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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
or
¨   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)

 
(Zip Code)
(336) 332-3400
(Registrant’s telephone number, including area code)
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 ¨    No þ
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
 
þ 
  
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 
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
The number of shares of common stock, no par value, of the registrant outstanding as of May 23, 2019 was 56,921,092.



KONTOOR BRANDS, INC.
Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 2



PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS (UNAUDITED)
KONTOOR BRANDS, INC.
Combined Balance Sheets
(Unaudited)

(In thousands)
 
March 2019
 
 
December 2018
 
March 2018
ASSETS
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and equivalents
 
$
102,945

 
 
$
96,776

 
$
88,234

Accounts receivable, less allowance for doubtful accounts of $10,826 at March 2019, $10,549 at December 2018 and $8,121 at March 2018
 
299,328

 
 
252,966

 
318,480

Due from related parties, current
 
291,127

 
 
547,690

 
274,368

Related party notes receivable
 
517,940

 
 
517,940

 
546,740

Inventories
 
519,006

 
 
473,812

 
499,849

Other current assets
 
50,671

 
 
52,014

 
51,783

Total current assets
 
1,781,017

 
 
1,941,198

 
1,779,454

Due from related parties, noncurrent
 
370

 
 
611

 
1,576

Property, plant and equipment, net
 
138,972

 
 
138,449

 
142,958

Operating lease assets
 
77,305

 
 




Intangible assets, net
 
51,913

 
 
53,059

 
56,638

Goodwill
 
213,623

 
 
214,516

 
220,233

Other assets
 
122,210

 
 
110,632

 
125,106

TOTAL ASSETS
 
$
2,385,410

 
 
$
2,458,465

 
$
2,325,965

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Short-term borrowings
 
$
8,368

 
 
$
3,215

 
$
12,103

Accounts payable
 
147,403

 
 
134,129

 
131,667

Due to related parties, current
 
3,865

 
 
16,140

 
60,424

Related party notes payable
 
241,867

 
 
269,112

 
269,112

Accrued liabilities
 
206,517

 
 
194,228

 
171,501

Operating lease liabilities, current
 
29,156

 
 




Total current liabilities
 
637,176

 
 
616,824

 
644,807

Operating lease liabilities, noncurrent
 
51,533

 
 



Other liabilities
 
117,719

 
 
118,189

 
117,376

Commitments and contingencies
 

 
 

 

Total liabilities
 
806,428

 
 
735,013

 
762,183

Equity
 
 
 
 
 
 
 
Parent company investment
 
1,723,406

 
 
1,868,634

 
1,676,563

Accumulated other comprehensive loss
 
(144,424
)
 
 
(145,182
)
 
(112,781
)
Total equity
 
1,578,982

 
 
1,723,452

 
1,563,782

TOTAL LIABILITIES AND EQUITY
 
$
2,385,410

 
 
$
2,458,465

 
$
2,325,965


See accompanying notes to unaudited combined financial statements.


3 Kontoor Brands, Inc. Q1 FY19 Form 10-Q


KONTOOR BRANDS, INC.
Combined Statements of Income
(Unaudited)

 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands, except per share amounts)
 
2019
 
 
2018
Net revenues (including sales to related parties of $10,611 and $13,479 for March 2019 and March 2018, respectively)
 
$
648,344

 
 
$
669,663

Costs and operating expenses
 
 
 
 
 
Cost of goods sold (including purchases from related parties of $256 and $827 for March 2019 and March 2018, respectively)
 
401,025

 
 
382,421

Selling, general and administrative expenses
 
222,124

 
 
194,834

Total costs and operating expenses
 
623,149

 
 
577,255

Operating income
 
25,195

 
 
92,408

Related party interest income, net
 
2,339

 
 
1,651

Other interest income, net
 
1,325

 
 
917

Other expense, net
 
(971
)
 
 
(1,197
)
Income before income taxes
 
27,888

 
 
93,779

Income taxes
 
12,475

 
 
14,083

Net income
 
$
15,413

 
 
$
79,696

Earnings per common share
 
 
 
 
 
Basic
 
$
0.27

 
 
$
1.41

Diluted
 
$
0.27

 
 
$
1.41

See accompanying notes to unaudited combined financial statements.











Kontoor Brands, Inc. Q1 FY19 Form 10-Q 4



KONTOOR BRANDS, INC.
Combined Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands)
 
2019
 
 
2018
Net income
 
$
15,413

 
 
$
79,696

Other comprehensive income
 

 
 

Foreign currency translation, net of related taxes
 
758

 
 
9,701

Total other comprehensive income
 
758

 
 
9,701

Comprehensive income
 
$
16,171

 
 
$
89,397

See accompanying notes to unaudited combined financial statements.
















5 Kontoor Brands, Inc. Q1 FY19 Form 10-Q


KONTOOR BRANDS, INC.
Combined Statements of Cash Flows
(Unaudited)

 
 
Three Months Ended March
 
 
 
 
 
 
(In thousands)
 
2019
 
 
2018
OPERATING ACTIVITIES
 
 
 
 
 
Net income
 
$
15,413

 
 
$
79,696

Adjustments to reconcile net income to cash provided (used) by operating activities:
 
 
 
 
 
Depreciation and amortization
 
7,703

 
 
8,310

Stock-based compensation
 
7,685

 
 
3,740

Provision for doubtful accounts
 
2,730

 
 
(10
)
Other
 
(512
)
 
 
(362
)
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
 
(48,473
)
 
 
(60,849
)
Inventories
 
(44,926
)
 
 
(61,146
)
Due from related parties
 
256,803

 
 
(54,329
)
Accounts payable
 
12,935

 
 
(43,613
)
Income taxes
 
1,311

 
 
(5,573
)
Accrued liabilities
 
9,426

 
 
18,353

Due to related parties
 
(12,268
)
 
 
22,412

Other assets and liabilities
 
(1,340
)
 
 
(20,994
)
Cash provided (used) by operating activities
 
206,487

 
 
(114,365
)
INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
 
(5,300
)
 
 
(6,528
)
Repayments received from related party notes receivable
 

 
 
1,000

Other, net
 
(20
)
 
 
6,428

Cash (used) provided by investing activities
 
(5,320
)
 
 
900

FINANCING ACTIVITIES
 
 
 
 
 
Net increase in short-term borrowings
 
5,081

 
 
7,565

Repayments of related party notes payable
 
(27,245
)
 
 

Net transfers (to) from parent
 
(173,485
)
 
 
109,705

Cash (used) provided by financing activities
 
(195,649
)
 
 
117,270

Effect of foreign currency rate changes on cash and cash equivalents
 
651

 
 
3,618

Net change in cash and cash equivalents
 
6,169

 
 
7,423

Cash and cash equivalents – beginning of period
 
96,776

 
 
80,811

Cash and cash equivalents – end of period
 
$
102,945

 
 
$
88,234



See accompanying notes to unaudited combined financial statements.


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 6



KONTOOR BRANDS, INC.
Combined Statements of Equity
(Unaudited)


 
 
Three Months Ended March 2019
 
 
Parent Company Investment
 
Accumulated Other Comprehensive Loss
 
Total Equity
 
 
 
 
 (In thousands)
 
 
 
Balance, December 2018
 
$
1,868,634

 
$
(145,182
)
 
$
1,723,452

Adoption of new accounting standard (ASU 2016-02)
 
(2,713
)
 

 
(2,713
)
Net income
 
15,413

 

 
15,413

Foreign currency translation
 

 
758

 
758

Net transfers to parent
 
(157,928
)
 

 
(157,928
)
Balance, March 2019
 
$
1,723,406

 
$
(144,424
)
 
$
1,578,982


 
 
Three Months Ended March 2018
 
 
Parent Company Investment
 
Accumulated Other Comprehensive Loss
 
Total Equity
 
 
 
 
 (In thousands)
 
 
 
Balance, December 2017
 
$
1,480,375

 
$
(122,482
)
 
$
1,357,893

Adoption of new accounting standard (ASU 2014-09)
 
3,047

 

 
3,047

Net income
 
79,696

 

 
79,696

Foreign currency translation
 

 
9,701

 
9,701

Net transfers from parent
 
113,445

 

 
113,445

Balance, March 2018
 
$
1,676,563

 
$
(112,781
)
 
$
1,563,782


See accompanying notes to unaudited combined financial statements.













7 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)



NOTE 1 — BASIS OF PRESENTATION

Background

On August 13, 2018, V.F. Corporation ("VF") announced its intention to spin-off its Jeanswear business into a separate publicly traded company (the "Separation"). The Jeanswear business includes the Wrangler®, Lee® and Rock & Republic® brands, as well as the VF Outlet™ business. The financial statements as of March 30, 2019 are prior to the Separation and thus are prepared on a "carve-out" basis as described below.
 
On May 22, 2019, VF completed the spin-off of Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") through a pro-rata distribution of one share of Kontoor common stock for every seven shares of VF common stock held at the close of business on the record date of May 10, 2019. Kontoor began to trade as a separate public company (NYSE: KTB) on May 23, 2019. In connection with the Separation, Kontoor transferred approximately $1.0 billion to VF on May 17, 2019 from a newly structured third-party debt issuance.

Description of Business

The Company is a global denim and casual apparel company headquartered in the United States ("U.S."). The Company designs, produces, procures, markets and distributes apparel primarily under the brand names Wrangler® and Lee®. The Company's products are sold in the U.S. through mass merchants, specialty stores, mid-tier and traditional department stores, company-operated stores and online. The Company's products are also sold internationally, primarily in Europe and Asia, through department, specialty, company-operated, concession retail and independently operated partnership stores and online. VF Outlet™ stores carry Wrangler® and Lee® branded products, as well as merchandise that is specifically purchased for sale in these stores, including products from VF.

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, the three-month period ended March 30, 2019 represents the first quarter of the Company's fiscal year ended December 28, 2019 ("fiscal 2019"). For presentation purposes herein, all references to periods ended March 2019, December 2018 and March 2018 correspond to the fiscal periods ended March 30, 2019, December 29, 2018 and March 31, 2018, respectively.

Basis of Presentation

These accompanying unaudited combined financial statements reflect the historical financial position, results of operations and cash flows of the Company for the periods presented as historically managed within VF. The unaudited combined financial statements have been derived from the consolidated financial statements and accounting records of VF. They 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 United States of
 
America ("GAAP") for complete financial statements. In the opinion of management, the accompanying combined financial statements contain all adjustments, consisting of only normal recurring adjustments necessary to fairly state the combined financial position, results of operations and cash flows of the Company for the interim periods presented. The combined financial statements may not be indicative of the Company's future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during the periods presented. Additionally, operating results for the three months ended March 2019 are not necessarily indicative of results that may be expected for any other interim period or for fiscal 2019. The unaudited combined financial statements should be read in conjunction with the audited combined financial statements for the fiscal year ended December 29, 2018 included in our Registration Statement on Form 10, as amended and filed with the Securities and Exchange Commission on April 30, 2019 ("2018 Form 10").

The combined statements of income include costs for certain centralized functions and programs provided and administered by VF that are charged directly to the Company. These centralized functions and programs include, but are not limited to, information technology, human resources, accounting shared services, supply chain, insurance, and the service cost component of net periodic pension benefit.

In addition, for purposes of preparing these combined financial statements on a "carve-out" basis under U.S. GAAP, a portion of VF's total corporate expenses are allocated to the Company. These expense allocations include the cost of corporate functions and resources provided by or administered by VF including, but not limited to, executive management, finance, accounting, legal, human resources, and related benefit costs associated with such functions, such as stock-based compensation and the non-service components of net periodic pension benefit. Allocations also include the cost of operating VF's corporate headquarters located in Greensboro, North Carolina.

Costs are allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional revenues, cost of goods sold or square footage, as applicable. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or benefit received by, the Company during the periods presented. However, the allocations may not reflect the expenses that would have incurred if the Company had been a standalone company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, the Company will assess whether it performs these functions using its own resources or outsourced services. However, some of these functions will continue to be provided by VF under transition services agreements for a period following the Separation. Additionally, the Company will provide some services to VF under reverse transition services agreements. The Company has also


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 8


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


entered into certain commercial arrangements with VF in connection with the Separation.

The combined financial statements include certain assets and liabilities that have historically been held at the VF corporate level but are specifically identifiable or otherwise attributable to the Company. VF's third-party long-term debt and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt.

 
All intracompany transactions are eliminated. All transactions between the Company and VF are included in these combined financial statements. For those transactions between the Company and VF that were historically settled in cash, the Company has reflected such balances in the combined balance sheets as "due from related parties" or "due to related parties". The aggregate net effect of transactions between the Company and VF that were not historically settled in cash are reflected in the combined balance sheets within "parent company investment" and in the combined statements of cash flows within "net transfers to parent".
NOTE 2 — RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” an update that requires entities to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The FASB subsequently issued updates to provide clarification on specific topics, including adoption guidance, practical expedients and interim transition disclosure requirements. This guidance was adopted by the Company during the first quarter of fiscal 2019 utilizing the optional transition method, which resulted in a $2.7 million cumulative effect adjustment to beginning retained earnings for the period ended March 2019. The adoption of these standards did not have a significant impact on the Company's combined statement of income and combined statement of cash flows. Refer to Note 3 of the combined financial statements for additional information.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815)": Targeted Improvements to Accounting for Hedging Activities," an update that amends and simplifies certain aspects of hedge accounting rules to better portray the economic results of risk management activities in the financial statements. The FASB has subsequently issued updates to the standard to provide additional guidance on specific topics. This guidance was adopted by the Company during the first quarter of fiscal 2019 and did not have a significant impact on the combined financial statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," an update that addresses the effect of the change in the U.S. federal corporate income tax rate due to the enactment of the Tax Act on items within accumulated other comprehensive income (loss). This guidance was adopted by the Company during the first quarter of fiscal 2019 and did not have a significant impact on the combined financial statements.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements," an update that provides technical corrections, clarifications and other improvements across a variety of accounting topics. The transition and effective date guidance is
 
based on the facts and circumstances of each update; however, many of them became effective for the Company at the beginning of fiscal 2019. The adoption of this guidance did not have a significant impact on the combined financial statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This guidance will be effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of this guidance will have on the combined financial statements. The adoption of this guidance is not expected to have a significant impact on the combined financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement," an update that modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This guidance will be effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of this guidance will have on its financial statement disclosures. The adoption of this guidance is not expected to have a significant impact on the combined financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans," an update that modifies the disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. This guidance will be effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of this guidance will have on its financial statement disclosures. The adoption of this guidance is not expected to have a significant impact on the combined financial statements.


9 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," an update that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance will be effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact that adoption of this guidance will have on the combined financial statements. The adoption of this guidance is not expected to have a significant impact on the combined financial statements.

NOTE 3 — LEASES

The Company enters into operating leases for offices, operational facilities, retail locations, vehicles and other assets to facilitate its operations that expire at various dates through 2027. Leases for real estate typically have initial terms ranging from 3 to 15 years, generally with renewal options. Leases for equipment typically have initial terms ranging from 3 to 7 years. Most leases have fixed rentals, with many of the real estate leases requiring additional payments for real estate taxes and occupancy-related costs. These lease terms may include optional renewals, terminations or purchases, which are considered in the Company’s assessments when such options are reasonably certain to be exercised.

For retail real estate leases, the Company does not typically include renewal options in the underlying lease term. For non-retail real estate leases, when renewal options are reasonably certain to be exercised, the Company includes the renewal options in the underlying lease term, up to a maximum of ten years. Renewals for all other leases are determined on a lease-by-lease basis.

Upon adoption of ASU 2016-02, the Company elected the package of practical expedients permitted under the new lease standard, which allows the Company to not reassess whether a contract contains a lease, how the lease is classified, and if initial direct costs can be capitalized. The Company elected to combine non-lease components with the related lease components for real estate, vehicles and other significant asset arrangements. The Company treats the combined items as a single lease component for accounting purposes. Lastly, the Company elected not to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets.


 




Certain of the Company’s leases contain fixed, indexed, or market-based escalation clauses which impact future payments. Certain arrangements contain variable payment provisions, such as payments based on sales volumes or amounts and mileage, or excess mileage. The Company’s leases typically contain customary covenants and restrictions.

The Company determines whether a contract is a lease at inception. This typically requires more judgment in storage and service arrangements where the Company must determine whether its rights to specific physical or production capacity may represent substantially all of the available capacity.

The Company measures right-of-use assets and related lease liabilities based on the present value of remaining lease payments, including in-substance fixed payments, the current payment amount when payments depend on an index or rate (e.g., inflation adjustments, market renewals), and the amount the Company believes is probable to be paid to the lessor under residual value guarantees, when applicable. Lease contracts may include fixed payments for non-lease components, such as maintenance, which are included in the measurement of lease liabilities for certain asset classes based on the Company’s election to combine lease and non-lease components.

As applicable borrowing rates are not typically implied within our lease arrangements, the Company discounts lease payments based on its estimated incremental borrowing rate at lease commencement, or modification, which is based on the Company’s estimated credit rating, the lease term at commencement and the contract currency of the lease arrangement.


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 10


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


The following table presents the lease-related assets and liabilities recorded in the combined balance sheet:
(in thousands)
 
March 2019
Assets
 

Operating lease assets, noncurrent
 
$
77,305

Total lease assets
 
$
77,305


 

Liabilities
 

Operating lease liabilities, current
 
$
29,156

Operating lease liabilities, noncurrent
 
51,533

Total lease liabilities
 
$
80,689


 

Weighted-average remaining lease term (in years)
 

Operating leases
 
3.69

Weighted-average discount rate
 

Operating leases
 
3.27
%


Lease costs
The following table presents certain information related to the lease costs for operating leases:
(in thousands)

Three Months Ended March 2019
Operating lease cost

$
7,613

Short-term lease cost (excluding leases of one month or less)

491

Variable lease cost

2,816

Total lease costs

$
10,920


Rent expense associated with operating leases for the three months ended March 2018 totaled approximately $10.6 million.

Other information
The following table presents supplemental cash flow information related to leases:
(in thousands)

Three Months Ended March 2019
Cash paid for amounts included in the measurement of lease liabilities:


Operating cash flows impact - operating leases

$
10,641

Right-of-use assets obtained in exchange for new operating leases

$
7,837





11 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


The following table reconciles maturities of operating lease liabilities as of March 30, 2019 to the lease liabilities reflected in the combined balance sheet:
(in thousands)

Lease Obligations
2019 (excluding the three months ended March 2019)

$
25,618

2020

26,388

2021

17,031

2022

7,922

2023

4,805

Thereafter

5,679

Total future minimum lease payments

87,443

Less: amounts related to imputed interest

(6,754
)
Present value of future minimum lease payments

80,689

Less: operating lease liabilities, current

(29,156
)
Operating lease liabilities, noncurrent

$
51,533



As of March 30, 2019, the Company has entered into approximately $3.0 million of operating lease arrangements, on an undiscounted basis, that have not yet commenced. The Company continuously monitors and may negotiate contract amendments that include extensions or modifications to existing leases.

The following table presents the future minimum lease payments during the noncancelable lease terms as presented under ASC 840:
(in thousands)

December 2018
2019

$
33,562

2020

29,246

2021

17,810

2022

7,932

2023

4,353

Thereafter

4,582

Total future minimum lease payments

$
97,485


NOTE 4 — REVENUES

The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied based on the transfer of control of promised goods or services. The transfer of control typically occurs at a point in time based on consideration of when the customer has i) an obligation to pay for, ii) physical possession of, iii) legal title to, iv) risks and rewards of ownership of and v) accepted the goods or services. The timing of revenue recognition within the wholesale channels occurs either on shipment or delivery of goods based on contractual terms with the customer. The timing of revenue recognition in the direct-to-consumer channels generally occurs at the point of sale within Company-operated or concession retail stores and either on shipment or delivery of goods for e-commerce transactions based
on contractual terms with the customer. For finished products shipped directly to customers from our suppliers, the Company’s
promise to the customer is a performance obligation to provide the specified goods and the Company has discretion in establishing

 
pricing, and thus the Company is the principal in the arrangement and revenue is recognized on a gross basis at the transaction price.

The duration of contractual arrangements with our customers in the wholesale and direct-to-consumer channels is typically less than one year. Payment terms with customers are generally between 30 and 60 days. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as it is expected, at contract inception, that the period between the transfer of the promised good or service to the customer and the customer payment for the good or service will be one year or less.

The amount of revenue recognized in the wholesale and direct-to-consumer channels reflects the expected consideration to be received for providing the goods or services to the customer, which includes estimates for variable consideration. Variable consideration includes allowances for trade terms, sales incentive programs, discounts, markdowns, chargebacks and product


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 12


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


returns. Estimates of variable consideration are determined at contract inception and reassessed at each reporting date, at a minimum, to reflect any changes in facts and circumstances. The Company utilizes the expected value method in determining its estimates of variable consideration, based on evaluations of specific product and customer circumstances, historical and anticipated trends and current economic conditions.

Revenue from the sale of gift cards is deferred and recorded as a contract liability until the gift card is redeemed by the customer, factoring in breakage as appropriate, which considers whether the Company has a legal obligation to remit the value of the unredeemed gift card to any jurisdiction under unclaimed property regulations.

The VF Outlet™ stores maintain customer loyalty programs where customers earn rewards from qualifying purchases, which are redeemable for discounts on future purchases or other rewards. For its customer loyalty programs, the Company estimates the standalone selling price of the loyalty rewards and allocates a portion of the consideration for the sale of products to the loyalty points earned. The deferred amount is recorded as a contract liability, and is recognized as revenue when the points are redeemed or when the likelihood of redemption is remote.

The Company has elected to treat all shipping and handling activities as fulfillment costs and recognize the costs as "selling, general and administrative expenses" at the time the related revenue is recognized. Shipping and handling costs billed to customers are included in "net revenues". Sales taxes and value added taxes collected from customers and remitted directly to governmental authorities are excluded from the transaction price.

The Company has licensing agreements for its symbolic intellectual property, most of which include minimum guaranteed royalties. Royalty income is recognized as earned over the respective license term based on the greater of minimum guarantees or the licensees’ sales of licensed products at rates specified in the licensing contracts. Royalty income related to the minimum guarantees is recognized using a measure of progress with variable amounts recognized only when the cumulative earned royalty exceeds the minimum guarantees. As of March 2019, the Company expects to recognize $38.2 million of fixed consideration related to the future minimum guarantees in effect under its licensing agreements and expects such amounts to be recognized over time through March 2023. The variable consideration is not disclosed as a remaining performance obligation as the licensing arrangements qualify for the sales-based royalty exemption.
 
The Company has applied the practical expedient to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less.
Performance Obligations
Disclosure is required for the aggregate transaction price allocated to performance obligations that are unsatisfied at the end of a reporting period, unless the optional practical expedients are applicable. The Company elected the practical expedients to not disclose the transaction price allocated to remaining performance obligations for i) variable consideration related to sales-based royalty arrangements and ii) contracts with an original expected duration of one year or less.
As of March 2019, there were no arrangements with transaction price allocated to remaining performance obligations other than (i) contracts for which the Company has applied the practical expedients discussed above and (ii) fixed consideration related to future minimum guarantees.
For the three months ended March 2019, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not material.
Contract Balances

Accounts receivable represent the Company's unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less an estimated allowance for doubtful accounts.
Contract assets are rights to consideration in exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time. Once the Company has an unconditional right to consideration under a contract, amounts are invoiced and contract assets are reclassified to "accounts receivable". The Company's primary contract assets relate to sales-based royalty arrangements.
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's primary contract liabilities relate to gift cards, loyalty programs and sales-based royalty arrangements.





13 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


The following table provides information about accounts receivable, contract assets and contract liabilities recorded in the combined balance sheets:
(In thousands)
 
March 2019
 
 
March 2018
Accounts receivable, net
 
$
299,328

 
 
$
318,480

Contract assets (a)
 
1,930

 
 
680

Contract liabilities (b)
 
1,995

 
 
2,292

(a) 
Included in "other current assets" in the combined balance sheets.
(b) 
Included in "accrued liabilities" in the combined balance sheets.
For the three months ended March 2019 and 2018, the Company recognized $1.3 million and $1.2 million, respectively, of revenue that was previously included in the contract liability balances. The changes in the contract asset and contract liability balances primarily result from the timing differences between the Company's satisfaction of performance obligations and the customer's payment.
Disaggregation of Revenue
The following tables disaggregate our revenues by channel and geography, which provides a meaningful depiction of how the nature, timing and uncertainty of revenues are affected by economic factors. Revenues from licensing arrangements have been included within the U.S. or Non-U.S. Wholesale channels, based on the respective region covered by the agreement. Branded Direct-to-Consumer revenues include the distribution of our products via concession retail locations internationally, Wrangler® and Lee® branded full-price stores globally and Company-owned outlet stores globally. The Branded Direct-to-Consumer channel also includes our branded products sold in our U.S.-based VF Outlet™ stores and our products that are marketed and distributed online via www.wrangler.com and www.lee.com. The Other channel includes (i) sales of VF-branded (other than Wrangler® and Lee®) and third-party branded merchandise in our VF Outlet™ stores, (ii) sales to VF for products manufactured in our plants and use of our transportation fleet and (iii) revenues from fulfilling a transition services agreement related to VF's sale of its Nautica® brand business in mid-2018.

Three Months Ended March 2019
(In thousands)
Wrangler
 
Lee
 
Other
 
Total
Channel revenues

 

 

 

U.S. Wholesale
$
276,825

 
$
100,859

 
$
6,725

 
$
384,409

Non-U.S. Wholesale
68,655

 
100,896

 

 
169,551

Branded Direct-To-Consumer
24,455

 
39,776

 

 
64,231

Other

 

 
30,153

 
30,153

Total
$
369,935

 
$
241,531

 
$
36,878

 
$
648,344

 
 
 
 
 
 
 
 
Geographic revenues

 

 

 

U.S.
$
293,869

 
$
119,120

 
$
36,878

 
$
449,867

International
76,066

 
122,411

 

 
198,477

Total
$
369,935

 
$
241,531

 
$
36,878

 
$
648,344



Kontoor Brands, Inc. Q1 FY19 Form 10-Q 14


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


 
Three Months Ended March 2018
(In thousands)
Wrangler
 
Lee
 
Other
 
Total
Channel revenues

 

 

 

U.S. Wholesale
$
263,786

 
$
110,259

 
$
7,564

 
$
381,609

Non-U.S. Wholesale
76,006

 
107,861

 

 
183,867

Branded Direct-To-Consumer
25,191

 
43,841

 

 
69,032

Other

 

 
35,155

 
35,155

Total
$
364,983

 
$
261,961

 
$
42,719

 
$
669,663

 
 
 
 
 
 
 
 
Geographic revenues

 

 

 

U.S.
$
279,640

 
$
128,964

 
$
42,719

 
$
451,323

International
85,343

 
132,997

 

 
218,340

Total
$
364,983

 
$
261,961

 
$
42,719

 
$
669,663


NOTE 5 — SALE OF ACCOUNTS RECEIVABLE

VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, non-recourse basis. Under the agreement, up to $377.5 million of VF's trade accounts receivable may be sold to the financial institution and remain outstanding at any point in time. Prior to the separation from VF, the Company had a separate agreement with VF, pursuant to which the Company's trade accounts receivable were sold as part of this program. The Company did not retain any interests in the sold accounts receivable but continued to service and collect outstanding accounts receivable on behalf of VF.

The Company removes the sold balances from "accounts receivable" in the combined balance sheet at the time of sale. The amount due from VF for these sales is separately reflected in the combined balance sheets within "due from related parties", as VF periodically remits cash to the Company for these transactions. Refer to Note 14 of the combined financial statements for additional information.
 

During the three months ended March 2019 and March 2018, the Company sold total trade accounts receivable of $245.0 million
and $243.1 million, respectively, to VF. As of March 2019, December 2018 and March 2018, $286.8 million, $544.9 million and $266.1 million, respectively, of the sold trade accounts receivable had been removed from "accounts receivable" and reflected in the combined balance sheet within "due from related parties".

The Company's portion of the funding fee charged by the financial institution is reflected in the combined statements of income within "other expense, net" and was $1.4 million and $1.0 million for the three months ended March 2019 and March 2018, respectively. Net proceeds of this program are reflected as operating activities in the combined statements of cash flows.
NOTE 6 — INVENTORIES
(In thousands)
 
March 2019
 
 
December 2018
 
March 2018
Finished products
 
$
454,763

 
 
$
396,345

 
$
439,020

Work-in-process
 
37,872

 
 
37,466

 
20,810

Raw materials
 
26,371

 
 
40,001

 
40,019

Total inventories
 
$
519,006

 
 
$
473,812

 
$
499,849





15 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


NOTE 7 — PENSION PLANS
Certain Company employees participate in U.S. and international defined benefit pension plans sponsored by VF (the "Shared Plans"), which include participants of other VF operations. The Company accounts for its participation in the Shared Plans as a multi-employer benefit plan. Accordingly, net periodic pension benefits specifically related to Company employees are reflected in the combined statements of income and the Company does not record an asset or liability in relation to the funded or unfunded status of the Shared Plans.
The Company recognized the following net pension benefits for the Shared Plans:
 
 
Three Months Ended
 
 
 
 
 
 
(In thousands)
 
March 2019
 
 
March 2018
Service cost
 
$
336

 
 
$
1,366

Non-service components
 
(965
)
 
 
(2,095
)
Net periodic pension benefit
 
$
(629
)
 
 
$
(729
)


The service cost component of net periodic pension benefit is reflected in the combined statements of income within "cost of goods sold" and "selling, general and administrative expenses". The non-service components of net periodic pension benefit is reflected in the combined statements of income within "selling, general and administrative expenses."
NOTE 8 — ACCUMULATED OTHER COMPREHENSIVE LOSS


The Company's comprehensive income consists of net income and specified components of other comprehensive loss (“OCL”), which relate to changes in assets and liabilities that are not included in net income but are instead deferred and accumulated within a separate component of equity in the combined balance sheets. The Company's comprehensive income is presented in the combined statements of comprehensive income.
The changes in accumulated OCL, all of which relate to foreign currency translation, are as follows:
(In thousands)
Accumulated OCL
Balance, December 2018
$
(145,182
)
Gains arising during period
758

Income tax effect

Balance, March 2019
$
(144,424
)
 

(In thousands)
Accumulated OCL
Balance, December 2017
$
(122,482
)
Gains arising during period
9,701

Income tax effect

Balance, March 2018
$
(112,781
)

NOTE 9 — STOCK-BASED COMPENSATION

Certain Company employees participate in the VF amended and restated 1996 Stock Compensation Plan. The following disclosures of stock-based compensation activity are based on grants related directly to Company employees.

During the three months ended March 2019, VF granted stock options to the Company's employees to purchase 4,036 shares of
 
VF's common stock at a weighted average exercise price of $82.38 per share. The exercise price of each option granted was equal to the fair market value of VF's common stock on the date of grant. Employee stock options vest in equal annual installments over three years.



Kontoor Brands, Inc. Q1 FY19 Form 10-Q 16


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates the following assumptions for inputs:

 
 
Three Months Ended March 2019
 
Expected volatility
 
25% to 27%
 
Weighted average expected volatility
 
26%
 
Expected term (in years)
 
6.1 to 7.5
 
Weighted average dividend yield
 
2.5%
 
Risk-free interest rate
 
2.5% to 2.8%
 
Weighted average fair value at date of grant
 
$18.13
 

NOTE 10 — INCOME TAXES
For purposes of the Company's combined financial statements, income taxes have been calculated as if the Company were filing income tax returns on a standalone basis. The Company's U.S. operations and certain of its non-U.S. operations historically have been included within the tax returns of VF, or VF's subsidiaries, that may not remain with the Company after the Separation. The Company believes the assumptions supporting its allocations and presentation of income taxes on a separate return basis are reasonable. However, the Company's tax results, as presented in the combined financial statements, may not be reflective of the results that the Company expects to generate in future periods.

On January 15, 2019, final regulations under Section 965 related to the transition tax were released. After analyzing these regulations during the three months ended March 2019, the Company recorded an additional net charge of $0.2 million, primarily comprised of $3.9 million of tax expense related to transition tax and a net tax benefit of $3.7 million related to a reduction in unrecognized tax benefits as a result of the final regulations.
The effective income tax rate for the three months ended March 2019 was 44.7% compared to 15.0% in the 2018 period. The three months ended March 2019 included a net discrete tax expense of $1.2 million, primarily comprised of $2.8 million of net tax expense related to unrecognized tax benefits and interest, $2.2 million of tax benefit related to stock compensation, and $0.2 million of tax expense related to adjustments of previously recorded amounts based on final regulations for the transition tax. The $1.2 million net discrete tax expense in the three months ended March 2019 increased the effective income tax rate by 4.4%.
The effective tax rate for the three months ended March 2018 included a net discrete tax benefit of $6.3 million, which included $5.5 million of net tax benefits related to the realization of previously
 
unrecognized tax benefits and interest and $0.8 million of tax benefit related to stock compensation. The $6.3 million net discrete tax benefit in the 2018 period decreased the effective income tax rate by 6.7%.
Without discrete items, the effective income tax rate for the three months ended March 2019 increased by 18.6% compared with the 2018 period primarily due to losses incurred in the current period for certain Central and South American jurisdictions for which no related tax benefit was recognized.
The Company is part of VF's consolidated U.S. federal income tax return, as well as separate and combined VF income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service examinations for VF's tax years through 2014 have been effectively settled. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that the Company's provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on the Company's combined financial statements. Management believes that some of these audits and negotiations will conclude during the next 12 months.
During the three months ended March 2019, the amount of net unrecognized tax benefits and associated interest decreased by $2.6 million to $48.7 million. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next 12 months by approximately $6.3 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $6.1 million would reduce income tax expense.
NOTE 11 — REPORTABLE SEGMENT INFORMATION

The chief operating decision maker allocates resources and assesses performance based on a global brand view which determines the Company's operating segments. These operating segments are the basis for the Company's reportable segments, as described below:

 
Wrangler — Wrangler® branded denim, apparel and accessories.

Lee — Lee® branded denim, apparel and accessories.

In addition, we report an "Other" category for purposes of reconciliation of revenues and profit, but the Other category is not


17 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


considered a reportable segment. Other includes sales (i) of VF-branded products (other than Wrangler® and Lee® branded products, which are reported in the respective segments above) and third-party branded merchandise at VF Outlet™ stores, (ii) of Rock and Republic® branded apparel, (iii) to VF for products manufactured in our plants and use of our transportation fleet and, (iv) from fulfillment of a transition services agreement associated with VF's sale of its Nautica® brand business in mid-2018.

Accounting policies utilized for internal management reporting at the individual segments are consistent with those included in Note 1 of the combined financial statements of our 2018 Form 10, except as noted below.

The Company's combined statements of income include costs for certain centralized functions and programs provided and administered by VF that are charged directly to VF's businesses, including the Company. These centralized functions and programs include, but are not limited to, information technology, human resources, accounting shared services, supply chain, insurance, and the service cost component of net periodic pension benefit. These historical allocations have been included in the measurement of segment profit below.
 

In addition, for purposes of preparing these combined financial statements on a "carve-out" basis, we have allocated a portion of VF's total corporate expenses to the Company. These expense allocations include the cost of corporate functions and resources provided by or administered by VF including, but not limited to, executive management, finance, accounting, legal, human resources, and related benefit costs associated with such functions, such as stock-based compensation and the non-service components of net periodic pension benefit. Allocations also include the cost of operating VF's corporate headquarters located in Greensboro, North Carolina. The Company has also been allocated the non-service components of net periodic pension benefit. These additional allocations are reported as corporate and other expenses in the table below.

Corporate and other expenses, net related party interest income, and net other interest income are not controlled by segment management and therefore are excluded from the measurement of segment profit.


Financial information for the Company's reportable segments is as follows:
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
March 2019
 
 
March 2018
Segment revenues:
 
 
 
 
 
Wrangler
 
$
369,935

 
 
$
364,983

Lee
 
241,531

 
 
261,961

Other
 
36,878

 
 
42,719

Total segment revenues
 
$
648,344

 
 
$
669,663

Segment profit:
 
 
 
 
 
Wrangler
 
$
23,665

 
 
$
62,946

Lee
 
17,633

 
 
35,989

Other
 
(3,085
)
 
 
(1,749
)
Total segment profit
 
$
38,213

 
 
$
97,186

Corporate and other expenses
 
(13,989
)
 
 
(5,975
)
Related party interest income, net
 
2,339

 
 
1,651

Other interest income, net
 
1,325

 
 
917

Income before income taxes
 
$
27,888

 
 
$
93,779


NOTE 12 — FAIR VALUE MEASUREMENTS
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s 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


Kontoor Brands, Inc. Q1 FY19 Form 10-Q 18


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)


assumptions that market participants would use in pricing the asset or liability.

The following table summarizes financial assets and financial liabilities that are measured and recorded in the combined financial statements at fair value on a recurring basis:
 
Total Fair  Value
 
Fair Value Measurement Using
(In thousands)
 
Level 1
 
Level 2
 
Level 3
March 2019
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
7,686

 
$
7,686

 
$

 
$

Time deposits
3,691

 
3,691

 

 

Investment securities
50,782

 
50,782

 

 

Financial liabilities:
 
 
 
 
 
 
 
Deferred compensation
50,782

 

 
50,782

 

 
Total Fair  Value
 
Fair Value Measurement Using
(In thousands)
 
Level 1
 
Level 2
 
Level 3
December 2018
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
21,687

 
$
21,687

 
$

 
$

Time deposits
2,518

 
2,518

 

 

Investment securities
46,666

 
46,666

 

 

Financial liabilities:
 
 
 
 
 
 
 
Deferred compensation
46,666

 

 
46,666

 

 

The Company's cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. Investment securities are held in VF's deferred compensation plans as an economic hedge of the related deferred compensation liabilities. These investments are mutual funds (Level 1) that are valued based on quoted prices in active markets. Liabilities related to VF's deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.

All other financial assets and financial liabilities are recorded in the combined financial statements at cost. These other financial assets
 
and financial liabilities include cash held as demand deposits, accounts receivable, due from related parties, related party notes receivable, short-term borrowings, accounts payable, due to related parties, related party notes payable and accrued liabilities. At March 2019 and December 2018, carrying value approximated fair value for the aforementioned financial assets and liabilities due to the short-term nature of these instruments. The Company did not transfer any assets or liabilities among the levels of the fair value hierarchy during the three months ended March 2019 or the fiscal year ended December 2018.
NOTE 13 — RESTRUCTURING

The Company typically incurs restructuring charges related to cost optimization of business activities. Of the $22.8 million of restructuring charges recognized during the three months ended March 2019, $12.0 million were reflected in "selling, general and administrative expenses" and $10.8 million were reflected in "cost of goods sold". Additionally, all of the $1.9 million of restructuring charges recognized during the three months ended March 2018 was reflected in "selling, general and administrative expenses."

 
The Company did not incur significant incremental costs related to the previously approved initiatives during the three months ended March 2019. Of the $36.6 million total restructuring accrual reported in the combined balance sheet at March 2019, $35.8 million is expected to be paid out within the next 12 months and is classified within "accrued liabilities". The remaining $0.8 million is expected be paid out beyond the next 12 months and thus is classified within "other liabilities".



19 Kontoor Brands, Inc. Q1 FY19 Form 10-Q

KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)



The components of the restructuring charges are as follows:
 
 
Three Months Ended
 
 
 
 
 
 
(in thousands)
 
March 2019
 
 
March 2018
Severance and employee-related benefits
 
$
13,157

 
 
$
1,936

Asset impairments
 
1,596

 
 

Inventory write-downs
 
4,403

 
 

Other
 
3,660

 
 

Total restructuring charges
 
$
22,816

 
 
$
1,936


Restructuring costs by business segment are as follows:
 
 
Three Months Ended
 
 
 
 
 
 
(In thousands)
 
March 2019
 
 
March 2018
Wrangler
 
$
16,422

 
 
$
826

Lee
 
6,224

 
 
677

Other
 
170

 
 
433

Total
 
$
22,816

 
 
$
1,936


The activity in the restructuring accrual for the three-month periods ended March 2019 and 2018 is as follows:
(In thousands)
Severance
 
Other
 
Total
Accrual at December 2018
$
23,249

 
$

 
$
23,249

Charges
13,157

 
3,660

 
16,817

Cash payments
(3,046
)
 

 
(3,046
)
Adjustments to accruals
(230
)
 

 
(230
)
Currency translation
(17
)
 
(197
)
 
(214
)
Accrual at March 2019
$
33,113

 
$
3,463

 
$
36,576



(in thousands)
Severance

Other

Total
Accrual at December 2017
$
11,007


$


$
11,007

Charges
1,936




1,936

Cash payments
(837
)



(837
)
Adjustments to accruals
(197
)



(197
)
Currency translation
4




4

Accrual at March 2018
$
11,913


$


$
11,913


NOTE 14 — RELATED PARTY TRANSACTIONS

The combined financial statements have been prepared on a standalone basis and are derived from the consolidated financial statements and accounting records of VF. The following discussion summarizes activity between the Company and VF (and its affiliates that were not part of the spin-off transaction) referred to hereafter as VF.

Allocation of General Corporate Expenses

 
The combined statements of income include expenses for certain centralized functions and other programs provided and administered by VF that were charged directly to the Company. In addition, for purposes of preparing these combined financial statements on a carve-out basis, we have allocated a portion of VF's total corporate expenses to the Company. See Note 1 in the 2018 Form 10 for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing these financial statements on a carve-out basis.



Kontoor Brands, Inc. Q1 FY19 Form 10-Q 20


KONTOOR BRANDS, INC.
Notes to Combined Financial Statements
(Unaudited)





Related Party Sales and Purchases

During the three months ended March 2019 and 2018, the Company's sales to VF totaled $10.6 million and $13.5 million, respectively, which are included in "net revenues" in the combined statements of income. The Company's cost of goods sold includes items purchased from VF totaling $0.3 million and $0.8 million during the three months ended March 2019 and 2018, respectively. At March 2019, December 2018 and March 2018, the aggregate amount of inventories purchased from VF that remained on the Company's combined balance sheets were $1.2 million, $0.8 million and $1.9 million, respectively.

Related Party Notes

At March 2019, December 2018 and March 2018, the Company had related party notes receivable of $517.9 million, $517.9 million and $546.7 million, respectively, with VF as the counterparty. These notes are short-term and are recorded in the combined balance sheets in "related party notes receivable". The weighted-average interest rate for these notes was approximately 3.7%, 3.4% and 2.4% at March 2019, December 2018 and March 2018, respectively.

At March 2019, December 2018 and March 2018, the Company had related party notes payable of $241.9 million, $269.1 million and $269.1 million, respectively, with VF as the counterparty. These notes are short-term and are recorded within the combined balance
 



sheets in "related party notes payable". The weighted-average interest rate for these notes was approximately 3.7%, 3.4% and 2.3% at March 2019, December 2018 and March 2018, respectively.

The Company recorded net interest income related to these notes of $2.3 million and $1.7 million during the three months ended March 2019 and 2018, respectively, which is reflected in "related party interest income, net" within the combined statements of income.

Due To and From Related Parties

Balances in due to and from related parties are generated by (i) the sale of trade accounts receivable to VF, as discussed in Note 5 to the combined financial statements, (ii) hedging agreements with VF, and (iii) sourcing payable to VF.

During the periods presented, the Company did not enter into derivative contracts with external counterparties. However, VF entered into derivative contracts with external counterparties to hedge certain foreign currency transactions with exposure to the euro, Mexican peso, Polish zloty, Canadian dollar, and other currencies. The Company entered into offsetting internal contracts with VF with maturities up to 20 months, and cash settled with VF on any asset or liability that arose under these contracts.

Due from related parties, current consists of the following:

(in thousands)
 
March 2019
 
 
December 2018
 
March 2018
Sale of trade accounts receivable
 
$
286,816

 
 
$
544,858

 
$
266,112

Hedging agreements with VF
 
4,266