WARNACO GROUP INC /DE/ (Form Type: 10-Q, Filing Date: 08/06/2010)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 3, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-10857

THE WARNACO GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		95-4032739
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

501 Seventh Avenue
New York, New York 10018
(Address of registrant’s principal executive offices)

Registrant’s telephone number, including area code: (212) 287-8000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No.

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of August 2, 2010 is as follows: 44,545,889

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, excluding share and per share data)
(Unaudited)


	July 3, 2010			January 2, 2010			July 4, 2009

ASSETS

Current assets:
Cash and cash equivalents	$	172,863		$	320,754		$	177,633
Accounts receivable, net of reserves of $86,001, $89,982 and $84,414 as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively		304,328			290,737			281,400
Inventories		277,565			253,362			291,578
Assets of discontinued operations		1,426			2,172			373
Prepaid expenses and other current assets (including deferred income taxes of $51,516, $51,605, and $65,693 as of July 3, 2010, January 2, 2010, and July 4, 2009, respectively)		144,898			135,832			158,630

Total current assets		901,080			1,002,857			909,614

Property, plant and equipment, net		119,952			120,491			115,387
Other assets:
Licenses, trademarks and other intangible assets, net		344,685			376,831			287,915
Goodwill		101,227			110,721			102,225
Other assets (including deferred income taxes of $14,691, $12,957, and $43,556 as of July 3, 2010, January 2, 2010, and July 4, 2009, respectively)		49,107			48,894			80,618

Total assets	$	1,516,051		$	1,659,794		$	1,495,759


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term debt	$	65,203		$	97,873		$	58,807
Accounts payable		156,695			127,636			124,531
Accrued liabilities		162,639			184,438			148,123
Liabilities of discontinued operations		8,556			8,018			11,363
Accrued income taxes payable (including deferred income taxes of $1,110, $146 and $1,359 as of July 3, 2010, January 2, 2010, and July 4, 2009, respectively)		30,679			24,723			7,831

Total current liabilities		423,772			442,688			350,655
Long-term debt		—			112,835			163,130
Other long-term liabilities (including deferred income taxes of $64,569, $65,219, and $51,533 as of July 3, 2010, January 2, 2010, and July 4, 2009, respectively)		191,661			188,161			122,699
Commitments and contingencies
Stockholders’ equity:
Warnaco Group, Inc. stockholders’ equity:
Preferred stock		—			—			—
Common stock: $0.01 par value, 112,500,000 shares authorized, 51,048,346, 50,617,795 and 50,358,920 issued as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively		510			506			504
Additional paid-in capital		652,988			633,378			639,607
Accumulated other comprehensive income		5,788			46,473			21,885
Retained earnings		440,722			362,813			321,647
Treasury stock, at cost 6,504,161, 4,939,729 and 4,937,038 shares as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively		(199,390	)		(127,060	)		(126,952	)

Total Warnaco Group, Inc. stockholders’ equity		900,618			916,110			856,691

Noncontrolling interest		—			—			2,584

Total stockholders’ equity		900,618			916,110			859,275

Total liabilities and stockholders’ equity	$	1,516,051		$	1,659,794		$	1,495,759

See Notes to Consolidated Condensed Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Net revenues	$	519,334		$	455,432		$	1,107,498		$	993,275
Cost of goods sold		289,592			266,432			610,638			578,990

Gross profit		229,742			189,000			496,860			414,285
Selling, general and administrative expenses		171,860			145,256			356,833			303,603
Amortization of intangible assets		2,586			2,151			5,254			4,278
Pension expense (income)		(22	)		594			(43	)		1,131

Operating income		55,318			40,999			134,816			105,273
Other loss		5,730			2,799			7,550			2,395
Interest expense		4,259			5,799			9,237			11,868
Interest income		(487	)		(416	)		(1,493	)		(824	)

Income from continuing operations before provision for income taxes and noncontrolling interest		45,816			32,817			119,522			91,834
Provision for income taxes		15,789			13,263			41,183			33,430

Income from continuing operations before noncontrolling interest		30,027			19,554			78,339			58,404
(Loss) from discontinued operations, net of taxes		(93	)		(882	)		(430	)		(1,903	)

Net income		29,934			18,672			77,909			56,501
Less: Net income attributable to the noncontrolling interest		—			(912	)		—			(1,170	)

Net income attributable to Warnaco Group, Inc.	$	29,934		$	17,760		$	77,909		$	55,331


Amounts attributable to Warnaco Group, Inc. common shareholders:
Income from continuing operations, net of tax	$	30,027		$	18,642		$	78,339		$	57,234
Discontinued operations, net of tax		(93	)		(882	)		(430	)		(1,903	)

Net income	$	29,934		$	17,760		$	77,909		$	55,331


Basic income per common share attributable to Warnaco Group, Inc. common shareholders (see Note 17):
Income from continuing operations	$	0.67		$	0.41		$	1.72		$	1.25
(Loss) from discontinued operations		(0.01	)		(0.02	)		(0.01	)		(0.04	)

Net income	$	0.66		$	0.39		$	1.71		$	1.21


Diluted income per common share attributable to Warnaco Group, Inc. common shareholders (see Note 17):
Income from continuing operations	$	0.65		$	0.40		$	1.68		$	1.23
(Loss) from discontinued operations		—			(0.02	)		(0.01	)		(0.04	)

Net income	$	0.65		$	0.38		$	1.67		$	1.19

Weighted average number of shares outstanding used in computing income per common share (see Note 17):
Basic		44,468,794			45,412,175			44,943,829			45,356,680

Diluted		45,426,632			46,010,870			45,936,496			45,879,453

See Notes to Consolidated Condensed Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


	Warnaco Group Inc.
					Accumulated
			Additional		Other
	Common		Paid-in		Comprehensive			Retained			Treasury			Noncontrolling		Comprehensive
	Stock		Capital		Income			Earnings			Stock			Interest		Income			Total

Balance at January 3, 2009	$	501	$	631,891	$	12,841		$	268,016		$	(125,562	)	$	1,054	$	—		$	788,741
Comprehensive income:
Net income									55,331						1,170		56,501			56,501
Other comprehensive income, net of tax:
Foreign currency translation adjustments						9,522									344		9,866			9,866
Loss on cash flow hedges						(572	)										(572	)		(572	)
Other						94									16		110			110

Other comprehensive income															360		9,404			9,404

Comprehensive income															1,530	$	65,905			65,905

Correction of adjustment to initially adopt accounting for uncertain tax positions									(1,700	)										(1,700	)
Stock issued in connection with stock compensation plans		3		1,023																1,026
Compensation expense in connection with employee stock compensation plans				6,693																6,693
Purchase of treasury stock related to stock compensation plans												(1,390	)							(1,390	)

Balance at July 4, 2009	$	504	$	639,607	$	21,885		$	321,647		$	(126,952	)	$	2,584				$	859,275


	Warnaco Group Inc.
					Accumulated
			Additional		Other
	Common		Paid-in		Comprehensive			Retained		Treasury			Noncontrolling		Comprehensive
	Stock		Capital		Income			Earnings		Stock			Interest		Income			Total

Balance at January 2, 2010	$	506	$	633,378	$	46,473		$	362,813	$	(127,060	)	$	—	$	—		$	916,110
Comprehensive income:
Net income									77,909							77,909			77,909
Other comprehensive income, net of tax:
Foreign currency translation adjustments						(43,290	)									(43,290	)		(43,290	)
Gain on cash flow hedges						2,531										2,531			2,531
Other						74										74			74

Other comprehensive income														—		(40,685	)		(40,685	)

Comprehensive income														—	$	37,224			37,224

Stock issued in connection with stock compensation plans		4		5,836															5,840
Compensation expense in connection with employee stock compensation plans				13,774															13,774
Purchase of treasury stock related to stock compensation plans											(3,326	)							(3,326	)
Repurchases of common stock											(69,004	)							(69,004	)

Balance at July 3, 2010	$	510	$	652,988	$	5,788		$	440,722	$	(199,390	)	$	—				$	900,618

See Notes to Consolidated Condensed Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six Months Ended
	July 3, 2010			July 4, 2009
Cash flows from operating activities:
Net income	$	77,909		$	56,501
Adjustments to reconcile net income to net cash provided by operating activities:
Foreign exchange (gain) loss		4,550			(2,355	)
Loss from discontinued operations		430			1,903
Depreciation and amortization		24,205			21,185
Stock compensation		13,774			6,693
Amortization of deferred financing costs		688			855
Provision for trade and other bad debts		923			3,366
Inventory writedown		7,680			8,421
Loss on repurchase of Senior Notes		3,747			—
Other		(1,239	)		(456	)
Changes in operating assets and liabilities:
Accounts receivable		(29,365	)		(25,154	)
Inventories		(38,642	)		32,210
Prepaid expenses and other assets		(13,414	)		2,091
Accounts payable, accrued expenses and other liabilities		16,362			(53,019	)
Accrued income taxes		26,514			18,657

Net cash provided by operating activities from continuing operations		94,122			70,898
Net cash provided by operating activities from discontinued operations		851			3,165

Net cash provided by operating activities		94,973			74,063


Cash flows from investing activities:
Proceeds on disposal of assets and collection of notes receivable		57			175
Purchases of property, plant & equipment		(18,106	)		(20,847	)
Business acquisitions, net of cash acquired		(6,038	)		—

Net cash (used in) investing activities from continuing operations		(24,087	)		(20,672	)
Net cash (used in) investing activities from discontinued operations		—			—

Net cash (used in) investing activities		(24,087	)		(20,672	)


Cash flows from financing activities:
Payment of deferred financing costs		—			(515	)
Repurchase of Senior Notes due 2013		(164,011	)		—
Premium on cancellation of interest rate swap		—			739
Change in short-term notes payable		(2,656	)		(18,707	)
Change in revolving credit facility		25,133			(4,102	)
Proceeds from the exercise of employee stock options		5,086			377
Purchase of treasury stock		(72,330	)		(1,390	)
Contingent payment related to acquisition of non-controlling interest in Brazilian subsidiary		(3,442	)		—

Net cash (used in) financing activities from continuing operations		(212,220	)		(23,598	)
Net cash (used in) financing activities from discontinued operations		—			—

Net cash (used in) financing activities		(212,220	)		(23,598	)

Effect of foreign exchange rate changes on cash and cash equivalents		(6,557	)		213

(Decrease) increase in cash and cash equivalents		(147,891	)		30,006
Cash and cash equivalents at beginning of period		320,754			147,627

Cash and cash equivalents at end of period	$	172,863		$	177,633

See Notes to Consolidated Condensed Financial Statements.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 1—Organization

The Warnaco Group, Inc. (‘‘Warnaco Group’’ and, collectively with its subsidiaries, the ‘‘Company’’) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all of the outstanding shares of Warnaco Inc. (‘‘Warnaco’’). Warnaco is the principal operating subsidiary of Warnaco Group.

Note 2 — Basis of Consolidation and Presentation

The Consolidated Condensed Financial Statements include the accounts of Warnaco Group and its subsidiaries. Non-controlling interest represents minority shareholders’ proportionate share of the equity in the Company’s consolidated subsidiary WBR Industria e Comercio de Vestuario S.A (“WBR”). In the fourth quarter of the year ended January 2, 2010, the Company increased its ownership interest in WBR to 100% and, accordingly, at January 2, 2010 and July 3, 2010, there were no minority shareholders of WBR. All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying unaudited Consolidated Condensed Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for Fiscal 2009. The year end Consolidated Condensed Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Periods Covered: The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period January 3, 2010 to January 1, 2011 (“Fiscal 2010”) will contain 52 weeks of operations and the period January 4, 2009 to January 2, 2010 (“Fiscal 2009”) contained 52 weeks of operations. Additionally, the period from April 4, 2010 to July 3, 2010 (the “Three Months Ended July 3, 2010”) and the period from April 5, 2009 to July 4, 2009 (the “Three Months Ended July 4, 2009”) each contained thirteen weeks of operations and the period from January 3, 2010 to July 3, 2010 (the “Six Months Ended July 3, 2010”) and the period from January 4, 2009 to July 4, 2009 (the “Six Months Ended July 4, 2009”) each contained twenty-six weeks of operations.

Reclassifications: Prior period items on the Company’s Consolidated Condensed Statements of Operations and Consolidated Condensed Statements of Cash Flows have been reclassified to give effect to the Company’s discontinued operations. In addition, amounts related to certain sales of Calvin Klein underwear in regions managed by the Sportswear Group, previously included in net revenues and operating income of the Sportswear Group, have been reclassified to the Intimate Apparel Group for the Three and Six Months Ended July 4, 2009 to conform to the presentation for the Three and Six Months Ended July 3, 2010. See Note 6 of Notes to Consolidated Condensed Financial Statements.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Stock-Based Compensation: 20,350 and 378,650 stock options were granted during the Three and Six Months Ended July 3, 2010, respectively, and 601,350 and 613,850 stock options were granted during the Three and Six Months Ended July 4, 2009, respectively. The fair values of stock options granted during the Three and Six Months Ended July 3, 2010 and the Three and Six Months Ended July 4, 2009 were estimated at the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions:


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Weighted average risk free rate of return (a)		1.99	%		1.83	%		1.82	%		1.84	%
Dividend yield (b)		—			—			—			—
Expected volatility of the market price of the Company’s common stock		56.8	%		59.3	%		56.8	%		59.3	%
Expected option life (years)		4.2			3.72			4.2			3.72


(a)		Based on the quoted yield for U.S. five-year treasury bonds as of the date of grant.

(b)		The terms of the Company’s New Credit Agreements and the terms of the indenture governing its Senior Notes (each as defined below) limit the Company’s ability to make certain payments, including dividends, and require the Company to meet certain financial covenants. The Company has not paid dividends on its common stock in any of the last six fiscal years.

A summary of stock-based compensation expense is as follows:


	Three Months Ended				Six Months Ended
	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009

Stock-based compensation expense before income taxes:
Stock options	$	1,601	$	1,529	$	4,860	$	2,619
Restricted stock grants		2,646		1,975		8,914		4,074

Total (a)		4,247		3,504		13,774		6,693


Income tax benefit:
Stock options		563		520		1,737		901
Restricted stock grants		875		664		2,680		1,210

Total		1,438		1,184		4,417		2,111


Stock-based compensation expense after income taxes:
Stock options		1,038		1,009		3,123		1,718
Restricted stock grants		1,771		1,311		6,234		2,864

Total	$	2,809	$	2,320	$	9,357	$	4,582


(a)		The primary reason for the increase in stock-based compensation expense for the Six Months Ended July 3, 2010, compared to the Six Months Ended July 4, 2009, related to the incorporation of a “Retirement Eligibility” feature that was applied to all the equity awards issued in March 2010. For employee stock-based compensation awards issued in March 2010 (and for similar types of future awards), the Company’s Compensation Committee approved the incorporation of a Retirement Eligibility feature such that an employee who has attained the age of 60 years with at least five years of continuous employment with the Company will be deemed to be “Retirement Eligible”. Awards granted to Retirement Eligible employees will continue to vest even if the employee’s employment with the Company is terminated prior to the award’s vesting date (other than for cause, and provided the employee does not engage in a competitive activity). As in previous years, awards granted to all other employees (i.e. those who are not Retirement Eligible) will cease vesting if the employee’s employment with the Company is terminated prior to the award’s vesting date. Stock-based compensation expense is recognized over the requisite service period associated with the related equity award. For Retirement Eligible employees, the requisite service period is either the grant date or the period from the grant date to the Retirement-Eligibility date (in the case where the Retirement Eligibility date precedes the vesting date). For all other employees (i.e. those who are not Retirement Eligible), as in previous years, the requisite service period is the period from the grant date to the vesting date. The Retirement Eligibility feature was not applied to awards issued prior to March 2010.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Subsequent Events: The Company has evaluated events and transactions subsequent to July 3, 2010 for potential recognition or disclosure in the Consolidated Condensed Financial Statements.

Recent Accounting Pronouncements

There were no new accounting pronouncements issued or effective during the Six Months Ended July 3, 2010 that had or are expected to have a material impact on the Company’s Consolidated Condensed Financial Statements.

Note 3—Acquisitions

Acquisition of Businesses in Asia

On April 29, 2010, the Company entered into agreements for the purchase of the businesses of a distributor of the Company’s Calvin Klein Jeans and Calvin Klein Underwear in southern Asia for total consideration of approximately $2,900 and on June 1, 2010, the Company entered into agreements for the purchase of the businesses of a distributor of the Company’s Calvin Klein Jeans and Calvin Klein Underwear in the People’s Republic of China for total consideration of approximately $5,900. The acquisition of the businesses in southern Asia and the People’s Republic of China were accounted for as business combinations, which were deemed not to be material for accounting purposes from a financial disclosure perspective.

Acquisition of Remaining Non-controlling Interest and Retail Stores in Brazil

During the fourth quarter of Fiscal 2009, the Company acquired the remaining non-controlling interest in WBR and eight retail stores in Brazil, collectively, the “Brazilian Acquisition”. In connection with the Brazilian Acquisition, the Company is required to make three future annual payments to the Sellers through March 31, 2012 which are contingent on the operating income, as defined, of WBR during that period. During the Six Months Ended July 3, 2010, the Company paid 6 million Brazilian real (approximately $3,400) to the Sellers, representing the first of the three contingent payments.

During the Three Months Ended July 3, 2010, the Company completed the accounting for the Brazilian Acquisition, including the acquisition of certain store assets, which had been recorded as intangible assets of $3,592 on the date of acquisition. During the Three Months Ended July 3, 2010, the Company reclassified those assets as prepaid rent (included in Other assets on the Company’s Consolidated Condensed Balance Sheet), which will be amortized as rent expense over the expected term of the respective leases (see Note 13 of Notes to Consolidated Condensed Financial Statements). The Company did not adjust prior period balance sheets to give effect to the change in classification as it considers the adjustment to be immaterial.

Note 4—Discontinued Operations

As disclosed in its Annual Report on Form 10-K for Fiscal 2009, the Company discontinued certain operations in prior periods. Summarized operating results for the discontinued operations of those prior periods are as follows:


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Net revenues	$	738		$	503		$	1,349		$	1,075

(Loss) before income tax provision (benefit)	$	(188	)	$	(1,171	)	$	(716	)	$	(2,006	)
Income tax (benefit)		(95	)		(289	)		(286	)		(103	)

(Loss) from discontinued operations	$	(93	)	$	(882	)	$	(430	)	$	(1,903	)

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Summarized assets and liabilities of the discontinued operations are presented in the Consolidated Condensed Balance Sheets as follows:


	July 3, 2010		January 2, 2010		July 4, 2009

Accounts receivable, net	$	213	$	366	$	195
Inventories		400		1,684		—
Prepaid expenses and other current assets		813		122		178

Assets of discontinued operations	$	1,426	$	2,172	$	373


Accounts payable	$	216	$	104	$	105
Accrued liabilities		8,329		7,902		9,380
Other		11		12		1,878

Liabilities of discontinued operations	$	8,556	$	8,018	$	11,363

Note 5—Restructuring Expenses and Other Exit Costs

During the Three and Six Months Ended July 3, 2010, the Company incurred restructuring charges and other exit costs of $1,154 and $2,113, respectively, primarily related to (i) costs associated with workforce reductions, which represented the remainder of the Company’s effort, which began in Fiscal 2008, to align its cost structure to match current economic conditions ($159 and $1,121); (ii) the rationalization and consolidation of the Company’s European operations, which had begun in Fiscal 2007 ($305 and $596) and (iii) other exit activities, including contract termination costs, legal and other costs ($690 and $804). The charges described in clauses (i) through (iii) were partially offset by the reversal of accruals of expense, totaling $408, in the first quarter of Fiscal 2010 that were no longer needed upon conclusion of the related restructuring events.

During the Three and Six Months Ended July 4, 2009, the Company incurred restructuring charges and other exit costs of $1,474 and $10,045, respectively, primarily related to (i) the continuation of the workforce reduction, which commenced during the fourth quarter of Fiscal 2008, in order to align the Company’s cost structure to match current economic conditions ($560 and $6,097, respectively); (ii) the rationalization and consolidation of the Company’s European operations, which had begun in Fiscal 2007 ($195 and $796, respectively) ; (iii) activities associated with management’s initiatives to increase productivity and profitability in the Swimwear Group, which had also begun in Fiscal 2007 ($696 and $1,139, respectively), and (iv) other exit activities, including contract termination costs, legal and other costs ($23 and $2,013, respectively).

Restructuring charges and other exit costs have been recorded in the Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 3, 2010 and Three and Six Months Ended July 4, 2009, as follows:


	Three Months Ended				Six Months Ended
	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009
Cost of goods sold	$	183	$	201	$	274	$	1,684
Selling, general and administrative expenses		971		1,273		1,839		8,361

	$	1,154	$	1,474	$	2,113	$	10,045


Cash portion of restructuring items	$	1,154	$	1,474	$	2,113	$	10,045
Non-cash portion of restructuring items		—		—		—		—

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Changes in liabilities related to restructuring expenses and other exit costs for the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009 are summarized below:


Balance at January 3, 2009	$	5,925
Charges for the Six Months Ended July 4, 2009		10,045
Cash reductions for the Six Months Ended July 4, 2009		(7,034	)
Non-cash changes and foreign currency effects		69

Balance at July 4, 2009	$	9,005


Balance at January 2, 2010	$	3,572
Charges for the Six Months Ended July 3, 2010		2,113
Cash reductions for the Six Months Ended July 3, 2010		(3,665	)
Non-cash changes and foreign currency effects		(51	)

Balance at July 3, 2010 (a)	$	1,969


(a)		at July 3, 2010, includes approximately $745 recorded in accrued liabilities (part of current liabilities), which amounts are expected to be settled over the next 12 months and approximately $1,224 recorded in other long term liabilities which amounts are expected to be settled over the next four years.

Note 6—Business Segments and Geographic Information

Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group.

The Sportswear Group designs, sources and markets moderate to premium priced men’s and women’s sportswear under the Calvin Klein and Chaps^® brands. As of July 3, 2010, the Sportswear Group operated 533 Calvin Klein retail stores worldwide (consisting of 73 full price free-standing stores, 45 outlet free standing stores, 414 shop-in-shop/concession stores and one on-line store). As of July 3, 2010, there were also 371 retail stores operated by third parties under retail licenses or distributor agreements.

The Intimate Apparel Group designs, sources and markets moderate to premium priced intimate apparel and other products for women and better to premium priced men’s underwear, sleepwear and loungewear under the Calvin Klein, Warner’s^®, Olga^® and Body Nancy Ganz/Bodyslimmers^® brand names. As of July 3, 2010, the Intimate Apparel Group operated: 681 Calvin Klein retail stores worldwide (consisting of 84 free-standing stores, 64 outlet free-standing stores and 532 shop-in-shop/concession stores and one on-line store). As of July 3, 2010, there were also 218 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.

The Swimwear Group designs, licenses, sources and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under the Speedo^®, Lifeguard^® and Calvin Klein brand names. The Swimwear Group operates one on-line store.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Information by business group is set forth below:


	Sportswear		Intimate		Swimwear
	Group		Apparel Group		Group		Group Total		Corporate / Other			Total

Three Months Ended July 3, 2010
Net revenues	$	244,044	$	199,116	$	76,174	$	519,334	$	—		$	519,334
Operating income (loss)		24,987		34,563		8,824		68,374		(13,056	)		55,318
Depreciation and amortization		6,962		4,004		569		11,535		716			12,251
Restructuring expense		549		160		445		1,154		—			1,154
Capital expenditures		6,147		2,320		76		8,543		1,063			9,606

Three Months Ended July 4, 2009
Net revenues (a)	$	212,057	$	168,954	$	74,421	$	455,432	$	—		$	455,432
Operating income (loss) (a)		13,320		27,523		8,238		49,081		(8,082	)		40,999
Depreciation and amortization		7,009		2,783		589		10,381		767			11,148
Restructuring expense (gain)		352		311		852		1,515		(41	)		1,474
Capital expenditures		7,156		6,727		71		13,954		1,412			15,366

Six Months Ended July 3, 2010
Net revenues	$	550,390	$	393,058	$	164,050	$	1,107,498	$	—		$	1,107,498
Operating income (loss)		75,929		68,181		20,709		164,819		(30,003	)		134,816
Depreciation and amortization		14,215		7,365		1,081		22,661		1,544			24,205
Restructuring expense		442		113		714		1,269		844			2,113
Capital expenditures		13,786		6,391		459		20,636		1,368			22,004

Six Months Ended July 4, 2009
Net revenues (a)	$	481,114	$	341,777	$	170,384	$	993,275	$	—		$	993,275
Operating income (loss) (a)		50,789		57,921		20,783		129,493		(24,220	)		105,273
Depreciation and amortization		12,887		5,628		1,186		19,701		1,484			21,185
Restructuring expense		3,388		2,912		2,433		8,733		1,312			10,045
Capital expenditures		9,524		9,221		393		19,138		2,282			21,420

Balance Sheet
Total Assets:
July 3, 2010	$	888,449	$	365,800	$	137,915	$	1,392,164	$	123,887		$	1,516,051
January 2, 2010		875,304		390,610		144,198		1,410,112		249,682			1,659,794
July 4, 2009		800,354		332,761		138,626		1,271,741		224,018			1,495,759
Property, Plant and Equipment:
July 3, 2010	$	41,106	$	38,457	$	3,490	$	83,053	$	36,899		$	119,952
January 2, 2010		30,909		45,882		3,555		80,346		40,145			120,491
July 4, 2009		29,332		40,133		3,864		73,329		42,058			115,387


(a)		net revenues of $10,832 and $21,287 and operating income of $555 and $1,551 for the Three and Six Months Ended July 4, 2009, respectively, related to certain sales of Calvin Klein underwear in regions managed by the Sportswear Group, previously included in net revenues and operating income of the Sportswear Group, have been reclassified to the Intimate Apparel Group to conform to the presentation for the Three and Six Months Ended July 3, 2010.

All inter-company revenues and expenses are eliminated in consolidation. Management does not include inter-company sales when evaluating segment performance. Each segment’s performance is evaluated based upon operating income after restructuring charges and shared services expenses but before unallocated corporate expenses.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The table below summarizes corporate/other expenses for each period presented:


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Unallocated corporate expenses (a)	$	14,186		$	6,418		$	30,554		$	18,116
Foreign exchange losses (gains)		(1,786	)		402			(2,819	)		2,234
Pension expense (income)		(60	)		536			(120	)		1,074
Restructuring expense (income)		—			(41	)		844			1,312
Depreciation and amortization of corporate assets		716			767			1,544			1,484

Corporate/other expenses	$	13,056		$	8,082		$	30,003		$	24,220


(a)		the increase in unallocated corporate expenses for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009 was due primarily to an increase in amounts accrued for performance-based employee compensation. The increase in unallocated corporate expenses for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009 is related primarily to share-based compensation expense due to the addition of Retirement Eligibility provisions in the Fiscal 2010 awards (see Note 2 of Notes to Consolidated Condensed Financial Statements) and an increase in amounts accrued for performance-based employee compensation.

A reconciliation of operating income from operating groups to income from continuing operations before provision for income taxes and non-controlling interest is as follows:


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Operating income by operating groups	$	68,374		$	49,081		$	164,819		$	129,493
Corporate/other expenses		(13,056	)		(8,082	)		(30,003	)		(24,220	)

Operating income		55,318			40,999			134,816			105,273
Other loss		5,730			2,799			7,550			2,395
Interest expense		4,259			5,799			9,237			11,868
Interest income		(487	)		(416	)		(1,493	)		(824	)

Income from continuing operations before provision for income taxes and noncontrolling interest	$	45,816		$	32,817		$	119,522		$	91,834

Geographic Information: Net revenues summarized by geographic region are as follows:


	Three Months Ended
	July 3, 2010		%			July 4, 2009		%
Net revenues:
United States	$	261,964		50.4	%	$	232,320		51.0	%
Europe		99,831		19.2	%		98,274		21.6	%
Asia		83,492		16.1	%		70,214		15.4	%
Canada		29,866		5.8	%		29,226		6.4	%
Mexico, Central and South America		44,181		8.5	%		25,398		5.6	%

	$	519,334		100.0	%	$	455,432		100.0	%

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


	Six Months Ended
	July 3, 2010		%			July 4, 2009		%
Net revenues:
United States	$	532,714		48.1	%	$	502,064		50.5	%
Europe		257,133		23.2	%		240,989		24.3	%
Asia		180,565		16.3	%		152,393		15.4	%
Canada		55,362		5.0	%		49,923		5.0	%
Mexico, Central and South America		81,724		7.4	%		47,906		4.8	%

	$	1,107,498		100.0	%	$	993,275		100.0	%

Note 7—Income Taxes

The effective tax rates for the Three Months Ended July 3, 2010 and July 4, 2009 were 34.5% and 40.4%, respectively. The decrease in effective tax rate reflects a tax benefit relating to the finalization of a foreign tax examination recorded during the Three Months Ended July 3, 2010, partially offset by a shift in earnings from lower to higher taxing jurisdictions. Included in the effective tax rate for the Three Months Ended July 4, 2009 is a non-cash tax charge recorded in the U.S. of approximately $2,500 in order to correct an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003 (see Note 6 of Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2009).

The effective tax rates for the Six Months Ended July 3, 2010 and July 4, 2009 were 34.5% and 36.4%, respectively. The decrease in effective tax rate reflects a decrease in foreign earnings taxed in the U.S. as well as a tax benefit relating to the finalization of foreign tax examinations recorded during the Three Months Ended July 3, 2010, partially offset by a shift in earnings from lower to higher taxing jurisdictions. Included in the effective tax rate for the Six Months Ended July 4, 2009 is a non-cash tax charge of approximately $2,500 recorded in the U.S. associated with the correction of an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003.

The Company applies the applicable provisions of GAAP to determine whether tax benefits associated with uncertain tax positions may be recognized in the financial statements. During the Six Months Ended July 3, 2010, the Company reduced its liability for unrecognized tax benefits by approximately $1,600 as a result of the conclusion of certain income tax examinations in foreign jurisdictions, of which a benefit of approximately $600 impacted the effective tax rate. Additionally, the Company believes that its accruals for uncertain tax positions are adequate and that the ultimate resolution of these uncertainties will not have a material impact on its results of operations, financial position, or statement of cash flows.

The Company remains under audit in various taxing jurisdictions. It is, therefore, difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Company’s assessment of many factors, it is reasonably possible that within the next twelve months the amount of unrecognized tax benefits may increase between $2,500 and $5,000 (net of decreases that are reasonably possible), as a result of additional uncertain tax positions, the reevaluation of current uncertain tax positions arising from developments in examinations, the finalization of tax examinations, or from the closure of tax statutes.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 8—Employee Benefit and Retirement Plans

Defined Benefit Pension Plans

The Company has a defined benefit pension plan covering certain full-time non-union domestic employees and certain domestic employees covered by a collective bargaining agreement who had completed service prior to January 1, 2003 (the “Pension Plan”). Participants in the Pension Plan have not earned any additional pension benefits after December 31, 2002. The Company also sponsors defined benefit plans for certain of its United Kingdom and other European employees (the “Foreign Plans”). The Foreign Plans were not considered to be material for any period presented. These pension plans are noncontributory and benefits are based upon years of service. The Company also has health care and life insurance plans that provide post-retirement benefits to certain retired domestic employees (the “Postretirement Plans”). The Postretirement Plans are, in most cases, contributory with retiree contributions adjusted annually.

Each quarter the Company recognizes interest cost of the Pension Plan’s projected benefit obligation offset by the expected return on Pension Plan assets. The Company records pension expense (income) as the effect of actual gains and losses exceeding the expected return on Pension Plan assets (including changes in actuarial assumptions) less changes in the Pension Plan’s projected benefit obligation (including changes in actuarial assumptions) in the fourth quarter of each year. This accounting results in volatility in pension expense or income; therefore, the Company reports pension expense/income on a separate line of its Statements of Operations in each period.

During the Six Months Ended July 3, 2010, the Company made contributions of $2,400 to the Pension Plan. The Company’s contributions to the Pension Plan are expected to be $6,300 in total for Fiscal 2010. The fair value of the Pension Plan’s assets fluctuates with market conditions and is subject to uncertainties that are difficult to predict. During the Six Months Ended July 3, 2010, the fair value of the Pension Plan’s assets decreased to $112,947, representing an annualized rate of return of approximately negative 3.5%.

The following table includes only the Pension Plan. The Foreign Plans were not considered to be material for any period presented. The components of net periodic benefit cost are as follows:


	Pension Plans						Postretirement Plans
	Three Months Ended						Three Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	—		$	—		$	33		$	39
Interest cost		2,358			2,549			91			52
Expected return on plan assets		(2,418	)		(2,012	)		—			—
Amortization of actuarial loss (gain)		—			—			(26	)		(41	)

Net benefit cost (income) (a)	$	(60	)	$	537		$	98		$	50


	Pension Plans						Postretirement Plans
	Six Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	—		$	—		$	66		$	78
Interest cost		4,716			5,098			182			105
Expected return on plan assets		(4,836	)		(4,024	)		—			—
Amortization of actuarial loss (gain)		—			—			(52	)		(83	)

Net benefit cost (income) (a)	$	(120	)	$	1,074		$	196		$	100


(a)		Pension Plan net benefit cost (income) does not include costs related to the Foreign Plans of $38 and $77 for the Three and Six Months Ended July 3, 2010, respectively, and $57 and $57 for the Three and Six Months Ended July 4, 2009, respectively.

Deferred Compensation Plans

The Company’s liability for employee contributions and investment activity was $3,643, $2,838 and $2,334 as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively. This liability is included in other long-term liabilities. The Company’s liability for director contributions and investment activity was $808, $703 and $531 as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively. This liability is included in other long-term liabilities.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 9—Comprehensive Income

The components of comprehensive income are as follows:


	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Net income	$	29,934		$	18,672		$	77,909		$	56,501
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments		(38,480	)		20,202			(43,290	)		9,866
Change in fair value of cash flow hedges		2,490			(910	)		2,531			(572	)
Change in actuarial gains (losses), net related to post retirement medical plans		—			1			—			—
Other		70			110			74			110

Total Comprehensive income (loss)		(5,986	)		38,075			37,224			65,905
Less: Comprehensive income attributable to noncontrolling interest		—			(1,181	)		—			(1,530	)

Comprehensive income (loss) attributable to Warnaco Group Inc.	$	(5,986	)	$	36,894		$	37,224		$	64,375

The components of accumulated other comprehensive income as of July 3, 2010, January 2, 2010 and July 4, 2009 are summarized below:


	July 3,			January 2,			July 4,
	2010			2010			2009

Foreign currency translation adjustments (a)	$	5,268		$	48,558		$	22,720

Actuarial (losses), net related to post retirement medical plans, net of tax of $607, $607 and $0 as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively		(1,058	)		(1,058	)		(29	)
Gain (loss) on cash flow hedges, net of taxes of $573, $387, and $0 as of July 3, 2010, January 2, 2010 and July 4, 2009, respectively		1,504			(1,027	)		(900	)
Other		74			—			94

Total accumulated other comprehensive income	$	5,788		$	46,473		$	21,885


(a)		the foreign currency translation adjustments reflect the change in the U.S. dollar relative to functional currencies where the Company conducts certain of its operations and the fact that the majority of the Company’s assets are based outside of the U.S. The decrease of $43,290 in foreign currency translation adjustments at July 3, 2010 compared to January 2, 2010 reflects the increase in the strength of the U.S. Dollar relative to the Euro, Canadian Dollar, Korean Won, Brazilian Real and Mexican Peso between such dates.

Note 10—Fair Value Measurement

The Company utilizes the market approach to measure fair value for financial assets and liabilities, which primarily relate to derivative contracts and interest rate swaps. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company classifies its financial instruments in a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:


		Level 1 -		Inputs are quoted prices in active markets for identical assets or liabilities.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


		Level 2 -		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

		Level 3 -		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Valuation Techniques

The fair value of foreign currency exchange contracts and zero cost collars was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward or spot exchange rate, as applicable. The fair value of these foreign currency exchange contracts is based on quoted prices that include the effects of U.S. and foreign interest rate yield curves and, therefore, meets the definition of level 2 fair value, as defined above.

The fair value of interest rate swaps was estimated based on the amount that the Company would receive or pay to terminate the swaps on the valuation date. Those amounts are based on receipt of interest at a fixed interest rate of 8⁷/₈% and a payment of a variable rate based on a fixed interest rate above the six month LIBOR rate. As such, the fair value of the interest rate swaps meets the definition of level 2, as defined above. As of July 3, 2010 and January 2, 2010, the Company had no outstanding interest rate swaps.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis, as of July 3, 2010, January 2, 2010 and July 4, 2009:


	July 3, 2010						January 2, 2010						July 4, 2009
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)

Assets
Interest rate swap (a)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,508	$	—
Foreign currency exchange contracts	$	—	$	5,388	$	—	$	—	$	79	$	—	$	—	$	801	$	—

Liabilities
Foreign currency exchange contracts	$	—	$	870	$	—	$	—	$	3,400	$	—	$	—	$	5,846	$	—


(a)		the 2004 and 2003 Swap Agreements (as defined in Note 14, below) were called by the issuer in June and July 2009, respectively. The Company received a total debt premium of $2,219, which was being amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature). The Senior Notes were fully repaid on June 15, 2010 and the remaining deferred premium was written off. See Note 14 of Notes to Consolidated Condensed Financial Statements.

Cash and cash equivalents, accounts receivable and accounts payable are recorded at carrying value, which approximates fair value. The Company’s Senior Notes, CKJEA Notes and amounts outstanding under the New Credit Agreements are also reported at carrying value.

Note 11— Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.

Accounts Receivable: The carrying amount of the Company’s accounts receivable approximates fair value.

Accounts Payable: The carrying amount of the Company’s accounts payable is approximately equal to their fair value because accounts payable are short-term in nature and the carrying value is equal to the settlement value.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Short-term Revolving Credit Facilities: The carrying amount of the New Credit Agreements, CKJEA Notes and other short-term debt is approximately equal to their fair value because of their short-term nature and because amounts outstanding bear interest at variable rates which fluctuate with market rates.

Senior Notes: The Senior Notes were scheduled to mature on June 15, 2013 and bore interest at 8⁷/8% payable semi-annually beginning December 15, 2003. However, at July 3, 2010, all of the Senior Notes had been redeemed from bondholders. At January 2, 2010, the fair value of the Senior Notes was based on their redemption price, including the related debt premium on the Swap Agreements, since a portion of the Senior Notes was redeemed on January 5, 2010 (see Note 14 of Notes to Consolidated Condensed Financial Statements). The fair value of the Senior Notes at July 4, 2009 was based upon quoted market prices for the Senior Notes.

Foreign Currency Exchange Contracts: The fair value of the outstanding foreign currency exchange forward contracts is based upon the cost to terminate the contracts, as described above in Note 10 of Notes to Consolidated Condensed Financial Statements.

Interest Rate Swaps: The fair value of the Swap Agreements as of July 4, 2009 was based upon the costs to terminate the contracts. As of July 3, 2010 and January 2, 2010, the Company had no outstanding interest rate swaps.

The carrying amounts and fair values of the Company’s financial instruments at July 3, 2010, January 2, 2010 and July 4, 2009 are as follows:


		July 3, 2010				January 2, 2010				July 4, 2009
	Balance Sheet	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Location	Amount		Value		Amount		Value		Amount		Value
Assets:
Accounts receivable	Accounts receivable, net of reserves	$	304,328	$	304,328	$	290,737	$	290,737	$	281,400	$	281,400
Open foreign currency exchange contracts	Prepaid expenses and other current assets		5,388		5,388		79		79		801		801
Interest rate swaps — net gain	Other assets		—		—		—		—		1,508		1,508

Liabilities:
Accounts payable	Accounts payable	$	156,695	$	156,695	$	127,636	$	127,636	$	124,531	$	124,531
Short-term revolving credit facilities	Short-term debt		65,203		65,203		47,873		47,873		58,807		58,807
Senior Notes, current portion	Short-term debt		—		—		50,000		51,479		—		—
Open foreign currency exchange contracts	Accrued liabilities		870		870		3,400		3,400		5,846		5,846
Senior Notes	Long-term debt		—		—		112,835		116,115		163,130		163,934

Derivative Financial Instruments

The Company is exposed to foreign exchange risk related to U.S. dollar-denominated purchases of inventory, payment of minimum royalty and advertising costs and intercompany payables by foreign subsidiaries whose functional currencies are not the U.S. dollar. The Company or its foreign subsidiaries enter into foreign exchange forward contracts, including zero-cost collar option contracts, to offset certain of its foreign exchange risk. During the Six Months Ended July 4, 2009, the Company also utilized interest rate swaps to convert a portion of the interest obligation related to its long-term debt from a fixed rate to floating rates. See Note 14 of Notes to Consolidated Condensed Financial Statements. The Company does not use derivative financial instruments for speculative or trading purposes.

A number of international financial institutions are counterparties to the Company’s zero cost collars and foreign exchange contracts. The Company monitors its positions with, and the credit quality of, these counterparty financial institutions and does not anticipate nonperformance by these counterparties. Management believes that the Company would not suffer a material loss in the event of nonperformance by these counterparties.

During the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009, the Company’s Korean, European and Canadian subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed to satisfy the first 50% of U.S. dollar denominated purchases of inventory over an 18-month period or payment of 100% of the minimum royalty and advertising expenses. All of the foregoing forward contracts were designated as cash flow hedges, with gains and losses accumulated on the Balance Sheet in Other Comprehensive Income and recognized in Cost of Goods Sold in the Statement of Operations during the periods in which the underlying transactions occur.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

During the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009, the Company also continued hedging programs, which were accounted for as economic hedges, with gains and losses recorded directly in Other loss (income) or Selling, general and administrative expense in the Statements of Operations in the period in which they are incurred. Those hedging programs included foreign currency exchange contracts, including, zero-cost collars, that were designed to fix the number of Euros, Korean won, Canadian dollars or Mexican pesos required to satisfy either (i) the first 50% of U.S. dollar denominated purchases of inventory over an 18-month period; (ii) 50% of intercompany purchases from a British subsidiary or (iii) U.S. dollar denominated intercompany loans and payables. See also Item 3. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Risk in this Quarterly Report on Form 10-Q for further details.

The following table summarizes the Company’s derivative instruments as of July 3, 2010, January 2, 2010 and July 4, 2009:


	Asset Derivatives								Liability Derivatives
			Fair Value							Fair Value
		Balance Sheet	July 3,		January 2,		July 4,		Balance Sheet	July 3,		January 2,		July 4,
	Type (a)	Location	2010		2010		2009		Location	2010		2010		2009

Derivatives designated as hedging instruments under FASB ASC 815-20

Foreign exchange contracts	CF	Prepaid expenses and other current assets	$	1,969	$	—	$	—	Accrued liabilities	$	—	$	1,119	$	656
Interest rate swaps	FV	Other assets		—		—		1,508	Long-term debt		—		—		—


Total derivatives designated as hedging instruments under FASB ASC 815-20			$	1,969	$	—	$	1,508		$	—	$	1,119	$	656


Derivatives not designated as hedging instruments under FASB ASC 815-20

Foreign exchange contracts	CF	Prepaid expenses and other current assets	$	3,419	$	79	$	801	Accrued liabilities	$	870	$	2,281	$	5,190


Total derivatives not designated as hedging instruments under FASB ASC 815-20			$	3,419	$	79	$	801		$	870	$	2,281	$	5,190


Total derivatives			$	5,388	$	79	$	2,309		$	870	$	3,400	$	5,846


(a)		CF = cash flow hedge; FV = fair value hedge

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following tables summarize the effect of the Company’s derivative instruments on the Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 3, 2010 and the Three and Six Months Ended July 4, 2009:


														Location of
		Amount of Gain (Loss) Recognized						Amount of Gain (Loss) Reclassified from						Gain (Loss)	Amount of Gain (Loss) Recognized
		in OCI on Derivatives					Location of Gain	Accumulated OCI into Income						Recognized in	in Income on Derivative
		(Effective Portion)					(Loss) Reclassified	(Effective Portion)						Income on	(Ineffective Portion)
		Three Months		Three Months			from Accumulated	Three Months			Three Months			Derivative	Three Months		Three Months
Derivatives in FASB ASC 815-20	Nature of Hedged	Ended		Ended			OCI into Income	Ended			Ended			(Ineffective	Ended		Ended
Cash Flow Hedging Relationships	Transaction	July 3, 2010		July 4, 2009			(Effective Portion)	July 3, 2010			July 4, 2009			Portion) (c)	July 3, 2010		July 4, 2009

Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	877	$	(555	)	cost of goods sold	$	341		$	(27	)	other loss/income	$	9	$	(21	)
Foreign exchange contracts	Purchases of inventory (b)		2,529		(485	)	cost of goods sold		(312	)		(105	)	other loss/income		106		(4	)


Total		$	3,406	$	(1,040	)		$	29		$	(132	)		$	115	$	(25	)


		Six Months		Six Months				Six Months			Six Months				Six Months		Six Months
		Ended		Ended				Ended			Ended				Ended		Ended
		July 3, 2010		July 4, 2009				July 3, 2010			July 4, 2009				July 3, 2010		July 4, 2009

Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	1,515	$	(107	)	cost of goods sold	$	400		$	70		other loss/income	$	26	$	(6	)
Foreign exchange contracts	Purchases of inventory (b)		1,390		(490	)	cost of goods sold		(818	)		(95	)	other loss/income		74		(11	)


Total		$	2,905	$	(597	)		$	(418	)	$	(25	)		$	100	$	(17	)


(a)		At July 3, 2010, the amount of minimum royalty costs hedged was $9,252; contracts expire March 2011. At July 4, 2009, the amount of minimum royalty costs hedged was $9,652; contracts expire March 2010.

(b)		At July 3, 2010, the amount of inventory purchases hedged was $46,650 ; contracts expire October 2011. At July 4, 2009, amount of inventory purchases hedged was $13,292; contracts expire October 2010.

(c)		No amounts were excluded from effectiveness testing

Location of Gain

Amount of Gain (Loss) Recognized
in Income on Derivative

Derivatives not designated as

Amount

(Loss) Recognized

Three Months

Six Months

hedging instruments under FASB

Nature of Hedged

Hedged

Maturity Date

in Income on

Ended

ASC 815-20

Transaction

Instrument

July 3, 2010

Derivative

July 3, 2010

Foreign exchange contracts (d)

Purchases of inventory

Forward contracts

907

August 2010

other loss/income

(110

)

Foreign exchange contracts (e)

Intercompany purchases of inventory

Forward contracts

15,045

December 2011

other loss/income

(873

)

(791

)

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

10,000

April 2011

other loss/income

385

903

Foreign exchange contracts

Intercompany loans

Forward contracts

—

other loss/income

—

(94

)

Foreign exchange contracts

Intercompany payables

Forward contracts

34,000

March 2011

other loss/income

1,762

2,859

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

other loss/income

383

1,511

Foreign exchange contracts

Intercompany payables

Forward contracts

4,000

July 2010

selling, general and administrative

504

398

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

selling, general and administrative

(232

)

Total

2,298

4,444

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


							Three Months Ended			Six Months Ended
			July 4, 2009		July 4, 2009		July 4, 2009			July 4, 2009

Foreign exchange contracts (d)	Purchases of inventory	Forward contracts	$	24,185	August 2009 - August 2010	other loss/income	$	(1,852	)	$	(2,560	)

Foreign exchange contracts (e)	Intercompany purchases of inventory	Forward contracts		3,840	December 2009	other loss/income		(605	)		(698	)

Foreign exchange contracts (f)	Minimum royalty and advertising costs	Forward contracts		10,000	April 2010	other loss/income		(504	)		(510	)

Foreign exchange contracts	Intercompany loans	Zero-cost collars		14,728	November 2009 - April 2010	other loss/income		500			415

Foreign exchange contracts	Intercompany payables	Zero-cost collars		35,000	July 2009 - January 2010	other loss/income		3			216

Foreign exchange contracts	Intercompany payables	Zero-cost collars		20,000	July 2009 - May 2010	selling, general and administrative		710			1,560


Total							$	(1,748	)	$	(1,577	)


(d)		Forward contracts used to offset 50% of U.S. dollar-denominated purchases of inventory by the Company’s foreign subsidiaries whose functional currencies were the Canadian dollar and Mexican peso, entered into by Warnaco Inc. on behalf of foreign subsidiaries.

(e)		Forward contracts used to offset 50% of Euro-denominated intercompany purchases by a subsidiary whose functional currency is the British pound.

(f)		Forward contracts used to offset payment of minimum royalty and advertising costs related to sales of inventory by the Company’s foreign subsidiary whose functional currency was the Euro, entered into by Warnaco Inc. on behalf of a foreign subsidiary.

A reconciliation of the balance of Accumulated Other Comprehensive Income during the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009 related to cash flow hedges of foreign exchange forward contracts is as follows:


Balance January 3, 2009	$	(328	)
Derivative losses recognized		(597	)
Gains amortized to earnings		25

Balance July 4, 2009, net of tax	$	(900	)


Balance January 2, 2010	$	(1,414	)
Derivative gains recognized		2,905
Gains amortized to earnings		418
Other		168

Balance before tax effect		2,077
Tax effect		(573	)

Balance July 3, 2010, net of tax	$	1,504

During the twelve months following July 3, 2010, the net amount of gains that were reported in Other Comprehensive Income at that date that are estimated to be amortized into earnings is $1,777. During the Six Months Ended July 3, 2010, the Company expected that all originally forecasted purchases of inventory or payment of minimum royalties, which were covered by cash flow hedges, would occur by the end of the respective originally specified time periods. Therefore, no amount of gains or losses was reclassified into earnings during the Six Months Ended July 3, 2010 as a result of the discontinuance of those cash flow hedges.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 12—Inventories

Inventories are valued at the lower of cost to the Company (using the first-in-first-out method) or market and are summarized as follows:


	July 3, 2010		January 2, 2010		July 4, 2009

Finished goods	$	277,401	$	251,540	$	290,315
Raw materials		164		1,822		1,263

	$	277,565	$	253,362	$	291,578

See Note 11 to Notes to Consolidated Condensed Financial Statements for details on the Company’s hedging programs related to purchases of inventory.

Note 13—Intangible Assets and Goodwill

The following tables set forth intangible assets as of July 3, 2010, January 2, 2010 and July 4, 2009 and the activity in the intangible asset accounts for the Six Months Ended July 3, 2010:


	July 3, 2010						January 2, 2010						July 4, 2009
	Gross Carrying		Accumulated				Gross Carrying		Accumulated				Gross Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net		Amount		Amortization		Net

Finite-lived intangible assets:
Licenses for a term (Company as licensee)	$	310,668	$	50,645	$	260,023	$	330,389	$	46,268	$	284,121	$	286,852	$	40,467	$	246,385
Other		16,164		9,330		6,834		20,427		8,387		12,040		16,298		7,525		8,773

		326,832		59,975		266,857		350,816		54,655		296,161		303,150		47,992		255,158

Indefinite-lived intangible assets:
Trademarks		54,715		—		54,715		56,719		—		56,719		22,530		—		22,530
Licenses in perpetuity		23,113		—		23,113		23,951		—		23,951		10,227		—		10,227

		77,828		—		77,828		80,670		—		80,670		32,757		—		32,757

Intangible Assets (a)	$	404,660	$	59,975	$	344,685	$	431,486	$	54,655	$	376,831	$	335,907	$	47,992	$	287,915


(a)		the increase in the balance of intangible assets from July 4, 2009 to July 3, 2010 primarily relates to the increase in value of certain intangible assets due to the correction of errors in prior period deferred tax balances associated with the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003 (see Note 10 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2009).


										Other
				Licenses			Licenses			Finite-lived
				in			for a			Intangible
	Trademarks			Perpetuity			Term			Assets			Total

Balance at January 2, 2010	$	56,719		$	23,951		$	284,121		$	12,040		$	376,831
Amortization expense		—			—			(4,377	)		(943	)		(5,320	)
Translation adjustments		—			—			(17,873	)		(671	)		(18,544	)
Recapture of tax basis (a)		(2,004	)		(838	)		(1,848	)		—			(4,690	)
Other (b)		—			—			—			(3,592	)		(3,592	)

Balance at July 3, 2010	$	54,715		$	23,113		$	260,023		$	6,834		$	344,685


(a)		relates to the correction of errors in prior period deferred tax balances associated with the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003.

(b)		during the Three Months Ended July 3, 2010, the Company completed the accounting for the acquisition of certain store assets in Brazil (see Note 2 of Notes to Consolidated Condensed Financial Statements), which had been recorded as intangible assets of $3,592 on the date of acquisition during the fourth quarter of Fiscal 2009. During the Three Months Ended July 3, 2010, the Company reclassified those assets as prepaid rent (included in Other assets on the Company’s Consolidated Condensed Balance Sheet).

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following table summarizes the Company’s estimated amortization expense for intangible assets for the next five years:


2011	$	9,081
2012		8,913
2013		8,827
2014		7,433
2015		7,433

The following table summarizes the changes in the carrying amount of goodwill for the Six Months Ended July 3, 2010:



	Sportswear			Intimate			Swimwear
	Group			Apparel Group			Group		Total

Goodwill balance at January 2, 2010	$	108,633		$	1,446		$	642	$	110,721
Adjustment:
Translation adjustments		(10,075	)		(90	)		—		(10,165	)
Other (a)		573			98			—		671

Goodwill balance at July 3, 2010	$	99,131		$	1,454		$	642	$	101,227


(a)		relates to the acquisition of businesses in the People’s Republic of China during the Three Months Ended July 3, 2010 (see Note 3 of Notes to Consolidated Condensed Financial Statements).

Note 14—Debt

Debt was as follows:


	July 3, 2010		January 2, 2010		July 4, 2009
Short-term debt:
CKJEA notes payable and other	$	39,881	$	47,684	$	50,133
New Credit Agreements		25,322		189		8,674
8 7/8% Senior Notes due 2013 (a)		—		50,000		—

		65,203		97,873		58,807


Long-term debt:
8 7/8% Senior Notes due 2013		—		110,890		160,890
Unrealized gain on swap agreements		—		—		1,508
Debt premium on 2003 and 2004 swaps		—		1,945		732

		—		112,835		163,130

Total Debt	$	65,203	$	210,708	$	221,937


(a)		reflects the portion of the Senior Notes that was redeemed from bondholders on January 5, 2010 (see below).

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Senior Notes

On January 5, 2010, the Company redeemed from bondholders $50,000 aggregate principal amount of its outstanding 8 7/8% Senior Notes due 2013 (“Senior Notes”) for a total consideration of $51,479 and on June 15, 2010, the Company redeemed from bondholders the remaining $110,890 aggregate principal amount of its outstanding Senior Notes for a total consideration of $112,530. In connection with the redemptions, the Company recognized losses, in the Other loss (income) line item in the Company’s Consolidated Condensed Statement of Operations totaling approximately $2,055 and $3,747, for the Three and Six Months Ended July 3, 2010, respectively, which included $1,640 and $3,119 of premium expense, the write-off of approximately $1,594 and $2,411 of deferred financing costs and $1,179 and $1,783 of unamortized gain from the previously terminated 2003 Swap Agreement and 2004 Swap Agreement (both defined below) for the Three and Six Months Ended July 3, 2010, respectively. The Company funded the redemption of the Senior Notes on January 5, 2010 and June 15, 2010 with available cash on hand in the U.S. and borrowings under its New Credit Agreement (defined below).

The aggregate principal amount outstanding under the Senior Notes was $0 as of July 3, 2010 and $160,890 at January 2, 2010 and at July 4, 2009.

Interest Rate Swap Agreements

The Company entered into interest rate swap agreements on September 18, 2003 (the “2003 Swap Agreement”) and November 5, 2004 (the “2004 Swap Agreement” and, together with the 2003 Swap Agreement, the “Swap Agreements”) with respect to the Senior Notes for a total notional amount of $75,000. In June 2009, the 2004 Swap Agreement was called by the issuer and the Company received a debt premium of $740. On July 15, 2009, the 2003 Swap Agreement was called by the issuer and the Company received a debt premium of $1,479. Both debt premiums were being amortized as reductions to interest expense through June 15, 2013 (the date on which the Senior Notes mature). The Senior Notes were fully repaid on June 15, 2010 and the remaining deferred premium was written off. During the Three and Six Months Ended July 3, 2010, $1,244 and $1,945, respectively, was amortized, including $1,179 and $1,783, respectively, related to the redemption of the Senior Notes (see above). The 2003 Swap Agreement and the 2004 Swap Agreement provided that the Company would receive interest at 8⁷/₈% and pay variable rates of interest based upon six month LIBOR plus 4.11% and 4.34%, respectively. As a result of the Swap Agreements and the amortization of the debt premiums, the weighted average effective interest rate of the Senior Notes was 8.53% as of January 2, 2010 and 7.77% as of July 4, 2009.

As of July 3, 2010 and January 2, 2010, the Company had no outstanding interest rate swap agreements. The fair values of the Company’s Swap Agreements at July 4, 2009 reflect the termination premium or termination discount that the Company would have realized if such Swap Agreements had been terminated on that date. Since the provisions of the Company’s Swap Agreements matched the provisions of the Company’s outstanding Senior Notes (the “Hedged Debt”), changes in the fair values of the Swap Agreements did not have any effect on the Company’s results of operations for the Three and Six Months Ended July 4, 2009 but were recorded in the Company’s Consolidated Balance Sheets as of that date in Other assets with a corresponding increase in the Hedged Debt.

New Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “New Credit Agreement”) and Warnaco of Canada Company, an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “New Canadian Credit Agreement” and, together with the New Credit Agreement, the “New Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit.

At July 3, 2010, the New Credit Agreement had interest rate options (dependent on the amount borrowed and the repayment period) that are based on: (i) a Base Rate (as defined in the New Credit Agreement) plus 0.75% (4.0% at July 3, 2010) or (ii) LIBOR (as defined in the New Credit Agreement) plus 1.75% (2.28% at July 3, 2010) in each case, on a per annum basis. The interest rate payable on outstanding borrowing is subject to adjustments based on changes in the Company’s leverage ratio. At July 3, 2010, the New Canadian Credit Agreement had interest rate options (dependent on the amount borrowed and the repayment period) that are based on: (i) the prime rate announced by Bank of America (acting through its Canada branch) plus 0.75% (3.25% at July 3, 2010) or (ii) a BA Rate (as defined in the New Canadian Credit Agreement) plus 1.75% (2.5% at July 3, 2010), in each case, on a per annum basis and subject to adjustments based on changes in the Company’s leverage ratio. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) as its rate of interest for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

As of July 3, 2010, the Company had $25,322 in loans and approximately $85,718 in letters of credit outstanding under the New Credit Agreement, leaving approximately $110,750 of availability. As of July 3, 2010, there were no loans and no letters of credit outstanding under the New Canadian Credit Agreement and the available line of credit was approximately $19,690. As of July 3, 2010, the Company was in compliance with all financial covenants contained in the New Credit Agreements.

Euro-Denominated CKJEA Notes Payable and Other

In connection with the Company’s 2006 acquisition of certain parts of its Calvin Klein businesses, the Company assumed certain short-term notes payable (the “CKJEA Notes”). The total CKJEA notes payable of $38,289 at July 3, 2010 consists of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA notes payable was 2.49% as of July 3, 2010, 2.18% as of January 2, 2010 and 2.39% as of July 4, 2009. All of the CKJEA notes payable are short-term and were renewed during the Six Months Ended July 3, 2010 for additional terms of no more than 12 months. At July 3, 2010, the Company’s Brazilian subsidiary, WBR, had lines of credit with several banks, with a total outstanding balance of $1,592, recorded in Short-term debt in the Company’s Consolidated Condensed Balance Sheet, which was secured by an equal amount of WBR’s trade accounts receivable. In addition, one of the Company’s Korean subsidiaries had an outstanding note payable of $1,568, with an interest rate of 4.7% per annum at July 4, 2009, all of which had been repaid as of January 2, 2010 and July 3, 2010.

Note 15—Stockholders’ Equity

Preferred Stock

The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value $0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value $0.01 per share. There were no shares of preferred stock issued and outstanding at July 3, 2010, January 2, 2010 and July 4, 2009.

Share Repurchase Programs

On May 12, 2010, the Company’s Board of Directors authorized a share repurchase program (the “2010 Share Repurchase Program”) for the repurchase of up to 5,000,000 shares of the Company’s common stock. All repurchases of shares under the new program will be made consistent with the terms of the Company’s applicable debt instruments. The share repurchase program may be modified or terminated by the Company’s Board of Directors at any time.

In May 2007, the Company’s Board of Directors authorized a share repurchase program (the “2007 Share Repurchase Program”) for the repurchase of up to 3,000,000 shares of the Company’s common stock. During the first quarter of Fiscal 2010, the Company repurchased the remaining 1,490,131 shares of its common stock allowed to be repurchased under the 2007 Share Repurchase Program in the open market at a total cost of approximately $69,004 (an average cost of $46.31 per share). At July 3, 2010, the Company had cumulatively purchased 3,000,000 shares of common stock in the open market at a total cost of approximately $106,916 (an average cost of $35.64 per share) under the 2007 Share Repurchase Program.

Repurchased shares are held in treasury pending use for general corporate purposes.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Stock Incentive Plans

A summary of stock option award activity under the Company’s stock incentive plans as of and for the Six Months Ended July 3, 2010 is presented below:


				Weighted
				Average
				Exercise
	Options			Price
Outstanding as of January 2, 2010		2,462,346		$	26.79
Granted		378,650			43.13
Exercised		(228,627	)		22.24
Forfeited / Expired		(54,614	)		35.95

Outstanding as of July 3, 2010		2,557,755		$	29.46


Options Exercisable as of July 3, 2010		1,642,755		$	24.96

A summary of the activity for unvested restricted share/unit awards under the Company’s stock incentive plans (excluding Performance Awards, defined below) as of and for the Six Months Ended July 3, 2010 is presented below:


				Weighted
	Restricted			Average Grant
	shares/units			Date Fair Value
Unvested as of January 2, 2010		751,108		$	32.78
Granted		240,410			43.43
Vested (a)		(196,041	)		34.22
Forfeited		(25,781	)		35.67

Unvested as of July 3, 2010		769,696		$	35.64


(a)		does not include an additional 36,750 restricted units with a grant date fair value of $43.28, granted to Retirement-Eligible employees, for which the requisite service period has been completed on the grant date but the restrictions will not lapse until the end of the three-year vesting period.

In March 2010, share-based compensation awards granted to certain of the Company’s executive officers under the 2005 Stock Incentive Plan included 75,750 performance-based restricted stock/restricted unit awards (“Performance Awards”) in addition to the service-based stock options and restricted stock awards, included in the preceding tables, of the types that had been granted in previous periods. The Performance Awards cliff-vest three years after the grant date and are subject to the same vesting provisions as awards of the Company’s regular service-based restricted stock/restricted unit awards granted in March 2010. The final number of Performance Awards that will be earned, if any, at the end of the three-year vesting period will be the greatest number of shares based on the Company’s achievement of certain goals relating to cumulative earnings per share growth (a performance condition) or the Company’s relative total shareholder return (“TSR”) (change in closing price of the Company’s common stock on the New York Stock Exchange compared to that of a peer group of companies (“Peer Companies”)) (a market condition) measured from the beginning of Fiscal 2010 to the end of Fiscal 2012 (the “Measurement Period”). The total number of Performance Awards earned could equal up to 150% of the number of Performance Awards originally granted, depending on the level of achievement of those goals during the Measurement Period.

The Company records stock-based compensation expense related to the Performance Awards ratably over the requisite service period based on the greater of the estimated expense calculated under the performance condition or the grant date fair value calculated under the market condition. Stock-based compensation expense related to an award with a market condition is recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. Under the performance condition, the estimated expense is based on the grant date fair value (the closing price of the Company’s common stock on the date of grant) and the Company’s current expectations of the probable number of Performance Awards that will ultimately be earned. The fair value of the Performance Awards under the market condition ($2,432) is based upon a Monte Carlo simulation model, which encompasses TSR’s during the Measurement Period, including both the period from the beginning of Fiscal 2010 to March 3, 2010 (the grant date), for which actual TSR’s are calculated, and the period from the grant date to the end of Fiscal 2012, a total of 2.83 years (the “Remaining Measurement Period”), for which simulated TSR’s are calculated.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

In calculating the fair value of the award under the market condition, the Monte Carlo simulation model utilizes multiple input variables over the Measurement Period in order to determine the probability of satisfying the market condition stipulated in the award. The Monte Carlo simulation model computed simulated TSR’s for the Company and Peer Companies during the Remaining Measurement Period with the following inputs: (i) stock price on the grant date (ii) expected volatility; (iii) risk-free interest rate; (iv) dividend yield and (v) correlations of historical common stock returns between the Company and the Peer Companies and among the Peer Companies. Expected volatilities utilized in the Monte Carlo model are based on historical volatility of the Company’s and the Peer Companies’ stock prices over a period equal in length to that of the Remaining Measurement Period. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant with a term equal to the Measurement Period assumption at the time of grant.

The calculation of simulated TSR’s under the Monte Carlo model for the Remaining Measurement Period included the following assumptions:


Weighted average risk free rate of return		1.25	%
Dividend yield		—
Expected volatility — Company		65.0	%
Expected volatility — Peer Companies		39.8% - 114.1	%
Remaining measurement period	2.83 years

The Company recorded compensation expense for the Performance Awards during the Six Months Ended July 3, 2010 based on the performance condition.

Performance share activity for the Six Months Ended July 3, 2010 was as follows:


			Weighted
			Average
	Performance		Grant Date
	Shares		Fair Value
Unvested as of January 2, 2010		—	$	—
Granted		75,750		43.28
Vested (a)		—		—
Forfeited		—		—

Unvested as of July 3, 2010		75,750	$	43.28


(a)		does not include 34,300 Performance Awards granted to Retirement Eligible employees, for which the requisite service period has been completed on the grant date; the restrictions on such awards will not lapse until the end of the three-year vesting period.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 16—Supplemental Cash Flow Information


	Six Months Ended
	July 3, 2010			July 4, 2009

Cash paid (received) during the period for:
Interest expense	$	9,310		$	11,585
Interest income		(445	)		(1,233	)
Income taxes, net of refunds received		14,669			14,676
Supplemental non-cash investing and financing activities:
Accounts payable for purchase of fixed assets		4,999			4,279

Note 17—Income per Common Share

The following table presents the calculation of both basic and diluted income per common share attributable to Warnaco Group, Inc. common shareholders, giving effect to participating securities. The Company has determined that based on a review of its share-based awards, only its restricted stock awards are deemed participating securities, which participate equally with common shareholders. The weighted average restricted stock outstanding was 556,328 and 526,413 shares for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and 577,924 and 511,771 shares for the Six Months Ended July 3, 2010 and July 4, 2009, respectively. Undistributed income allocated to participating securities is based on the proportion of restricted stock outstanding to the sum of weighted average number of common shares outstanding attributable to Warnaco Group, Inc. common shareholders and restricted stock outstanding for each period presented.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


	Six Months Ended
	July 3, 2010			July 4, 2009
Numerator for basic and diluted income per common share:

Income from continuing operations attributable to Warnaco Group, Inc. common shareholders and participating securities	$	78,339		$	57,234
Less: allocation to participating securities		(995	)		(639	)

Income from continuing operations attributable to Warnaco Group, Inc. common shareholders	$	77,344		$	56,595


Income (loss) from discontinued operations, net of tax, attributable to Warnaco Group, Inc. common shareholders and participating securities	$	(430	)	$	(1,903	)
Less: allocation to participating securities		5			21

Income (loss) from discontinued operations attributable to Warnaco Group, Inc. common shareholders	$	(425	)	$	(1,882	)


Net income attributable to Warnaco Group, Inc. common shareholders and participating securities	$	77,909		$	55,331
Less: allocation to participating securities		(990	)		(618	)

Net income attributable to Warnaco Group, Inc. common shareholders	$	76,919		$	54,713


Basic income per common share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing income per common share		44,943,829			45,356,680


Income per common share from continuing operations	$	1.72		$	1.25
Income per common share from discontinued operations		(0.01	)		(0.04	)

Net income per common share	$	1.71		$	1.21


Diluted income per share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing basic income per common share		44,943,829			45,356,680
Effect of dilutive securities:
Stock options and restricted stock units		992,667			522,773

Weighted average number of shares and share equivalents used in computing income per common share		45,936,496			45,879,453


Income per common share from continuing operations	$	1.68		$	1.23
Income per common share from discontinued operations		(0.01	)		(0.04	)

Net income per common share	$	1.67		$	1.19


Number of anti-dilutive “out-of-the-money” stock options outstanding (a)		399,034			1,270,349

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)


	Three Months Ended
	July 3, 2010			July 4, 2009
Numerator for basic and diluted income per common share:

Income from continuing operations attributable to Warnaco Group, Inc. common shareholders and participating securities	$	30,027		$	18,642
Less: allocation to participating securities		(371	)		(214	)

Income from continuing operations attributable to Warnaco Group, Inc. common shareholders	$	29,656		$	18,428


(Loss) from discontinued operations, net of tax, attributable to Warnaco Group, Inc. common shareholders and participating securities	$	(93	)	$	(882	)
Less: allocation to participating securities		1			10

(Loss) from discontinued operations attributable to Warnaco Group, Inc. common shareholders	$	(92	)	$	(872	)


Net income attributable to Warnaco Group, Inc. common shareholders and participating securities	$	29,934		$	17,760
Less: allocation to participating securities		(370	)		(204	)

Net income attributable to Warnaco Group, Inc. common shareholders	$	29,564		$	17,556


Basic income per common share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing income per common share		44,468,794			45,412,175


Income per common share from continuing operations	$	0.67		$	0.41
(Loss) per common share from discontinued operations		(0.01	)		(0.02	)

Net income per common share	$	0.66		$	0.39


Diluted income per share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing basic income per common share		44,468,794			45,412,175
Effect of dilutive securities:
Stock options and restricted stock units		957,838			598,695

Weighted average number of shares and share equivalents used in computing income per common share		45,426,632			46,010,870


Income per common share from continuing operations	$	0.65		$	0.40
(Loss) per common share from discontinued operations		—			(0.02	)

Net income per common share	$	0.65		$	0.38


Number of anti-dilutive “out-of-the-money” stock options outstanding (a)		399,034			431,000

(a)

Options to purchase shares of common stock at an exercise price greater than the average market price of the underlying shares are anti-dilutive and therefore not included in the computation of diluted income per common share from continuing operations.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 18—Legal Matters

SEC Inquiry: As disclosed in its Annual Report on Form 10-K for Fiscal 2009, the Company announced, on August 8, 2006, that it would restate its previously reported financial statements for the fourth quarter of 2005, fiscal 2005 and the first quarter of 2006. The restatements were required as a result of certain irregularities discovered by the Company during the Company’s 2006 second quarter closing review and certain other errors. The irregularities primarily related to the accounting for certain returns and customer allowances at the Company’s Chaps menswear division. These matters were reported to the Company’s Audit Committee, which engaged outside counsel, who in turn retained independent forensic accountants, to investigate and report to the Audit Committee. Based on information obtained in that investigation, and also to correct for an error which resulted from the implementation of the Company’s new systems infrastructure at its Swimwear Group during the first quarter of 2006, and certain immaterial errors, the Audit Committee accepted management’s recommendation that the Company restate its financial statements.

In connection with the restatements, the Company contacted the SEC staff to inform them of the restatements and the Company’s related investigation. Thereafter, the SEC staff initiated an informal inquiry, and on February 22, 2008, informed the Company that in September 2007 the SEC had issued a formal order of investigation, with respect to these matters. The Company is cooperating fully with the SEC.

OP Litigation: On August 19, 2004, the Company acquired 100% of the outstanding common stock of Ocean Pacific Apparel Corp. (“OP”) from Doyle & Bossiere Fund I, LLC (“Doyle”) and certain minority shareholders of OP. The terms of the acquisition agreement required the Company to make certain contingent payments to the sellers of OP under certain circumstances. On November 6, 2006, the Company sold the OP business to a third party. On May 23, 2007, Doyle filed a demand against the Company for arbitration before Judicial Arbitration and Mediation Services in Orange County, California, alleging that certain contingent purchase price payments are due to them as a result of the Company’s sale of the OP business in November 2006. The complaint seeks monetary damages and other relief. The Company believes that Doyle’s lawsuit is without merit and intends to defend itself vigorously. The Company believes that it has adequately reserved for this matter.

Lejaby Claims: On March 10, 2008, the Company sold its Lejaby business to Palmers Textil AG (“Palmers”). On August 18, 2009, Palmers filed an action against the Company in Le Tribunal de Commerce de Paris (The Paris Commercial Court), alleging that the Company made certain misrepresentations in the sale agreement, and seeking to declare the sale null and void, monetary damages and other relief (the “Palmers Suit”). In addition, the Company and Palmers have been unable to agree on certain post-closing adjustments to the purchase price, including adjustments for working capital. The dispute regarding the amount of post-closing adjustments is not a subject of the Palmers Suit. The Company believes that the Palmers’ lawsuit is without merit and intends to defend itself vigorously. The Company believes that it has adequately reserved for these claims.

Other: In addition, from time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or business.

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 19 — Commitments

Except as set forth in the table below, the contractual obligations and commitments in existence as of July 3, 2010 did not differ materially from those disclosed as of January 2, 2010 in the Company’s Annual Report on Form 10-K for Fiscal 2009.


	Payments Due by Year
	2011		2012		2013		2014		2015		Thereafter		Total
Operating leases entered into during the Six Months Ended July 3, 2010	$	13,990	$	11,329	$	6,749	$	3,602	$	1,975	$	2,642	$	40,287
Other contractual obligations pursuant to agreements entered into during the Six Months Ended July 3, 2010		6,722		1,816		1,036		49		51		18		9,692

Total	$	20,712	$	13,145	$	7,785	$	3,651	$	2,026	$	2,660	$	49,979

Contractual obligations as of January 2, 2010 (as reported in the Company’s Form 10-K for Fiscal 2009) included approximately $37,000 related to a 15 year lease contract for a new distribution center in the Netherlands (the “DC”) that was entered into by the Company’s Netherlands subsidiary. In the event of default by the Netherlands subsidiary in making rental payments under the lease, the Warnaco Group Inc. has issued a guarantee to the lessor for those payments.

At July 3, 2010, in the ordinary course of business, the Company had open purchase orders with suppliers of approximately $304,848, of which $298,005 is payable in 2010 and $6,843 is payable in 2011.

As of July 3, 2010, the Company was also party to outstanding hedging instruments (see Note 11 of Notes to the Consolidated Condensed Financial Statements and Item 3 — Qualitative and Quantitative Disclosures About Market Risk —Foreign Exchange Risk).

As of July 3, 2010, the Company remains under audit in various taxing jurisdictions. It is, therefore, difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Company’s assessment of many factors, including past experience and complex judgments about future events, it is reasonably possible that within the next twelve months its accrual for uncertain tax positions may increase between $2,500 and $5,000 (net of decreases that are reasonably possible), as a result of additional uncertain tax positions, the reevaluation of current uncertain tax positions arising from developments in examinations, the finalization of tax examinations, or from the closure of tax statutes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Warnaco Group, Inc. (“Warnaco Group” and, collectively with its subsidiaries, the “Company”) is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and that could affect the market value of the Company’s common stock. Except for the historical information contained herein, this Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements that involve risks and uncertainties. See “Statement Regarding Forward-Looking Disclosure.”

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the Consolidated Condensed Financial Statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period January 3, 2010 to January 1, 2011 (“Fiscal 2010”) will contain 52 weeks of operations and the period January 4, 2009 to January 2, 2010 (“Fiscal 2009”) contained 52 weeks of operations. Additionally, the period from April 4, 2010 to July 3, 2010 (the “Three Months Ended July 3, 2010”) and the period from April 5, 2009 to July 4, 2009 (the “Three Months Ended July 4, 2009”) each contained thirteen weeks of operations and the period from January 3, 2010 to July 3, 2010 (the “Six Months Ended July 3, 2010”) and the period from January 4, 2009 to July 4, 2009 (the “Six Months Ended July 4, 2009”) each contained twenty-six weeks of operations.

References to “Calvin Klein Jeans” refer to jeans, accessories and “bridge” products. “Core Intimates” refer to the Intimate Apparel Group’s Warner’s^®, Olga^® and Body Nancy Ganz/Bodyslimmers^® brand names and intimate apparel private labels. References to “Retail” within each operating Group refer to the Company’s owned full price free standing stores, owned outlet stores, concession / “shop-in-shop” stores and on-line stores. Results related to stores operated by third parties under retail licenses or distributor agreements are included in “Wholesale” within each operating Group.

Overview

The Company designs, sources, markets, licenses and distributes intimate apparel, sportswear and swimwear worldwide through a line of highly recognized brand names. The Company’s products are distributed domestically and internationally in over 100 countries, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty and other stores, mass merchandisers and the internet. As of July 3, 2010, the Company operated: (i) 1,214 Calvin Klein retail stores worldwide (consisting of 266 free-standing stores (including 157 full price and 109 outlet stores), 946 shop-in-shop/concession stores, one Calvin Klein Underwear on-line store and one Calvin Klein Jeans on-line store and (ii) one Speedo^® on-line store. As of July 3, 2010, there were also 589 Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements.

Highlights for the Three and Six Months Ended July 3, 2010 included:

•

Net revenue increased $63.9 million, or 14.0%, to $519.3 million for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009 and increased $114.2 million, or 11.5%, to $1,107.5 million for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009, reflecting increases of $32.0 million and $69.3 million, respectively, in the Sportswear Group, $30.1 million and $51.2 million, respectively, in the Intimate Apparel Group, and, in the Swimwear Group, an increase of $1.8 million and a decrease of $6.3 million, respectively. Net revenue includes increases of $4.8 million and $32.4 million due to the favorable effect of fluctuations in certain foreign currency exchange rates (see below) for the Three and Six Months Ended July 3, 2010, respectively.

•

Operating income increased $14.3 million, or 34.9%, to $55.3 million for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009 and increased $29.5 million, or 28.1%, to $134.8 million for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009. Operating income includes increases of $8.8 million and $16.1 million due to the favorable effect of fluctuations in certain foreign currency exchange rates (see below) for the Three and Six Months Ended July 3, 2010, respectively. Operating income includes restructuring charges of $1.1 million and $2.1 million for the Three and Six Months Ended July 3, 2010, respectively, and $1.5 million and $10.0 million for the Three and Six Months Ended July 4, 2009, respectively.

•

Both net revenues and operating income for the Three and Six Months Ended July 3, 2010 were favorably affected by fluctuations in foreign currencies. On average, for the Three and Six Months Ended July 3, 2010 compared to the Three and Six Months Ended July 4, 2009, the U.S. dollar weakened relative to functional currencies, other than the Euro, of countries where the Company conducts a majority of its foreign operations (primarily the Korean Won, Canadian Dollar, Brazilian Real and Mexican Peso), as follows: the U.S. dollar weakened relative to the Korean Won by 11% and 16%, the Canadian Dollar by 12% and 15%, the Brazilian Real by 17% and 23% and the Mexican Peso by 7% and 9%, respectively. However, on average, for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009, the U.S. dollar strengthened relative to the Euro by 6% and was substantially unchanged for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009 (see Item 3. Quantitative and Qualitative Disclosure About Market Risk — Foreign Exchange Risk, below).

•

Income from continuing operations, on a GAAP basis, for the Three Months Ended July 3, 2010 was $0.65 per diluted share, a 63% increase compared to the $0.40 per diluted share for the Three Months Ended July 4, 2009. On a non-GAAP basis (excluding restructuring expense, pension expense (income) and certain other items (see Non-GAAP Measures, below)), income from continuing operations for the Three Months Ended July 3, 2010 was $0.71 per diluted share, a 51% increase compared to the $0.47 per diluted share for the Three Months Ended July 4, 2009.

•

Income from continuing operations, on a GAAP basis, for the Six Months Ended July 3, 2010 was $1.68 per diluted share, a 37% increase compared to the $1.23 per diluted share for the Six Months Ended July 4, 2009. On a non-GAAP basis (excluding restructuring expense, pension expense (income) and certain other items (see Non-GAAP Measures, below)), income from continuing operations for the Six Months Ended July 3, 2010 was $1.80 per diluted share, a 25% increase compared to the $1.44 per diluted share for the Six Months Ended July 4, 2009.

•

During the first fiscal quarter of 2010, the Company completed all remaining share repurchases under its 2007 Share Repurchase Program by repurchasing 1,490,131 shares of common stock for a total of $69.0 million (based on an average of $46.31 per share). In May 2010, the Company’s Board of Directors approved the 2010 Share Repurchase Program (as defined below, see Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds), which allows the Company to repurchase up to 5.0 million shares of its common stock.

•

At July 3, 2010, the Company had cash and cash equivalents of $172.9 million. The Company’s total debt at July 3, 2010 was $65.2 million after redemption from bondholders on June 15, 2010 of the remaining $110.9 million aggregate principal amount of outstanding Senior Notes for a total consideration of $112.5 million and on January 5, 2010, of $50.0 million aggregate principal amount of its outstanding Senior Notes for a total consideration of $51.5 million.

•

Inventories at July 3, 2010 were down $14.0 million, or 4.8%, from the balance at July 4, 2009, primarily as a result of the Company’s initiative to reduce inventory levels.

•

On April 29, 2010, the Company entered into agreements for the purchase of a distributor’s business in southern Asia for total consideration of approximately $2.9 million and on June 1, 2010, the Company entered into agreements for the purchase of a distributor’s business in the People’s Republic of China for total consideration of approximately $5.9 million.

Non-GAAP Measures

The Company’s reported financial results are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The reported operating income, income from continuing operations and diluted earnings per share from continuing operations reflect certain items which affect the comparability of those reported results. Those financial results are also presented on a non-GAAP basis, as defined by Regulation S-K section 10(e) issued by the Securities and Exchange Commission (“SEC”), to exclude the effect of these items. The Company’s computation of these non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not intended to be, and should not be, considered in isolation from or as a substitute for the most directly comparable GAAP financial measure to which they are reconciled, as presented in the following table:


	Three Months Ended					Six Months Ended
	July 3, 2010		July. 4, 2009			July 3, 2010		July 4, 2009
	(Dollars in thousands, except per share amounts)

Operating income, as reported	$	55,318	$	40,999		$	134,816	$	105,273
Restructuring charges and pension (a)		1,132		2,068			2,070		11,176
Other (b)		—		(260	)		—		(520	)

Operating income, as adjusted	$	56,450	$	42,807		$	136,886	$	115,929


Income from continuing operations, as reported	$	30,027	$	18,642		$	78,339	$	57,234
Restructuring charges and pension (c)		858		1,430			1,340		7,923
Costs related to the redemption of Debt (d)		1,354		—			2,368		—
Other (b)		—		(156	)		—		(312	)
Taxation (e)		446		2,059			1,554		1,731

Income from continuing operations, as adjusted	$	32,685	$	21,975		$	83,601	$	66,576


Diluted earnings per share from continuing operations, as reported	$	0.65	$	0.40		$	1.68	$	1.23
Restructuring charges and pension		0.02		0.03			0.03		0.17
Costs related to the redemption of Debt		0.03		—			0.05		—
Other		—		—			—		—
Taxation		0.01		0.04			0.04		0.04

Diluted earnings per share from continuing operations, as adjusted	$	0.71	$	0.47		$	1.80	$	1.44


(a)		This adjustment seeks to present the Company’s Consolidated Condensed Statements of Operations on a continuing basis without the effects of restructuring charges of $1,154 and $1,474 for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $2,113 and $10,045 for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, and pension (income) expense of $(22) and $594 for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $(43) and $1,131 for the Six Months Ended July 3, 2010 and July 4, 2009, respectively.

(b)		This adjustment seeks to present the Company’s Consolidated Condensed Statements of Operations on a continuing basis with an additional charge of $260 and $520 for the Three Months and Six Months Ended July 4, 2009 for amortization expense related to the correction of amounts recorded in prior periods in connection with the recapture of cancellation of indebtedness income and to reflect these items net of income tax effects of $104 and $208, respectively.

(c)		Adjustment to reflect the items in (a), above, net of income tax effects of $274 and $638 for the Three Months Ended July 3, 2010 and the Three Months Ended July 4, 2009, respectively, and $730 and $3,253 for the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009, respectively.

(d)		This adjustment seeks to present the Company’s Consolidated Condensed Statements of Operations on a continuing basis without the effects of charges of $2,055, net of income tax effects of $701 and charges of $3,747, net of income tax effects of $1,379, related to the repurchase of a portion of its Senior Notes during the Three Months and Six Months Ended July 3, 2010.

(e)		Adjustment to reflect the Company’s income from continuing operations at tax rates of 33.3% and 33.9%, which reflect the Company’s normalized tax rates for the Fiscal 2010 and Fiscal 2009, respectively, excluding the effect of restructuring charges, pension expense, charges related to the repurchase of Senior Notes during the Three and Six Months Ended July 3, 2010 and amortization expense during the Three and Six Months Ended July 4, 2009, and certain other tax-related items.

The Company believes it is valuable for users of its financial statements to be made aware of the non-GAAP financial information as such measures are used by management to evaluate the operating performance of the Company’s continuing businesses on a comparable basis and to make operating and strategic decisions. Such non-GAAP measures will also enhance users’ ability to analyze trends in the Company’s business. In addition, the Company uses performance targets based, in part, on non-GAAP operating income and diluted earnings per share as a component of the measurement of incentive compensation.

Furthermore, the Warnaco Group Inc. 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 into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results. As a supplement to its reported operating results, the Company presents constant currency financial information, which is a non-GAAP financial measure. The Company uses constant currency information to provide a framework to assess how its businesses performed excluding the effects of changes in foreign currency translation rates. Management believes this information is useful to investors to facilitate comparisons of operating results and better identify trends in the Company’s businesses.

To calculate the increase in segment revenues 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 in isolation from, or as a substitute to, the Company’s operating performance measures calculated in accordance with GAAP. The constant currency information presented in the following tables may not be comparable to similarly titled measures reported by other companies.

NET REVENUES ON A CONSTANT CURRENCY BASIS
(Dollars in thousands)
(Unaudited)


	Three Months Ended July 3, 2010
	GAAP		Impact of Foreign			Non-GAAP
	As Reported		Currency Exchange			Constant Currency
By Segment:
Sportswear Group	$	244,044	$	4,057		$	239,987
Intimate Apparel Group		199,116		577			198,539
Swimwear Group		76,174		142			76,032

Net revenues	$	519,334	$	4,776		$	514,558


By Region:
United States	$	261,964	$	—		$	261,964
Europe		99,831		(6,844	)		106,675
Asia		83,492		3,881			79,611
Canada		29,866		3,007			26,859
Mexico, Central and South America		44,181		4,732			39,449

Total	$	519,334	$	4,776		$	514,558

NET REVENUES ON A CONSTANT CURRENCY BASIS
(Dollars in thousands)
(Unaudited)


	Six Months Ended July 3, 2010
	GAAP		Impact of Foreign		Non-GAAP
	As Reported		Currency Exchange		Constant Currency
By Segment:
Sportswear Group	$	550,390	$	21,177	$	529,213
Intimate Apparel Group		393,058		9,521		383,537
Swimwear Group		164,050		1,748		162,302

Net revenues	$	1,107,498	$	32,446	$	1,075,052


By Region:
United States	$	532,714	$	—	$	532,714
Europe		257,133		1,989		255,144
Asia		180,565		12,780		167,785
Canada		55,362		7,051		48,311
Mexico, Central and South America		81,724		10,626		71,098

Total	$	1,107,498	$	32,446	$	1,075,052

Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in its consolidated condensed financial statements and accompanying notes. See the Company’s Annual Report on Form 10-K for Fiscal 2009 for a discussion of the Company’s critical accounting policies.

Stock-Based Compensation

In March 2010, share-based compensation awards granted to certain of the Company’s executive officers under the 2005 Stock Incentive Plan included 75,750 performance-based restricted stock/restricted unit awards (“Performance Awards”) in addition to the service-based stock options and restricted stock awards of the types that had been granted in previous periods. See Note 15 of Notes to Consolidated Condensed Financial Statements. The Performance Awards cliff-vest three years after the grant date and are subject to the same vesting provisions as awards of the Company’s regular service-based restricted stock/restricted unit awards granted in March 2010. The final number of Performance Awards that will be earned, if any, at the end of the three-year vesting period will be the greatest number of shares based on the Company’s achievement of certain goals relating to cumulative earnings per share growth (a performance condition) or the Company’s relative total shareholder return (“TSR”) (change in closing price of the Company’s common stock on the New York Stock Exchange compared to that of a peer group of companies (“Peer Companies”)) (a market condition) measured from the beginning of Fiscal 2010 to the end of Fiscal 2012 (the “Measurement Period”). The total number of Performance Awards earned could equal up to 150% of the number of Performance Awards originally granted, depending on the level of achievement of those goals during the Measurement Period.

The Company records stock-based compensation expense related to the Performance Awards ratably over the requisite service period based on the greater of the estimated expense calculated under the performance condition or the grant date fair value calculated under the market condition. Stock-based compensation expense related to an award with a market condition is recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. Under the performance condition, the estimated expense is based on the grant date fair value (the closing price of the Company’s common stock on the date of grant) and the Company’s current expectations of the probable number of Performance Awards that will ultimately be earned. The fair value of the Performance Awards under the market condition ($2.4 million for the March 2010 Performance Awards) is based upon a Monte Carlo simulation model, which encompasses TSR’s during the Measurement Period, including both the period from the beginning of Fiscal 2010 to March 3, 2010 (the grant date), for which actual TSR’s are calculated, and the period from the grant date to the end of Fiscal 2012, a total of 2.83 years (the “Remaining Measurement Period”), for which simulated TSR’s are calculated.

For all employee stock-based compensation awards issued in March 2010 (and for similar types of future awards), the Company’s Compensation Committee approved the incorporation of a Retirement Eligibility feature such that an employee who has attained the age of 60 years with at least five years of continuous employment with the Company will be deemed to be “Retirement Eligible”. Awards granted to Retirement Eligible employees will continue to vest even if the employee’s employment with the Company is terminated prior to the award’s vesting date (other than for cause, and provided the employee does not engage in a competitive activity). As in previous years, awards granted to all other employees (i.e. those who are not Retirement Eligible) will cease vesting if the employee’s employment with the Company is terminated prior to the awards vesting date. Stock-based compensation expense is recognized over the requisite service period associated with the related equity award. For Retirement Eligible employees, the requisite service period is either the grant date or the period from the grant date to the Retirement-Eligibility date (in the case where the Retirement Eligibility date precedes the vesting date). For all other employees (i.e. those who are not Retirement Eligible), as in previous years, the requisite service period is the period from the grant date to the vesting date. The Retirement Eligibility feature was not applied to awards issued prior to March 2010. The increase in stock-based compensation expense recorded during the Six Months Ended July 3, 2010 of approximately $7.1 million, from the Six Months Ended July 4, 2009, primarily related to the Retirement Eligibility feature described above.

Recent Accounting Pronouncements

Results of Operations

Statement of Operations (Selected Data)

The following tables summarize the historical results of operations of the Company for the Three and Six Months Ended July 3, 2010 compared to the Three and Six Months Ended July 4, 2009. The results of the Company’s discontinued operations are included in “Loss from discontinued operations, net of taxes” for all periods presented. Results of operations contained 13 weeks of activity for each of the Three Months Ended July 3, 2010 and for the Three Months Ended July 4, 2009 and twenty-six weeks of activity for each of the Six Months Ended July 3, 2010 and for the Six Months Ended July 4, 2009.


	Three Months						Three Months						Six Months						Six Months
	Ended July 3,			% of Net			Ended July 4,			% of Net			Ended July 3,			% of Net			Ended July 4,			% of Net
	2010			Revenues			2009			Revenues			2010			Revenues			2009			Revenues
	(in thousands of dollars)
Net revenues	$	519,334			100.0	%	$	455,432			100.0	%	$	1,107,498			100.0	%	$	993,275			100.0	%
Cost of goods sold		289,592			55.8	%		266,432			58.5	%		610,638			55.1	%		578,990			58.3	%

Gross profit		229,742			44.2	%		189,000			41.5	%		496,860			44.9	%		414,285			41.7	%
Selling, general and administrative expenses		171,860			33.1	%		145,256			31.9	%		356,833			32.2	%		303,603			30.6	%
Amortization of intangible assets		2,586			0.5	%		2,151			0.5	%		5,254			0.5	%		4,278			0.4	%
Pension expense (income)		(22	)		0.0	%		594			0.1	%		(43	)		0.0	%		1,131			0.1	%

Operating income		55,318			10.7	%		40,999			9.0	%		134,816			12.2	%		105,273			10.6	%
Other (loss)		5,730						2,799						7,550						2,395
Interest expense		4,259						5,799						9,237						11,868
Interest income		(487	)					(416	)					(1,493	)					(824	)

Income from continuing operations before provision for income taxes and noncontrolling interest		45,816						32,817						119,522						91,834
Provision for income taxes		15,789						13,263						41,183						33,430


Income from continuing operations before noncontrolling interest		30,027						19,554						78,339						58,404
(Loss) from discontinued operations, net of taxes		(93	)					(882	)					(430	)					(1,903	)

Net income		29,934						18,672						77,909						56,501
Less: Net Income attributable to the noncontrolling interest		—						(912	)					—						(1,170	)

Net income attributable to Warnaco Group, Inc.	$	29,934					$	17,760					$	77,909					$	55,331

Net Revenues

Net revenues by group were as follows:


	Three Months		Three Months										Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase					Constant $			Ended July 3,		Ended July 4,		Increase						Constant $
	2010		2009		(Decrease)		% Change			% Change			2010		2009		(Decrease)			% Change			% Change
	(in thousands of dollars)
Sportswear Group	$	244,044	$	212,057	$	31,987		15.1	%		13.1	%	$	550,390	$	481,114	$	69,276			14.4	%		9.9	%
Intimate Apparel Group		199,116		168,954		30,162		17.9	%		17.6	%		393,058		341,777		51,281			15.0	%		12.4	%
Swimwear Group		76,174		74,421		1,753		2.4	%		2.1	%		164,050		170,384		(6,334	)		-3.7	%		-4.8	%

Net revenues (a)	$	519,334	$	455,432	$	63,902		14.0	%		13.0	%	$	1,107,498	$	993,275	$	114,223			11.5	%		8.2	%


(a)		includes net revenues of Calvin Klein businesses of $358.0 million and $304.5 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, (an increase of 17.5%) and $778.8 million and $685.4 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively (an increase of 13.6%).

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

The changes in net revenues for the Sportswear, Intimate Apparel and Swimwear Groups for the Three Months Ended July 3, 2010 relative to the Three Months Ended July 4, 2009 reflect:

•

an increase of $43.1 million in wholesale and $20.8 million in retail net revenues, which includes an increase in domestic net revenues of $29.6 million and an increase in international net revenues of $34.3 million. The increase in international net revenues includes a $4.8 million increase due to the favorable effect of fluctuations in foreign currency exchange rates in countries where the Company conducts certain of its operations (primarily the Korean Won, Canadian Dollar, Brazilian Real and Mexican Peso), partially offset by the unfavorable effect of foreign currency exchange fluctuations in the Euro. International net revenues also include an increase of 3.1% from comparable store sales during the Three Months Ended July 3, 2010.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

The changes in net revenues for the Sportswear, Intimate Apparel and Swimwear Groups for the Six Months Ended July 3, 2010 relative to the Six Months Ended July 4, 2009 reflect:

•

an increase of $63.5 million in wholesale and $50.7 million in retail net revenues, which includes an increase in domestic net revenues of $30.7 million and an increase in international net revenues of $83.5 million. The increase in international net revenues includes a $32.4 million increase due to the favorable effect of fluctuations in foreign currency exchange rates in countries where the Company conducts certain of its operations. International net revenues also include an increase of 4.4% from comparable store sales during the Six Months Ended July 3, 2010.

The following table summarizes the Company’s net revenues by channel of distribution and region for the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009:


	Six Months			Six Months
	Ended July 3,			Ended July 4,
	2010			2009
United States — wholesale
Department stores and independent retailers		11	%		10	%
Specialty stores		8	%		9	%
Chain stores		9	%		9	%
Mass merchandisers		2	%		2	%
Membership clubs		7	%		10	%
Off price and other		10	%		10	%

Total United States — wholesale		47	%		50	%
International — wholesale		30	%		30	%
Retail (a)		23	%		20	%

Net revenues — consolidated		100	%		100	%


(a)		for the Six Months Ended July 3, 2010 and the Six Months Ended July 4, 2009, 97.2% and 96.7%, respectively, of retail net revenues were derived from the Company’s international operations.

The following tables summarize the Company’s net revenues by channel of distribution and region for the Three and Six Months Ended July 3, 2010 and the Three and Six Months Ended July 4, 2009:

By Region:


	Net Revenues												Net Revenues
	Three Months		Three Months										Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase /					Constant $			Ended July		Ended July 4,		Increase /					Constant $
	2010		2009		(Decrease)		% Change			% Change			3, 2010		2009		(Decrease)		% Change			% Change
	(in thousands of dollars)												(in thousands of dollars)
United States	$	261,964	$	232,320	$	29,644		12.8	%		12.8	%	$	532,714	$	502,064	$	30,650		6.1	%		6.1	%
Europe		99,831		98,274		1,557		1.6	%		8.6	%		257,133		240,989		16,144		6.7	%		5.9	%
Asia		83,492		70,214		13,278		18.9	%		13.5	%		180,565		152,393		28,172		18.5	%		10.1	%
Canada		29,866		29,226		640		2.2	%		-8.1	%		55,362		49,923		5,439		10.9	%		-3.2	%
Mexico, Central and South America		44,181		25,398		18,783		74.0	%		55.3	%		81,724		47,906		33,818		70.6	%		48.4	%

	$	519,334	$	455,432	$	63,902		14.0	%		13.0	%	$	1,107,498	$	993,275	$	114,223		11.5	%		8.2	%

By Channel:


	Net Revenues									Net Revenues
	Three Months		Three Months							Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase /					Ended July 3,		Ended July 4,		Increase /
	2010		2009		Decrease)		% Change			2010		2009		Decrease)		% Change
	in thousands of dollars									in thousands of dollars
Wholesale	$	392,918	$	349,798	$	43,120		12.3	%	$	857,030	$	793,464	$	63,566		8.0	%
Retail		126,416		105,634		20,782		19.7	%		250,468		199,811		50,657		25.4	%

Total	$	519,334	$	455,432	$	63,902		14.0	%	$	1,107,498	$	993,275	$	114,223		11.5	%

Sportswear Group

Sportswear Group net revenues were as follows:


	Three Months		Three Months							Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase					Ended July 3,		Ended July 4,		Increase
	2010		2009		(Decrease)		% Change			2010		2009		(Decrease)		% Change
	(in thousands of dollars)
Calvin Klein Jeans	$	127,708	$	116,397	$	11,311		9.7	%	$	318,909	$	298,686	$	20,223		6.8	%
Chaps		49,727		43,022		6,705		15.6	%		95,951		80,102		15,849		19.8	%

Sportswear wholesale		177,435		159,419		18,016		11.3	%		414,860		378,788		36,072		9.5	%
Sportswear retail		66,609		52,638		13,971		26.5	%		135,530		102,326		33,204		32.4	%

Sportswear Group (a) (b)	$	244,044	$	212,057	$	31,987		15.1	%	$	550,390	$	481,114	$	69,276		14.4	%


(a)		Includes net revenues of $17.3 million and $12.7 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $55.2 million and $39.3 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, related to the Calvin Klein accessories business in Europe and Asia.

(b)		In order to conform to the Company’s current presentation, approximately $10.8 million and $21.3 million of Calvin Klein underwear net revenues for the Three and Six Months Ended July 4, 2009, respectively, which had previously been included in the Sportswear Group, were reclassified to the Intimate Apparel Group.

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Sportswear Group net revenues increased $32.0 million to $244.1 million for the Three Months Ended July 3, 2010 from $212.1 million for the Three Months Ended July 4, 2009, reflecting an increase of $18.0 million in Sportswear wholesale and an increase of $14.0 million in Sportswear retail. Sportswear Group net revenues include a $4.1 million increase due to the favorable effect of fluctuations in certain foreign currency exchange rates. Sportswear Group net revenues from international operations increased $23.2 million and from domestic operations increased $8.8 million. The increase in Sportswear Group net revenues from international operations included a 2.6% increase from comparable store sales during the Three Months Ended July 3, 2010.

The increase in Sportswear wholesale net revenues (in local currency) primarily reflects:

Calvin Klein Jeans:

Increases in sales:

	•		in Europe of accessories;

	•		in the U.S. to stores operated by Calvin Klein Inc. (“CKI”), as well as to the off-price channel;

	•		in Canada to department stores, membership clubs, and independent retailers;

	•		in Mexico and Central and South America to department stores and membership clubs; and

	•		in Asia, primarily due to an increase in the expansion of the distribution network in the People’s Republic of China and southern Asia

			partially offset by decreases in sales:

	•		in the U.S. to department stores and membership clubs (decreases in membership clubs primarily relate to the timing of shipments);

	•		in Europe to department stores, independent retailers and specialty stores and the off-price channel;

	•		in Canada to off-price channels; and

	•		in Asia in the off-price channel primarily due to lower levels of excess inventory and fewer promotional sales.

Chaps:

			Increases in sales:

	•		in the U.S. in the chain store and off-price channels and in department store channel, primarily due to a new customer in 2010; and

•

in Canada to department stores, off-price channels and independent retailers

partially offset by decreases in sales:

	•		in Canada to membership clubs, primarily due to timing of shipments (certain shipments are expected to occur in third quarter 2010, while comparable shipments occurred in the second quarter 2009); and

	•		in Mexico and Central and South America in department stores.

The increase in Sportswear retail net revenue (in local currency) primarily reflects:

Increases in sales:

•

in Canada, Central and South America, Europe and Asia due to the addition of new stores opened by the Company and acquired by the Company (including the eight stores acquired in Brazil in the fourth quarter of 2009 and twenty-two stores acquired in southern Asia in the second quarter of 2010), and due to an increase in comparable store sales in Central and South America, Europe and Asia.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Sportswear Group net revenues increased $69.3 million to $550.4 million for the Six Months Ended July 3, 2010 from $481.1 million for the Six Months Ended July 4, 2009, reflecting an increase of $36.1 million in Sportswear wholesale and an increase of $33.2 million in Sportswear retail. Sportswear Group net revenues include a $21.2 million increase due to the favorable effect of fluctuations in certain foreign currency exchange rates. Sportswear Group net revenues from international operations increased $50.3 million and from domestic operations increased $19.0 million. The increase in Sportswear Group net revenues from international operations included a 4.9% increase from comparable store sales during the Six Months Ended July 3, 2010.

The increase in Sportswear wholesale net revenues (in local currency) primarily reflects:

Calvin Klein Jeans:

Increases in sales:

	•		in Europe of accessories;

	•		in the U.S. to department stores, the off-price channel and stores operated by CKI;

	•		in Canada to department stores;

	•		in Mexico and Central and South America to department and specialty stores and membership clubs; and

	•		in Asia, primarily due to an increase in the expansion of the distribution network in the People’s Republic of China and southern Asia

			partially offset by decreases in sales:

	•		in the U.S to membership clubs, primarily related to the timing of shipments;

	•		in Europe to independent retailers and specialty stores and the off-price channel;

	•		in Canada to off-price channels, membership clubs, and independent retailers, primarily due to timing of shipments (shipments are expected to occur in the second half of 2010 where comparable shipments occurred in the first half of 2009; and

	•		in Asia in the off-price channel primarily due to lower levels of excess inventory and fewer promotional sales.

Chaps:

Increases in sales:

•

in the U.S. in the chain store and off-price channels and in department store channel, primarily due to a new customer in 2010; and

•

in Canada to department stores, off-price channels, and independent retailers

partially offset by decreases in sales:

	•		in Canada to membership clubs, primarily due to timing of shipments (certain shipments are expected to occur in third quarter 2010, while comparable shipments occurred in the second quarter 2009); and

	•		in Mexico and Central and South America to department stores.

The increase in Sportswear retail net revenue (in local currency) primarily reflects:

Increases in sales:

•

in Canada, Central and South America, Europe and Asia due to the addition of new stores opened by the Company and acquired by the Company (including the eight stores acquired in Brazil in the fourth quarter of 2009 and twenty-two stores acquired in southern Asia in the second quarter of 2010), and an increase in comparable store sales in Central and South America, Europe and Asia.

Intimate Apparel Group

Intimate Apparel Group net revenues were as follows:


	Three Months		Three Months							Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase					Ended July 3,		Ended July 4,		Increase
	2010		2009		(Decrease)		% Change			2010		2009		(Decrease)		% Change
	(in thousands of dollars)
Calvin Klein Underwear	$	99,860	$	78,961	$	20,899		26.5	%	$	195,552	$	175,690	$	19,862		11.3	%
Core Intimates		45,858		43,448		2,410		5.5	%		91,393		77,422		13,971		18.0	%

Intimate Apparel wholesale		145,718		122,409		23,309		19.0	%		286,945		253,112		33,833		13.4	%
Calvin Klein Underwear retail		53,398		46,545		6,853		14.7	%		106,113		88,665		17,448		19.7	%

Intimate Apparel Group (a)	$	199,116	$	168,954	$	30,162		17.9	%	$	393,058	$	341,777	$	51,281		15.0	%


(a)		Includes approximately $10.8 million and $21.3 million for the Three and Six Months Ended July 4, 2009, respectively, related to certain sales of Calvin Klein underwear, previously included in the Sportswear Group, in order to conform to the current period presentation.

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Intimate Apparel Group net revenues increased $30.2 million to $199.1 million for the Three Months Ended July 3, 2010 from $169.0 million for the Three Months Ended July 4, 2009, reflecting an increase of $23.3 million in Intimate Apparel wholesale and an increase of $6.9 million in Calvin Klein Underwear retail. Intimate Apparel Group net revenues include a $0.6 million increase due to the favorable effect of fluctuations in certain foreign currency exchange rates. Intimate Apparel Group net revenues from international operations increased $10.5 million and from domestic operations increased $19.6 million. The increase in Intimate Apparel Group net revenues from international operations included a 4.3% increase from comparable store sales during the Three Months Ended July 3, 2010.

The increase in Intimate Apparel wholesale net revenue (in local currency) primarily reflects:

Calvin Klein Underwear:

Increases in sales:

•

in all geographies in the department store channel, which benefitted from the launch of the Calvin Klein X men’s product line;

•

in the U.S. in membership clubs primarily due to timing of certain shipments (shipments occurred in the second quarter of 2010 and are expected to take place in the third and fourth quarters of 2010, while comparable shipments occurred during the first quarter of 2009);

	•		in the U.S. in the off-price channel primarily due to additional off-price products offered;

	•		in Mexico and Central and South America to membership clubs and specialty stores;

	•		in Canada to department stores, off-price channels, and independent retailers; and

	•		in Asia primarily due to the expansion of the Company’s distribution networks in China and southern Asia

partially offset by decreases in sales:

	•		in Canada to membership clubs primarily due to timing of shipments (shipments occurred in the first quarter of 2010 while comparable shipments occurred in the second quarter of 2009); and

	•		in Asia to the off-price channel, primarily due to lower levels of excess inventory and fewer promotional sales.

Core Intimates:

Increases in sales:

•

in the U.S. in the off-price channel (primarily due to additional offerings) and in the mass merchandisers channel primarily due to a new customer;

	•		in Mexico and Central and South America in membership clubs and department stores

			partially offset by a decline in sales:

	•		in the U.S. in the membership club channel; and

•

in Canada, primarily due to timing-related changes to mass merchandisers, and independent retailers (certain shipments occurred in the first quarter 2010 while comparable shipments occurred in the second quarter 2009), and off-price channels due to lower excess inventory.

The increase in Calvin Klein Underwear retail net revenue (in local currency) primarily reflects:

•

in Canada, Asia, Europe, and Central and South America due to the addition of new stores opened by the Company and acquired by the Company (including the eight stores acquired in Brazil in the fourth quarter of 2009 and twenty-two stores acquired in southern Asia in the second quarter of 2010), and an increase in comparable store sales in Europe, Asia, Canada and Central and South America.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Intimate Apparel Group net revenues increased $51.3 million to $393.1 million for the Six Months Ended July 3, 2010 from $341.8 million for the Six Months Ended July 4, 2009, reflecting an increase of $33.9 million in Intimate Apparel wholesale and an increase of $17.4 million in Calvin Klein Underwear retail. Intimate Apparel Group net revenues include a $9.5 million increase due to the favorable effect of fluctuations in foreign currency exchange rates. Intimate Apparel Group net revenues from international operations increased $29.8 million and from domestic operations increased $21.5 million. The increase in Intimate Apparel Group net revenues from international operations included a 4.3% increase from comparable store sales for the Six Months Ended July 3, 2010.

The increase in Intimate Apparel wholesale net revenue (in local currency) primarily reflects:

Calvin Klein Underwear:

Increases in sales:

•

in all geographies in the department store channel, which benefitted from the launch of the Calvin Klein X men’s product line;

	•		in the U.S. in the off-price channel primarily due to additional off-price products offered;

	•		in Mexico and Central and South America to membership clubs and specialty stores;

	•		in Canada to off-price channels and independent retailers; and

•

in Asia primarily related to the expansion of the Company’s distribution networks in China and southern Asia and the sale of off-season merchandise and promotional events and discounts

partially offset by decreases in sales:

•

in the U.S. in membership clubs primarily due to timing of certain shipments which are expected to take place in the second half of 2010, while comparable shipments occurred during the first half of 2009;

•

in Europe to the off-price channel primarily due to lower levels of excess inventory; and

•

in Canada, to membership clubs primarily related to timing of shipments (shipments are expected to occur in the second half of 2010 where comparable shipments occurred in the second quarter of 2009).

Core Intimates:

Increases in sales:

•

in the U.S. to department stores, the chain store channel and the mass merchandisers channel primarily due to a new customer;

•

in the U.S. in the off-price channel primarily due to additional off-price offerings, partially offset by a decrease in sales primarily due to lower levels of excess inventory;

•

in the U.S. Warner’s products increased, primarily related to higher replenishment of successful styles and new product launches, in the department store and chain store channels and the launch of the Simply Perfect product line into the mass market channel; and

•

in the U.S. the Olga line increased, primarily related to higher replenishment of new styles and additional customers in the chain store and department store channels, beginning in the third quarter of 2009;

	•		in Canada, to department stores and mass merchandisers; and

	•		in Mexico and Central and South America in department stores and membership clubs

			partially offset by a decline in sales:

	•		in the U.S. in the membership club channel; and

	•		in Canada to off-price channels primarily due to lower levels of excess inventory.

The increase in Calvin Klein Underwear retail net revenue (in local currency) primarily reflects:

•

in Canada, Asia, Europe, and Central and South America the addition of new stores opened by the Company and acquired by the Company (including the eight stores acquired in Brazil in the fourth quarter of 2009 and twenty-two stores acquired in southern Asia in the second quarter of 2010), and an increase in comparable store sales in Europe, Asia, Canada and Central and South America.

Swimwear Group

Swimwear Group net revenues were as follows:


	Three Months		Three Months								Six Months		Six Months
	Ended July 3,		Ended July 4,		Increase						Ended July		Ended July 4,		Increase
	2010		2009		(Decrease)			% Change			3, 2010		2009		(Decrease)			% Change
	(in thousands of dollars)
Speedo	$	63,082	$	61,747	$	1,335			2.2	%	$	136,572	$	145,520	$	(8,948	)	-6.1	%
Calvin Klein		6,683		6,223		460			7.4	%		18,653		16,044		2,609		16.3	%

Swimwear wholesale		69,765		67,970		1,795			2.6	%		155,225		161,564		(6,339	)	-3.9	%
Swimwear retail (a)		6,409		6,451		(42	)		-0.7	%		8,825		8,820		5		0.1	%

Swimwear Group	$	76,174	$	74,421	$	1,753			2.4	%	$	164,050	$	170,384	$	(6,334	)	-3.7	%


(a)		includes $3.7 million and $3.8 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $4.1 million and $4.0 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, related to Calvin Klein retail swimwear.

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Swimwear Group net revenues increased $1.8 million to $76.2 million for the Three Months Ended July 3, 2010 from $74.4 million for the Three Months Ended July 4, 2009, reflecting an increase of $1.8 million in Swimwear wholesale. Swimwear retail net revenues were substantially unchanged. Swimwear Group net revenues include a $0.1 million increase due to the favorable effect of fluctuations in foreign currency exchange rates. Swimwear Group net revenues from international operations increased $0.5 million and from domestic operations increased $1.3 million. The increase in Swimwear Group net revenues from international operations included a 4.7% decrease from comparable store sales for the Three Months Ended July 3, 2010.

The increase in Swimwear wholesale net revenues (in local currency) reflects:

Speedo:

Increases in sales:

	•		in the U.S., primarily in the mass channel and sporting goods, specialty and department stores; and

	•		in Canada, to mass merchandisers, chain stores and department stores

			partially offset by decreases in sales:

	•		in the U.S. to membership clubs, team dealers, mid-tier and discounters; and

	•		in Canada, to independent retailers.

Calvin Klein:

Increases in sales:

	•		in the U.S. primarily due to improved delivery to department and specialty stores and the introduction of sales to membership clubs in 2010; and

	•		in Canada, to independent retailers

partially offset by decreases in sales:

•

in Europe to department stores and independent retailers primarily due to timing of shipments (shipments occurred in the first quarter of 2010, while comparable shipments occurred in the second quarter of 2009); and

•

in Canada, to department stores and chain stores.

Swimwear retail net revenue (in local currency) reflects:

			Increases in sales:

	•		at the online Speedo store in the U.S.

			partially offset by decreases in sales:

	•		in Europe of Calvin Klein swimwear at outlet stores; and

	•		in Canada a decrease in comparable store sales.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Swimwear Group net revenues decreased $6.3 million to $164.1 million for the Six Months Ended July 3, 2010 from $170.4 million for the Six Months Ended July 4, 2009, reflecting a decrease of $6.3 million in Swimwear wholesale. Swimwear retail net revenues were substantially unchanged. Swimwear Group net revenues include a $1.7 million increase due to the favorable effect of fluctuations in foreign currency exchange rates. Swimwear Group net revenues from international operations increased $3.6 million and from domestic operations declined $9.9 million. The increase in Swimwear Group net revenues from international operations included a 2.8% decrease from comparable store sales for the Six Months Ended July 3, 2010.

The decrease in Swimwear wholesale net revenues (in local currency) reflects:

Speedo:

Decreases in sales:

	•		in the U.S., primarily due to lower sales volume in membership clubs, mid-tier and discounters;

	•		in Canada, in off-price channels, and independent retailers; and

	•		in Mexico and Central and South America in membership clubs

			partially offset by increases in sales:

	•		in the U.S. to department and specialty stores and the mass merchandisers channel; and

	•		in Canada to chain stores, mass merchandisers and department stores.

Calvin Klein:

Increases in sales:

	•		in the U.S. primarily due to improved delivery to department and specialty stores and the introduction of sales to membership clubs in 2010;

	•		in Europe to department stores and independent retailers; and

	•		in Canada to department stores

			partially offset by decreases in sales:

	•		in Canada to independent retailers and membership clubs.

Swimwear retail net revenue (in local currency) reflects:

	•		in Europe an increase in sales volume at free-standing, concession and outlet stores;

			offset by:

	•		in Canada a decrease in comparable store sales.

Gross Profit

Gross profit was as follows:



	Three Months		% of			Three Months		% of			Six Months		% of			Six Months		% of
	Ended July 3,		Brand Net			Ended July 4,		Brand Net			Ended July 3,		Brand Net			Ended July 4,		Brand Net
	2010		Revenues			2009		Revenues			2010		Revenues			2009		Revenues
	(in thousands of dollars)
Sportswear Group (a)	$	103,419		42.4	%	$	84,536		39.9	%	$	241,566		43.9	%	$	196,991		40.9	%
Intimate Apparel Group (a)		99,575		50.0	%		78,026		46.2	%		197,047		50.1	%		158,540		46.4	%
Swimwear Group		26,748		35.1	%		26,438		35.5	%		58,247		35.5	%		58,754		34.5	%

Total gross profit	$	229,742		44.2	%	$	189,000		41.5	%	$	496,860		44.9	%	$	414,285		41.7	%


(a)		reflects the reclassification of approximately $6.7 million and $13.4 million of gross profit related to certain sales of Calvin Klein underwear, previously reported in the Sportswear Group, to the Intimate Apparel Group for the Three Months and Six Months Ended July 4, 2009, respectively, in order to conform to the current presentation.

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Gross profit was $229.7 million, or 44.2% of net revenues, for the Three Months Ended July 3, 2010 compared to $189.0 million, or 41.5% of net revenues, for the Three Months Ended July 4, 2009. The $40.7 million increase in gross profit was due to increases in the Sportswear Group ($18.9 million), the Intimate Apparel Group ($21.5 million) and the Swimwear Group ($0.3 million). The 270 basis point increase in gross margin is primarily reflective of a favorable sales mix as the Company experienced an increase in full-price (and other more profitable channels) net revenues as a proportion of total net revenues, and the favorable effects of fluctuations in certain foreign currency exchange rates. Gross profit for the Three Months Ended July 3, 2010 includes an increase of $7.8 million due to foreign currency fluctuations.

Sportswear Group gross profit increased $18.9 million, and gross margin increased 250 basis points, for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009, reflecting a $17.0 million increase in the international business (primarily related to the favorable effect of fluctuations in exchange rates of certain foreign currencies, an increase in net sales and a favorable sales mix in Europe, particularly Calvin Klein accessories, and Asia), and a $1.9 million increase in the domestic business (primarily reflecting an increase in net revenues and a favorable sales mix).

Intimate Apparel Group gross profit increased $21.5 million and gross margin increased 380 basis points for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009 reflecting a $12.2 million increase in the international business (primarily related to increased net revenues and a favorable sales mix, partially offset by the unfavorable effect of fluctuations in exchange rates of foreign currencies), and a $9.3 million increase in the domestic business. The increase in the domestic business primarily reflects increased net revenues and a favorable product and channel mix.

Swimwear Group gross profit increased $0.3 million and gross margin decreased 40 basis points for the Three Months Ended July 3, 2010 compared to the Three Months Ended July 4, 2009. The increase in gross profit and decrease in gross margin primarily reflect an increase in sales volume and an unfavorable sales mix.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Gross profit was $496.9 million, or 44.9% of net revenues, for the Six Months Ended July 3, 2010 compared to $414.3 million, or 41.7% of net revenues, for the Six Months Ended July 4, 2009. The $82.6 million increase in gross profit was due to increases in the Sportswear Group ($44.6 million) and the Intimate Apparel Group ($38.5 million), partially offset by a decrease in the Swimwear Group ($0.5 million). The 320 basis point increase in gross margin is primarily reflective of a favorable sales mix as the Company experienced an increase in full-price (and other more profitable channels) net revenues as a proportion of total net revenues, and the favorable effects of fluctuations in foreign currency exchange rates. Gross profit for the Six Months Ended July 3, 2010 includes an increase of $24.3 million due to foreign currency fluctuations.

Sportswear Group gross profit increased $44.6 million, and gross margin increased 300 basis points, for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009, reflecting a $37.7 million increase in the international business (primarily related to the favorable effect of fluctuations in exchange rates of foreign currencies, an increase in net sales in all geographies and a favorable sales mix in Europe, particularly Calvin Klein accessories, and Asia), and a $6.9 million increase in the domestic business (primarily reflecting an increase in net revenues and a favorable sales mix).

Intimate Apparel Group gross profit increased $38.5 million and gross margin increased 370 basis points for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009 reflecting a $26.6 million increase in the international business (primarily related to the favorable effect of fluctuations in exchange rates of foreign currencies, increased net revenues and a favorable sales mix), and an $11.9 million increase in the domestic business. The increase in the domestic business primarily reflects increased net revenues and a favorable product and channel mix.

Swimwear Group gross profit decreased $0.5 million and gross margin increased 100 basis points for the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009. The decrease in gross profit and increase in gross margin primarily reflect a decrease in sales volume and a better sales mix.

Selling, General and Administrative Expenses

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Selling, general & administrative (“SG&A”) expenses increased $26.6 million to $171.9 million (33.1% of net revenues) for the Three Months Ended July 3, 2010 compared to $145.3 million (31.9% of net revenues) for the Three Months Ended July 4, 2009. The increase in SG&A expenses includes (i) an increase of $14.8 million in selling and distribution expenses primarily associated with the opening of additional retail stores in Europe, Asia, Canada and Brazil, partially offset by decreases due to cost savings resulting from restructuring activities during Fiscal 2009; (ii) an increase of $6.5 million in marketing expenses, including the launch of the Calvin Klein X product line of men’s underwear and (iii) an increase in administrative expenses of $5.6 million primarily related to amounts accrued for performance-based employee compensation, partially offset by a decline of $0.3 million in restructuring charges (see Note 5 of Notes to Consolidated Condensed Financial Statements). The U.S. dollar strengthened during the Three Months Ended July 3, 2010 relative to certain functional currencies where the Company conducts certain of its operations compared to the Three Months Ended July 4, 2009, resulting in a $1.0 million decrease in SG&A.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Selling, general & administrative (“SG&A”) expenses increased $53.2 million to $356.8 million (32.2% of net revenues) for the Six Months Ended July 3, 2010 compared to $303.6 million (30.6% of net revenues) for the Six Months Ended July 4, 2009. The increase in SG&A expenses includes (i) an increase of $34.8 million in selling and distribution expenses primarily associated with the opening of additional retail stores in Europe, Asia, Canada and Brazil, partially offset by decreases due to cost savings resulting from restructuring activities during Fiscal 2009; (ii) an increase of $14.2 million in marketing expenses, including the launch of the Calvin Klein X product line of men’s underwear; and (iii) an increase in administrative expenses of $10.8 million, including an increase due to amounts accrued for performance-based employee compensation as well as an increase in stock-based compensation expense primarily as a result in the change in terms of equity awards granted to employees in March 2010. Compensation expense related to those awards granted to employees who were deemed to be Retirement Eligible on the date of grant would be recognized on the date of grant, or, in the case of employees who may become Retirement Eligible within 36 months of the date of grant, on a straight-line basis through the period from the date of grant to the date such employee may become Retirement Eligible, instead of being recognized on a straight-line basis over 36 months as such equity awards were accounted for in prior periods (see Note 2 of Notes to Consolidated Condensed Financial Statements). Those increases were partially offset by a $6.6 million decline in restructuring charges (see Note 5 of Notes to Consolidated Condensed Financial Statements). The U.S. dollar weakened during the Six Months Ended July 3, 2010 relative to certain functional currencies where the Company conducts certain of its operations compared to the Six Months Ended July 4, 2009, resulting in an $8.2 million increase in SG&A.

Amortization of Intangible Assets

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Amortization of intangible assets was $2.6 million for the Three Months Ended July 3, 2010 compared to $2.2 million for the Three Months Ended July 4, 2009. The increase primarily relates to (i) increase in the value of certain intangible assets due to the correction in the second and fourth quarters of Fiscal 2009 of those intangible assets recorded at February 4, 2003, the date that Warnaco Group, Warnaco Inc. (“Warnaco”) and certain of Warnaco’s subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C. Sections 101-1330, as amended; (ii) the acquisition of favorable retail store leases in Brazil in the fourth quarter of 2009 and (iii) the favorable effect of foreign currency fluctuations on the Korean Won-denominated carrying amounts of Calvin Klein licenses acquired in January 2006 and January 2008, partially offset by the write-off of the Calvin Klein Golf license in the third quarter of Fiscal 2009 and the unfavorable effect of foreign currency fluctuations on the Euro-denominated carrying amounts of Calvin Klein licenses acquired in January 2006 and January 2008.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Amortization of intangible assets was $5.3 million for the Six Months Ended July 3, 2010 compared to $4.3 million for the Six Months Ended July 4, 2009. The increase primarily relates to (i) increase in the value of certain intangible assets due to the correction in the second and fourth quarters of Fiscal 2009 of those intangible assets recorded at February 4, 2003, the date that Warnaco Group, Warnaco Inc. (“Warnaco”) and certain of Warnaco’s subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C. Sections 101-1330, as amended; (ii) the acquisition of favorable retail store leases in Brazil in the fourth quarter of 2009 and (iii) the favorable effect of foreign currency fluctuations on the Korean Won-denominated carrying amounts of Calvin Klein licenses acquired in January 2006 and January 2008, partially offset by the write-off of the Calvin Klein Golf license in the third quarter of Fiscal 2009 and the unfavorable effect of foreign currency fluctuations on the Euro-denominated carrying amounts of Calvin Klein licenses acquired in January 2006 and January 2008.

Pension Income / Expense

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Pension income was $0.02 million in the Three Months Ended July 3, 2010 compared to pension expense of $0.6 million in the Three Months Ended July 4, 2009. The decrease in pension expense is primarily related to a higher asset base in Fiscal 2010 due to positive returns earned on the Plan’s assets during Fiscal 2010, partially offset by an increase in interest cost on the Company’s projected benefit obligation resulting from a decrease in the discount/interest rate to 6.1% in the Three Months Ended July 3, 2010 from 8.0% in the Three Months Ended July 4, 2009. See Note 8 of Notes to the Consolidated Condensed Financial Statements.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Pension income was $0.04 million in the Six Months Ended July 3, 2010 compared to pension expense of $1.1 million in the Six Months Ended July 4, 2009. The decrease in pension expense is primarily related to a higher asset base in Fiscal 2010 due to positive returns earned on the Plan’s assets during Fiscal 2010, partially offset by an increase interest cost on the Company’s projected benefit obligation resulting from a decrease in the discount/interest rate to 6.1% in the Six Months Ended July 3, 2010 from 8.0% in the Six Months Ended July 4, 2009. See Note 8 of Notes to the Consolidated Condensed Financial Statements.

Operating Income

The following table presents operating income by group:


	Three Months			% of			Three Months			% of			Six Months			% of			Six Months			% of
	Ended July 3,			Group Net			Ended July 4,			Group Net			Ended July 3,			Group Net			Ended July 4,			Group Net
	2010			Revenues			2009			Revenues			2010			Revenues			2009			Revenues
	(in thousands of dollars)
Sportswear Group	$	24,987			10.2	%	$	13,320			6.3	%	$	75,929			13.8	%	$	50,789			10.6	%
Intimate Apparel Group		34,563			17.4	%		27,523			16.3	%		68,181			17.3	%		57,921			16.9	%
Swimwear Group		8,824			11.6	%		8,238			11.1	%		20,709			12.6	%		20,783			12.2	%
Unallocated corporate expenses		(13,056	)	na				(8,082	)	na				(30,003	)	na				(24,220	)	na

Operating income (a)	$	55,318		na			$	40,999		na			$	134,816		na			$	105,273		na


Operating income as a percentage of net revenue		10.7	%					9.0	%					12.2	%					10.6	%


(a)		Includes approximately $1.2 million and $1.5 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and approximately $2.1 million and $10.0 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, related to restructuring expenses. See Note 5 of Notes to Consolidated Condensed Financial Statements.

The following table summarizes key measures of the Company’s operating income for the Three Months and Six Months Ended July 3, 2010 and the Three Months and Six Months Ended July 4, 2009:


	Three Months			Three Months									Six Months			Six Months
	Ended July 3,			Ended July 4,			Increase /			%			Ended July 3,			Ended July 4,			Increase /			%
	2010			2009			(Decrease)			Change			2010			2009			(Decrease)			Change
	(In thousands of dollars)												(in thousands of dollars)
By Region:
Domestic	$	41,586		$	34,251		$	7,335			21.4	%	$	86,274		$	76,817		$	9,457			12.3	%
International		26,788			14,830			11,958			80.6	%		78,545			52,676			25,869			49.1	%
Unallocated corporate expenses		(13,056	)		(8,082	)		(4,974	)		61.5	%		(30,003	)		(24,220	)		(5,783	)		23.9	%

Total (a)	$	55,318		$	40,999		$	14,319			34.9	%	$	134,816		$	105,273		$	29,543			28.1	%


By Channel:
Wholesale	$	54,804		$	38,187		$	16,617			43.5	%	$	142,660		$	113,130		$	29,530			26.1	%
Retail		13,570			10,894			2,676			24.6	%		22,159			16,363			5,796			35.4	%
Unallocated corporate expenses		(13,056	)		(8,082	)		(4,974	)		61.5	%		(30,003	)		(24,220	)		(5,783	)		23.9	%

Total (a)	$	55,318		$	40,999		$	14,319			34.9	%	$	134,816		$	105,273		$	29,543			28.1	%


(a)		includes operating income from Calvin Klein businesses of $44.4 million and $28.9 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, (an increase of 53.8%) and $116.8 million and $90.5 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, (an increase of 29.1%).

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Operating income was $55.3 million (10.7% of net revenues) for the Three Months Ended July 3, 2010 compared to $41.0 million (9.0% of net revenues) for the Three Months Ended July 4, 2009. Operating income for the Three Months Ended July 3, 2010 includes an increase of $8.8 million related to the favorable effects of fluctuations in exchange rates of foreign currencies.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Operating income was $134.8 million (12.2% of net revenues) for the Six Months Ended July 3, 2010 compared to $105.3 million (10.6% of net revenues) for the Six Months Ended July 4, 2009. Operating income for the Six Months Ended July 3, 2010 includes an increase of $16.1 million related to the favorable effects of fluctuations in exchange rates of foreign currencies.

Sportswear Group

Sportswear Group operating income was as follows:


	Three Months		% of			Three Months		% of			Six Months		% of			Six Months		% of
	Ended July 3,		Brand Net			Ended July 4,		Brand Net			Ended July 3,		Brand Net			Ended July 4,		Brand Net
	2010 (c)		Revenues			2009 (c)		Revenues			2010 (c)		Revenues			2009 (c)		Revenues
	(in thousands of dollars)
Calvin Klein Jeans	$	11,855		9.3	%	$	6,724		5.8	%	$	54,473		17.1	%	$	38,514		12.9	%
Chaps		8,178		16.4	%		4,672		10.9	%		14,727		15.3	%		9,292		11.6	%

Sportswear wholesale		20,033		11.3	%		11,396		7.1	%		69,200		16.7	%		47,806		12.6	%
Sportswear retail		4,954		7.4	%		1,924		3.7	%		6,729		5.0	%		2,983		2.9	%

Sportswear Group (a) (b)	$	24,987		10.2	%	$	13,320		6.3	%	$	75,929		13.8	%	$	50,789		10.6	%


(a)		includes restructuring expense of $0.5 million and $0.4 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and a $0.4 million and $3.4 million charge for the Six Months Ended July 3, 2010 and July 4, 2009, respectively.

(b)		reflects the reclassification of approximately $0.5 million and $1.5 million of operating income related to certain sales of Calvin Klein underwear previously reported in the Sportswear Group to the Intimate Apparel Group for the Three Months and Six Months Ended July 4, 2009, respectively, in order to conform to the current period presentation.


(c)		includes an allocation of shared services expenses by brand in the following table:


	Three Months		Three Months		Six Months		Six Months
	Ended July 3,		Ended July 4,		Ended July 3,		Ended July 4,
	2010		2009		2010		2009
	(in thousands of dollars)
Calvin Klein Jeans	$	3,127	$	3,081	$	6,243	$	6,300
Chaps		2,057		1,815		4,114		3,621

Sportswear wholesale		5,184		4,896		10,357		9,921
Sportswear retail		21		185		43		187

Sportswear Group	$	5,205	$	5,081	$	10,400	$	10,108

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Sportswear Group operating income increased $11.7 million, or 87.7%, primarily reflecting increases of $5.2 million, $3.0 million and $3.5 million in the Calvin Klein Jeans wholesale, Calvin Klein Jeans retail and Chaps businesses, respectively. The increase in Sportswear operating income primarily reflects an $18.9 million increase in gross profit, partially offset by a $7.2 million increase in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 1.5 percentage points. The increase in SG&A expenses primarily reflects increases in Europe, Asia and Central and South America due to store openings and the effects of foreign currency fluctuations.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Sportswear Group operating income increased $25.1 million, or 49.5%, primarily reflecting increases of $16.0 million, $3.7 million and $5.4 million in the Calvin Klein Jeans wholesale, Calvin Klein Jeans retail and Chaps businesses, respectively. The increase in Sportswear operating income primarily reflects a $44.6 million increase in gross profit, partially offset by a $19.5 million increase in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 0.3 percentage points. The increase in SG&A expenses primarily reflects increases in Europe, Asia and Central and South America due to store openings and the effects of foreign currency fluctuations, partially offset by a $2.8 million decrease in restructuring charges (see Note 5 of Notes to Consolidated Condensed Financial Statements).

Intimate Apparel Group

Intimate Apparel Group operating income was as follows:


	Three Months		% of			Three Months		% of			Six Months		% of			Six Months		% of
	Ended July 3,		Brand Net			Ended July 4,		Brand Net			Ended July 3,		Brand Net			Ended July 4,		Brand Net
	2010 (a)		Revenues			2009 (a)		Revenues			2010 (c)		Revenues			2009 (c)		Revenues
	(in thousands of dollars)
Calvin Klein Underwear	$	21,238		21.3	%	$	13,778		17.4	%	$	41,122		21.0	%	$	37,691		21.5	%
Core Intimates		5,994		13.1	%		6,229		14.3	%		13,122		14.4	%		8,413		10.9	%

Intimate Apparel wholesale		27,232		18.7	%		20,007		16.3	%		54,244		18.9	%		46,104		18.2	%
Calvin Klein Underwear retail		7,331		13.7	%		7,516		16.1	%		13,937		13.1	%		11,817		13.3	%

Intimate Apparel Group (a) (b)	$	34,563		17.4	%	$	27,523		16.3	%	$	68,181		17.3	%	$	57,921		16.9	%


(a)		Includes restructuring charges of $0.2 million and $0.3 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $0.2 million and $2.9 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively.

(b)		Reflects the reclassification of approximately $0.5 million and $1.5 million of operating income related to certain sales of Calvin Klein underwear previously reported in the Sportswear Group to the Intimate Apparel Group for the Three Months and Six Months Ended July 4, 2009, respectively, in order to conform to the current period presentation.

(c)		Includes an allocation of shared services/other expenses by brand in the following table:


	Three Months		Three Months		Six Months		Six Months
	Ended July 3,		Ended July 4,		Ended July 3,		Ended July 4,
	2010		2009		2010		2009
	(in thousands of dollars)
Calvin Klein Underwear	$	2,385	$	2,319	$	4,767	$	4,615
Core Intimates		1,478		1,398		2,955		2,759

Intimate Apparel wholesale		3,863		3,717		7,722		7,374
Calvin Klein Underwear retail		68		88		134		174

Intimate Apparel Group	$	3,931	$	3,805	$	7,856	$	7,548

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Intimate Apparel Group operating income for the Three Months Ended July 3, 2010 increased $7.0 million, or 25.6%, reflecting a $7.4 million increase in Calvin Klein Underwear wholesale, partially offset by decreases of $0.2 million in Core Intimates and $0.2 million in Calvin Klein Underwear retail. The increase in Intimate Apparel operating income primarily reflects a $21.5 million increase in gross profit, partially offset by a $14.5 million increase in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales increased 2.7 percentage points. The increase in SG&A expense primarily reflects incremental marketing investment behind the launch of the Calvin Klein X product line of men’s underwear, an increase related to retail store openings in Europe, Asia and Canada and the effect of fluctuations in foreign currency exchange rates.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Intimate Apparel Group operating income for the Six Months Ended July 3, 2010 increased $10.2 million, or 17.7%, reflecting increases of $3.4 million Calvin Klein Underwear wholesale, $2.1 million in Calvin Klein Underwear retail and $4.7 million in Core Intimates. The increase in Intimate Apparel operating income primarily reflects a $38.5 million increase in gross profit, partially offset by a $28.3 million increase in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales increased 3.4 percentage points. The increase in SG&A expense primarily reflects incremental marketing investments behind the launch of the Calvin Klein X product line of men’s underwear, an increase related to retail store openings in Europe, Asia and Canada and the effect of fluctuations in foreign currency exchange rates, partially offset by a reduction of $2.0 million in restructuring charges.

Swimwear Group

Swimwear Group operating income was as follows:


	Three Months			% of			Three Months			% of			Six Months			% of			Six Months			% of
	Ended July 3,			Brand Net			Ended July 4,			Brand Net			Ended July 3,			Brand Net			Ended July 4,			Brand Net
	2010 (c)			Revenues			2009 (c)			Revenues			2010 (c)			Revenues			2009 (c)			Revenues
	(in thousands of dollars)
Speedo	$	9,439			15.0	%	$	8,923			14.5	%	$	19,576			14.3	%	$	20,690			14.2	%
Calvin Klein		(1,900	)		-28.4	%		(2,139	)		-34.4	%		(360	)		-1.9	%		(1,470	)		-9.2	%

Swimwear wholesale		7,539			10.8	%		6,784			10.0	%		19,216			12.4	%		19,220			11.9	%
Swimwear retail (a)		1,285			20.0	%		1,454			22.5	%		1,493			16.9	%		1,563			17.7	%

Swimwear Group (b)	$	8,824			11.6	%	$	8,238			11.1	%	$	20,709			12.6	%	$	20,783			12.2	%


(a)		Includes $1.0 million and $1.1 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $0.9 million and $1.0 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively, related to Calvin Klein retail swimwear.

(b)		Includes restructuring charges of $0.4 million and $0.9 million for the Three Months Ended July 3, 2010 and July 4, 2009, respectively, and $0.7 million and $2.4 million for the Six Months Ended July 3, 2010 and July 4, 2009, respectively.

(c)		Includes an allocation of shared services expenses by brand in the following table:


	Three Months		Three Months		Six Months		Six Months
	Ended July 3,		Ended July 4,		Ended July 3,		Ended July 4,
	2010		2009		2010		2009
	(in thousands of dollars)
Speedo	$	2,347	$	2,439	$	4,702	$	4,848
Calvin Klein		70		60		146		116

Swimwear wholesale		2,417		2,499		4,848		4,964
Swimwear retail		141		150		282		300

Swimwear Group	$	2,558	$	2,649	$	5,130	$	5,264

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Swimwear Group operating income for the Three Months Ended July 3, 2010 increased $0.6 million, or 7.1%, reflecting a $0.5 million increase in Speedo wholesale, a $0.2 million increase in Calvin Klein wholesale, partially offset by a decrease of $0.1 million in Swimwear retail. The increase in Swimwear operating income primarily reflects a $0.3 million increase in gross profit, partially offset by a $0.3 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 1.0 percentage point.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Swimwear Group operating income for the Six Months Ended July 3, 2010 was substantially unchanged compared to the Six Months Ended July 4, 2009, reflecting a $1.1 million decrease in Speedo wholesale, offset by a $1.1 million increase in Calvin Klein wholesale. Operating income in Swimwear retail was substantially unchanged. The substantially unchanged Swimwear operating income primarily reflects a $0.5 million decrease in gross profit, partially offset by a $0.5 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales increased 0.6 percentage points.

Other Loss (Income)

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Loss of $5.7 million for the Three Months Ended July 3, 2010 primarily reflects a loss of $2.0 million related to the redemption of $110.9 million of Senior Notes during the Three Months Ended July 3, 2010 (see Note 14 of Notes to Consolidated Condensed Financial Statements and Capital Resources and Liquidity — Financing Arrangements — Senior Notes, below) and a loss of $3.7 million due to losses on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency, net of gains on foreign currency exchange contracts designed as economic hedges (see Note 11 to Notes to Consolidated Condensed Financial Statements). Loss of $2.8 million for the Three Months Ended July 4, 2009 primarily reflects $3.6 million of net losses related to foreign currency exchange contracts designed as economic hedges (see Note 11 to Notes to Consolidated Condensed Financial Statements), partially offset by net gains of $0.8 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Loss of $7.5 million for the Six Months Ended July 3, 2010 primarily reflects a loss of $3.7 million related to the redemption of $160.9 million of Senior Notes during the Six Months Ended July 3, 2010 (see Note 14 of Notes to Consolidated Condensed Financial Statements and Capital Resources and Liquidity — Financing Arrangements — Senior Notes, below) and a loss of $3.8 million due to losses on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency, net of gains on foreign currency exchange contracts designed as economic hedges (see Note 11 to Notes to Consolidated Condensed Financial Statements). Loss of $2.4 million for the Six Months Ended July 4, 2009 primarily reflects $4.4 million of net losses related to foreign currency exchange contracts designed as economic hedges (see Note 11 to Notes to Consolidated Condensed Financial Statements), partially offset by net gains of $2.0 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency.

Interest Expense

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Interest expense decreased $1.5 million to $4.3 million for the Three Months Ended July 3, 2010 from $5.8 million for the Three Months Ended July 4, 2009. The decrease primarily relates to the redemption of $110.9 million and $50.0 million of the outstanding balance of the Senior Notes in the U.S., which were repaid on June 15, 2010 and January 5, 2010, respectively, decreases in the outstanding balances and interest rates related to the CKJEA Notes payable and the New Credit Agreements, and the amortization of the premium on the Swap Agreements, each defined below, which were terminated in the second and third quarters of Fiscal 2009, partially offset by an increase related to the accretion of the liability for the contingent payments to the Sellers in the acquisitions in Brazil in the fourth quarter of 2009 (see Note 3 of Notes to Consolidated Condensed Financial Statements).

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Interest expense decreased $2.7 million to $9.2 million for the Six Months Ended July 3, 2010 from $11.9 million for the Six Months Ended July 4, 2009. The decrease primarily relates to the redemption of $110.9 million and $50.0 million of the outstanding balance of the Senior Notes in the U.S., which were repaid on June 15, 2010 and January 5, 2010, respectively, decreases in the outstanding balances and interest rates related to the CKJEA Notes payable and the New Credit Agreements, and the amortization of the premium on the Swap Agreements, which were terminated in the second and third quarters of Fiscal 2009, partially offset by an increase related to the accretion of the liability for the contingent payments to the Sellers in the acquisitions in Brazil in the fourth quarter of 2009 (see Note 3 of Notes to Consolidated Condensed Financial Statements).

Interest Income

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Interest income increased $0.1 million to $0.5 million for the Three Months Ended July 3, 2010 from $0.4 million for the Three Months Ended July 4, 2009. The increase in interest income was due primarily to an increase of $0.1 million related to a third-party note receivable.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Interest income increased $0.7 million to $1.5 million for the Six Months Ended July 3, 2010 from $0.8 million for the Six Months Ended July 4, 2009. The increase in interest income was due primarily to an increase of $0.6 million related to a third-party note receivable and an increase of $0.1 million due to higher cash balances in 2010 than in 2009.

Income Taxes

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

The effective tax rates for the Three Months Ended July 3, 2010 and July 4, 2009 were 34.5% and 40.4%, respectively. The decrease in effective tax rate reflects a tax benefit relating to the finalization of a foreign tax examination recorded during the Three Months Ended July 3, 2010, partially offset by a shift in earnings from lower to higher taxing jurisdictions. Included in the effective tax rate for the Three Months Ended July 4, 2009 is a non-cash tax charge recorded in the U.S. of approximately $2.5 million in order to correct an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003 (see Note 6 of Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2009).

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

The effective tax rates for the Six Months Ended July 3, 2010 and July 4, 2009 were 34.5% and 36.4%, respectively. The decrease in effective tax rate reflects a decrease in foreign earnings taxed in the U.S. as well as a tax benefit relating to the finalization of foreign tax examinations recorded during the Three Months Ended July 3, 2010, partially offset by a shift in earnings from lower to higher taxing jurisdictions. Included in the effective tax rate for the Six Months Ended July 4, 2009 is a non-cash tax charge of approximately $2.5 million recorded in the U.S. associated with the correction of an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income which had been deferred in connection with the Company’s bankruptcy proceedings in 2003.

Discontinued Operations

Three Months Ended July 3, 2010 compared to Three Months Ended July 4, 2009

Loss from discontinued operations, net of taxes, was $0.1 million for the Three Months Ended July 3, 2010 compared to a loss of $0.9 million for the Three Months Ended July 4, 2009, in both periods primarily related to the Company’s Ocean Pacific and Calvin Klein Collection discontinued businesses. See Note 4 of Notes to Consolidated Condensed Financial Statements.

Six Months Ended July 3, 2010 compared to Six Months Ended July 4, 2009

Loss from discontinued operations, net of taxes, was $0.4 million for the Six Months Ended July 3, 2010 compared to a loss of $1.9 million for the Six Months Ended July 4, 2009, in both periods primarily related to the Company’s Ocean Pacific and Calvin Klein Collection discontinued businesses. See Note 4 of Notes to Consolidated Condensed Financial Statements.

Capital Resources and Liquidity

Financing Arrangements

Senior Notes

On January 5, 2010, the Company redeemed from bondholders the $50.0 million aggregate principal amount of its outstanding 87/8% Senior Notes due 2013 (“Senior Notes”) for a total consideration of $51.5 million and on June 15, 2010, the Company redeemed from bondholders the remaining $110.9 million aggregate principal amount of its outstanding Senior Notes for a total consideration of $112.5 million. In connection with the redemptions, the Company recognized losses, in the Other loss (income) line item in the Company’s Consolidated Condensed Statement of Operations of approximately $2.0 million and $3.7 million, for the Three and Six Months Ended July 3, 2010, respectively, which included $1.6 million and $3.1 million of premium expense, the write-off of approximately $1.6 million and $2.4 million of deferred financing costs, and $1.2 million and $1.8 million of unamortized gain from the previously terminated 2003 Swap Agreement and 2004 Swap Agreement (see Note 14 of Notes to Consolidated Condensed Financial Statements) for the Three and Six Months Ended July 3, 2010, respectively. The Company funded the redemption of the Senior Notes on January 5, 2010 and June 15, 2010 with available cash on hand in the U.S. and borrowings under its New Credit Agreement (defined below).

The aggregate principal amount outstanding under the Senior Notes was $0 as of July 3, 2010 and $160.9 million at January 2, 2010 and at July 4, 2009.

New Credit Agreements

As of July 3, 2010, the Company had $25.3 million of loans and approximately $85.7 million in letters of credit outstanding under the New Credit Agreement, leaving approximately $110.8 million of availability. As of July 3, 2010, there were no loans and no letters of credit outstanding under the New Canadian Credit Agreement and the available line of credit was approximately $19.7 million. As of July 3, 2010, the Company was in compliance with all financial covenants contained in the New Credit Agreements.

Euro-Denominated CKJEA Notes Payable and Other

In connection with the Company’s 2006 acquisition of certain parts of its Calvin Klein businesses, the Company assumed certain short-term notes payable (the “CKJEA Notes”). The total CKJEA notes payable of $38.3 million at July 3, 2010 consists of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA notes payable was 2.49% as of July 3, 2010, 2.18% as of January 2, 2010 and 2.39% as of July 4, 2009. All of the CKJEA notes payable are short-term and were renewed during the Six Months Ended July 3, 2010 for additional terms of no more than 12 months. At July 3, 2010, the Company’s Brazilian subsidiary, WBR, had lines of credit with several banks, with a total outstanding balance of $1.6 million, recorded in Short-term debt in the Company’s Consolidated Condensed Balance Sheet, which was secured by an equal amount of WBR’s trade accounts receivable. In addition, one of the Company’s Korean subsidiaries had an outstanding note payable of $1.6 million with an interest rate of 4.7% per annum at July 4, 2009, all of which had been repaid as of January 2, 2010 and July 3, 2010.

Liquidity

The Company’s principal source of cash is from sales of its merchandise to both wholesale and retail customers. During the Six Months Ended July 3, 2010, sales of the Company’s products increased in local currencies compared to the same period in the prior year. Since more than 50% of those sales arose from the Company’s operations outside the U.S., fluctuations in foreign currencies (principally the Euro, Korean Won, Canadian Dollar, Brazilian Real and Mexican Peso) relative to the U.S. Dollar have a significant effect on the Company’s cash inflows, expressed in U.S. Dollars. During the Six Months Ended July 3, 2010 compared to the same period in the prior year, the U.S. Dollar was weaker relative to the foreign currencies noted above, other than the Euro, against which the U.S. Dollar was substantially unchanged As a result, the increase in sales in local currencies was further increased by the favorable effect of fluctuations in foreign currencies, which was reflected in an increase in net revenues of 11.5% during the Six Months Ended July 3, 2010 compared to the Six Months Ended July 4, 2009 (see Results of Operations — Net Revenues, above).

The Company believes that, at July 3, 2010, cash on hand, cash available under its New Credit Agreements (see Capital Resources and Liquidity — Financing Arrangements, above) and cash to be generated from future operating activities will be sufficient to fund its operations, including contractual obligations (see Note 19 to Notes to Consolidated Condensed Financial Statements, above) and capital expenditures, for the next 12 months.

As of July 3, 2010, the Company had working capital (current assets less current liabilities) of $477.3 million. Included in working capital as of July 3, 2010 was (among other items) cash and cash equivalents of $172.9 million, and short-term debt of $65.2 million, including $25.3 million of New Credit Agreements, $38.3 million of the CKJEA Notes and $1.6 million of other short-term debt.

On January 5, 2010, the Company redeemed from bondholders $50.0 million aggregate principal amount of the outstanding Senior Notes for a total consideration of $51.5 million. On June 15, 2010, the Company redeemed from bondholders the remaining $110.9 million aggregate principal amount of outstanding Senior Notes for a total consideration of $112.5 million. The Company funded the redemption of the Senior Notes on January 5, 2010 and June 15, 2010 with available cash on hand in the U.S. and borrowings under its New Credit Agreement. See Financing Arrangements — Senior Notes, above.

As of July 3, 2010, under the New Credit Agreement, the Company had $25.3 million of loans and $85.7 million in letters of credit outstanding, leaving approximately $110.8 million of availability, and, under the New Canadian Credit Agreement, no loans and no letters of credit, leaving approximately $19.7 million of availability. The Company expects to make principal payments under its short-term notes payable as excess cash becomes available.

The revolving credit facilities under the New Credit Agreements reflect funding commitments by a syndicate of 14 banks, including Bank of America N.A., JPMorgan Chase, N.A., Deutsche Bank, HSBC, Royal Bank of Scotland and The Bank of Nova Scotia. The ability of any one or more of those banks to meet its commitment to provide the Company with funding up to the maximum of available credit is dependent on the fair value of the bank’s assets and its legal lending ratio relative to those assets (amount the bank is allowed to lend). The Company believes that the ability of those banks to make loans during the Six Months Ended July 3, 2010 has increased relative to Fiscal 2009 since the turmoil in the credit markets during Fiscal 2009 had diminished by the end of the second quarter of Fiscal 2010. However, the Company continues to monitor the creditworthiness of the syndicated banks.

During Fiscal 2009, the Company was able to borrow funds, from time to time, under the New Credit Agreements for seasonal and other cash flow requirements. The Company repaid those borrowings by the end of Fiscal 2009. As of July 3, 2010, the Company expects that it will continue to be able to obtain needed funds under the New Credit Agreements when requested. However, in the event that such funds are not available, the Company may have to delay certain capital expenditures or plans to expand its business, to scale back operations and/or raise capital through the sale of its equity or debt securities. There can be no assurance that the Company would be able to sell its equity or debt securities on terms that are satisfactory.

The Company’s corporate credit ratings and outlooks at July 3, 2010, are summarized below:


Rating	Corporate
Agency	Rating (a)	Outlook

Moody’s	Ba1	stable

Standard & Poor’s	BB+	positive


(a)		ratings on individual debt issuances can be different from the Company’s composite credit ratings depending on the priority position of creditors holding such debt, collateral related to such debt and other factors. The Company’s secured debt is rated BBB by Standard & Poor’s and Baa2 by Moody’s.

The Company’s credit ratings contribute to its ability to access the credit markets. Factors that can affect the Company’s credit ratings include changes in its operating performance, the economic environment, conditions in the apparel industry, the Company’s financial position, and changes in the Company’s business or financial strategy. The Company is not currently aware of any circumstances that would likely result in a downgrade of its credit ratings. If a downgrade were to occur, it could adversely affect, among other things, the Company’s future borrowing costs and access to capital markets. The current state of the economy creates greater uncertainty than in the past with regard to financing opportunities and the cost of such financing. Given the Company’s capital structure and its projections for future profitability and cash flow, the Company believes it is well positioned to obtain additional financing, if necessary, to refinance its debt, or, if opportunities present themselves, to make future acquisitions. However, there can be no assurance that such financing, if needed, can be obtained on terms satisfactory to the Company or at such time as a specific need may arise.

During Fiscal 2010, the Company has targeted the leasing of 120,000 square feet of new retail store space worldwide, which the Company expects will result in capital expenditures of approximately $21.0 million. During the Six Months Ended July 3, 2010, capital expenditures related to material handling equipment and other leasehold improvements at the Company’s new distribution center in the Netherlands was approximately $9.5 million. The distribution center began operations during May 2010. Capital expenditures for the remainder of Fiscal 2010 related to the distribution center are expected to be $0.4 million.

During the Six Months Ended July 3, 2010, the Company made $2.1 million in cash severance payments to employees and expects to make an additional $0.7 million of cash severance payments during the remainder of Fiscal 2010 in connection with consolidation of its European operations. The Company also paid $1.5 million related to other restructuring and exit activities, including contract termination costs. The Company expects to incur further restructuring expenses of approximately $0.9 million in connection with the consolidation of its European operations through 2010.

During the fourth quarter of Fiscal 2009, the Company acquired the remaining 49% equity interest in WBR, its subsidiary in Brazil. In addition to the initial cash payment made upon acquisition, the Company may be required to make up to three annual contingent payments through March 31, 2012. During the Six Months Ended July 3, 2010, the Company made the first such payment, amounting to 6 million Brazilian Real (approximately $3.4 million), based upon the operating results achieved by WBR in the fourth quarter of Fiscal 2009.

During the Six Months Ended July 3, 2010, the Company acquired the businesses of certain of its distributors in southern Asia and the People’s Republic of China for total consideration of $8.8 million, of which $6.0 million was paid during the Three Months Ended July 3, 2010.

During the Six Months Ended July 3, 2010, the Company completed repurchases under its 2007 Share Repurchase Program by repurchasing the 1,490,131 shares of common stock available for repurchase under the 2007 Share Repurchase Program for a total of $69.0 million (based on an average of $46.31 per share). In addition, the Company repurchased 74,301 shares of common stock for a total of $3.3 million (based on an average of $44.76 per share) related to the surrender of shares for the payment of minimum income tax due upon vesting of certain restricted stock awarded by the Company to its employees (see Note 15 of Notes to Consolidated Condensed Financial Statements and Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds). Repurchased shares are held in treasury pending use for general corporate purposes.

During the Six Months Ended July 3, 2010, some of the Company’s foreign subsidiaries with functional currencies other than the U.S. dollar made purchases of inventory, paid minimum royalty and advertising costs and /or had intercompany loans and payables denominated in U.S. dollars. During the Six Months Ended July 3, 2010 compared to the same period in the prior year, the U.S. Dollar was weaker relative to the foreign currencies noted above, other than the Euro, against which the U.S. Dollar was substantially unchanged. The cash flows of those subsidiaries were, therefore, impacted by the fluctuations relative to the U.S. dollar in relation to those foreign currencies. In order to minimize the effects of fluctuations in foreign currency exchange rates of those transactions, the Company uses derivative financial instruments, primarily foreign currency exchange forward contracts and zero cost collars (option contracts). There were no zero cost collars at July 3, 2010 (see Item 3. Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange Risk and Note 11 of Notes to Consolidated Condensed Financial Statements).

The Company carries its derivative financial instruments at fair value on the Consolidated Condensed Balance Sheets. The Company utilizes the market approach to measure fair value for financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. At July 3, 2010, the Company’s hedging programs included $62.6 million of future inventory purchases, $19.3 million of future minimum royalty and advertising payments and $38.0 million of intercompany payables denominated in non-functional currencies, primarily the U.S. dollar.

The Company classifies its financial instruments under a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

	Level 1 —		Inputs are quoted prices in active markets for identical assets or liabilities.

	Level 2 —		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

	Level 3 —		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The fair value of foreign currency exchange contracts was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The fair value of these foreign currency exchange contracts is based on exchange-quoted prices which are adjusted by a forward yield curve and, therefore, meets the definition of level 2 fair value, as defined above.

The fair value of zero-cost collars was determined as the net unrealized gains or losses on the option contracts comprising each collar, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current spot exchange rate. The fair value of these zero-cost collars is based on exchange-quoted prices and, therefore, meets the definition of level 2 fair value, as defined above.

The Pension Protection Act of 2006 (the “PPA”) revised the basis and methodology for determining defined benefit plan minimum funding requirements as well as maximum contributions to and benefits paid from tax-qualified plans. The PPA may ultimately require the Company to make additional contributions to its domestic plans. During the Six Months Ended July 3, 2010, the Company contributed $2.4 million to the domestic pension plan. Fiscal 2010 domestic plan contributions of $6.3 million are currently expected and annual contributions for the following four years are expected to be similar. Actual Fiscal 2010 and later year contributions could exceed the Company’s current projections, and may be influenced by future changes in government requirements. Additionally, the Company’s projections concerning timing of the PPA funding requirements are subject to change and may be influenced by factors such as general market conditions affecting trust asset performance, interest rates, and the Company’s future decisions regarding certain elective provisions of the PPA. See Note 8 of Notes to Consolidated Financial Statements for additional information on the Company’s pension plan.

Accounts receivable increased $13.6 million to $304.3 million at July 3, 2010 from $290.7 million at January 2, 2010, due primarily to increased sales volume in June 2010 compared to December 2009. The balance of accounts receivable at July 3, 2010 includes a decrease of $12.4 million, due to the stronger U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian dollar, Brazilian real and Mexican peso), at that date compared to January 2, 2010.

Accounts receivable increased $22.9 million to $304.3 million at July 3, 2010 from $281.4 million at July 4, 2009. The balance of accounts receivable at July 3, 2010 includes a decrease of $4.5 million, due to the stronger U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations, at that date compared to July 4, 2009.

Inventories increased $24.2 million to $277.6 million at July 3, 2010 from $253.4 million at January 2, 2010 to support expected sales. The balance of inventories at July 3, 2010 includes a decrease of $13.6 million, due to the stronger U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations, at that date compared to January 2, 2010.

Inventories decreased $14.0 million to $277.6 million at July 3, 2010 from $291.6 million at July 4, 2009, reflecting primarily the Company’s initiative, begun in 2009, to reduce inventory in light of the downturn in the global economy. The balance of inventories at July 3, 2010 includes a decrease of $6.6 million, due to the stronger U.S. dollar relative to foreign currencies in connection with transactions in countries where the Company conducts certain of its operations, at that date compared to July 4, 2009.


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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Condensed Balance Sheets as of July 3, 2010, January 2, 2010 and July 4, 2009		1

Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 3, 2010 and for the Three and Six Months Ended July 4, 2009		2

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Six Months Ended July 3, 2010 and for the Six Months Ended July 4, 2009		3

Consolidated Condensed Statements of Cash Flows for the Six Months Ended July 3, 2010 and for the Six Months Ended July 4, 2009		4

Notes to Consolidated Condensed Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		58

Item 4. Controls and Procedures		60

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		61

Item 1A. Risk Factors		61

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		61

Item 3. Defaults Upon Senior Securities		61

Item 4. Reserved		62

Item 5. Other Information		62

Item 6. Exhibits		62

SIGNATURES		64

Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9
Exhibit 10.10
Exhibit 10.11
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT