KONTOOR BRANDS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This section should be read in conjunction with the Consolidated and Combined Financial Statements and related Notes included in Part IV of this Annual Report on Form 10-K. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended January 2, 2021 , for discussion of the results of operations for the year ended January 2, 2021 , compared to the year ended December 28, 2019 . The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in "Special Note On Forward-Looking Statements" included in Part I of this Annual Report on Form 10-K.
Description of Business
Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company headquartered inthe United States ("U.S."). We completed a spin-off transaction from VF Corporation ("VF" or "former parent") onMay 22, 2019 (the "Separation") and began to trade as a standalone public company (NYSE: KTB) onMay 23, 2019 . The Company designs, produces, procures, markets and distributes apparel primarily under the brand names Wrangler® and Lee®. The Company's products are sold in theU.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 theEurope ,Middle East andAfrica ("EMEA") andAsia-Pacific ("APAC") regions, through department, specialty, company-operated, concession retail and independently operated partnership stores and online.
Fiscal Year
The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest toDecember 31 of each year. For presentation purposes herein, all references to periods endedDecember 2021 ,December 2020 andDecember 2019 correspond to the 52-week fiscal year endedJanuary 1, 2022 , the 53-week fiscal year endedJanuary 2, 2021 and the 52-week fiscal year endedDecember 28, 2019 , respectively.
Impact of COVID-19 and Other Recent Developments
The novel coronavirus ("COVID-19") pandemic continues to impact global economic
conditions, as well as the Company's operations. COVID-19 had a meaningful
negative impact on our financial condition, cash flows and results of operations
during 2020, as revenues declined and we reduced spending in light of COVID-19
uncertainty. Although we continued to experience disruption and volatility, our
revenues nearly returned to pre-pandemic levels in 2021, reflecting the lesser
impact of COVID-19 and the strength and resiliency of our customers and brands.
Accordingly, our comparisons between 2021 and 2020 were significantly impacted
by the lower revenues and expenses in 2020.
We continue to monitor safety protocols and health precautions as we operate our
facilities. The Company's offices are open where permitted by local restrictions
and deemed appropriate by management, but many associates continue to work
remotely. The Company's manufacturing plants and distribution centers around the
world are currently operating, and we have continued to experience retail store
closures and reduced traffic in various countries during 2021. We continue to
experience delays in product and raw material availability due largely to global
supply chain disruptions, driven in part by port congestion and transportation
delays. We are working with our customers to minimize any impact, and have
incurred transitory costs, including air freight to expedite shipments to meet
customer demand, primarily during the second half of 2021.
The ultimate economic impact of the pandemic remains fluid, and there continue
to be periods of COVID-19 resurgence in various parts of the world. While we
anticipate the potential for additional periods of disruption and volatility
during 2022, we believe that we are appropriately positioned to successfully
manage through any associated operational challenges resulting from a prolonged
COVID-19 operating environment.
Basis of Presentation
The Company's financial statements fromMay 23, 2019 were consolidated financial statements based on the reported results ofKontoor Brands, Inc. as a standalone company. The Company's financial statements through the Separation date ofMay 22, 2019 were combined financial statements prepared on a "carve-out" basis of accounting, which reflected the business as historically managed within VF. The balance sheet and cash flows included only those assets and liabilities directly related to theJeanswear andVF Outlet businesses, and the statement of operations included the historically reported results of those businesses along with allocations of a portion of VF's total corporate expenses. Refer to Note 1 to the Company's financial statements in this Form 10-K for additional information on the carve-out basis of accounting. 25Kontoor Brands, Inc. 2021 Form
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The basis of accounting differences before and after the Separation from VF results in a lack of comparability between periods in the statements of operations, primarily in selling, general and administrative expenses. Effective with the Separation, the Company also implemented business model changes, which included the exit of unprofitable markets inEurope andSouth America , the transition of our former Central andSouth America ("CASA") region to a licensed model and the discontinuation of certain transactions with VF. Accordingly, certain revenues and costs presented in the carve-out statement of operations did not continue after the Separation. References to fiscal 2021 and 2020 foreign currency amounts herein reflect the impact of changes in foreign exchange rates from fiscal 2020 and 2019, respectively, and the corresponding impact on translating foreign currencies intoU.S. dollars and on foreign currency-denominated transactions. The Company's most significant foreign currency translation exposure is typically driven by business conducted in euro-based countries, the Chinese yuan and the Mexican peso. However, the Company conducts business in other developed and emerging markets around the world with exposure to other foreign currencies.
Amounts herein may not recalculate due to the use of unrounded numbers.
Business Overview
We have undergone transformational change to improve operational performance, address internal and external factors and set the stage for long-term profitable growth. We have launched significant initiatives to refine a global go-to-market approach that will sustain our long-term commitment to total shareholder return, some of which were accelerated due to the COVID-19 environment. We have continued to implement proactive strategic programs to improve quality-of-sales, including two key initiatives related to our business inIndia and ourVF Outlet stores in theU.S. We decided in 2020 to transition ourIndia business to a licensed model and completed this transition in 2021. Also during 2020, we performed a strategic review of theVF Outlet store fleet, and decided to exit certainVF Outlet stores, discontinue the sale of third party branded merchandise at all locations, and convert the remaining locations to Lee Wrangler OutletTM and Lee Wrangler Clearance CenterTM retail stores. We have made significant investments to support the design and implementation of a global enterprise resource planning ("ERP") system and information technology infrastructure build-out. Following the implementation in the EMEA region during the third quarter of 2021, we have now implemented our ERP system in all regions and exited the last of our transition service agreements with VF. At our Investor Day in 2021, we introduced our Horizon 2 multi-year strategic vision, "Catalyzing Growth" which outlined four growth catalysts: i) expansion of our coreU.S. Wholesale business, ii) category extensions such as outdoor, tees and work, iii) geographic expansion of our Wrangler® and Lee® brand, most notably inChina , and iv) channel expansion focused on the digital platforms in ourU.S. Wholesale and Direct-to-Consumer channels. We are sharply focused on driving brand growth and delivering long-term value to our stakeholders including our consumers, customers, shareholders, suppliers and the communities where we do business around the world. We continue to be focused on accelerating revenue generation, expanding margin and generating cash flow to fuel and sustain long-term performance and our competitive advantage around the world. The options in our capital allocation strategy are to (i) pay-down debt; (ii) provide for a superior dividend payout; (iii) effectively manage our share repurchase authorization and (iv) act on strategic investment opportunities that may arise. 26Kontoor Brands, Inc 2021 Form 10-K --------------------------------------------------------------------------------
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HIGHLIGHTS OF THE YEAR ENDED
•Net revenues increased 18% to$2.5 billion compared to the year endedDecember 2020 , driven by growth in all channels as discussed below. Net revenues in 2020 included an approximate 1% benefit due to sales attributable to a 53rd week. •U.S. Wholesale revenues increased 19% compared to the year endedDecember 2020 , primarily due to the less significant impact of COVID-19 compared with the prior year, new business growth and growth in ourU.S. digital wholesale business.U.S. Wholesale revenues represented 69% of total revenues in the current year. •Non-U.S. Wholesale revenues increased 35% compared to the year endedDecember 2020 , driven by growth in ourChina and EMEA wholesale businesses and the less significant impact of COVID-19 compared with the prior year. Non-U.S. wholesale revenues included a 6% favorable impact from foreign currency and represented 20% of total revenues in the current year. •Direct-to-Consumer revenues increased 12% on a global basis compared to the year endedDecember 2020 , primarily due to growth in our owned e-commerce sites and the less significant impact of COVID-19 compared with the prior year, partially offset by lower retail sales in 2021 resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. Direct-to-Consumer revenues included a 2% favorable impact from foreign currency and represented 11% of total revenues in the current year. •Gross margin increased 350 basis points to 44.7% compared to the year endedDecember 2020 , primarily driven by leverage of fixed manufacturing costs on higher production, favorable customer, product and channel mix, benefits from product cost and lower provisions for inventory losses in 2021. These increases were partially offset by higher transitory costs, including air freight to expedite shipments to meet customer demand. •Selling, general and administrative expenses as a percentage of revenues decreased to 33.3% compared to 35.3% for the year endedDecember 2020 , primarily due to leverage of fixed costs on higher revenues, lower bad debt expense in 2021 and lower retail store expenses resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. These benefits were partially offset by increases in demand creation and digital spending, distribution costs and compensation expense. Prior year comparisons were also affected by reduced spending in 2020 in light of COVID uncertainty.
•Net income increased 188% to
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated and Combined Statements of Operations
The following table presents a summary of the changes in net revenues for the
years ended
(In millions) 2021 Compared to 2020 2020 Compared to 2019 Net revenues - prior year $ 2,097.8 $ 2,548.8 Operations 349.9 (452.4) Impact of foreign currency 28.2 1.4 Net revenues - current year $ 2,475.9 $ 2,097.8 2021 Compared to 2020 Net revenues increased 18% due to growth in the Wrangler and Lee segments across all channels. This revenue increase was attributable to the less significant impact of COVID-19 compared with the prior year, growth in ourU.S. and EMEA digital wholesale businesses, new business growth in theU.S. and growth in our owned e-commerce sites. These increases were partially offset by lowerVF Outlet retail sales in the current period resulting from the discontinued sale of third-party branded merchandise and the exit of certain underperforming stores as well as the transition of ourIndia business to a licensed model.
Additional details on 2021 and 2020 revenues are provided in the section titled "Information by Business Segment."
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The following table presents components of the Company's statements of operations as a percent of net revenues:
(Dollars in thousands) 2021 2020 2019 Net revenues$ 2,475,916 $ 2,097,839 $ 2,548,839 Gross margin (net revenues less cost of goods sold)$ 1,107,726 $ 863,689 $ 1,004,374 As a percentage of net revenues 44.7 % 41.2 % 39.4 % Selling, general and administrative expenses$ 824,747 $ 739,855 $ 803,448 As a percentage of net revenues 33.3 % 35.3 % 31.5 % Non-cash impairment of intangible asset $ - $ -$ 32,636 As a percentage of net revenues - % - % 1.3 % Operating income$ 282,979 $ 123,834 $ 168,290 As a percentage of net revenues 11.4 % 5.9 % 6.6 % 2021 Compared to 2020 Gross margin increased 350 basis points primarily driven by leverage of fixed manufacturing costs on higher production, favorable customer, product and channel mix, benefits from lower product cost and lower provisions for inventory losses in the current period. These increases were partially offset by higher transitory costs, including air freight to expedite shipments to meet customer demand. Selling, general and administrative expenses as a percentage of net revenues decreased to 33.3% compared to 35.3% for the year endedDecember 2020 , primarily due to leverage of fixed costs on higher revenues, lower bad debt expense in 2021 and lower retail store expenses resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. These benefits were partially offset by higher demand creation and digital spending, distribution costs and compensation expense. Prior year comparisons were also affected by reduced spending in 2020 in light of COVID uncertainty. During the years endedDecember 2021 and 2020, costs related to the Company's global ERP implementation and information technology infrastructure build-out were 3.0% and 3.8%, respectively, of total net revenues. The effective income tax rate was 20.1% for the year endedDecember 2021 compared to 6.9% for the year endedDecember 2020 . The 2021 effective income tax rate included a net discrete tax benefit of$0.3 million , primarily comprised of$1.9 million of tax benefit related to stock compensation,$1.3 million of tax expense related to changes in valuation allowances and$0.4 million of tax expense related to the finalization ofU.S. federal and state tax return filings. The$0.3 million of net discrete tax benefit in 2021 decreased the effective income tax rate by 0.1% compared to a decrease of 16.8% for discrete items in 2020. Without discrete items, the effective income tax rate for the year endedDecember 2021 decreased 3.5%, primarily due to changes in our jurisdictional mix of earnings. Our effective income tax rate for foreign operations was 10.4% and 12.5% for the years endedDecember 2021 andDecember 2020 , respectively. 28Kontoor Brands, Inc 2021 Form 10-K -------------------------------------------------------------------------------- Table of Contents Information by Business Segment Management at each of the segments has direct control over and responsibility for corresponding net revenues and operating income, hereinafter termed "segment revenues" and "segment profit," respectively. Our management evaluates operating performance and makes investment and other decisions based on segment revenues and segment profit. Common costs for certain centralized functions are allocated to the segments as discussed in Note 3 to the Company's financial statements.
The following tables present a summary of the changes in segment revenues and
segment profit for the years ended
Segment Revenues (In millions) Wrangler Lee Total Segment revenues - 2019$ 1,518.1 $ 882.3 $ 2,400.4 Operations (169.4) (195.4) (364.8) Impact of foreign currency 0.7 0.7 1.4 Segment revenues - 2020$ 1,349.4 $ 687.6 $ 2,037.0 Operations 217.6 179.7 397.3 Impact of foreign currency 8.2 19.8 28.0 Segment revenues - 2021$ 1,575.2 $ 887.1 $ 2,462.3 Segment Profit (In millions) Wrangler Lee Total Segment profit - 2019$ 215.0 $ 68.2 $ 283.2 Operations 29.3 (31.5) (2.2) Impact of foreign currency 0.6 1.2 1.8 Segment profit - 2020$ 244.9 $ 37.9 $ 282.8 Operations 48.8 85.7 134.5 Impact of foreign currency 0.5 4.7 5.2 Segment profit - 2021$ 294.2 $ 128.3 $ 422.5 29 Kontoor Brands, Inc. 2021 Form 10-K
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The following sections discuss the changes in segment revenues and segment
profit.
Wrangler
Year Ended December Percent Change
(Dollars in millions) 2021 2020 2019 2021 2020 Segment revenues$ 1,575.2 $ 1,349.4 $ 1,518.1 16.7 % (11.1) % Segment profit$ 294.2 $ 244.9 $ 215.0 20.1 % 13.9 % Operating margin 18.7 % 18.1 % 14.2 % 2021 Compared to 2020
Global revenues for the Wrangler® brand increased 17%, driven by growth in all channels.
•Revenues in theAmericas region increased 16%, primarily due to a 15% increase in theU.S. Wholesale channel, as well as growth in our owned e-commerce sites. Increases in theU.S. Wholesale channel were driven by the less significant impact of COVID-19 compared with the prior year, growth in theU.S. digital wholesale business and strength in our coreU.S. wholesale and Western businesses and new product categories. These increases were partially offset by lower retail sales in the current year resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. Non-U.S. Americas wholesale revenues increased 31%, primarily due to the less significant impact of COVID-19 compared with the prior year and a 7% favorable impact from foreign currency.
•Revenues in the APAC region increased 15%, primarily due to growth in our owned e-commerce sites and a 3% favorable impact from foreign currency.
•Revenues in the EMEA region increased 27%, primarily due to the less significant impact of COVID-19 compared with the prior year, growth in the digital wholesale business and our owned e-commerce sites and a 5% favorable impact from foreign currency.
Operating margin increased to 18.7% compared to 18.1% for 2020, primarily due to favorable customer, product and channel mix, leverage of fixed costs on higher revenues, lower provisions for inventory losses in the current year and lower retail store expenses resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. These benefits were partially offset by transitory expenses in the current year, including air freight to expedite shipments to meet customer demand, as well as higher demand creation and digital spending, distribution costs and compensation expense. Prior year comparisons were also affected by reduced spending in 2020 in light of COVID uncertainty. During 2021 and 2020, operating margin was negatively impacted by 30 basis points and 60 basis points, respectively, due to restructuring and Separation costs. 30Kontoor Brands, Inc 2021 Form 10-K --------------------------------------------------------------------------------
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Lee
Year Ended December Percent Change
(Dollars in millions) 2021 2020 2019
2021 2020
Segment revenues $ 887.1 $ 687.6 $ 882.3 29.0 % (22.1) %
Segment profit $ 128.3 $ 37.9 $ 68.2 238.4 % (44.4) %
Operating margin 14.5 % 5.5 % 7.7 %
2021 Compared to 2020
Global revenues for the Lee® brand increased 29%, driven by growth in all channels, as well as a 3% favorable impact from foreign currency.
•Revenues in theAmericas region increased 25%, primarily due to a 32% increase in theU.S. wholesale channel, as well as growth in our owned e-commerce sites. Increases in theU.S. Wholesale channel were driven by the less significant impact of COVID-19 compared with the prior year, new business growth and growth in theU.S. digital wholesale business. These increases were partially offset by lower retail sales in the current year resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. Non-U.S. Americas wholesale revenues increased 37%, primarily due to the less significant impact of COVID-19 compared with the prior year and a 6% favorable impact from foreign currency. •Revenues in the APAC region increased 34%, primarily due to the less significant impact of COVID-19 compared with the prior year, growth in wholesale and direct-to-consumer revenues, including growth in our owned e-commerce sites, and an 8% favorable impact from foreign currency.
•Revenues in the EMEA region increased 39%, primarily due to the less significant impact of COVID-19 compared with the prior year, growth in wholesale and direct-to-consumer revenues, including growth in the digital wholesale business, and a 5% favorable impact from foreign currency.
Operating margin increased to 14.5% compared to 5.5% for 2020, primarily driven by favorable customer, product and channel mix, leverage of fixed costs on higher revenues, lower retail store expenses resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020 and lower bad debt expense in 2021. These increases were partially offset by transitory expenses in the current year, including air freight to expedite shipments to meet customer demand, as well as higher demand creation and digital spending, distribution costs and compensation expense. Prior year comparisons were also affected by reduced spending in 2020 in light of COVID uncertainty. During 2021 and 2020, operating margin was negatively impacted by 30 basis points and 150 basis points, respectively, due to restructuring and Separation costs.
Other
In addition, we report an "Other" category in order to reconcile segment revenues and segment profit to the Company's operating results, but the Other category is not considered a reportable segment based on evaluation of aggregation criteria. Other primarily includes other revenue sources, including sales and licensing of Rock & Republic® apparel. Other also included sales of third-party branded merchandise atVF Outlet stores through the first quarter of 2021. During 2020, the Company discontinued the sale of third-party branded merchandise in allVF Outlet stores, exited certainVF Outlet stores and converted all remaining locations to Lee Wrangler OutletTM and Lee Wrangler Clearance CenterTM retail stores. Prior to 2020, the Other category also included transactions with VF for pre-Separation activities, which included sales of VF-branded products atVF Outlet stores, as well as sales to VF for products manufactured in our plants, use of our transportation fleet and fulfillment of a transition services agreement related to VF's sale of its Nautica® brand business in mid-2018. Year Ended December Percent Change (Dollars in millions) 2021 2020 2019 2021 2020 Revenues$ 13.6 $ 60.8 $ 148.5 (77.6)% (59.0)% Profit (loss)$ 0.5 $ (18.4) $ 2.8 102.8% (753.4)% Operating margin 3.8 % (30.3) % 1.9 % 2021 Compared to 2020 Other revenues decreased and operating margin increased primarily as a result of the Company's discontinued sales of third-party branded merchandise inVF Outlet stores. 31 Kontoor Brands, Inc. 2021 Form 10-K
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Reconciliation of Segment Profit to Income Before Income Taxes
The Company has incurred corporate and other expenses as a standalone public company sinceMay 23, 2019 . For purposes of preparing financial statements on a carve-out basis for periods through the Separation date ofMay 22, 2019 , corporate and other expenses included the Company's allocation of a portion of VF's total corporate expenses. Refer to Note 3 to the Company's financial statements for additional information on the Company's methodology for allocating these costs. The costs below are necessary to reconcile total reportable segment profit to income before taxes. These costs are excluded from segment profit as they are managed centrally and are not under control of brand management. Year Ended December Percent Change (Dollars in millions) 2021 2020 2019 2021 2020 Total reportable segment profit$ 422.5 $ 282.8 $ 283.2 49.4 % (0.1) % Non-cash impairment of intangible asset - - (32.6) 0 % (100.0) % (1) Corporate and other expenses (141.0) (143.1) (90.1) (1.5) % 58.8 % Interest income from former parent, net - - 3.8 0 % (100.0) % Interest expense (38.9) (50.0) (35.8) (22.2) % 39.7 % Interest income 1.5 1.6 3.9 (8.0) % (59.0) % Profit (loss) related to other revenues 0.5 (18.4) 2.8 102.8% (753.4)% Income before income taxes$ 244.6 $ 72.9 $ 135.2 235.4 % (46.1) %
(1) Represents an impairment charge recorded during the third quarter of 2019 related to the Rock & Republic® trademark. See Note 7 to the Company's financial statements.
2021 Compared to 2020
Corporate and other expenses decreased$2.1 million , driven by the exit of our transition service agreements with our former parent inAugust 2021 , offset by higher compensation expense and an increase in expenses related to the Company's global ERP implementation and information technology infrastructure build-out during 2021. Interest expense decreased$11.1 million , primarily due to favorable interest rates and lower average borrowings under the Credit Facilities as compared to the prior year, partially offset by$6.6 million due to accelerated amortization of the original issue discount and debt issuance costs associated with refinancing and early repayments on our Credit Facilities. ANALYSIS OF FINANCIAL CONDITION Liquidity and Capital Resources The Company's ability to fund our operating needs is dependent upon our ability to generate positive long-term cash flow from operations and maintain our debt financing on acceptable terms. During 2021, the Company generated increased cash flows from operations and restructured its borrowing arrangements under more favorable terms, as discussed below. As we continue to normalize operations in a post-COVID environment and generate strong positive cash flows from operations, we believe that we will be able to support our short-term liquidity needs as well as any future liquidity and capital requirements through the combination of cash flows from operations, available cash balances and borrowing capacity from our amended revolving credit facility.
In
OnNovember 18, 2021 , the Company completed a refinancing pursuant to which it issued$400.0 million of unsecured senior notes bearing interest at a rate of 4.125% per annum (the "Notes") and amended and restated its Credit Agreement (the "Amended Credit Agreement"). The net proceeds from the offering of the Notes, together with$7.6 million of cash on hand, were used to repay$265.0 million of the principal amount outstanding under Term Loan A, and all of the$133.0 million principal amount outstanding under Term Loan B. The Amended Credit Agreement provides for (i) a five-year$400.0 million term loan A facility ("Amended Term Loan A") and (ii) a five-year$500.0 million revolving credit facility (the "Amended Revolving Credit Facility") (collectively, the "Amended Credit Facilities") with the lenders and agents party thereto. The Amended Term Loan A is scheduled to be repaid in quarterly installments beginning inMarch 2023 . 32Kontoor Brands, Inc 2021 Form 10-K -------------------------------------------------------------------------------- Table of Contents These debt obligations could restrict our future business strategies and could adversely impact our future results of operations, financial conditions or cash flows. Refer to Note 10 to the Company's financial statements in this Form 10-K for additional information regarding the Company's Notes and credit facilities, including financial covenants and interest rates thereunder, and borrowing limits and availability as ofDecember 2021 . As ofDecember 2021 , the Company was in compliance with all applicable financial covenants and expects to maintain compliance with the applicable financial covenants for at least one year from the issuance of these financial statements. If economic conditions caused by COVID-19 significantly deteriorate for a prolonged period, this could impact the Company's operating results and cash flows and thus our ability to maintain compliance with the applicable financial covenants. As a result, the Company could be required to seek new amendments to the Amended Credit Agreement or secure other sources of liquidity, such as refinancing of existing borrowings, the issuance of debt or equity securities, or sales of assets. However, there can be no assurance that the Company would be able to obtain such additional financing on commercially reasonable terms or at all. The Amended Revolving Credit Facility may be used to borrow funds in bothU.S. dollar and certain non-U.S. dollar currencies, and has a maximum borrowing capacity of$500.0 million and a$75.0 million letter of credit sublimit. We expect to have availability under the Amended Revolving Credit Facility through its maturity in 2026. OnAugust 5, 2021 , the Company announced that its Board of Directors approved a share repurchase program (the "Repurchase Program"). The Repurchase Program authorizes the repurchase of up to$200.0 million of the Company's outstanding Common Stock through open market or privately negotiated transactions. The timing and amount of repurchases are determined by the Company's management based on its evaluation of market conditions, share price, legal requirements and other factors. The Repurchase Program does not have an expiration date but may be suspended, modified or terminated at any time without prior notice. During the year endedDecember 2021 , the Company repurchased 1.4 million shares of Common Stock for$75.5 million , including commissions, under the Repurchase Program. We anticipate utilizing cash flows from operations to support continued investments in our brands, talent and capabilities, growth strategies, dividend payments to shareholders, repayment of our debt obligations over time and repurchases of Common Stock. Management believes that our cash balances and funds provided by operating activities, along with existing borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and planned dividend payouts and (iii) flexibility to repurchase Common Stock and meet investment opportunities that may arise.
The following table presents outstanding borrowings and available borrowing
capacity under the Amended Revolving Credit Facility and our cash and cash
equivalents balances as of
(In millions)
Outstanding borrowings under the Amended Revolving Credit Facility $
-
Available borrowing capacity under the Amended Revolving Credit
Facility (1) $ 486.9
Cash and cash equivalents $ 185.3
(1) Available borrowing capacity under the Amended Revolving Credit Facility is
net of $13.1 million of outstanding standby letters of credit issued on behalf
of the Company under this facility.
Refer to Note 10 to the Company's financial statements in this Form 10-K for
additional information regarding the Company's Amended Credit Facilities,
including financial covenants and interest rates thereunder as of
AtDecember 2021 andDecember 2020 , the Company had$10.1 million and$35.9 million , respectively, of borrowing availability under international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. There were no outstanding balances under these arrangements atDecember 2021 , and$0.2 million atDecember 2020 , which primarily consisted of letters of credit that are non-interest bearing to the Company. In addition, short-term borrowings atDecember 2021 andDecember 2020 included other debt of$0.2 million and$0.9 million , respectively. During 2021, the Company paid$95.1 million of dividends to its shareholders. OnFebruary 22, 2022 , the Board of Directors declared a regular quarterly cash dividend of$0.46 per share of the Company's Common Stock. The cash dividend will be payable onMarch 18, 2022 , to shareholders of record at the close of business onMarch 8, 2022 . The Company intends to continue to pay cash dividends in future periods. The declaration and amount of any future dividends will be dependent upon multiple factors including our financial condition, earnings, cash flows, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors or considerations that our Board of Directors deems relevant.
We currently expect capital expenditures to range from
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The following table presents our cash flows during the periods:
(In millions) Year Ended December Cash provided (used) by: 2021 2020 2019 Operating activities$ 283.9 $ 242.0 $ 777.8 Investing activities$ (39.4) $ (49.1) $ 483.9 Financing activities$ (304.1) $ (57.7) $ (1,252.1) Operating Activities Cash provided by operating activities is dependent on the level of our net income, adjustments to net income and changes in working capital. During 2021, cash provided by operating activities increased$41.9 million as compared to 2020. The increase was primarily due to higher net income, partially offset by changes in working capital accounts as compared to the prior year period, primarily related to increases in inventory and accounts receivable.
Investing Activities
During 2021, cash used by investing activities decreased$9.7 million as compared to 2020, primarily due to declines in capitalized computer software and property, plant and equipment expenditures in 2021, partially offset by higher proceeds from sales of assets during 2020.
Financing Activities
During 2021, cash used by financing activities increased$246.4 million as compared to 2020. This increase was primarily due to our debt refinancing in 2021 where we repaid$523.0 million of term loans, partially offset by$400.0 million of proceeds from the issuance of the Notes. Additionally, we repurchased$75.5 million of Common Stock during 2021 and paid higher dividends in 2021 as a result of the Company suspending dividends during the second and third quarter of 2020. Contractual Obligations The Company believes it has sufficient liquidity to fund its operations and meet its short-term and long-term obligations. The Company's estimated contractual obligations and other commercial commitments atDecember 2021 , and the future periods in which such obligations are expected to be settled in cash are described below. Contractual commitments on the Company's balance sheets include obligations to make principal payments on$800 million of long-term debt based on the defined terms of our debt agreements. Refer to Note 10 to the Company's financial statements in this Form 10-K for additional information. These debt agreements also require periodic interest payments on floating and fixed rate terms. Future estimated interest payments under these agreements, based on interest rates in effect as ofDecember 2021 and the remaining terms of the debt arrangements, are$30.2 million ,$30.1 million ,$29.6 million ,$29.0 million and$26.9 million for 2022 through 2026, respectively, and$49.5 million thereafter. The Company has future payments related to "other liabilities" recorded in the balance sheets, which primarily represent long-term liabilities for deferred compensation and other employee-related benefits. Refer to Note 1 1 and Note 12 to the Company's financial statements in this Form 10-K for additional information.
The Company is obligated under noncancelable operating leases. Refer to Note 19 to the Company's financial statements in this Form 10-K for additional information related to future lease payments.
The Company has unrecorded commitments consisting of inventory obligations, minimum royalty payments and other obligations. Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending and (iii) advertising. Refer to
Note 20 to the Company's financial statements in this Form 10-K for additional information.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. 34Kontoor Brands, Inc 2021 Form 10-K --------------------------------------------------------------------------------
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Critical Accounting Policies and Estimates
We have chosen accounting policies that management believes are appropriate to
accurately and fairly report our operating results and financial position in
conformity with GAAP. We apply these accounting policies in a consistent manner.
Significant accounting policies are summarized in Note 1 to the Company's
financial statements included in Part IV of this Annual Report on Form 10-K.
The application of these accounting policies requires that we make estimates and
assumptions about future events and apply judgments that affect the reported
amounts of assets, liabilities, net revenues, expenses, contingent assets and
liabilities and related disclosures. These estimates, assumptions and judgments
are based on historical experience, current trends and other factors believed to
be reasonable under the circumstances. Management evaluates these estimates and
assumptions on an ongoing basis. Because our business cycle is relatively short
(i.e., from the date that inventory is received until that inventory is sold and
the trade accounts receivable is collected), actual results related to most
estimates are known within a few months after any balance sheet date. In
addition, we may retain outside specialists to assist in impairment testing of
goodwill and intangible assets. Several of the estimates and assumptions we are
required to make relate to future events and are therefore, inherently
uncertain, especially as it relates to events outside of our control. If actual
results ultimately differ from previous estimates, the revisions are included in
results of operations when the actual amounts become known.
We believe the following accounting policies involve the most significant
management estimates, assumptions and judgments used in preparation of the
financial statements or are the most sensitive to change from outside factors.
The selection and application of the Company's critical accounting policies and
estimates are periodically discussed with the Audit Committee of the Board of
Directors.
Testing of Long-Lived Assets, Including Intangible Assets and
Long Lived Assets - Property, Plant and Equipment and Operating Lease Assets
Description
Our policy is to review property, plant and equipment and operating lease assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We test for potential impairment at the asset or asset group level, which is the lowest level for which there are identifiable cash flows that are largely independent, by comparing the carrying value to the estimated undiscounted cash flows expected to be generated by the asset. If the forecasted undiscounted cash flows to be generated by the asset are not expected to be adequate to recover the asset's carrying value, a fair value analysis must be performed, and an impairment charge is recorded if there is an excess of the asset's carrying value over its estimated fair value.
Judgements and Uncertainties
When testing property, plant and equipment or operating lease assets for
potential impairment, management uses the income-based discounted cash flow
method using the estimated cash flows of the respective asset or asset group. We
include assumptions about sales growth and operating margins, considered against
our budgets, business plans and economic projections. Assumptions are also made
for varying terminal growth rates for years beyond the forecast period.
Generally, we utilize operating margin assumptions based on future expectations,
operating margins historically realized in the reporting units' industries and
industry marketplace valuation multiples.
The estimated undiscounted cash flows of the asset or asset group through the
end of its useful life are compared to its carrying value. If the undiscounted
cash flows of the asset or asset group exceed its carrying value, there is no
impairment charge. If the undiscounted cash flows of the asset or asset group
are less than its carrying value, the estimated fair value of the asset or asset
group is calculated based on the discounted cash flows using the reporting
unit's weighted average cost of capital ("WACC"), and an impairment charge is
recognized for the difference between the estimated fair value of the asset or
asset group and its carrying value.
Effect if Actual Results Differ From Assumptions
We have not made any material changes in the methodology used to evaluate the impairment of property, plant and equipment operating lease assets during 2021. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments, useful lives of property, plant and equipment or term length of leases. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to potentially material impairments. As ofDecember 2021 , the effect of a hypothetical 10% change in the aforementioned key assumptions would not have a material effect on reported results. 35Kontoor Brands, Inc. 2021 Form 10-K
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Indefinite-Lived Intangible Assets and
Description
Our policy is to evaluate indefinite-lived intangible assets and goodwill for possible impairment as of the beginning of the fourth quarter of each year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. As part of our annual impairment testing, we may elect to assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If management's assessment of these qualitative factors indicates that it is not more likely than not that the fair value of the intangible asset or reporting unit is less than its carrying value, then no further testing is required. Otherwise, the intangible asset or reporting unit must be quantitatively tested for impairment. Judgements and Uncertainties An indefinite-lived intangible asset is quantitatively tested for possible impairment by comparing the estimated fair value of the asset to its carrying value. Fair value of an indefinite-lived trademark is based on an income approach using the relief-from-royalty method. Under this method, forecasted net revenues for products sold with the trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership), and the estimated fair value is calculated as the present value of those forecasted royalties avoided by owning the trademark. The discount rate is based on the reporting unit's WACC that considers market participant assumptions, plus a spread that factors in the risk of the intangible asset. The royalty rate is selected based on consideration of (i) royalty rates included in active license agreements, if applicable, (ii) royalty rates received by market participants in the apparel industry and (iii) the current performance of the reporting unit. If the estimated fair value of the trademark intangible asset exceeds its carrying value, there is no impairment charge. If the estimated fair value of the trademark is less than its carrying value, an impairment charge would be recognized for the difference.Goodwill is quantitatively evaluated for possible impairment by comparing the estimated fair value of a reporting unit to its carrying value. Reporting units are businesses with discrete financial information that is available and reviewed by segment management. For goodwill impairment testing, we estimate the fair value of a reporting unit using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to present value using the reporting unit's WACC as discussed above. For the market-based approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and net revenue / EBITDA data from target companies deemed similar to the reporting unit. Based on the range of estimated fair values developed from the income and market-based methods, we determine the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, we calculate the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value. The income-based fair value methodology requires management's assumptions and judgments regarding economic conditions in the markets in which we operate and conditions in the capital markets, many of which are outside of management's control. At the reporting unit level, fair value estimation requires management's assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit's strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management's estimates and assumptions regarding: •Annual cash flows, on a debt-free basis, arising from future net revenues and profitability, changes in working capital, capital spending and income taxes for at least a ten-year forecast period.
•A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.
•A discount rate that reflects the risks inherent in realizing the forecasted cash flows. A discount rate considers the risk-free rate of return on long-term treasury securities, the risk premium associated with investing in equity securities of comparable companies, the beta obtained from comparable companies and the cost of debt for investment grade issuers. In addition, the discount rate may consider any company-specific risk in achieving the prospective financial information. Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of our reporting units.
Effect if Actual Results Differ From Assumptions
Management made its estimates based on information available as of the date of our assessment, using assumptions we believe market participants would use in performing an independent valuation of the business. It is possible that our conclusions regarding impairment or recoverability of goodwill or intangible assets in any reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in our goodwill and intangible asset impairment testing will prove to be accurate 36Kontoor Brands, Inc 2021 Form 10-K --------------------------------------------------------------------------------
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predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions in future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of net revenues and EBITDA. As ofDecember 2021 , the effect of a hypothetical 10% change in the aforementioned key assumptions would not have a material effect on reported results.
A future impairment charge for goodwill or intangible assets could have a material effect on our financial position and results of operations.
Income Taxes
Description
As a global company, Kontoor is subject to income taxes and files income tax returns in over 50 U.S. and foreign jurisdictions each year. The Company'sU.S. operations and certain of its non-U.S. operations historically have been included in the tax returns of VF or its subsidiaries that may not have been part of the spin-off transaction. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company could be subject to changes in its tax rates, the adoption of newU.S. or international tax legislation or exposure to additional tax liabilities. The Company makes an ongoing assessment to identify any significant exposure related to increases in tax rates in the jurisdictions in which the Company operates.
Judgements and Uncertainties
The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and significant management judgment. The Company's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. The Company has evaluated these potential issues under the "more-likely-than-not" standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized.
Effect if Actual Results Differ From Assumptions
Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Income tax expense could be materially affected to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent the Company is required to pay amounts greater than the established liability for unrecognized tax benefits. The Company does not currently anticipate any material impact on earnings from the ultimate resolution of income tax uncertainties. There are no accruals for general or unknown tax expenses. The Company has$27.8 million of gross deferred income tax assets related to operating loss carryforwards, and$19.9 million of valuation allowances against those assets. Realization of deferred tax assets related to operating loss carryforwards is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws. If management believes that the Company will not be able to generate sufficient taxable income to offset losses during the carryforward periods, the Company records valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. If in a future period management determines that the amount of deferred tax assets to be realized differs from the net recorded amount, the Company would record an adjustment to income tax expense in that future period.
Recently Issued and Adopted Accounting Standards
Refer to Note 1 to the Company's financial statements included elsewhere in
this Annual Report on Form 10-K for discussion of recently issued and adopted
accounting standards.
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