|12 Months Ended|
Dec. 28, 2019
|Disclosure of Compensation Related Costs, Share-based Payments [Abstract]|
|STOCK-BASED COMPENSATION||STOCK-BASED COMPENSATION
Description of Plans
Prior to the Separation, certain Company employees participated in the VF amended and restated 1996 Stock Compensation Plan (the "VF Plan"), pursuant to which VF granted shares of options, restricted stock units (“RSUs”), performance-based restricted stock units ("PRSUs") and restricted stock awards ("RSAs").
Effective as of May 20, 2019, the Company's Board of Directors authorized the Kontoor Brands, Inc. 2019 Stock Compensation Plan (the "2019 Plan"). Pursuant to the 2019 Plan, the Company is authorized to grant equity-based awards to officers, key employees and nonemployee members of the Company’s Board of Directors in the form of options, RSUs, PRSUs and RSAs. The 2019 Plan also allows for the issuance of replacement grants related to the conversion of VF awards for employees that transferred from VF to the Company (defined below as “Converted Awards”). A maximum of 7.5 million shares of Common Stock, plus shares subject to Converted Awards, may be issued under the 2019 Plan. As of December 2019, 6.6 million shares remained available for future grants. Shares delivered under the 2019 Plan are issued from Kontoor's authorized but unissued Common Stock.
Substantially all of the Company’s outstanding awards are classified as equity awards, which are accounted for within stockholders’ equity in the Company's balance sheet. Compensation cost for all awards expected to vest is recognized over the shorter of the requisite service period or the vesting period. Awards that do not vest are forfeited.
Conversion at Separation
In accordance with the terms of the Separation, share-based awards granted to Company employees under the VF Plan ("VF Awards") were converted at the time of Separation to options, RSUs, PRSUs and RSAs totaling approximately 2.4 million shares of Kontoor Common Stock (the "Converted Awards"). Certain stock option and PRSU awards were retained by VF to be settled in accordance with their original terms under the VF Plan.
The VF Awards were converted using a ratio of 2.425563, which was designed to preserve the intrinsic economic value of the VF Awards after taking into consideration the spin-off. The Company performed a comparison of the fair value immediately before the conversion to the fair value immediately after the conversion, and recorded compensation expense of $0.5 million at the time of Separation to reflect the incremental fair value of the Converted Awards.
Stock-based Compensation Expense
For the period from 2017 through the Separation date, stock-based compensation expense was presented on a carve-out basis, and included expense for VF grants related directly to employees that were historically dedicated to the Jeanswear business ("direct employees") as well as an allocation of VF’s corporate and shared employee stock-based compensation expenses. Of the total stock-based compensation cost recognized by the Company in 2019 (through the Separation date), 2018 and 2017, $7.3 million, $10.9 million and $9.2 million, respectively, related to direct employees and $2.2 million, $4.0 million and $3.8 million, respectively, related to allocations of VF’s corporate and shared employee stock-based compensation expenses.
For the period from the Separation date through December 2019, stock-based compensation includes expense related to the Converted Awards and new grants under the 2019 Plan, as well as the expense related to grants remaining under the VF Plan, all of which is being amortized over the remaining vesting periods of the awards.
The following table presents total stock-based compensation cost and the associated income tax benefits recognized in the statements of income for all awards:
There were no material amounts of stock-based compensation costs included in inventory at December 2019, December 2018 or December 2017.
At December 2019, there was $23.1 million of total unrecognized compensation cost related to all stock-based compensation arrangements for Company employees that will be recognized over a weighted average period of approximately 1.5 years.
Converted Awards — The following information relates to the historical valuation of stock option awards granted by VF prior to the Separation. The exercise price of each option was equal to the fair market value of VF's common stock on the grant date.
The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:
Employee stock options vest in equal annual installments over three years, and compensation cost is recognized ratably over the shorter of the requisite service period or the vesting period. All options granted have ten-year terms.
Stock options granted to employees that transferred from VF to the Company with the Separation were included in the Converted Awards as discussed above except for retirement eligible employees, whose options remained with VF. The adjusted exercise price and outstanding quantities of the Converted Awards are included in the table below. No stock options have been granted by the Company subsequent to the Separation.
The following table presents stock option activity from the Separation date to December 2019:
The total fair value of stock options that vested since the Separation was $0.3 million. The total intrinsic value of stock options exercised since the Separation was $2.0 million.
Restricted Stock Units
Converted Awards — Prior to the Separation, VF granted PRSUs that enabled employees to receive shares of VF Common Stock in the year following the conclusion of a three-year performance period. Each PRSU had a potential final payout ranging from zero to two shares of VF Common Stock. For PRSUs granted in 2016 and 2017, the number of shares earned by participants, if any, was based on achievement of a three-year baseline profitability goal and annually established performance goals set by the Talent and Compensation Committee of VF’s Board of Directors. For PRSUs granted in 2018, the number of shares earned by participants, if any, was based on achievement of three-year financial targets set by the Talent and Compensation Committee of VF’s Board of Directors.
The actual number of shares earned may also be adjusted upward or downward by 25% of the target award based on how VF’s total shareholder return (“TSR”) over the three-year period compares to the TSR for companies included in the Standard & Poor’s 500 Consumer Discretionary Index for 2018 grants, and the Standard & Poor’s 500 Index for 2017 grants. The grant date fair value of the TSR-based adjustment was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs and was $4.61 and $2.67 per share for the 2018 and 2017 PRSU grants, respectively.
The 2016 PRSUs were retained by VF and paid out in June 2019 under the original terms of the awards. A portion of the 2017 and 2018 PRSUs was retained by VF to be paid out under the original terms of the awards. The remaining 2017 PRSUs were converted to 43,786 shares of Kontoor non-performance based RSU awards, and the remaining 2018 PRSUs were converted to 82,542 shares of Kontoor PRSU awards, all of which are included in the table below.
In addition, VF granted time-based RSUs to employees as part of its annual stock compensation program during 2018. Each time-based RSU entitles the holder to one share of VF Common Stock. These awards typically vest 50% over a two-year period and 50% over a four-year period from the date of grant. All of these awards were converted to 196,325 shares of Kontoor time-based RSUs and are included in the table below.
New Awards — Kontoor grants PRSUs that enable employees to receive shares of Kontoor Common Stock at the end of a three-year performance period. Each PRSU has a potential final payout ranging from zero to two shares of Kontoor Common Stock. The number of shares earned by participants, if any, is based on achievement of annually established performance goals set by the Talent and Compensation Committee of the Kontoor Board of Directors. Shares earned will be issued to participants following the conclusion of the three-year performance period.
Kontoor also grants nonperformance-based RSUs to certain key employees and nonemployee members of the Board of Directors. Each time-based employee RSU entitles the holder to one share of Kontoor Common Stock and typically vests over a three-year period. Each RSU granted to a nonemployee member of the Board of Directors vests upon grant and will be settled in one share of Kontoor Common Stock one year from the date of grant.
Dividend equivalents on the RSUs accumulate during the vesting period and are payable in additional shares of Kontoor Common Stock when the RSUs vest. Dividend equivalents are subject to the same risk of forfeiture as the RSUs.
During 2019, the Company granted new awards under the 2019 Plan, including PRSUs for 422,359 shares granted to employees, time-based RSUs for 348,906 shares granted to employees and time-based RSUs for 29,739 shares granted to nonemployee members of the Board of Directors. The grant date fair value of the awards was equal to the per share fair market value of the underlying Kontoor Common Stock on each grant date.
The following table presents RSU and PRSU activity from the Separation date to December 2019:
At December 2019, the fair value of PRSU and RSU awards outstanding was $21.4 million and $26.6 million, respectively.
Restricted Stock Awards
Converted Awards — Prior to the Separation, VF granted RSAs of VF Common Stock to certain members of management with vesting periods of up to five years from the grant date. The fair value of the RSAs was equal to the fair market value of VF Common Stock at the grant date. Dividends accumulate in the form of additional RSAs and are subject to the same risk of forfeiture as the RSAs. These awards were converted to Kontoor RSAs at the Separation and are included in the table below. They generally have the same terms and conditions as the original awards and are being amortized ratably over the remaining vesting periods.
The following table presents RSA activity from the Separation date to December 2019:
The fair value of nonvested RSAs was $8.2 million at December 2019. The fair value of the shares that vested since the Separation was $2.6 million.During 2019, approximately 39,700 shares were withheld to settle employee tax withholding related to vesting of awards.
The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef