Kontoor Brands Announces Second Quarter 2019 Results

Aug 08, 2019 Press Release

Second Quarter 2019 GAAP EPS of $0.67, Adjusted EPS of $0.96

Reaffirms Full-Year 2019 Outlook

GREENSBORO, N.C.--(BUSINESS WIRE)-- Kontoor Brands, Inc. (NYSE:KTB), a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, today reported financial results for its second quarter ended June 29, 2019. Kontoor became an independent, publicly traded company on May 23, 2019.

“The restructuring and cost savings actions we’ve taken to simplify and stabilize the organization are paying off and are setting the foundation for improved profitability in the second half of 2019 and beyond,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “We will remain disciplined in our approach and focused on our total shareholder return goal of 8 to 10 percent supported by an industry leading dividend.”

Second Quarter 2019 Income Statement Review

This release refers to “adjusted” amounts that exclude the impact of restructuring and separation costs, changes in our business model and other adjustments, as well as “constant currency” figures, which are further described in the Non-GAAP Financial Measures paragraph below.

Revenue decreased 8 percent to $610 million on a reported basis in the second quarter of 2019 and was down 7 percent in constant currency. On an adjusted basis, revenue declined 6 percent to $602 million.

Adjusted revenue declines, during the quarter, were primarily driven by three factors:

  • Impacts of a major U.S. retailer bankruptcy in Q4 2018, which represented about 2 points of the decline;
  • Actions to exit an underperforming country in Europe and to change business models in select markets, which contributed an additional 2 points to the decline; and,
  • Foreign currency headwinds that impacted revenues by approximately 1 point.

During the second quarter, U.S. revenue was $487 million, down 3 percent on a reported basis. Adjusted U.S. revenues declined 1 percent. International revenue was $123 million, down 25 percent on a reported basis and down 19 percent in constant currency, driven primarily by strategic actions to exit an underperforming country, as well as business model changes in select markets. Adjusted international revenues declined 23 percent, with strategic actions and timing shifts of shipments largely driving the declines.

Wrangler® brand global revenue decreased 8 percent to $364 million on a reported basis, down 7 percent in constant currency, largely driven by international performance. U.S. revenue declined 3 percent due to timing shifts of shipments and the customer bankruptcy. Adjusted global revenues declined 8 percent. Excluding currency and the impact of the customer bankruptcy, Wrangler® adjusted revenue would have been down 6 percent in the quarter. Of note, excluding the bankruptcy, Wrangler’s U.S wholesale performance was up 2 percent in the first half of 2019, and we anticipate global sales to accelerate in the second half of this year.

Lee® brand global revenue decreased 5 percent to $207 million on a reported basis, down 3 percent in constant currency. Adjusted global revenues declined 5 percent. Excluding currency and the impact of the customer bankruptcy, Lee® adjusted revenue would have increased 1 percent in the quarter.

Other (including non-branded VF Outlet™ and Rock & Republic®) global revenue decreased 20 percent to $39 million, while on an adjusted basis, Other global revenue decreased 2 percent to $35 million.

Gross margin decreased 160 basis points to 38.6 percent on a reported basis. On an adjusted basis, gross margin was down 110 basis points to 40.0 percent. Declines were primarily due to charges associated with global restructuring activities and related actions, as well as the impacts of unfavorable channel mix driven by lower international sales and higher levels of distressed sales, as well as negative impacts from foreign currency. The comparative performance in gross margin will improve in the second half of the year versus the first half.

Selling, General & Administrative (SG&A) expenses were $182 million on a reported basis, up 110 basis points, as a percent of revenue. On an adjusted basis, SG&A was $167 million, down 40 basis points as a percent of revenue, driven by expense control.

Operating income on a reported basis was $54 million. On an adjusted basis, operating income was $74 million, down 11 percent. Operating margin on a reported basis declined 260 basis points to 8.8 percent. Adjusted operating margin decreased 70 basis points to 12.3 percent.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $60 million, down 26 percent. Adjusted EBITDA was $82 million, down 10 percent. EBITDA margin on a reported basis declined 250 basis points to 9.9 percent. Adjusted EBITDA margin decreased 60 basis points to 13.6 percent.

Earnings per share was $0.67 on a reported basis. Adjusted earnings per share was $0.96.

Balance Sheet

The company ended second quarter 2019 with $77 million in cash and cash equivalents, and approximately $1 billion in total debt, after paying down approximately $50 million of debt during the quarter.

On July 23, 2019, Kontoor Brands’ Board of Directors declared a regular quarterly cash dividend of $0.56 per share payable on September 20, 2019, to shareholders of record at the close of business on September 10, 2019.

Inventory at the end of second quarter 2019 was $538 million, up 9 percent compared to the prior year period, primarily due to inventory built in anticipation of plants closed during the quarter. At year-end, inventory levels are expected to improve and be relatively flat to below prior year levels.

Full Year 2019 Outlook Reaffirmed

“We have the pieces in place and see a clear path to achieving our long-term revenue growth, margin improvement, and cash generation goals,” said Baxter. “These improvements start to gain traction in the second half of 2019 as our business model changes and cost improvement initiatives begin to take hold.”

Kontoor Brands’ outlook for the fiscal year ended December 28, 2019, remains unchanged:

  • Revenue is expected to exceed $2.5 billion, reflecting a mid-single digit decline compared with full year 2018 adjusted revenue. Excluding the negative impact of foreign currency exchange rates, impacts of a prior year U.S. retailer bankruptcy, and strategic business exits, full year 2019 revenue is expected to be relatively consistent with full year 2018 adjusted revenue. First half reported revenue declined mid-single digits and the company expects second half revenue to improve, with the fourth quarter benefiting the most from strategic actions and the Q4 2018 customer bankruptcy comparison.
  • Adjusted EBITDA is expected to range between $340 million and $360 million, reflecting a mid-single digit to low double-digit decline compared with full year 2018 adjusted EBITDA. As anticipated, the impacts of strategic actions and the prior year U.S. retailer bankruptcy weighed on our second quarter performance. We expect to see improved second half performance as benefits from restructuring and cost savings initiatives begin to more fully manifest. As planned, inventory levels are expected to remain elevated during the third quarter of the year due to the inventory built during the second quarter in anticipation of plants closed. The company expects second half adjusted EBITDA to be more weighted to the fourth quarter.
  • Capital Expenditures are expected to range between $55 million and $65 million, including approximately $30 million to $40 million to support the design and implementation of a global enterprise resource planning (ERP) system. As previously announced, the global ERP system implementation is expected to require approximately $80 million to $90 million of capital investment during a two-to-three year period and is expected to result in significant efficiencies and cost savings, once fully implemented.
  • Other full year assumptions include an effective tax rate of approximately 24 percent. Interest expense should be approximately $40 million in 2019, or $60 million on an annualized basis.

Reaffirmed 2020 to 2021 Financial Roadmap

  • Revenue is expected to increase at a low-single digit compound annual growth rate (CAGR) over the period.
  • Adjusted EBITDA is expected to increase at a mid-single digit CAGR over the period.
  • Capital Expenditures are expected to range between $105 million and $110 million in aggregate over the period.

Webcast Information

Kontoor Brands will host its second quarter 2019 conference call beginning at 8:30 a.m. Eastern Time today, August 8, 2019. The conference will be broadcast live via the internet, accessible at https://www.kontoorbrands.com/investors. For those unable to listen to the live broadcast, an archived version will be available at the same location for three months.

Non-GAAP Financial Measures

Constant Currency - This release refers to “reported” amounts in accordance with U.S. GAAP, which include translation and transactional impacts from changes in foreign currency exchange rates. This release also refers to “constant currency” amounts, which exclude the translation impact of changes in foreign currency exchange rates.

Adjusted Amounts - This release refers to adjusted amounts that exclude the impact of restructuring and separation costs, changes in our business model and other adjustments.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures are presented in the supplemental financial information included with this release that identifies and quantifies all reconciling adjustments and provides management’s view of why this information is useful to investors. Such non-GAAP measures should be viewed in addition to, and not as an alternative for, reported results under GAAP. The non-GAAP measures used by Kontoor Brands in this press release may be different from the measures used by other companies.

About Kontoor Brands

Kontoor Brands, Inc. (NYSE:KTB) is a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands: Wrangler® and Lee®. Kontoor designs, manufactures and distributes superior high-quality products that look good and fit right, giving people around the world the freedom and confidence to express themselves. Kontoor Brands is a purpose-led organization focused on leveraging its global platform, strategic sourcing model and best-in-class supply chain to drive brand growth and deliver long-term value for its stakeholders.

Forward-Looking Statements

Certain statements included in this release and attachments are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting Kontoor Brands and therefore involve several risks and uncertainties. You can identify these statements by the fact that they use words such as “will,” “anticipate,” “estimate,” “expect,” “should,” and “may” and other words and terms of similar meaning or use of future dates. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of Kontoor to differ materially from those expressed or implied by forward-looking statements in this release include, but are not limited to: risks associated with Kontoor Brands’ spin-off from VF Corporation, including the risk of disruption to Kontoor’s business in connection with the spin-off and that Kontoor could lose revenue as a result of such disruption; the risk that Kontoor does not realize all of the expected benefits of the spin-off; the risk that the spin-off will not be tax-free for U.S. federal income tax purposes; and the risk that there will be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of Kontoor. Other risks for Kontoor include foreign currency fluctuations; the level of consumer demand for apparel; disruption to distribution systems; reliance on a small number of large customers; the financial strength of customers; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets; response to changing fashion trends, evolving consumer preferences and changing patterns of consumer behavior, intense competition from online retailers, manufacturing and product innovation; increasing pressure on margins; ability to implement its business strategy; ability to grow its international and direct-to-consumer businesses; Kontoor’s and its vendors’ ability to maintain the strength and security of information technology systems; the risk that Kontoor’s facilities and systems and those of third-party service providers may be vulnerable to and unable to anticipate or detect data security breaches and data or financial loss; ability to properly collect, use, manage and secure consumer and employee data; stability of manufacturing facilities and foreign suppliers; continued use by suppliers of ethical business practices; ability to accurately forecast demand for products; continuity of members of management; ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; maintenance by licensees and distributors of the value of Kontoor’s brands; ability to execute and integrate acquisitions; changes in tax laws and liabilities; legal, regulatory, political and economic risks; the risk of economic uncertainty associated with the pending exit of the United Kingdom from the European Union ("Brexit") or any other similar referendums that may be held; and adverse or unexpected weather conditions. More information on potential factors that could affect Kontoor’s financial results is included from time to time in Kontoor’s public reports filed with the SEC and Kontoor Brands’ Registration Statement on Form 10 also filed with the SEC.

 

 

KONTOOR BRANDS, INC.

Condensed Combined Statements of Income

(Unaudited)

(In thousands)

 

 

 

 

Three Months Ended June

 

%

 

Six Months Ended June

 

%

 

 

2019

 

2018

 

Change

 

2019

 

2018

 

Change

Net revenues

 

$

609,746

 

 

$

663,856

 

 

(8)%

 

$

1,258,090

 

 

$

1,333,519

 

 

(6)%

Costs and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

374,177

 

 

396,785

 

 

(6)%

 

775,202

 

 

779,206

 

 

(1)%

Selling, general and administrative expenses

 

182,049

 

 

191,337

 

 

(5)%

 

404,173

 

 

386,171

 

 

5%

Total costs and operating expenses

 

556,226

 

 

588,122

 

 

(5)%

 

1,179,375

 

 

1,165,377

 

 

1%

Operating income

 

53,520

 

 

75,734

 

 

(29)%

 

78,715

 

 

168,142

 

 

(53)%

Interest income from former parent, net

 

1,423

 

 

1,660

 

 

(14)%

 

3,762

 

 

3,311

 

 

14%

Interest expense

 

(7,638

)

 

(416

)

 

*

 

(7,736

)

 

(781

)

 

*

Interest income

 

1,408

 

 

1,386

 

 

2%

 

2,831

 

 

2,668

 

 

6%

Other expense, net

 

(1,370

)

 

(1,241

)

 

10%

 

(2,341

)

 

(2,438

)

 

(4)%

Income before income taxes

 

47,343

 

 

77,123

 

 

(39)%

 

75,231

 

 

170,902

 

 

(56)%

Income taxes

 

9,357

 

 

16,665

 

 

(44)%

 

21,832

 

 

30,748

 

 

(29)%

Net income

 

$

37,986

 

 

$

60,458

 

 

(37)%

 

$

53,399

 

 

$

140,154

 

 

(62)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.67

 

 

$

1.07

 

 

 

 

$

0.94

 

 

$

2.47

 

 

 

Diluted

 

$

0.67

 

 

$

1.07

 

 

 

 

$

0.94

 

 

$

2.47

 

 

 

Basis of presentation: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 each year. For presentation purposes herein, all references to periods ended June 2019 and June 2018 relate to the 13-week and 26-week fiscal periods ended June 29, 2019 and June 30, 2018, respectively. References to December 2018 relate to the balance sheet as of December 29, 2018.

* Calculation not meaningful

 

KONTOOR BRANDS, INC.

Condensed Combined Balance Sheets

(Unaudited)

(In thousands)

 

 

 

June 2019

 

December 2018

 

June 2018

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and equivalents

 

$

76,687

 

 

$

96,776

 

 

$

86,356

 

Accounts receivable

 

254,049

 

 

252,966

 

 

262,525

 

Due from related parties, current

 

 

 

547,690

 

 

553,976

 

Related party notes receivable

 

 

 

517,940

 

 

546,740

 

Inventories

 

538,168

 

 

473,812

 

 

491,836

 

Other current assets

 

79,397

 

 

52,014

 

 

45,202

 

Total current assets

 

948,301

 

 

1,941,198

 

 

1,986,635

 

Due from related parties, noncurrent

 

 

 

611

 

 

 

Property, plant and equipment, net

 

131,727

 

 

138,449

 

 

142,263

 

Operating lease assets

 

90,416

 

 

 

 

 

Intangible assets, net

 

50,953

 

 

53,059

 

 

55,263

 

Goodwill

 

213,761

 

 

214,516

 

 

216,080

 

Other assets

 

153,044

 

 

110,632

 

 

120,439

 

TOTAL ASSETS

 

$

1,588,202

 

 

$

2,458,465

 

 

$

2,520,680

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Short-term borrowings

 

$

2,829

 

 

$

3,215

 

 

$

5,062

 

Current portion of long-term debt

 

26,250

 

 

 

 

 

Accounts payable

 

159,214

 

 

134,129

 

 

136,620

 

Due to related parties, current

 

 

 

16,140

 

 

59,424

 

Related party notes payable

 

 

 

269,112

 

 

269,112

 

Accrued liabilities

 

177,582

 

 

194,228

 

 

166,881

 

Operating lease liabilities, current

 

34,439

 

 

 

 

 

Total current liabilities

 

400,314

 

 

616,824

 

 

637,099

 

Operating lease liabilities, noncurrent

 

58,594

 

 

 

 

 

Other liabilities

 

86,189

 

 

118,189

 

 

115,894

 

Long-term debt

 

960,937

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Total liabilities

 

1,506,034

 

 

735,013

 

 

752,993

 

Total equity

 

82,168

 

 

1,723,452

 

 

1,767,687

 

TOTAL LIABILITIES AND EQUITY

 

$

1,588,202

 

 

$

2,458,465

 

 

$

2,520,680

 

 
 

KONTOOR BRANDS, INC.

Condensed Combined Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June

 

 

2019

 

2018

OPERATING ACTIVITIES

 

 

 

 

Net income

 

$

53,399

 

 

$

140,154

 

Depreciation and amortization

 

16,025

 

 

16,089

 

Stock-based compensation

 

11,473

 

 

5,552

 

Other, net

 

499,254

 

 

(426,793

)

Cash provided (used) by operating activities

 

580,151

 

 

(264,998

)

INVESTING ACTIVITIES

 

 

 

 

Capital expenditures

 

(9,300

)

 

(13,035

)

Repayments from related party notes receivable

 

517,940

 

 

 

Other, net

 

1,081

 

 

6,050

 

Cash provided (used) by investing activities

 

509,721

 

 

(6,985

)

FINANCING ACTIVITIES

 

 

 

 

Proceeds from issuance of long-term debt

 

1,050,000

 

 

 

Other, net (including transfers to former parent)

 

(2,160,956

)

 

280,534

 

Cash (used) provided by financing activities

 

(1,110,956

)

 

280,534

 

Effect of foreign currency rate changes on cash and cash equivalents

 

995

 

 

(3,006

)

Net change in cash and cash equivalents

 

(20,089

)

 

5,545

 

Cash and cash equivalents – beginning of period

 

96,776

 

 

80,811

 

Cash and cash equivalents – end of period

 

$

76,687

 

 

$

86,356

 

 

 

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reportable Segment Information

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended June

 

 

 

% Change
Constant
Currency (a)

 

 

2019

 

2018

 

% Change

 

Segment revenues:

 

 

 

 

 

 

 

 

Wrangler

 

$

363,992

 

 

$

397,745

 

 

(8)%

 

(7)%

Lee

 

206,908

 

 

217,773

 

 

(5)%

 

(3)%

Other (b)

 

38,846

 

 

48,338

 

 

(20)%

 

(20)%

Total segment revenues

 

$

609,746

 

 

$

663,856

 

 

(8)%

 

(7)%

Segment profit:

 

 

 

 

 

 

 

 

Wrangler

 

$

56,980

 

 

$

67,670

 

 

(16)%

 

(18)%

Lee

 

13,747

 

 

18,065

 

 

(24)%

 

(21)%

Other (b)

 

1,805

 

 

1,363

 

 

32%

 

33%

Total segment profit

 

72,532

 

 

87,098

 

 

(17)%

 

(18)%

Corporate and other expenses

 

(20,382

)

 

(12,605

)

 

62%

 

62%

Interest income from former parent, net

 

1,423

 

 

1,660

 

 

(14)%

 

(14)%

Interest expense

 

(7,638

)

 

(416

)

 

*

 

*

Interest income

 

1,408

 

 

1,386

 

 

2%

 

2%

Income before income taxes

 

$

47,343

 

 

$

77,123

 

 

(39)%

 

(40)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June

 

 

 

% Change
Constant
Currency (a)

 

 

2019

 

2018

 

% Change

 

Segment revenues:

 

 

 

 

 

 

 

 

Wrangler

 

$

733,927

 

 

$

762,728

 

 

(4)%

 

(2)%

Lee

 

448,439

 

 

479,734

 

 

(7)%

 

(4)%

Other (b)

 

75,724

 

 

91,057

 

 

(17)%

 

(17)%

Total segment revenues

 

$

1,258,090

 

 

$

1,333,519

 

 

(6)%

 

(4)%

Segment profit:

 

 

 

 

 

 

 

 

Wrangler

 

$

80,645

 

 

$

130,616

 

 

(38)%

 

(48)%

Lee

 

31,380

 

 

54,054

 

 

(42)%

 

(41)%

Other (b)

 

(1,280

)

 

(387

)

 

(231)%

 

(230)%

Total segment profit

 

110,745

 

 

184,283

 

 

(40)%

 

(47)%

Corporate and other expenses

 

(34,371

)

 

(18,579

)

 

85%

 

85%

Interest income from former parent, net

 

3,762

 

 

3,311

 

 

14%

 

14%

Interest expense

 

(7,736

)

 

(781

)

 

*

 

*

Interest income

 

2,831

 

 

2,668

 

 

6%

 

7%

Income before income taxes

 

$

75,231

 

 

$

170,902

 

 

(56)%

 

(63)%

(a) Refer to constant currency definition on the following pages.

(b) Other is included for purposes of reconciliation of revenues and profit, but it is not 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 fulfilling a transition services agreement related to VF's sale of its Nautica® brand business in mid-2018.

* Calculation not meaningful

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reportable Segment Information – Constant Currency Basis (Non-GAAP)

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended June 2019

 

 

As Reported

 

Adjust for Foreign

 

 

 

 

under GAAP

 

Currency Exchange

 

Constant Currency

Segment revenues:

 

 

 

 

 

 

Wrangler

 

$

363,992

 

 

$

5,452

 

 

$

369,444

 

Lee

 

206,908

 

 

4,462

 

 

211,370

 

Other

 

38,846

 

 

17

 

 

38,863

 

Total segment revenues

 

$

609,746

 

 

$

9,931

 

 

$

619,677

 

Segment profit:

 

 

 

 

 

 

Wrangler

 

$

56,980

 

 

$

(1,356

)

 

$

55,624

 

Lee

 

13,747

 

 

603

 

 

14,350

 

Other

 

1,805

 

 

3

 

 

1,808

 

Total segment profit

 

72,532

 

 

(750

)

 

71,782

 

Corporate and other expenses

 

(20,382

)

 

(62

)

 

(20,444

)

Interest income from former parent, net

 

1,423

 

 

 

 

1,423

 

Interest expense

 

(7,638

)

 

(375

)

 

(8,013

)

Interest income

 

1,408

 

 

9

 

 

1,417

 

Income before income taxes

 

$

47,343

 

 

$

(1,178

)

 

$

46,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 2019

 

 

As Reported

 

Adjust for Foreign

 

 

 

 

under GAAP

 

Currency Exchange

 

Constant Currency

Segment revenues:

 

 

 

 

 

 

Wrangler

 

$

733,927

 

 

$

14,424

 

 

$

748,351

 

Lee

 

448,439

 

 

13,973

 

 

462,412

 

Other

 

75,724

 

 

18

 

 

75,742

 

Total segment revenues

 

$

1,258,090

 

 

$

28,415

 

 

$

1,286,505

 

Segment profit:

 

 

 

 

 

 

Wrangler

 

$

80,645

 

 

$

(12,747

)

 

$

67,898

 

Lee

 

31,380

 

 

299

 

 

31,679

 

Other

 

(1,280

)

 

2

 

 

(1,278

)

Total segment profit

 

110,745

 

 

(12,446

)

 

98,299

 

Corporate and other expenses

 

(34,371

)

 

(62

)

 

(34,433

)

Interest income from former parent, net

 

3,762

 

 

 

 

3,762

 

Interest expense

 

(7,736

)

 

(325

)

 

(8,061

)

Interest income

 

2,831

 

 

18

 

 

2,849

 

Income before income taxes

 

$

75,231

 

 

$

(12,815

)

 

$

62,416

 

Constant Currency Financial Information

The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company from translating its foreign revenues and expenses into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results. As a supplement to our reported operating results, we present constant currency financial information, which is a non-GAAP financial measure that excludes the impact of translating foreign currencies into U.S. dollars. We use constant currency information to provide a framework to assess how our business performed excluding the effects of changes in the rates used to calculate foreign currency translation. Management believes this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses.

To calculate foreign currency translation on a constant currency basis, operating results for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

These constant currency performance measures should be viewed in addition to, and not as an alternative for, reported results under GAAP. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Condensed Combined Statements of Income by Quarter

(Unaudited)

(In thousands)

 

 

 

2018

 

 

March

 

June

 

September

 

December

 

Full Year

Net revenues

 

$

669,663

 

 

$

663,856

 

 

$

704,246

 

 

$

726,233

 

 

$

2,763,998

 

Costs and operating expenses

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

382,421

 

 

396,785

 

 

424,053

 

 

446,176

 

 

1,649,435

 

Selling, general and administrative expenses

 

194,834

 

 

191,337

 

 

184,909

 

 

210,441

 

 

781,521

 

Total costs and operating expenses

 

577,255

 

 

588,122

 

 

608,962

 

 

656,617

 

 

2,430,956

 

Operating income

 

92,408

 

 

75,734

 

 

95,284

 

 

69,616

 

 

333,042

 

Interest income from former parent, net

 

1,651

 

 

1,660

 

 

2,104

 

 

2,323

 

 

7,738

 

Interest expense

 

(365

)

 

(416

)

 

(200

)

 

(2,755

)

 

(3,736

)

Interest income

 

1,282

 

 

1,386

 

 

1,508

 

 

4,127

 

 

8,303

 

Other expense, net

 

(1,197

)

 

(1,241

)

 

(2,084

)

 

(746

)

 

(5,269

)

Income before income taxes

 

93,779

 

 

77,123

 

 

96,612

 

 

72,565

 

 

340,078

 

Income taxes

 

14,083

 

 

16,665

 

 

25,594

 

 

20,663

 

 

77,005

 

Net income

 

$

79,696

 

 

$

60,458

 

 

$

71,018

 

 

$

51,902

 

 

$

263,073

 

Basis of presentation: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to the March, June, September and December quarters of 2018 relate to the 13-week fiscal periods ended March 31, 2018, June 30, 2018, September 29, 2018, and December 29, 2018, respectively. The Company presented its 2018 unaudited condensed combined statements of income by quarter in its press release dated June 20, 2019 in order to provide investors with comparable financial information. Selling, general and administrative expenses in the June and September 2018 quarters presented above have been revised to correct the allocation of a $3.5 million pre-tax pension curtailment charge from the September 2018 quarter to the June 2018 quarter.

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reconciliation of Adjusted Financial Measures by Quarter (Non-GAAP)

(Unaudited)

(Thousands, except per share amounts)

 

 

2019

 

2018

 

March

 

June

 

March

 

June

 

September

 

December

 

Full Year

Net revenues - as reported under GAAP

$

648,344

 

 

$

609,746

 

 

$

669,663

 

 

$

663,856

 

 

$

704,246

 

 

$

726,233

 

 

$

2,763,998

 

Business model changes(a)

(18,416

)

 

(7,389

)

 

(21,694

)

 

(21,027

)

 

(22,248

)

 

(16,363

)

 

(81,332

)

Adjusted net revenues

$

629,928

 

 

$

602,357

 

 

$

647,969

 

 

$

642,829

 

 

$

681,998

 

 

$

709,870

 

 

$

2,682,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold - as reported under GAAP

$

401,025

 

 

$

374,177

 

 

$

382,421

 

 

$

396,785

 

 

$

424,053

 

 

$

446,176

 

 

$

1,649,435

 

Restructuring & separation costs(b)

(12,847

)

 

(4,807

)

 

 

 

(1,662

)

 

(129

)

 

(10,731

)

 

(12,522

)

Business model changes(a)

(17,831

)

 

(6,363

)

 

(15,443

)

 

(16,489

)

 

(20,207

)

 

(13,934

)

 

(66,073

)

Other adjustments(c)

(186

)

 

(1,618

)

 

(2,968

)

 

281

 

 

631

 

 

(19

)

 

(2,075

)

Adjusted cost of goods sold

$

370,161

 

 

$

361,389

 

 

$

364,010

 

 

$

378,915

 

 

$

404,348

 

 

$

421,492

 

 

$

1,568,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses - as reported under GAAP

$

222,124

 

 

$

182,049

 

 

$

194,834

 

 

$

191,337

 

 

$

184,909

 

 

$

210,441

 

 

$

781,521

 

Restructuring & separation costs(b)

(23,734

)

 

(7,954

)

 

(1,936

)

 

(355

)

 

(1,087

)

 

(12,715

)

 

(16,093

)

Business model changes(a)

(3,724

)

 

(2,410

)

 

(6,175

)

 

(6,203

)

 

(4,460

)

 

(4,787

)

 

(21,625

)

Other adjustments(c)

(2,638

)

 

(4,602

)

 

2,290

 

 

(4,216

)

 

5,437

 

 

11,765

 

 

15,276

 

Adjusted selling, general and administrative expenses

$

192,028

 

 

$

167,083

 

 

$

189,013

 

 

$

180,563

 

 

$

184,799

 

 

$

204,704

 

 

$

759,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net - as reported under GAAP

$

(971

)

 

$

(1,370

)

 

$

(1,197

)

 

$

(1,241

)

 

$

(2,084

)

 

$

(746

)

 

$

(5,269

)

Business model changes(a)

61

 

 

(204

)

 

20

 

 

(216

)

 

53

 

 

(10

)

 

(153

)

Other adjustments(c)

1,368

 

 

1,524

 

 

1,115

 

 

1,341

 

 

1,164

 

 

1,558

 

 

5,178

 

Adjusted other expense, net

$

458

 

 

$

(50

)

 

$

(62

)

 

$

(116

)

 

$

(867

)

 

$

802

 

 

$

(244

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - as reported under GAAP

$

0.27

 

 

$

0.67

 

 

$

1.41

 

 

$

1.07

 

 

$

1.25

 

 

$

0.92

 

 

$

4.64

 

Restructuring & separation costs(b)

0.59

 

 

0.18

 

 

0.03

 

 

0.03

 

 

0.02

 

 

0.33

 

 

0.40

 

Business model changes(a)

0.06

 

 

0.02

 

 

 

 

0.03

 

 

0.05

 

 

0.04

 

 

0.12

 

Other adjustments(c)

0.04

 

 

0.08

 

 

0.01

 

 

0.05

 

 

(0.09

)

 

(0.17

)

 

(0.19

)

Adjusted diluted earnings per share

$

0.96

 

 

$

0.96

 

 

$

1.45

 

 

$

1.18

 

 

$

1.23

 

 

$

1.12

 

 

$

4.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - as reported under GAAP

$

15,413

 

 

$

37,986

 

 

79,696

 

 

60,458

 

 

71,018

 

 

51,902

 

 

263,073

 

Income taxes

12,475

 

 

9,357

 

 

14,083

 

 

16,665

 

 

25,594

 

 

20,663

 

 

77,005

 

Interest income from former parent, net

(2,339

)

 

(1,423

)

 

(1,651

)

 

(1,660

)

 

(2,104

)

 

(2,323

)

 

(7,738

)

Interest expense

98

 

 

7,638

 

 

365

 

 

416

 

 

200

 

 

2,755

 

 

3,736

 

Interest income

(1,423

)

 

(1,408

)

 

(1,282

)

 

(1,386

)

 

(1,508

)

 

(4,127

)

 

(8,303

)

EBIT

$

24,224

 

 

$

52,150

 

 

$

91,211

 

 

$

74,493

 

 

$

93,200

 

 

$

68,870

 

 

$

327,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

7,703

 

 

7,761

 

 

8,310

 

 

7,780

 

 

7,581

 

 

7,361

 

 

31,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

$

31,927

 

 

$

59,911

 

 

$

99,521

 

 

$

82,273

 

 

$

100,781

 

 

$

76,231

 

 

$

358,805

 

Restructuring & separation costs(b)

36,581

 

 

12,761

 

 

1,936

 

 

2,017

 

 

1,216

 

 

23,446

 

 

28,615

 

Business model changes(a)

3,200

 

 

1,180

 

 

(57

)

 

1,449

 

 

2,472

 

 

2,348

 

 

6,212

 

Other adjustments(c)

4,192

 

 

7,744

 

 

1,793

 

 

5,276

 

 

(4,904

)

 

(10,188

)

 

(8,023

)

Adjusted EBITDA

$

75,900

 

 

$

81,596

 

 

$

103,193

 

 

$

91,015

 

 

$

99,565

 

 

$

91,837

 

 

$

385,609

 

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reconciliation of Adjusted Financial Measures by Quarter (Non-GAAP)

(Unaudited)

(Thousands, except per share amounts)

Basis of presentation: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to the March 2019, June 2019, March 2018, June 2018, September 2018 and December 2018 quarters relate to the 13-week fiscal periods ended March 30, 2019, June 29, 2019, March 31, 2018, June 30, 2018, September 29, 2018, and December 29, 2018, respectively. The Company has presented its 2018 financial information by quarter in order to provide investors with comparable financial information.

Non-GAAP Financial Information

The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures.

Management uses the above financial measures internally in its budgeting and review process and, in some cases, as a factor in determining compensation. In addition, Adjusted EBITDA is a key financial measure for the Company's shareholders and financial leaders, since the Company's current debt financing agreements require the measurement of adjusted EBITDA, along with other measures, in connection with the Company's compliance with debt covenants. While management believes that these non-GAAP financial measures are useful in evaluating the business, this information should be considered as supplemental in nature and should be viewed in addition to, and not as an alternate for, reported results under GAAP. In addition, these non-GAAP measures may be different from similarly titled measures used by other companies.

(a) Business model changes relate to the exit of unprofitable markets in select European and South American countries, and the discontinuation of manufacturing for VF Corporation. The business model change costs resulted in a net tax benefit of $0.023 million, $0.052 million, $0.247 million, $0.080 million, $0.129 million and $0.120 million for March 2019, June 2019, March 2018, June 2018, September 2018 and December 2018, respectively.

(b) Restructuring costs relate to strategic actions taken to achieve cost savings, and separation costs relate to the spin-off from VF Corporation and establishment of Kontoor as a separate public company. The restructuring costs resulted in a net tax expense of $3.184 million, $2.702 million, $0.457 million, $0.277 million, $0.236 million and $5.033 million for March 2019, June 2019, March 2018, June 2018, September 2018 and December 2018, respectively.

(c) Other adjustments have been made to revise historical corporate allocations, primarily attributable to the carve-out basis of accounting, so that Adjusted EBITDA reflects the anticipated cost structure of a separate public company. Additionally, adjustments have been made to remove the funding fees related to the accounts receivable sale arrangement, as they are treated as interest expense for calculation of Adjusted EBITDA for debt compliance purposes. The other adjustments resulted in a net tax expense/(benefit) of $0.378 million, $1.457 million, ($0.075 million), $0.950 million, ($1,292 million) and ($2.134 million) for March 2019, June 2019, March 2018, June 2018, September 2018 and December 2018, respectively.

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Summary of Select GAAP and Non-GAAP Measures

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June

 

 

2019

 

2018

 

 

GAAP

 

Adjusted

 

GAAP

 

Adjusted

 

 

 

 

 

 

 

 

 

Net revenues

 

$

609,746

 

 

$

602,357

 

 

$

663,856

 

 

$

642,829

 

Gross profit

 

$

235,569

 

 

$

240,968

 

 

$

267,071

 

 

$

263,914

 

As a percentage of total net revenues

 

38.6

%

 

40.0

%

 

40.2

%

 

41.1

%

Selling, general and administrative expenses

 

$

182,049

 

 

$

167,083

 

 

$

191,337

 

 

$

180,563

 

As a percentage of total net revenues

 

29.9

%

 

27.7

%

 

28.8

%

 

28.1

%

Earnings per share - diluted

 

$

0.67

 

 

$

0.96

 

 

$

1.07

 

 

$

1.18

 

EBIT

 

$

52,150

 

 

$

73,835

 

 

$

74,493

 

 

$

83,235

 

EBITDA

 

$

59,911

 

 

$

81,596

 

 

$

82,273

 

 

$

91,015

 

Non-GAAP Financial Information

The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures.

Management uses the above financial measures internally in its budgeting and review process and, in some cases, as a factor in determining compensation. In addition, Adjusted EBITDA is a key financial measure for the Company's shareholders and financial leaders, since the Company's current debt financing agreements require the measurement of adjusted EBITDA, along with other measures, in connection with the Company's compliance with debt covenants. While management believes that these non-GAAP financial measures are useful in evaluating the business, this information should be considered as supplemental in nature and should be viewed in addition to, and not as an alternate for, reported results under GAAP. In addition, these non-GAAP measures may be different from similarly titled measures used by other companies.

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reconciliation of Adjusted Net Revenue

(Unaudited)

(In thousands)

 

 

Three Months Ended June 2019

 

Net Revenues-As Reported Under GAAP

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

299,040

 

 

$

108,757

 

 

 

$

4,710

 

 

$

412,507

 

Non-U.S. Wholesale

40,569

 

 

56,845

 

 

 

633

 

 

98,047

 

Branded Direct-To-Consumer

24,383

 

 

41,306

 

 

 

14

 

 

65,703

 

Other

 

 

 

 

 

33,489

 

 

33,489

 

Total

$

363,992

 

 

$

206,908

 

 

 

$

38,846

 

 

$

609,746

 

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

317,831

 

 

$

130,795

 

 

 

$

38,002

 

 

$

486,628

 

International

46,161

 

 

76,113

 

 

 

844

 

 

123,118

 

Total

$

363,992

 

 

$

206,908

 

 

 

$

38,846

 

 

$

609,746

 

 

 

 

 

 

 

 

 

 

 

Adjustments for Business Model Changes(a)

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

 

 

$

 

 

 

$

 

 

$

 

Non-U.S. Wholesale

(1,484

)

 

(184

)

 

 

 

 

(1,668

)

Branded Direct-To-Consumer

(1,936

)

 

(336

)

 

 

 

 

(2,272

)

Other

 

 

 

 

 

(3,449

)

 

(3,449

)

Total

$

(3,420

)

 

$

(520

)

 

 

$

(3,449

)

 

$

(7,389

)

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

 

 

$

 

 

 

$

(3,449

)

 

$

(3,449

)

International

(3,420

)

 

(520

)

 

 

 

 

(3,940

)

Total

$

(3,420

)

 

$

(520

)

 

 

$

(3,449

)

 

$

(7,389

)

 

 

 

 

 

 

 

 

 

 

Adjusted Net Revenues

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

299,040

 

 

$

108,757

 

 

 

$

4,710

 

 

$

412,507

 

Non-U.S. Wholesale

39,085

 

 

56,661

 

 

 

633

 

 

96,379

 

Branded Direct-To-Consumer

22,447

 

 

40,970

 

 

 

14

 

 

63,431

 

Other

 

 

 

 

 

30,040

 

 

30,040

 

Total

$

360,572

 

 

$

206,388

 

 

 

$

35,397

 

 

$

602,357

 

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

317,831

 

 

$

130,795

 

 

 

$

34,553

 

 

$

483,179

 

International

42,741

 

 

75,593

 

 

 

844

 

 

119,178

 

Total

$

360,572

 

 

$

206,388

 

 

 

$

35,397

 

 

$

602,357

 

Non-GAAP Financial Information

The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures.

Management uses the above financial measures internally in its budgeting and review process and, in some cases, as a factor in determining compensation. In addition, Adjusted EBITDA is a key financial measure for the Company's shareholders and financial leaders, since the Company's current debt financing agreements require the measurement of adjusted EBITDA, along with other measures, in connection with the Company's compliance with debt covenants. While management believes that these non-GAAP financial measures are useful in evaluating the business, this information should be considered as supplemental in nature and should be viewed in addition to, and not as an alternate for, reported results under GAAP. In addition, these non-GAAP measures may be different from similarly titled measures used by other companies.

(a) Business model changes relate to the exit of unprofitable markets in select European and South American countries, and the discontinuation of manufacturing for VF Corporation.

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reconciliation of Adjusted Net Revenue, Continued

(Unaudited)

(In thousands)

 

 

Three Months Ended June 2018

 

Net Revenues-As Reported Under GAAP

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

311,222

 

 

$

100,674

 

 

 

$

7,094

 

 

$

418,990

 

Non-U.S. Wholesale

59,624

 

 

73,076

 

 

 

26

 

 

132,726

 

Branded Direct-To-Consumer

26,899

 

 

44,023

 

 

 

27

 

 

70,949

 

Other

 

 

 

 

 

41,191

 

 

41,191

 

Total

$

397,745

 

 

$

217,773

 

 

 

$

48,338

 

 

$

663,856

 

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

329,166

 

 

$

122,655

 

 

 

$

48,312

 

 

$

500,133

 

International

68,579

 

 

95,118

 

 

 

26

 

 

163,723

 

Total

$

397,745

 

 

$

217,773

 

 

 

$

48,338

 

 

$

663,856

 

 

 

 

 

 

 

 

 

 

 

Adjustments for Business Model Changes(a)

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

 

 

$

 

 

 

$

 

 

$

 

Non-U.S. Wholesale

(3,338

)

 

(335

)

 

 

 

 

(3,673

)

Branded Direct-To-Consumer

(4,450

)

 

(764

)

 

 

 

 

(5,214

)

Other

 

 

 

 

 

(12,140

)

 

(12,140

)

Total

$

(7,788

)

 

$

(1,099

)

 

 

$

(12,140

)

 

$

(21,027

)

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

 

 

$

 

 

 

$

(12,140

)

 

$

(12,140

)

International

(7,788

)

 

(1,099

)

 

 

 

 

(8,887

)

Total

$

(7,788

)

 

$

(1,099

)

 

 

$

(12,140

)

 

$

(21,027

)

 

 

 

 

 

 

 

 

 

 

Adjusted Net Revenues

 

Wrangler

 

Lee

 

 

Other

 

Total

Channel revenues

 

 

 

 

 

 

 

 

U.S. Wholesale

$

311,222

 

 

$

100,674

 

 

 

$

7,094

 

 

$

418,990

 

Non-U.S. Wholesale

56,286

 

 

72,741

 

 

 

26

 

 

129,053

 

Branded Direct-To-Consumer

22,449

 

 

43,259

 

 

 

27

 

 

65,735

 

Other

 

 

 

 

 

29,051

 

 

29,051

 

Total

$

389,957

 

 

$

216,674

 

 

 

$

36,198

 

 

$

642,829

 

 

 

 

 

 

 

 

 

 

Geographic revenues

 

 

 

 

 

 

 

 

U.S.

$

329,166

 

 

$

122,655

 

 

 

$

36,172

 

 

$

487,993

 

International

60,791

 

 

94,019

 

 

 

26

 

 

154,836

 

Total

$

389,957

 

 

$

216,674

 

 

 

$

36,198

 

 

$

642,829

 

 

Investors:
Eric Tracy, (336) 332-5205
Senior Director, Investor Relations
Eric.Tracy@kontoorbrands.com

or

Media:
Vanessa McCutchen, (336) 332-5612
Senior Director, Corporate Communications
Vanessa.McCutchen@kontoorbrands.com

Source: Kontoor Brands, Inc.