Table of Contents

 
 
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
OR
     
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
 
 

 

 


 

THE WARNACO GROUP, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED July 3, 2010
         
    PAGE  
    NUMBER  
PART I — FINANCIAL INFORMATION
 
       
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    31  
 
       
    58  
 
       
    60  
 
       
PART II — OTHER INFORMATION
 
       
    61  
 
       
    61  
 
       
    61  
 
       
    61  
 
       
    62  
 
       
    62  
 
       
    62  
 
       
    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

 

 


Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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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.

 

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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.

 

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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.

 

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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 )
 
                       

 

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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
                       

 

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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.

 

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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.

 

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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 %
 
                       

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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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     Ended  
ASC 815-20   Transaction   Instrument   July 3, 2010     July 3, 2010   Derivative   July 3, 2010     July 3, 2010  
 
                                           
Foreign exchange contracts (d)
  Purchases of inventory   Forward contracts   $ 907     August 2010   other loss/income   $ 92     $ (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     45       (232 )
 
                                       
 
                                           
Total
                              $ 2,298     $ 4,444  
 
                                       

 

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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.

 

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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).

 

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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).

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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  
 
           

 

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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.

 

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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.

 

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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.

 

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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.

 

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    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.

 

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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.

 

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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  
 
                 

 

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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.
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.
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.

 

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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.
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.

 

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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 %
 
                                                   

 

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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.

 

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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.

 

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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:

 

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    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).

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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(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  
 
                       

 

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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.

 

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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.

 

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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.

 

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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.
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.

 

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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.

 

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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.

 

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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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Cash Flows
The following table summarizes the cash flows from the Company’s operating, investing and financing activities for the Six Months Ended July 3, 2010 and July 4, 2009:
                 
    Six Months Ended  
    July 3, 2010     July 4, 2009  
    (in thousands of dollars)  
 
               
Net cash provided by operating activities:
               
Continuing operations
  $ 94,122     $ 70,898  
Discontinued operations
    851       3,165  
Net cash (used in) investing activities:
               
Continuing operations
    (24,087 )     (20,672 )
Discontinued operations
           
Net cash (used in) financing activities:
               
Continuing operations
    (212,220 )     (23,598 )
Discontinued operations
           
Translation adjustments
    (6,557 )     213  
 
           
(Decrease) increase in cash and cash equivalents
  $ (147,891 )   $ 30,006  
 
           
For the Six Months Ended July 3, 2010, cash provided by operating activities from continuing operations was $94.1 million compared to cash provided by operating activities of $70.9 million in the Six Months Ended July 4, 2009. The $23.2 million increase in cash provided by operating activities was du