ktb-20230401

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 1, 2023


☐			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 28, 2023 was 56,078,513.

KONTOOR BRANDS, INC.

Table of Contents


			Page
Part I — Financial Information

Item 1. Financial Statements (Unaudited)			3

Consolidated Balance Sheets: March 202 3 , December 2022 and March 2022			3

Consolidated Statements of Operations: Three months ended March 2023 and March 2022			4

Consolidated Statements of Comprehensive Income: Three months ended March 2023 and March 2022			5

Consolidated Statements of Cash Flows: Three months ended March 2023 and March 2022			6

Consolidated Statements of Equity: Three months ended March 2023 and March 2022			7

Notes to Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20

Item 3. Quantitative and Qualitative Disclosures about Market Risk			29

Item 4. Controls and Procedures			29

Part II — Other Information

Item 1. Legal Proceedings			30

Item 1A. Risk Factors			30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30

Item 6. Exhibits			31

Signatures			32

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 2

PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

KONTOOR BRANDS, INC.

Consolidated Balance Sheets

(Unaudited)


(In thousands, except share amounts)	March 2023		December 2022		March 2022
ASSETS
Current assets
Cash and cash equivalents	$	52,677	$	59,179	$	193,630
Accounts receivable, net	224,024		225,858		276,037
Inventories	660,089		596,836		432,891
Prepaid expenses and other current assets	102,757		100,396		82,495
Total current assets	1,039,547		982,269		985,053
Property, plant and equipment, net	104,999		104,465		101,380
Operating lease assets	55,116		51,029		47,759
Intangible assets, net	13,173		13,361		14,248
Goodwill	209,904		209,627		211,504

Other assets	220,831		221,510		229,110
TOTAL ASSETS	$	1,643,570	$	1,582,261	$	1,589,054
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings	$	7,255	$	7,280	$	239
Current portion of long-term debt	12,500		10,000		2,500
Accounts payable	163,871		206,262		266,974
Accrued liabilities	197,203		196,989		198,777
Operating lease liabilities, current	21,241		19,898		22,563
Total current liabilities	402,070		440,429		491,053
Operating lease liabilities, noncurrent	32,472		31,506		26,511

Other liabilities	81,796		76,950		98,257
Long-term debt	827,944		782,619		789,143
Commitments and contingencies
Total liabilities	1,344,282		1,331,504		1,404,964
Equity
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at March 2023, December 2022 and March 2022	—		—		—
Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 55,933,661 at March 2023; 55,516,872 at December 2022 and 56,276,243 at March 2022	—		—		—
Additional paid-in capital	251,108		243,696		224,721
Retained earnings	116,185		86,726		43,066
Accumulated other comprehensive loss	(68,005)		(79,665)		(83,697)
Total equity	299,288		250,757		184,090
TOTAL LIABILITIES AND EQUITY	$	1,643,570	$	1,582,261	$	1,589,054

See accompanying notes to unaudited consolidated financial statements.

3 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March

(In thousands, except per share amounts)		2023		2022
Net revenues		$	667,123	$	679,743
Costs and operating expenses
Cost of goods sold		380,422		375,122
Selling, general and administrative expenses		191,752		196,400

Total costs and operating expenses		572,174		571,522
Operating income		94,949		108,221
Interest expense		(10,273)		(8,023)
Interest income		419		469
Other expense, net		(2,226)		(222)
Income before income taxes		82,869		100,445
Income taxes		16,573		19,635
Net income		$	66,296	$	80,810
Earnings per common share
Basic		$	1.19	$	1.43
Diluted		$	1.16	$	1.40
Weighted average shares outstanding
Basic		55,646		56,321
Diluted		56,940		57,836

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 4

KONTOOR BRANDS, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended March

(In thousands)		2023		2022
Net income		$	66,296	$	80,810
Other comprehensive income
Net change in foreign currency translation		8,323		(3,615)
Net change in defined benefit pension plans		(35)		6
Net change in derivative financial instruments		3,372		12,668
Total other comprehensive income, net of related taxes		11,660		9,059
Comprehensive income		$	77,956	$	89,869

See accompanying notes to unaudited consolidated financial statements.

5 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March

(In thousands)	2023		2022
OPERATING ACTIVITIES
Net income	$	66,296	$	80,810
Adjustments to reconcile net income to cash (used) provided by operating activities:
Depreciation and amortization	9,127		9,862
Stock-based compensation	1,002		5,730
Provision for doubtful accounts	1,877		1,757

Other	2,642		3,422
Changes in operating assets and liabilities:
Accounts receivable	2,851		9,990
Inventories	(59,903)		(70,183)
Accounts payable	(42,965)		54,109
Income taxes	12,237		12,201
Accrued liabilities	(11,259)		(34,642)
Other assets and liabilities	5,473		1,777
Cash (used) provided by operating activities	(12,622)		74,833
INVESTING ACTIVITIES
Property, plant and equipment expenditures	(6,463)		(2,885)
Capitalized computer software	(5,483)		(2,112)

Other	149		(31)
Cash used by investing activities	(11,797)		(5,028)
FINANCING ACTIVITIES




Borrowings under revolving credit facility	178,000		—
Repayments under revolving credit facility	(128,000)		—
Repayments of term loan	(2,500)		—

Repurchases of Common Stock	—		(22,513)
Dividends paid	(26,808)		(26,033)
Shares withheld for taxes, net of proceeds from issuance of Common Stock	(3,619)		(11,102)
Other	(57)		(298)
Cash provided (used) by financing activities	17,016		(59,946)
Effect of foreign currency rate changes on cash and cash equivalents	901		(1,551)
Net change in cash and cash equivalents	(6,502)		8,308
Cash and cash equivalents – beginning of period	59,179		185,322
Cash and cash equivalents – end of period	$	52,677	$	193,630

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 6

KONTOOR BRANDS, INC.

Consolidated Statements of Equity

(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 2022	55,517	$	—	$	243,696	$	86,726	$	(79,665)	$	250,757
Net income	—	—		—		66,296		—		66,296
Stock-based compensation, net	417	—		7,412		(10,029)		—		(2,617)
Other comprehensive income	—	—		—		—		11,660		11,660
Dividends on Common Stock ($0.48 per share)	—	—		—		(26,808)		—		(26,808)

Balance, March 2023	55,934	$	—	$	251,108	$	116,185	$	(68,005)	$	299,288


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Equity

(In thousands, except per share amounts)	Shares	Amounts

Balance, December 2021	56,381	$	—	$	218,259	$	22,635	$	(92,756)	$	148,138
Net income	—	—		—		80,810		—		80,810
Stock-based compensation, net	387	—		6,462		(11,833)		—		(5,371)
Other comprehensive income	—	—		—		—		9,059		9,059
Dividends on Common Stock ($0.46 per share)	—	—		—		(26,033)		—		(26,033)
Repurchases of Common Stock	(492)	—		—		(22,513)		—		(22,513)
Balance, March 2022	56,276	$	—	$	224,721	$	43,066	$	(83,697)	$	184,090

See accompanying notes to unaudited consolidated financial statements.

7 Kontoor Brands, Inc. Q1 FY23 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."). The Company designs, produces, procures, markets, distributes and licenses apparel, footwear and accessories, 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 the Europe and Asia-Pacific regions, 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 December 30, 2023 ("fiscal 2023"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended March 2023, December 2022 and March 2022 correspond to the fiscal periods ended April 1, 2023, December 31, 2022 and April 2, 2022, respectively.

Macroeconomic Environment and Other Recent Developments

Macroeconomic conditions, including inflation, rising interest rates, recessionary concerns, fluctuating foreign currency exchange rates and distress in global credit and banking markets, as well as ongoing global supply chain disruptions, labor challenges and the COVID-19 pandemic, continue to adversely impact global economic conditions, as well as the Company's operations. Additionally, the conflict between Russia and Ukraine continues to cause disruption in the surrounding areas and greater uncertainty in the global economy. The Company considered the impact of these developments 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 7 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 the above conditions. 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 2023 are not necessarily indicative of results that may be expected for any other interim period or for fiscal 2023. The unaudited financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's 2022 Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 1, 2023 ("2022 Annual Report on Form 10-K").

Recently Adopted Accounting Standards

In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-04, "Disclosure of Supplier Finance Program Obligations," which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose key terms of the programs, outstanding confirmed amounts as of period end, a description of where those obligations are presented in the balance sheet and an annual rollforward of obligations. This guidance was adopted by the Company during the first quarter of 2023, except for the requirement to include a rollforward of obligations which is effective beginning in 2024 with early adoption permitted. Refer to Note 6 to the Company's financial statements for additional information related to supplier finance program obligations.

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 8

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 2 — REVENUES

Disaggregation of Revenue

The following tables present revenues disaggregated by channel and geography. Revenues from licensing arrangements are 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 sales at company-operated Wrangler® and Lee® branded full-price and outlet stores, digital sales at www.wrangler.com and www.lee.com and sales from international concession arrangements.

Other includes sales and licensing of Rock & Republic®, other company-owned brands and private label apparel.


	Three Months Ended March 2023

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	337,676	$	135,299	$	3,228	$	476,203
Non-U.S. Wholesale	51,919		66,005		10		117,934
Direct-to-Consumer	33,552		39,345		89		72,986

Total	$	423,147	$	240,649	$	3,327	$	667,123

Geographic revenues
U.S.	$	365,129	$	149,690	$	3,317	$	518,136
International	58,018		90,959		10		148,987
Total	$	423,147	$	240,649	$	3,327	$	667,123


	Three Months Ended March 2022

(In thousands)	Wrangler		Lee		Other		Total
Channel revenues
U.S. Wholesale	$	330,652	$	136,806	$	2,527	$	469,985
Non-U.S. Wholesale	52,819		91,051		501		144,371
Direct-to-Consumer	28,952		36,363		72		65,387

Total	$	412,423	$	264,220	$	3,100	$	679,743

Geographic revenues
U.S.	$	354,393	$	150,116	$	2,599	$	507,108
International	58,030		114,104		501		172,635
Total	$	412,423	$	264,220	$	3,100	$	679,743

Contract Balances and Performance Obligations

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


(In thousands)	March 2023		December 2022		March 2022
Accounts receivable, net	$	224,024	$	225,858	$	276,037
Contract assets (a)	5,317		5,050		4,311
Contract liabilities (b)	1,392		1,057		1,787

(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 2023 and March 2022, revenue recognized that was included in contract liabilities as of December 2022 and December 2021, respectively, was not significant.

As of March 2023, the Company has contractual rights under its licensing agreements to receive $52.2 million of fixed consideration related to the future minimum guarantees through December 2028. As of March 2023, there were no arrangements with any

9 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not significant. The variable consideration under these arrangements is not disclosed as a remaining performance obligation as the licensing arrangements qualify for the sales-based royalty exemption.

NOTE 3 — BUSINESS SEGMENT INFORMATION

The Company has two reportable segments:

•Wrangler — Wrangler® branded denim, apparel, footwear and accessories.

•Lee — Lee® branded denim, apparel, footwear and accessories.

The Company considers its chief executive officer to be its chief operating decision maker. The chief operating decision maker allocates resources and assesses performance based on the global brand operating results of Wrangler® and Lee®, which are the Company's operating and reportable segments.

In addition, we report an "Other" category to reconcile segment revenues and segment profit to the Company's operating results, but the Other category does not meet the criteria to be considered a reportable segment. Other includes sales and licensing of Rock & Republic®, other company-owned brands and private label apparel.

Accounting policies utilized for internal management reporting at the individual segments are consistent with those disclosed in the Company's 2022 Annual Report on Form 10-K. 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.

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


	Three Months Ended March

(In thousands)		2023		2022
Segment revenues:
Wrangler		$	423,147	$	412,423
Lee		240,649		264,220
Total reportable segment revenues		663,796		676,643
Other revenues		3,327		3,100
Total net revenues		$	667,123	$	679,743
Segment profit:
Wrangler		$	71,107	$	75,388
Lee		39,573		52,230
Total reportable segment profit		$	110,680	$	127,618
Corporate and other expenses		(18,064)		(19,982)
Interest expense		(10,273)		(8,023)
Interest income		419		469
Profit related to other revenues		107		363
Income before income taxes		$	82,869	$	100,445

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 10

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 4 — ACCOUNTS RECEIVABLE

Allowance for Doubtful Accounts

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


	Three Months Ended March

(In thousands)		2023		2022

Balance, December		$	9,918	$	11,705
Provisions for expected credit losses		1,877		1,757
Accounts receivable balances written off		(560)		(153)
Other (1)		233		(284)
Balance, March		$	11,468	$	13,025

(1) Other primarily includes the impact of foreign currency translation and recoveries of amounts previously written off, none of which were individually significant.

Sale of Trade Accounts Receivable

The Company is party to 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 2023 and March 2022, the Company sold total trade accounts receivable of $359.7 million and $355.5 million, respectively. As of March 2023, December 2022 and March 2022, $256.3 million, $246.0 million and $227.0 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 $3.0 million and $0.6 million for the three months ended March 2023 and March 2022, respectively. Net proceeds of this program 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 2023		December 2022		March 2022
Finished products	$	577,143	$	509,554	$	346,160
Work-in-process	32,857		34,316		40,310
Raw materials	50,089		52,966		46,421
Total inventories	$	660,089	$	596,836	$	432,891

11 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 6 — SUPPLY CHAIN FINANCING

The Company facilitates a voluntary Supply Chain Finance ("SCF") program with its financial institutions that allows certain suppliers the option to sell or assign their rights to receivables due from the Company, enabling the suppliers to receive payment from the financial institutions sooner than our negotiated payment terms. Participation in the SCF program is based on terms and conditions negotiated directly between the suppliers and the financial institutions. The Company agrees to commercial terms with suppliers independent of their participation in the SCF program, and thus their participation has no impact on our payment terms. The Company is not a party to the agreements between our suppliers and the financial institutions, and has no economic interest in our suppliers' decision to participate in the SCF program. For suppliers who participate in the SCF program, they have sole discretion to determine which invoices, if any, are to be sold to the financial institutions. All amounts payable to suppliers who participate in the SCF program are included within "accounts payable" in the Company's balance sheets, and the Company's associated payments to the suppliers are included in operating activities in the Company's statements of cash flows. At March 2023, December 2022 and March 2022, accounts payable included total outstanding balances of $23.9 million, $24.7 million and $16.7 million, respectively, due to suppliers that participate in the SCF program.

NOTE 7 — SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-term Borrowings

At March 2023, December 2022 and March 2022, the Company had $24.9 million, $24.8 million and $10.0 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. There was a total outstanding balance of $7.1 million under these arrangements at both March 2023 and December 2022, and no outstanding balance at March 2022. In addition, short-term borrowings included other debt of $0.2 million at March 2023, December 2022 and March 2022.

Long-term Debt

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


(In thousands)	March 2023		December 2022		March 2022
Revolving Credit Facility	$	50,000	$	—	$	—
Term Loan A	395,586		397,954		397,559

4.125% Notes, due 2029	394,858		394,665		394,084
Total long-term debt	840,444		792,619		791,643
Less: current portion	(12,500)		(10,000)		(2,500)
Long-term debt, due beyond one year	$	827,944	$	782,619	$	789,143

Credit Facilities

On November 18, 2021, the Company completed a refinancing pursuant to which it issued $400.0 million of Notes (as defined below) and amended and restated its senior secured Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) a five-year $400.0 million term loan A facility (“Term Loan A”), with quarterly mandatory repayments which commenced in March 2023 and (ii) a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”) (collectively, the “Credit Facilities”) with the lenders and agents party thereto.

Term Loan A had an outstanding principal amount of $397.5 million at March 2023, and $400.0 million at both December 2022 and March 2022, which is reported net of unamortized deferred financing costs. As of March 2023, interest expense on Term Loan A was being recorded at an effective annual interest rate of 4.3%, including the amortization of deferred financing costs and the impact of the Company’s interest rate swap.

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 2023, the Company had $50.0 million of outstanding borrowings under the Revolving Credit Facility and $11.7 million of outstanding standby letters of credit issued on behalf of the Company, leaving $438.3 million available for borrowing against this facility.

The interest rate per annum applicable to the Credit Agreement is an interest rate benchmark elected by the Company based on the currency and term of the borrowing plus an applicable margin, as defined therein.

The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type as well as customary events of default. In addition, the Credit Agreement contains financial covenants which require compliance with (i) a total leverage ratio not to exceed 4.50 to 1.00 as of the last day of any test period, with an allowance for up to two elections to increase the limit to

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 12

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

5.00 to 1.00 in connection with certain material acquisitions, and (ii) a consolidated interest coverage ratio as of the last day of any test period to be no less than 3.00 to 1.00. As of March 2023, the Company was in compliance with all covenants and expects to maintain compliance with the applicable covenants for at least one year from the issuance of these financial statements.

Senior Notes

On November 18, 2021, the Company entered into an indenture (the “Indenture”) by and among the Company and certain subsidiaries of the Company named as guarantors therein (the “Guarantors”), pursuant to which it issued $400.0 million of unsecured senior notes due November 2029 (the “Notes”) through a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes bear interest at a fixed rate of 4.125% per annum, payable in cash in arrears on May 15 and November 15 of each year.

The Notes had an outstanding principal amount of $400.0 million at March 2023, December 2022 and March 2022, which is reported net of unamortized deferred financing costs. As of March 2023, interest expense on the Notes was being recorded at an effective annual interest rate of 4.3%, including the amortization of deferred financing costs.

The Notes are guaranteed on a senior unsecured basis by the Company’s existing and future domestic subsidiaries (other than certain excluded subsidiaries) that are borrowers under or guarantors of the Credit Facilities or certain other indebtedness. The Indenture governing the Notes contains customary negative covenants for financings of this type. The Indenture does not contain any financial covenants. As of March 2023, the Company was in compliance with the Indenture and expects to maintain compliance with the applicable covenants for at least one year from the issuance of these financial statements.

Refer to Note 10 in the Company's 2022 Annual Report on Form 10-K for additional information regarding the Company’s debt obligations.

NOTE 8 — 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 2023
Financial assets:
Cash equivalents:
Money market funds	$	25,798	$	25,798	$	—	$	—
Time deposits	2,079		2,079		—		—
Foreign currency exchange contracts	20,377		—		20,377		—
Interest rate swap agreements	8,946		—		8,946		—
Investment securities	46,641		46,641		—		—
Financial liabilities:
Foreign currency exchange contracts	3,230		—		3,230		—

Deferred compensation	48,539		—		48,539		—

13 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


			Fair Value Measurement Using
(In thousands)	Total Fair Value		Level 1		Level 2		Level 3
December 2022
Financial assets:
Cash equivalents:
Money market funds	$	20,097	$	20,097	$	—	$	—
Time deposits	2,194		2,194		—		—
Foreign currency exchange contracts	15,565		—		15,565		—
Interest rate swap agreements	11,357		—		11,357		—
Investment securities	43,131		43,131		—		—
Financial liabilities:
Foreign currency exchange contracts	2,307		—		2,307		—

Deferred compensation	44,589		—		44,589		—

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 and 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 2023, the carrying value of the Company's long-term debt was $840.4 million compared to a fair value of $785.5 million. At December 2022, the carrying value of the Company's long-term debt was $792.6 million compared to a fair value of $718.0 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 2023 and December 2022, their carrying values approximated fair value due to the short-term nature of these instruments.

NOTE 9 — 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 $321.3 million at March 2023, $322.3 million at December 2022 and $287.5 million at March 2022, 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.

During 2019, the Company entered into "floating to fixed" interest rate swap agreements to mitigate exposure to volatility in reference rates on the Company's future interest payments. The notional amount of the interest rate swap agreements was $300.0 million at March 2023, December 2022 and March 2022. 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 a specific 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 2023.

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 14

KONTOOR BRANDS, INC.

Notes to Consolidated 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

	March		December		March		March		December		March
(In thousands)	2023		2022		2022		2023		2022		2022

Derivatives designated as hedging instruments:
Foreign currency exchange contracts	$	20,361	$	15,565	$	11,041	$	(2,914)	$	(2,307)	$	(1,073)
Interest rate swap agreements	8,946		11,357		4,309		—		—		—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	16		—		131		(316)		—		(2)
Total derivatives	$	29,323	$	26,922	$	15,481	$	(3,230)	$	(2,307)	$	(1,075)

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 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.

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


	March 2023				December 2022				March 2022

(In thousands)	Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability
Gross amounts presented in the balance sheet	$	29,323	$	(3,230)	$	26,922	$	(2,307)	$	15,481	$	(1,075)
Gross amounts not offset in the balance sheet	(1,449)		1,449		(1,629)		1,629		(938)		938
Net amounts	$	27,874	$	(1,781)	$	25,293	$	(678)	$	14,543	$	(137)

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 2023		December 2022		March 2022
Prepaid expenses and other current assets	$	18,046	$	14,183	$	9,424
Accrued liabilities	(2,683)		(1,218)		(838)
Other assets	11,277		12,739		6,057
Other liabilities	(547)		(1,089)		(237)

15 Kontoor Brands, Inc. Q1 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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:


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

Cash Flow Hedging Relationships		2023		2022
Foreign currency exchange contracts		$	10,337	$	7,325
Interest rate swap agreements		(309)		9,095
Total		$	10,028	$	16,420


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

Location of Gain (Loss)		2023		2022
Net revenues		$	(171)	$	(132)
Cost of goods sold		5,992		2,301
Other expense, net		160		(103)
Interest expense		2,101		(1,266)
Total		$	8,082	$	800

Other Derivative Information

Any contracts that are not designated as hedges are recorded at fair value in the Company's balance sheets. Changes in the fair values of derivative contracts not designated as hedges are recognized directly in earnings. There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships or changes in the fair values of derivative contracts not designated as hedges during the three months ended March 2023 and March 2022.

At March 2023, AOCL included $28.3 million of pre-tax net deferred gains for foreign currency exchange contracts and interest rate swap agreements that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on rates in effect when outstanding derivative contracts are settled.

NOTE 10 — ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents deferred components of AOCL in equity, net of related taxes:


(In thousands)	March 2023		December 2022		March 2022
Foreign currency translation	$	(99,139)	$	(107,462)	$	(96,740)
Defined benefit pension plans	2,208		2,243		(2,171)
Derivative financial instruments	28,926		25,554		15,214
Accumulated other comprehensive loss	$	(68,005)	$	(79,665)	$	(83,697)

Kontoor Brands, Inc. Q1 FY23 Form 10-Q 16

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The following tables present changes in AOCL, net of related tax impact:


	Three Months Ended March 2023

(In thousands)	Foreign Currency Translation		Defined Benefit Pension Plans		Derivative Financial Instruments		Total

Balance, December 2022	$	(107,462)	$	2,243	$	25,554	$	(79,665)