ktb-20230701

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 July 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 July 28, 2023 was 56,124,326.

KONTOOR BRANDS, INC.

Table of Contents


			Page
Part I — Financial Information

Item 1. Financial Statements (Unaudited)			3

Consolidated Balance Sheets: June 2023, December 2022 and June 2022			3

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

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

Consolidated Statements of Cash Flows: Six months ended June 2023 and June 2022			6

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

Notes to Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

Item 4. Controls and Procedures			31

Part II — Other Information

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32

Item 5. Other Information			32

Item 6. Exhibits			33

Signatures			34

Kontoor Brands, Inc. Q2 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)	June 2023		December 2022		June 2022
ASSETS
Current assets
Cash and cash equivalents	$	82,418	$	59,179	$	145,296
Accounts receivable, net	186,024		225,858		185,157
Inventories	626,885		596,836		537,900
Prepaid expenses and other current assets	114,345		100,396		89,171
Total current assets	1,009,672		982,269		957,524
Property, plant and equipment, net	106,878		104,465		101,994
Operating lease assets	65,388		51,029		44,271
Intangible assets, net	12,941		13,361		13,740
Goodwill	209,969		209,627		210,164

Other assets	203,469		221,510		215,455
TOTAL ASSETS	$	1,608,317	$	1,582,261	$	1,543,148
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings	$	62	$	7,280	$	4,848
Current portion of long-term debt	15,000		10,000		5,000
Accounts payable	195,282		206,262		281,391
Accrued liabilities	156,766		196,989		153,527
Operating lease liabilities, current	21,899		19,898		20,254
Total current liabilities	389,009		440,429		465,020
Operating lease liabilities, noncurrent	42,044		31,506		25,132

Other liabilities	80,743		76,950		86,839
Long-term debt	773,270		782,619		786,968
Commitments and contingencies
Total liabilities	1,285,066		1,331,504		1,363,959
Equity
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at June 2023, December 2022 and June 2022	—		—		—
Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 56,109,508 at June 2023; 55,516,872 at December 2022 and 55,382,208 at June 2022	—		—		—
Additional paid-in capital	258,349		243,696		232,041
Retained earnings	124,995		86,726		39,105
Accumulated other comprehensive loss	(60,093)		(79,665)		(91,957)
Total equity	323,251		250,757		179,189
TOTAL LIABILITIES AND EQUITY	$	1,608,317	$	1,582,261	$	1,543,148

See accompanying notes to unaudited consolidated financial statements.

3 Kontoor Brands, Inc. Q2 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June					Six Months Ended June

(In thousands, except per share amounts)		2023		2022			2023		2022
Net revenues		$	616,009	$	613,572		$	1,283,132	$	1,293,315
Costs and operating expenses
Cost of goods sold		365,748		346,608			746,170		721,730
Selling, general and administrative expenses		186,864		178,219			378,616		374,619

Total costs and operating expenses		552,612		524,827			1,124,786		1,096,349
Operating income		63,397		88,745			158,346		196,966
Interest expense		(9,663)		(8,234)			(19,936)		(16,257)
Interest income		691		296			1,110		765
Other expense, net		(3,152)		(2,746)			(5,378)		(2,968)
Income before income taxes		51,273		78,061			134,142		178,506
Income taxes		14,877		16,066			31,450		35,701
Net income		$	36,396	$	61,995		$	102,692	$	142,805
Earnings per common share
Basic		$	0.65	$	1.11		$	1.84	$	2.55
Diluted		$	0.64	$	1.09		$	1.80	$	2.49
Weighted average shares outstanding
Basic		56,089		55,740			55,868		56,031
Diluted		56,846		56,711			56,893		57,315

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q2 FY23 Form 10-Q 4

KONTOOR BRANDS, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended June					Six Months Ended June

(In thousands)		2023		2022			2023		2022
Net income		$	36,396	$	61,995		$	102,692	$	142,805
Other comprehensive income (loss)
Net change in foreign currency translation		4,529		(13,274)			12,852		(16,889)
Net change in defined benefit pension plans		(35)		5			(70)		11
Net change in derivative financial instruments		3,418		5,009			6,790		17,677
Total other comprehensive income (loss), net of related taxes		7,912		(8,260)			19,572		799
Comprehensive income		$	44,308	$	53,735		$	122,264	$	143,604

See accompanying notes to unaudited consolidated financial statements.

5 Kontoor Brands, Inc. Q2 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June

(In thousands)	2023		2022
OPERATING ACTIVITIES
Net income	$	102,692	$	142,805
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	18,219		18,821
Stock-based compensation	7,023		12,474
Provision for doubtful accounts	(278)		308

Other	9,113		4,826
Changes in operating assets and liabilities:
Accounts receivable	44,043		95,340
Inventories	(25,574)		(179,019)
Accounts payable	(11,545)		70,974
Income taxes	(22,242)		(13,090)
Accrued liabilities	(20,665)		(47,907)
Other assets and liabilities	10,890		(6,144)
Cash provided by operating activities	111,676		99,388
INVESTING ACTIVITIES
Property, plant and equipment expenditures	(13,277)		(6,995)
Capitalized computer software	(6,756)		(4,493)

Other	(10)		(120)
Cash used by investing activities	(20,043)		(11,608)
FINANCING ACTIVITIES




Borrowings under revolving credit facility	268,000		—
Repayments under revolving credit facility	(268,000)		—
Repayments of term loan	(5,000)		—

Repurchases of Common Stock	—		(62,494)
Dividends paid	(53,756)		(51,508)
Shares withheld for taxes, net of proceeds from issuance of Common Stock	(3,057)		(11,024)
Other	(7,236)		4,330
Cash used by financing activities	(69,049)		(120,696)
Effect of foreign currency rate changes on cash and cash equivalents	655		(7,110)
Net change in cash and cash equivalents	23,239		(40,026)
Cash and cash equivalents – beginning of period	59,179		185,322
Cash and cash equivalents – end of period	$	82,418	$	145,296

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q2 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
Net income	—	—		—		36,396		—		36,396
Stock-based compensation, net	176	—		7,241		(638)		—		6,603
Other comprehensive income	—	—		—		—		7,912		7,912
Dividends on Common Stock ($0.48 per share)	—	—		—		(26,948)		—		(26,948)

Balance, June 2023	56,110	$	—	$	258,349	$	124,995	$	(60,093)	$	323,251


	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
Net income	—	—		—		61,995		—		61,995
Stock-based compensation, net	109	—		7,320		(500)		—		6,820
Other comprehensive loss	—	—		—		—		(8,260)		(8,260)
Dividends on Common Stock ($0.46 per share)	—	—		—		(25,475)		—		(25,475)
Repurchases of Common Stock	(1,003)	—		—		(39,981)		—		(39,981)
Balance, June 2022	55,382	$	—	$	232,041	$	39,105	$	(91,957)	$	179,189

See accompanying notes to unaudited consolidated financial statements.

7 Kontoor Brands, Inc. Q2 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 second 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 June 2023, December 2022 and June 2022 correspond to the fiscal periods ended July 1, 2023, December 31, 2022 and July 2, 2022, respectively.

Macroeconomic Environment and Other Recent Developments

Macroeconomic conditions, including inflation, rising interest rates, recessionary concerns, fluctuating foreign currency exchange rates and uncertainty in global credit and banking markets, as well as ongoing global supply chain disruptions, labor challenges and recovery from the COVID-19 pandemic, especially in China, 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 and six months ended June 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. Q2 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 June 2023

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	355,207	$	98,218	$	2,366	$	455,791
Non-U.S. Wholesale	38,104		51,232		—		89,336
Direct-to-Consumer	32,174		38,558		150		70,882

Total	$	425,485	$	188,008	$	2,516	$	616,009

Geographic revenues
U.S.	$	382,111	$	114,248	$	2,516	$	498,875
International	43,374		73,760		—		117,134
Total	$	425,485	$	188,008	$	2,516	$	616,009


	Three Months Ended June 2022

(In thousands)	Wrangler		Lee		Other		Total
Channel revenues
U.S. Wholesale	$	348,537	$	120,197	$	2,127	$	470,861
Non-U.S. Wholesale	40,457		39,858		374		80,689
Direct-to-Consumer	28,950		32,998		74		62,022

Total	$	417,944	$	193,053	$	2,575	$	613,572

Geographic revenues
U.S.	$	372,981	$	135,057	$	2,201	$	510,239
International	44,963		57,996		374		103,333
Total	$	417,944	$	193,053	$	2,575	$	613,572


	Six Months Ended June 2023

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	692,883	$	233,517	$	5,594	$	931,994
Non-U.S. Wholesale	90,023		117,237		10		207,270
Direct-to-Consumer	65,726		77,903		239		143,868

Total	$	848,632	$	428,657	$	5,843	$	1,283,132

Geographic revenues
U.S.	$	747,240	$	263,938	$	5,833	$	1,017,011
International	101,392		164,719		10		266,121
Total	$	848,632	$	428,657	$	5,843	$	1,283,132

9 Kontoor Brands, Inc. Q2 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


	Six Months Ended June 2022

(In thousands)	Wrangler		Lee		Other		Total
Channel revenues
U.S. Wholesale	$	679,189	$	257,003	$	4,654	$	940,846
Non-U.S. Wholesale	93,276		130,909		875		225,060
Direct-to-Consumer	57,902		69,361		146		127,409

Total	$	830,367	$	457,273	$	5,675	$	1,293,315

Geographic revenues
U.S.	$	727,374	$	285,173	$	4,800	$	1,017,347
International	102,993		172,100		875		275,968
Total	$	830,367	$	457,273	$	5,675	$	1,293,315

Contract Balances and Performance Obligations

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


(In thousands)	June 2023		December 2022		June 2022
Accounts receivable, net	$	186,024	$	225,858	$	185,157
Contract assets (a)	6,034		5,050		5,648
Contract liabilities (b)	1,921		1,057		3,227

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

As of June 2023, the Company has contractual rights under its licensing agreements to receive $53.6 million of fixed consideration related to the future minimum guarantees through December 2028. As of June 2023, there were no arrangements with any 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 and six months ended June 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.

Kontoor Brands, Inc. Q2 FY23 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 before income taxes:


	Three Months Ended June					Six Months Ended June

(In thousands)		2023		2022			2023		2022
Segment revenues:
Wrangler		$	425,485	$	417,944		$	848,632	$	830,367
Lee		188,008		193,053			428,657		457,273
Total reportable segment revenues		613,493		610,997			1,277,289		1,287,640
Other revenues		2,516		2,575			5,843		5,675
Total net revenues		$	616,009	$	613,572		$	1,283,132	$	1,293,315
Segment profit:
Wrangler		$	70,976	$	75,064		$	142,083	$	150,452
Lee		17,165		22,904			56,738		75,134
Total reportable segment profit		$	88,141	$	97,968		$	198,821	$	225,586
Corporate and other expenses		(27,660)		(12,017)			(45,724)		(31,999)
Interest expense		(9,663)		(8,234)			(19,936)		(16,257)
Interest income		691		296			1,110		765
(Loss) profit related to other revenues		(236)		48			(129)		411
Income before income taxes		$	51,273	$	78,061		$	134,142	$	178,506

NOTE 4 — ACCOUNTS RECEIVABLE

Allowance for Doubtful Accounts

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


	Six Months Ended June

(In thousands)		2023		2022

Balance, December		$	9,918	$	11,705
Increase (decrease) in provision for expected credit losses		(278)		308
Accounts receivable balances written off		(1,107)		(576)
Other (1)		263		(869)
Balance, June		$	8,796	$	10,568

(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 six months ended June 2023 and June 2022, the Company sold total trade accounts receivable of $704.2 million and $732.9 million, respectively. As of June 2023, December 2022 and June 2022, $211.5 million, $246.0 million and $212.8 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 $3.1 million and $6.1 million for the three and six months ended June 2023, respectively, and $0.9 million and $1.5 million for the three and six months ended June 2022, respectively. Net proceeds of this program are reflected as operating activities in the Company's statements of cash flows.

11 Kontoor Brands, Inc. Q2 FY23 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)	June 2023		December 2022		June 2022
Finished products	$	548,967	$	509,554	$	444,976
Work-in-process	33,502		34,316		40,018
Raw materials	44,416		52,966		52,906
Total inventories	$	626,885	$	596,836	$	537,900

NOTE 6 — SUPPLY CHAIN FINANCING

The Company facilitates voluntary Supply Chain Finance ("SCF") programs with its financial institutions that allow 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 an 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 an 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 an SCF program. Suppliers who participate in an SCF program 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 SCF programs 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 June 2023, December 2022 and June 2022, accounts payable included total outstanding balances of $30.6 million, $24.7 million and $18.9 million, respectively, due to suppliers that participate in the SCF programs.

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

Short-term Borrowings

At June 2023, December 2022 and June 2022, the Company had $23.9 million, $24.8 million and $25.6 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 no outstanding balance under these arrangements at June 2023, and $7.1 million and $4.6 million of outstanding balances at December 2022 and June 2022, respectively. In addition, short-term borrowings included other debt of $0.1 million at June 2023, and $0.2 million at both December 2022 and June 2022.

Long-term Debt

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


(In thousands)	June 2023		December 2022		June 2022
Revolving Credit Facility	$	—	$	—	$	—
Term Loan A	393,218		397,954		397,691

4.125% Notes, due 2029	395,052		394,665		394,277
Total long-term debt	788,270		792,619		791,968
Less: current portion	(15,000)		(10,000)		(5,000)
Long-term debt, due beyond one year	$	773,270	$	782,619	$	786,968

Credit Facilities

On November 18, 2021, the Company completed a refinancing pursuant to which it issued $400.0 million of unsecured 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.

Kontoor Brands, Inc. Q2 FY23 Form 10-Q 12

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Term Loan A had an outstanding principal amount of $395.0 million at June 2023, and $400.0 million at both December 2022 and June 2022, which is reported net of unamortized deferred financing costs. As of June 2023, interest expense on Term Loan A was being recorded at an effective annual interest rate of 4.4%, 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 June 2023, the Company had no outstanding borrowings under the Revolving Credit Facility and $11.7 million of outstanding standby letters of credit issued on behalf of the Company, leaving $488.3 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 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 June 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 June 2023, December 2022 and June 2022, which is reported net of unamortized deferred financing costs. As of June 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 June 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.

13 Kontoor Brands, Inc. Q2 FY23 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

June 2023
Financial assets:
Cash equivalents:
Money market funds	$	50,353	$	50,353	$	—	$	—
Time deposits	2,316		2,316		—		—
Foreign currency exchange contracts	23,382		—		23,382		—
Interest rate swap agreements	8,529		—		8,529		—
Investment securities	47,464		47,464		—		—
Financial liabilities:
Foreign currency exchange contracts	4,965		—		4,965		—

Deferred compensation	49,217		—		49,217		—


			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 June 2023, the carrying value of the Company's long-term debt was $788.3 million compared to a fair value of $727.0 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 June 2023 and December 2022, their carrying values approximated fair value due to the short-term nature of these instruments.

Kontoor Brands, Inc. Q2 FY23 Form 10-Q 14

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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 $333.0 million at June 2023, $322.3 million at December 2022 and $294.9 million at June 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 June 2023, December 2022 and June 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 relationships. 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 for the hedging relationship. All designated hedging relationships were determined to be highly effective as of June 2023.

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

	June		December		June		June		December		June
(In thousands)	2023		2022		2022		2023		2022		2022

Derivatives designated as hedging instruments:
Foreign currency exchange contracts	$	23,358	$	15,565	$	13,968	$	(4,629)	$	(2,307)	$	(360)
Interest rate swap agreements	8,529		11,357		6,512		—		—		—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	24		—		28		(336)		—		—
Total derivatives	$	31,911	$	26,922	$	20,508	$	(4,965)	$	(2,307)	$	(360)

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:


	June 2023				December 2022				June 2022

(In thousands)	Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability
Gross amounts presented in the balance sheet	$	31,911	$	(4,965)	$	26,922	$	(2,307)	$	20,508	$	(360)
Gross amounts not offset in the balance sheet	(2,038)		2,038		(1,629)		1,629		(360)		360
Net amounts	$	29,873	$	(2,927)	$	25,293	$	(678)	$	20,148	$	—

15 Kontoor Brands, Inc. Q2 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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)	June 2023		December 2022		June 2022
Prepaid expenses and other current assets	$	29,167	$	14,183	$	12,222
Accrued liabilities	(4,497)		(1,218)		(221)
Other assets	2,744		12,739		8,286
Other liabilities	(468)		(1,089)		(139)

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 June					Six Months Ended June

Cash Flow Hedging Relationships		2023		2022			2023		2022
Foreign currency exchange contracts		$	7,792	$	6,915		$	18,129	$	14,240
Interest rate swap agreements		2,017		1,459			1,708		10,554
Total		$	9,809	$	8,374		$	19,837	$	24,794


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

Location of Gain (Loss)		2023		2022			2023		2022
Net revenues		$	(62)	$	(261)		$	(233)	$	(393)
Cost of goods sold		4,256		2,425			10,248		4,726
Other expense, net		136		2			296		(101)
Interest expense		2,435		(745)			4,536		(2,011)
Total		$	6,765	$	1,421		$	14,847	$	2,221

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 and six months ended June 2023 and June 2022.

At June 2023, AOCL included $30.1 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)	June 2023		December 2022		June 2022
Foreign currency translation	$	(94,610)	$	(107,462)	$	(110,014)
Defined benefit pension plans	2,173		2,243		(2,166)
Derivative financial instruments	32,344		25,554		20,223
Accumulated other comprehensive loss	$	(60,093)	$	(79,665)	$	(91,957)

Kontoor Brands, Inc. Q2 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 June 2023

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

Balance, March 2023	$	(99,139)	$	2,208	$	28,926	$	(68,005)
Other comprehensive income (loss) due to gains (losses) arising before reclassifications	4,529		—		9,442		13,971
Reclassifications to net income of previously deferred (gains) losses	—		(35)		(6,024)		(6,059)
Net other comprehensive income (loss)	4,529		(35)		3,418		7,912
Balance, June 2023	$	(94,610)	$	2,173	$	32,344	$	(60,093)


	Three Months Ended June 2022

(In thousands)	Foreign Currency Translation		Defined Benefit Pension Plans		Derivative Financial Instruments		Total
Balance, March 2022	$	(96,740)	$	(2,171)	$	15,214	$	(83,697)
Other comprehensive income (loss) due to gains (losses) arising before reclassifications	(13,274)		—		6,552		(6,722)
Reclassifications to net income of previously deferred (gains) losses	—		5		(1,543)		(1,538)
Net other comprehensive income (loss)	(13,274)		5		5,009		(8,260)