ktb-20230930

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 September 30, 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 October 27, 2023 was 56,180,152.

KONTOOR BRANDS, INC.

Table of Contents


			Page
Part I — Financial Information

Item 1. Financial Statements (Unaudited)			3

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

Consolidated Statements of Operations: Three and nine months ended S eptember 2023 and Sept ember 2022			4

Consolidated Statements of Comprehensive Income: Three and nine months ended Septe mber 2023 and Sep te mber 2022			5

Consolidated Statements of Cash Flows: Nine months ended September 2023 and September 2022			6

Consolidated Statements of Equity: Three and n ine months ended Se ptember 2023 and September 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			32

Item 4. Controls and Procedures			32

Part II — Other Information

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 2. Unregistered Sales of Equity Securitie s , Use of Proceeds, and Issuer P urchases of Equity Securit ies			33

Item 5. Other Information			33

Item 6. Exhibits			34

Signatures			35

Kontoor Brands, Inc. Q3 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)	September 2023		December 2022		September 2022
ASSETS
Current assets
Cash and cash equivalents	$	77,828	$	59,179	$	58,053
Accounts receivable, net	236,816		225,858		234,569
Inventories	605,234		596,836		678,207
Prepaid expenses and other current assets	113,186		100,396		102,425
Total current assets	1,033,064		982,269		1,073,254
Property, plant and equipment, net	110,399		104,465		101,407
Operating lease assets	63,114		51,029		47,831
Intangible assets, net	12,553		13,361		13,242
Goodwill	209,413		209,627		209,012

Other assets	197,387		221,510		208,264
TOTAL ASSETS	$	1,625,930	$	1,582,261	$	1,653,010
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings	$	—	$	7,280	$	7,093
Current portion of long-term debt	17,500		10,000		7,500
Accounts payable	182,448		206,262		306,278
Accrued liabilities	168,356		196,989		167,690
Operating lease liabilities, current	20,975		19,898		18,885
Total current liabilities	389,279		440,429		507,446
Operating lease liabilities, noncurrent	41,348		31,506		30,255

Other liabilities	79,084		76,950		82,417
Long-term debt	768,595		782,619		824,793
Commitments and contingencies
Total liabilities	1,278,306		1,331,504		1,444,911
Equity
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at September 2023, December 2022 and September 2022	—		—		—
Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 56,173,518 at September 2023; 55,516,872 at December 2022 and 55,464,569 at September 2022	—		—		—
Additional paid-in capital	261,966		243,696		237,934
Retained earnings	156,491		86,726		62,448
Accumulated other comprehensive loss	(70,833)		(79,665)		(92,283)
Total equity	347,624		250,757		208,099
TOTAL LIABILITIES AND EQUITY	$	1,625,930	$	1,582,261	$	1,653,010

See accompanying notes to unaudited consolidated financial statements.

3 Kontoor Brands, Inc. Q3 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September					Nine Months Ended September

(In thousands, except per share amounts)		2023		2022			2023		2022
Net revenues		$	654,540	$	606,521		$	1,937,672	$	1,899,836
Costs and operating expenses
Cost of goods sold		383,075		342,460			1,129,245		1,064,190
Selling, general and administrative expenses		185,983		188,995			564,599		563,614

Total costs and operating expenses		569,058		531,455			1,693,844		1,627,804
Operating income		85,482		75,066			243,828		272,032
Interest expense		(10,454)		(8,858)			(30,390)		(25,115)
Interest income		964		263			2,074		1,028
Other expense, net		(3,764)		(2,219)			(9,142)		(5,187)
Income before income taxes		72,228		64,252			206,370		242,758
Income taxes		12,697		13,169			44,147		48,870
Net income		$	59,531	$	51,083		$	162,223	$	193,888
Earnings per common share
Basic		$	1.06	$	0.92		$	2.90	$	3.47
Diluted		$	1.05	$	0.90		$	2.85	$	3.40
Weighted average shares outstanding
Basic		56,151		55,428			55,962		55,830
Diluted		56,956		56,550			56,914		57,060

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q3 FY23 Form 10-Q 4

KONTOOR BRANDS, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended September					Nine Months Ended September

(In thousands)		2023		2022			2023		2022
Net income		$	59,531	$	51,083		$	162,223	$	193,888
Other comprehensive (loss) income
Net change in foreign currency translation		(6,916)		(11,568)			5,936		(28,457)
Net change in defined benefit pension plans		(37)		6			(107)		17
Net change in derivative financial instruments		(3,787)		11,236			3,003		28,913
Total other comprehensive (loss) income, net of related taxes		(10,740)		(326)			8,832		473
Comprehensive income		$	48,791	$	50,757		$	171,055	$	194,361

See accompanying notes to unaudited consolidated financial statements.

5 Kontoor Brands, Inc. Q3 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September

(In thousands)	2023		2022
OPERATING ACTIVITIES
Net income	$	162,223	$	193,888
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	27,405		27,827
Stock-based compensation	9,017		17,758
Provision for doubtful accounts	87		2,202

Other	10,331		8,536
Changes in operating assets and liabilities:
Accounts receivable	(10,660)		37,673
Inventories	(6,354)		(323,449)
Accounts payable	(23,145)		98,556
Income taxes	(24,064)		(11,682)
Accrued liabilities	(10,170)		(33,473)
Other assets and liabilities	12,856		(5,107)
Cash provided by operating activities	147,526		12,729
INVESTING ACTIVITIES
Property, plant and equipment expenditures	(21,553)		(13,091)
Capitalized computer software	(8,940)		(7,633)

Other	(837)		(990)
Cash used by investing activities	(31,330)		(21,714)
FINANCING ACTIVITIES




Borrowings under revolving credit facility	288,000		76,000
Repayments under revolving credit facility	(288,000)		(36,000)
Repayments of term loan	(7,500)		—

Repurchases of Common Stock	—		(62,494)
Dividends paid	(80,719)		(77,021)
Shares withheld for taxes, net of proceeds from issuance of Common Stock	(2,506)		(12,643)
Other	(7,297)		7,002
Cash used by financing activities	(98,022)		(105,156)
Effect of foreign currency rate changes on cash and cash equivalents	475		(13,128)
Net change in cash and cash equivalents	18,649		(127,269)
Cash and cash equivalents – beginning of period	59,179		185,322
Cash and cash equivalents – end of period	$	77,828	$	58,053

See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q3 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
Net income	—	—		—		59,531		—		59,531
Stock-based compensation, net	64	—		3,617		(1,072)		—		2,545
Other comprehensive loss	—	—		—		—		(10,740)		(10,740)
Dividends on Common Stock ($0.48 per share)	—	—		—		(26,963)		—		(26,963)

Balance, September 2023	56,174	$	—	$	261,966	$	156,491	$	(70,833)	$	347,624


	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
Net income	—	—		—		51,083		—		51,083
Stock-based compensation, net	83	—		5,893		(2,227)		—		3,666
Other comprehensive loss	—	—		—		—		(326)		(326)
Dividends on Common Stock ($0.46 per share)	—	—		—		(25,513)		—		(25,513)

Balance, September 2022	55,465	$	—	$	237,934	$	62,448	$	(92,283)	$	208,099

See accompanying notes to unaudited consolidated financial statements.

7 Kontoor Brands, Inc. Q3 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 third 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 September 2023, December 2022 and September 2022 correspond to the fiscal periods ended September 30, 2023, December 31, 2022 and October 1, 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 global supply chain issues, labor challenges and uneven economic recovery following 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, as well as the conflict in Israel, are causing 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 nine months ended September 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").

Out-of-Period Adjustment

During the three months ended September 2023, management identified inaccuracies in processing certain transactions with U.S. Customs and Border Protection ("U.S. Customs") arising from the implementation of the Company's enterprise resource planning system, which resulted in underpayment of duties owed to U.S. Customs for the 2021 to 2023 periods. Accordingly, the Company recorded a $13.1 million adjustment in the current period within "cost of goods sold" for additional duty expense related to prior periods. The Company concluded that the out-of-period adjustment was not material to the consolidated financial statements for the current interim period or to any previously reported annual or interim periods.

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. Q3 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 from company-operated Wrangler® and Lee® branded full-price and outlet stores, online and international concession arrangements.

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


	Three Months Ended September 2023

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	355,608	$	103,564	$	1,799	$	460,971
Non-U.S. Wholesale	53,644		71,433		—		125,077
Direct-to-Consumer	35,287		33,030		175		68,492

Total	$	444,539	$	208,027	$	1,974	$	654,540

Geographic revenues
U.S.	$	385,501	$	118,352	$	1,974	$	505,827
International	59,038		89,675		—		148,713
Total	$	444,539	$	208,027	$	1,974	$	654,540


	Three Months Ended September 2022

(In thousands)	Wrangler		Lee		Other		Total
Channel revenues
U.S. Wholesale	$	324,564	$	84,122	$	1,771	$	410,457
Non-U.S. Wholesale	50,448		81,682		28		132,158
Direct-to-Consumer	31,149		32,661		96		63,906

Total	$	406,161	$	198,465	$	1,895	$	606,521

Geographic revenues
U.S.	$	351,624	$	98,862	$	1,867	$	452,353
International	54,537		99,603		28		154,168
Total	$	406,161	$	198,465	$	1,895	$	606,521


	Nine Months Ended September 2023

(In thousands)	Wrangler		Lee		Other		Total

Channel revenues
U.S. Wholesale	$	1,048,491	$	337,081	$	7,393	$	1,392,965
Non-U.S. Wholesale	143,667		188,670		10		332,347
Direct-to-Consumer	101,013		110,933		414		212,360

Total	$	1,293,171	$	636,684	$	7,817	$	1,937,672

Geographic revenues
U.S.	$	1,132,741	$	382,290	$	7,807	$	1,522,838
International	160,430		254,394		10		414,834
Total	$	1,293,171	$	636,684	$	7,817	$	1,937,672

9 Kontoor Brands, Inc. Q3 FY23 Form 10-Q

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


	Nine Months Ended September 2022

(In thousands)	Wrangler		Lee		Other		Total
Channel revenues
U.S. Wholesale	$	1,003,753	$	341,125	$	6,425	$	1,351,303
Non-U.S. Wholesale	143,724		212,591		903		357,218
Direct-to-Consumer	89,051		102,022		242		191,315

Total	$	1,236,528	$	655,738	$	7,570	$	1,899,836

Geographic revenues
U.S.	$	1,078,998	$	384,035	$	6,667	$	1,469,700
International	157,530		271,703		903		430,136
Total	$	1,236,528	$	655,738	$	7,570	$	1,899,836

Contract Balances and Performance Obligations

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


(In thousands)	September 2023		December 2022		September 2022
Accounts receivable, net	$	236,816	$	225,858	$	234,569
Contract assets (a)	8,704		5,050		6,599
Contract liabilities (b)	1,348		1,057		919

(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 nine months ended September 2023 and September 2022, no significant revenue was recognized that was included in contract liabilities as of December 2022 and December 2021, respectively. For the three and nine months ended September 2023, no significant revenue was recognized from performance obligations satisfied, or partially satisfied, in prior periods. As of September 2023, the Company has contractual rights under its licensing agreements to receive $62.1 million of fixed consideration related to the future minimum guarantees through December 2028.

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. Q3 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 September					Nine Months Ended September

(In thousands)		2023		2022			2023		2022
Segment revenues:
Wrangler		$	444,539	$	406,161		$	1,293,171	$	1,236,528
Lee		208,027		198,465			636,684		655,738
Total reportable segment revenues		652,566		604,626			1,929,855		1,892,266
Other revenues		1,974		1,895			7,817		7,570
Total net revenues		$	654,540	$	606,521		$	1,937,672	$	1,899,836
Segment profit:
Wrangler		$	81,556	$	75,597		$	223,639	$	226,049
Lee		20,735		26,703			77,473		101,837
Total reportable segment profit		$	102,291	$	102,300		$	301,112	$	327,886
Corporate and other expenses		(20,091)		(28,775)			(65,815)		(60,774)
Interest expense		(10,454)		(8,858)			(30,390)		(25,115)
Interest income		964		263			2,074		1,028
Loss related to other revenues		(482)		(678)			(611)		(267)
Income before income taxes		$	72,228	$	64,252		$	206,370	$	242,758

NOTE 4 — ACCOUNTS RECEIVABLE

Allowance for Doubtful Accounts

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


	Nine Months Ended September

(In thousands)		2023		2022

Balance, December		$	9,918	$	11,705
Increase in provision for expected credit losses		87		2,116
Accounts receivable balances written off		(1,247)		(1,069)
Other (1)		(105)		(1,197)
Balance, September		$	8,653	$	11,555

(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 nine months ended September 2023 and September 2022, the Company sold total trade accounts receivable of $1,023.5 million and $1,016.0 million, respectively. As of September 2023, December 2022 and September 2022, $216.2 million, $246.0 million and $197.8 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 $3.0 million and $9.1 million for the three and nine months ended September 2023, respectively, and $1.4 million and $3.0 million for the three and nine months ended September 2022, respectively. Net proceeds of this program are reflected as operating activities in the Company's statements of cash flows.

11 Kontoor Brands, Inc. Q3 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)	September 2023		December 2022		September 2022
Finished products	$	526,633	$	509,554	$	584,480
Work-in-process	34,325		34,316		37,823
Raw materials	44,276		52,966		55,904
Total inventories	$	605,234	$	596,836	$	678,207

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 are included in operating activities in the Company's statements of cash flows. At September 2023, December 2022 and September 2022, accounts payable included total outstanding balances of $21.9 million, $24.7 million and $21.0 million, respectively, due to suppliers that participate in the SCF programs.

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

Short-term Borrowings

At September 2023, December 2022 and September 2022, the Company had $23.7 million, $24.8 million and $24.3 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 September 2023, and $7.1 million and $6.9 million of outstanding balances at December 2022 and September 2022, respectively. In addition, short-term borrowings included other debt of $0.2 million at both December 2022 and September 2022, with no balance remaining at September 2023.

Long-term Debt

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


(In thousands)	September 2023		December 2022		September 2022
Revolving Credit Facility	$	—	$	—	$	40,000
Term Loan A	390,849		397,954		397,822

4.125% Notes, due 2029	395,246		394,665		394,471
Total long-term debt	786,095		792,619		832,293
Less: current portion	(17,500)		(10,000)		(7,500)
Long-term debt, due beyond one year	$	768,595	$	782,619	$	824,793

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. Q3 FY23 Form 10-Q 12

KONTOOR BRANDS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Term Loan A had an outstanding principal amount of $392.5 million at September 2023, and $400.0 million at both December 2022 and September 2022, which is reported net of unamortized deferred financing costs. As of September 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 September 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 September 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 September 2023, December 2022 and September 2022, which is reported net of unamortized deferred financing costs. As of September 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 September 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.

Total cash paid for interest was $23.5 million and $18.7 million during the nine months ended September 2023 and September 2022, respectively.

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. Q3 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

September 2023
Financial assets:
Cash equivalents:
Money market funds	$	53,655	$	53,655	$	—	$	—
Time deposits	2,286		2,286		—		—
Foreign currency exchange contracts	19,731		—		19,731		—
Interest rate swap agreements	6,067		—		6,067		—
Investment securities	44,841		44,841		—		—
Financial liabilities:
Foreign currency exchange contracts	1,774		—		1,774		—

Deferred compensation	46,799		—		46,799		—


			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 September 2023, the carrying value of the Company's long-term debt was $786.1 million compared to a fair value of $720.5 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 September 2023 and December 2022, their carrying values approximated fair value due to the short-term nature of these instruments.

Kontoor Brands, Inc. Q3 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 $339.9 million at September 2023, $322.3 million at December 2022 and $292.8 million at September 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 September 2023, December 2022 and September 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 September 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

	September		December		September		September		December		September
(In thousands)	2023		2022		2022		2023		2022		2022

Derivatives designated as hedging instruments:
Foreign currency exchange contracts	$	19,717	$	15,565	$	21,329	$	(1,737)	$	(2,307)	$	(186)
Interest rate swap agreements	6,067		11,357		11,494		—		—		—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	14		—		30		(37)		—		—
Total derivatives	$	25,798	$	26,922	$	32,853	$	(1,774)	$	(2,307)	$	(186)

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:


	September 2023				December 2022				September 2022

(In thousands)	Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability
Gross amounts presented in the balance sheet	$	25,798	$	(1,774)	$	26,922	$	(2,307)	$	32,853	$	(186)
Gross amounts not offset in the balance sheet	(1,774)		1,774		(1,629)		1,629		(186)		186
Net amounts	$	24,024	$	—	$	25,293	$	(678)	$	32,667	$	—

15 Kontoor Brands, Inc. Q3 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)	September 2023		December 2022		September 2022
Prepaid expenses and other current assets	$	24,220	$	14,183	$	18,523
Accrued liabilities	(1,442)		(1,218)		(134)
Other assets	1,578		12,739		14,330
Other liabilities	(332)		(1,089)		(52)

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 September					Nine Months Ended September

Cash Flow Hedging Relationships		2023		2022			2023		2022
Foreign currency exchange contracts		$	5,700	$	12,414		$	23,829	$	26,654
Interest rate swap agreements		202		5,327			1,910		15,881
Total		$	5,902	$	17,741		$	25,739	$	42,535


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

Location of Gain (Loss)		2023		2022			2023		2022
Net revenues		$	(37)	$	(401)		$	(270)	$	(794)
Cost of goods sold		7,095		4,228			17,343		8,954
Other expense, net		128		168			424		67
Interest expense		2,664		346			7,200		(1,665)
Total		$	9,850	$	4,341		$	24,697	$	6,562

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 nine months ended September 2023 and September 2022.

At September 2023, AOCL included $27.1 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)

September 2023

December 2022

September 2022