

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 $350.0 million at March 2021 and $400.0 million at both December 2020 and March 2020. 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. 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 the Company determines that the hedging relationship has ceased to be highly effective, it would discontinue hedge accounting. All designated hedging relationships were determined to be highly effective as of March 2021. A limited number of foreign currency exchange contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes.

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 2021		December 2020		March 2020		March 2021		December 2020		March 2020

Derivatives designated as hedging instruments:
Foreign currency exchange contracts	$	6,593	$	7,179	$	5,717	$	(4,659)	$	(8,640)	$	(14,603)
Interest rate swap agreements	—		—		—		(12,710)		(16,309)		(17,528)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	221		352		1,271		(3)		(154)		(477)
Total derivatives	$	6,814	$	7,531	$	6,988	$	(17,372)	$	(25,103)	$	(32,608)

The Company records and presents the fair value of all derivative assets and liabilities in the Company's balance sheets on a gross basis, even though certain of the derivative contracts are subject to master netting agreements. If the Company were to offset and record the asset and liability balances of its derivative contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Company's balance sheets would be adjusted from the current gross presentation to the net amounts.

15 Kontoor Brands, Inc. Q1 FY21 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents a reconciliation of gross to net amounts for derivative asset and liability balances:


	March 2021				December 2020				March 2020

(In thousands)	Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability
Gross amounts presented in the balance sheet	$	6,814	$	(17,372)	$	7,531	$	(25,103)	$	6,988	$	(32,608)
Gross amounts not offset in the balance sheet	(2,355)		2,355		(1,818)		1,818		(2,970)		2,970
Net amounts	$	4,459	$	(15,017)	$	5,713	$	(23,285)	$	4,018	$	(29,638)

The following table presents the location of derivatives in the Company's balance sheets, with current or noncurrent classification based on maturity dates:


(In thousands)	March 2021		December 2020		March 2020
Prepaid expenses and other current assets	$	5,830	$	5,773	$	5,217
Accrued liabilities	(4,065)		(7,166)		(10,256)
Other assets	984		1,758		1,771
Other liabilities	(13,307)		(17,937)		(22,352)

Cash Flow Hedges

The following tables present the pre-tax effects of cash flow hedges included in the Company's statements of operations and statements of comprehensive income (loss):


	Gain (Loss) on Derivatives Recognized in AOCL
(In thousands)	Three Months Ended

Cash Flow Hedging Relationships		March 2021		March 2020
Foreign currency exchange contracts		$	1,546	$	(10,906)
Interest rate swap agreements		2,086		(14,670)
Total		$	3,632	$	(25,576)


	Gain (Loss) Reclassified from AOCL into Income
(In thousands)	Three Months Ended

Location of Gain (Loss)		March 2021		March 2020
Net revenues		$	75	$	(358)
Cost of goods sold		(1,405)		3,741
Other expense, net		(134)		(4)
Interest expense		(1,513)		(231)
Total		$	(2,977)	$	3,148

Derivative Contracts Not Designated as Hedges

Contracts that are not designated as hedges and are recorded at fair value in the Company's balance sheets primarily relate to derivatives contracts used by the Company to manage foreign currency exchange risk on certain accounts receivable and accounts payable. Gains or losses on the balance sheet contracts largely offset the net transaction gains or losses on the related assets and liabilities. In addition, a limited number of cash flow hedges are deemed ineffective and de-designated. Changes in the fair values of derivative contracts not designated as hedges are recognized directly in earnings.

Kontoor Brands, Inc. Q1 FY21 Form 10-Q 16

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents a summary of these derivatives included in the Company's statements of operations:

(In thousands)

Location of Gain (Loss) on Derivatives Recognized in Income

Gain (Loss) on Derivatives Recognized in Income

Three Months Ended

Derivatives Not Designated as Hedges

March 2021

March 2020

Foreign currency exchange contracts

Net revenues

(81)

Cost of goods sold

(123)

(3,672)

Other expense, net