Kontoor Brands Reports Third Quarter 2020 Results; Reinstates a Quarterly Dividend and Provides FY'20 Outlook

Kontoor Brands, Inc. (NYSE: KTB), a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, today reported financial results for its third quarter ended September 26, 2020.

“Our strategic actions delivered strong results in the quarter and are enhancing the Kontoor operating model focused on more profitable and sustainable long-term growth,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “Investments in our brands, people and partnerships drove significant sequential top line improvement, while restructuring, quality-of-sales initiatives and accretive mix shifts supported solid gross margin increases. And, importantly, our robust cash flow generation allowed us to continue to aggressively pay down debt, while also providing the opportunity to reinstate a quarterly dividend in the fourth quarter of 2020, a key tenet of our total shareholder return model.”

“Our accomplishments during the third quarter are a direct reflection of our colleagues’ incredible efforts, and I want to thank them for their tremendous contributions throughout these dynamic times,” added Baxter.

This release refers to “adjusted” amounts and “constant currency” amounts, which are further described in the Non-GAAP Financial Measures section below. All per share amounts are presented on a diluted basis.

Third Quarter 2020 Income Statement Review

Revenue decreased to $583 million, a 9 percent year-over-year decline on a reported and constant currency basis.

Revenue declines during the quarter were primarily driven by COVID-19 impacts, offset in part by increases in Digital, new business development wins, and a $33 million shift in the timing of U.S. Wrangler® shipments from the second quarter to the third quarter of 2020.

During the third quarter, U.S. revenue was $455 million, flat year-over-year on a reported basis. The impacts of COVID-19 were in part offset by growth in Digital, with U.S. digital wholesale increasing 68 percent and U.S. owned.com increasing 43 percent, as well as new business development wins and the previously mentioned timing shift.

International revenue was $128 million, down 30 percent on a reported basis and down 31 percent in constant currency, primarily driven by COVID-19 impacts. Despite the decline, both the Europe and China businesses experienced a gradual recovery during the quarter, with continued sequential revenue improvements in both regions expected in the fourth quarter.

Wrangler® brand global revenue decreased to $347 million, a 6 percent decline on a reported and constant currency basis. Wrangler® U.S. revenue increased 2 percent, driven by increases in Digital, strength in the Western business and the previously mentioned timing shift into the third quarter.

Lee® brand global revenue decreased to $214 million, down 8 percent on a reported and constant currency basis, driven primarily by COVID-19 impacts. Lee® U.S. revenue increased 10 percent, a result of new business development wins and increases in Digital during the quarter.

Other global revenue declined 43 percent to $22 million on a reported and constant currency basis driven by COVID-19 impacts to the Company’s VF Outlet stores, as well as planned reductions in the sale of goods manufactured for third parties and the Rock & Republic® brand.

Gross margin increased 410 basis points to 44.2 percent of revenue on a reported basis. On an adjusted basis, gross margin increased 240 basis points to 43.3 percent of revenue. Benefits of product costs as well as favorable channel and product mix were the primary drivers of the increase in adjusted gross margin.

Selling, General & Administrative (SG&A) expenses were $175 million on a reported basis. On an adjusted basis, SG&A was $150 million, or 25.6 percent of revenue, down 230 basis points year-over-year. Adjustments primarily represent costs associated with the global ERP implementation and information technology infrastructure build-out. Tight expense control and restructuring benefits helped offset fixed cost de-leverage due to revenue declines.

Operating income on a reported basis was $83 million, increasing 167 percent compared with the prior year. On an adjusted basis, operating income was $103 million, increasing 24 percent from $83 million in the same period in 2019. Adjusted operating margin increased 460 basis points to 17.6 percent of revenue, reflecting the benefits of gross margin improvements and tight expense control, which more than offset the significant impacts of COVID-19.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $91 million. Adjusted EBITDA was $109 million, increasing 22 percent from $90 million in the prior year. EBITDA margin on a reported basis increased to 15.7 percent of revenue. Adjusted EBITDA margin increased 470 basis points to 18.8 percent of revenue.

Earnings per share was $1.05 on a reported basis compared with $0.25 in the prior year. Adjusted earnings per share was $1.33 compared with $0.95 in the prior year.

September 26, 2020, Balance Sheet and Liquidity Review

The Company ended the third quarter of 2020 with $285 million in cash and equivalents, and approximately $1.0 billion in long-term debt. At the end of the third quarter of 2020, the Company achieved its lowest net debt level and strongest liquidity position since becoming an independent, publicly traded company in May 2019.

Due to the Company's strong cash generation, during the third quarter of 2020, the Company made additional discretionary repayments on its revolver totaling $100 million. As of September 2020, the Company had $125 million of outstanding borrowings under the Revolving Credit Facility and $368 million available for borrowing against this facility. The Company was in compliance with the terms of its amended credit facility at the end of the third quarter. Strong cash generation is expected to support continued aggressive debt paydown during the fourth quarter of 2020.

Inventory at the end of the third quarter of 2020 was $432 million, down $113 million or 21 percent compared to the prior-year period.

Quarterly Dividend Reinstated and Declared

Given the Company’s continued improving operational performance and strong cash flow generation, the Company today announced its Board of Directors has declared a regular quarterly cash dividend of $0.40 per share of its common stock. The cash dividend will be payable on December 18, 2020, to shareholders of record at the close of business on December 10, 2020.

Outlook

While the impacts from the COVID-19 pandemic and macroeconomic factors remain uncertain, the Company is providing full-year 2020 Adjusted EPS guidance and additional perspective on its fourth quarter outlook, including the following:

  • The Company continues to take the necessary, proactive steps to accommodate a prolonged COVID-19 operating environment.
  • Revenue in the fourth quarter of 2020 is expected to show continued sequential improvement from third quarter 2020 results, with revenue anticipated to be flat to down modestly.
  • Adjusted gross margin in the fourth quarter of 2020 is anticipated to be above the 40.9 percent achieved in the prior year, reflecting continued benefits from ongoing restructuring and quality-of-sales initiatives, as well as higher anticipated growth in more accretive channels such as Digital and improving mix within international.
  • Fourth quarter adjusted SG&A is expected to increase year-over-year, driven by strategic decisions to amplify investments in demand creation and DTC in support of both the fourth quarter and long-term revenue.
  • Full-year 2020 Adjusted EPS is anticipated to be in the range of $2.25 to $2.35.
  • Strong cash generation is expected to support continued aggressive debt paydown, which is anticipated to be at least $100 million during the fourth quarter.

Webcast Information

Kontoor Brands will host its third quarter 2020 conference call beginning at 8 a.m. Eastern Time today, October 29, 2020. The conference will be broadcast live via the Internet, accessible at https://www.kontoorbrands.com/investors. For those unable to listen to the live broadcast, an archived version will be available at the same location.

Non-GAAP Financial Measures

Adjusted Amounts - This release refers to “adjusted” amounts that exclude the impact of restructuring and separation costs, a non-cash impairment charge related to our Rock & Republic® trademark during the third quarter of 2019 and other adjustments. Adjustments during 2020 primarily represent costs associated with the Company’s global ERP implementation and information technology infrastructure build-out. Additional information regarding adjusted amounts is provided in notes to the supplemental financial information included with this release.

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

Net Debt - This release refers to “net debt” which represents total long-term debt, including current portion, less cash and equivalents.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures are presented in the supplemental financial information included with this release that identifies and quantifies all reconciling adjustments and provides management's view of why this non-GAAP information is useful to investors. While management believes that these non-GAAP measures are useful in evaluating the business, this information should be viewed in addition to, and not as an alternate for, reported results under GAAP. The non-GAAP measures used by the Company in this release may be different from similarly titled measures used by other companies.

About Kontoor Brands

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

Forward-Looking Statements

Certain statements included in this release and attachments are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve several risks and uncertainties. You can identify these statements by the fact that they use words such as “will,” “anticipate,” “estimate,” “expect,” “should,” “may” and other words and terms of similar meaning or use of future dates. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as required under the U.S. federal securities laws. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this release include, but are not limited to: risks associated with the Company's spin-off from VF Corporation, including the risk of disruption to our business in connection with the spin-off and that the Company could lose revenue as a result of such disruption; the risk that the Company does not realize all of the expected benefits of the spin-off; the risk that the spin-off will not be tax-free for U.S. federal income tax purposes; the risk that there will be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of the Company; the risk of significant costs to the Company to perform certain functions (currently being performed by VF Corporation for the Company on a transitional basis) following the transition period; and the risk associated with significant restrictions on the Company’s actions in order to avoid triggering tax-related liabilities. Other risks for the Company include foreign currency fluctuations; the level of consumer demand for apparel; financial difficulty experienced by the retail industry; disruption to distribution systems; reliance on a small number of large customers; the financial strength of customers; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets and its impact on the Company’s ability to obtain short-term or long-term financing on favorable terms; restrictions on the Company’s business relating to its debt obligations; diseases, epidemics and public health-related concerns, such as the recent impact of the COVID-19 pandemic, which could continue to result in closed factories, reduced workforces, supply chain interruption, and reduced consumer traffic and purchasing; response to changing fashion trends, evolving consumer preferences and changing patterns of consumer behavior, intense industry competition, including from online retailers, and manufacturing and product innovation; changes to trade policy, including tariff and import/export regulations; increasing pressure on margins; ability to implement its business strategy; ability to grow its international and direct-to-consumer businesses; the Company's and its vendors’ ability to maintain the strength and security of information technology systems; the risk that facilities and systems and those of third-party service providers may be vulnerable to and unable to anticipate or detect data security breaches and data or financial loss; ability to properly collect, use, manage and secure consumer and employee data; stability of manufacturing facilities and foreign suppliers; continued use by suppliers of ethical business practices; ability to accurately forecast demand for products; continuity of members of management; ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; operational difficulties and additional expenses related to the Company’s design and implementation of an enterprise resource planning software system; maintenance by licensees and distributors of the value of the Company’s brands; ability to execute and integrate acquisitions; changes in tax laws and liabilities; volatility in the price and trading volume of the Company’s common stock; failure to declare future cash dividends; the impact of climate change and related legislative and regulatory responses; legal, regulatory, political and economic risks; the risk of economic uncertainty associated with the recent exit of the United Kingdom from the European Union ("Brexit") or any other similar referendums that may be held; and unseasonal or severe weather conditions. Many of the foregoing risks and uncertainties will continue to be exacerbated by the COVID-19 pandemic and any continued worsening of the global business and economic environment as a result. More information on potential factors that could affect the Company's financial results are described in detail in the Company’s most recent Annual Report on Form 10-K and in other reports and statements that the Company files with the SEC.

 
 

KONTOOR BRANDS, INC.

Condensed Consolidated and Combined Statements of Operations

(Unaudited)

Three Months Ended

September

%

Nine Months Ended

September

%

(Dollars in thousands)

2020

2019

Change

2020

2019

Change

Net revenues

$

583,222

$

638,138

(9)%

$

1,436,974

$

1,896,228

(24)%

Costs and operating expenses

Cost of goods sold

325,512

382,181

(15)%

854,134

1,157,383

(26)%

Selling, general and administrative expenses

174,846

192,293

(9)%

521,935

596,466

(12)%

Non-cash impairment of intangible asset

32,636

*

32,636

*

Total costs and operating expenses

500,358

607,110

(18)%

1,376,069

1,786,485

(23)%

Operating income

82,864

31,028

167%

60,905

109,743

(45)%

Interest income from former parent, net

*

3,762

*

Interest expense

(13,249

)

(14,140

)

(6)%

(37,308

)

(21,876

)

71%

Interest income

283

712

(60)%

1,255

3,543

(65)%

Other expense, net

(751

)

(1,456

)

(48)%

(1,710

)

(3,797

)

(55)%

Income before income taxes

69,147

16,144

328%

23,142

91,375

(75)%

Income taxes

8,362

1,642

409%

(1,669

)

23,474

(107)%

Net income

$

60,785

$

14,502

319%

$

24,811

$

67,901

(63)%

Earnings per common share

Basic

$

1.07

$

0.26

$

0.44

$

1.20

Diluted

$

1.05

$

0.25

$

0.43

$

1.19

Weighted average shares outstanding

Basic

57,007

56,694

56,938

56,663

Diluted

57,642

57,401

57,669

56,989

 

* Calculation not meaningful.

Basis of presentation for all financial tables within this release: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 each year. For presentation purposes herein, all references to periods ended September 2020 and September 2019 relate to the 13-week and 39-week fiscal periods ended September 26, 2020 and September 28, 2019, respectively. References to September 2020, December 2019 and September 2019 relate to the balance sheets as of September 26, 2020, December 28, 2019 and September 28, 2019, respectively. Amounts herein may not recalculate due to the use of unrounded numbers.

 
 
 

KONTOOR BRANDS, INC.

Condensed and Consolidated Balance Sheets

(Unaudited)

(In thousands)

September 2020

December 2019

September 2019

ASSETS

Current assets

Cash and equivalents

$

285,251

$

106,808

$

40,804

Accounts receivable, net

221,971

228,459

302,582

Inventories

432,280

458,101

545,426

Prepaid expenses and other current assets

81,781

84,235

73,162

Total current assets

1,021,283

877,603

961,974

Property, plant and equipment, net

122,739

132,192

126,963

Operating lease assets

71,075

86,582

96,590

Intangible assets, net

16,458

17,293

17,530

Goodwill

212,637

212,836

212,834

Other assets

224,532

190,650

169,874

TOTAL ASSETS

$

1,668,724

$

1,517,156

$

1,585,765

LIABILITIES AND EQUITY

Current liabilities

Short-term borrowings

$

148

$

1,070

$

6,028

Current portion of long-term debt

15,625

7,500

Accounts payable

207,564

147,347

149,685

Accrued liabilities

206,521

194,744

190,353

Operating lease liabilities, current

33,065

35,389

35,992

Total current liabilities

462,923

378,550

389,558

Operating lease liabilities, noncurrent

43,023

54,746

64,328

Other liabilities

115,040

101,334

95,701

Long-term debt

1,021,710

913,269

980,607

Commitments and contingencies

Total liabilities

1,642,696

1,447,899

1,530,194

Total equity

26,028

69,257

55,571

TOTAL LIABILITIES AND EQUITY

$

1,668,724

$

1,517,156

$

1,585,765

 
 

KONTOOR BRANDS, INC.

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

Nine Months Ended September

(In thousands)

2020

2019

OPERATING ACTIVITIES

Net income

$

24,811

$

67,901

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization

24,384

23,020

Stock-based compensation

9,738

17,798

Non-cash impairment of intangible asset

32,636

Due from former parent

548,301

Due to former parent

(16,065

)

Other

70,750

(95,210

)

Cash provided by operating activities

129,683

578,381

INVESTING ACTIVITIES

Property, plant and equipment expenditures

(16,481

)

(11,750

)

Capitalized computer software

(30,038

)

(898

)

Collection of notes receivable from former parent

517,940

Proceeds from sales of assets

13,068

2,049

Other

(3,651

)

(422

)

Cash (used) provided by investing activities

(37,102

)

506,919

FINANCING ACTIVITIES

Borrowings under revolving credit facility

512,500

30,000

Repayments under revolving credit facility

(387,500

)

(30,000

)

Proceeds from issuance of term loans

1,050,000

Payment of deferred financing costs

(4,346

)

(12,993

)

Repayments of term loans

(50,000

)

Repayment of notes payable to former parent

(269,112

)

Net transfers to former parent

(1,814,682

)

Dividends paid

(31,877

)

(31,763

)

Proceeds from issuance of Common Stock, net of shares withheld for taxes

(2,800

)

(514

)

Other

(885

)

(10,868

)

Cash provided (used) by financing activities

85,092

(1,139,932

)

Effect of foreign currency rate changes on cash and cash equivalents

770

(1,340

)

Net change in cash and cash equivalents

178,443

(55,972

)

Cash and cash equivalents – beginning of period

106,808

96,776

Cash and cash equivalents – end of period

$

285,251

$

40,804

 
 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Business Segment Information

(Unaudited)

Three Months Ended September

% Change

% Change

Constant

Currency(a)

(Dollars in thousands)

2020

2019

Segment revenues:

Wrangler

$

346,629

$

367,206

(6)%

(6)%

Lee

214,440

232,221

(8)%

(8)%

Total reportable segment revenues

561,069

599,427

(6)%

(7)%

Other revenues (b)

22,153

38,711

(43)%

(43)%

Total net revenues

$

583,222

$

638,138

(9)%

(9)%

Segment profit:

Wrangler

$

76,908

$

61,070

26%

26%

Lee

40,968

30,156

36%

34%

Total reportable segment profit

$

117,876

$

91,226

29%

28%

Non-cash impairment of intangible asset (c)

(32,636

)

*

*

Corporate and other expenses

(31,347

)

(29,861

)

5%

5%

Interest expense

(13,249

)

(14,140

)

(6)%

(6)%

Interest income

283

712

(60)%

(60)%

(Loss) profit related to other revenues (b)

(4,416

)

843

*

*

Income before income taxes

$

69,147

$

16,144

328%

324%

Nine Months Ended September

% Change

% Change

Constant

Currency(a)

2020

2019

Segment revenues:

Wrangler

$

901,670

$

1,101,133

(18)%

(18)%

Lee

483,162

680,660

(29)%

(29)%

Total reportable segment revenues

1,384,832

1,781,793

(22)%

(22)%

Other revenues (b)

52,142

114,435

(54)%

(54)%

Total net revenues

$

1,436,974

$

1,896,228

(24)%

(24)%

Segment profit:

Wrangler

$

139,709

$

141,715

(1)%

(2)%

Lee

23,524

61,536

(62)%

(63)%

Total reportable segment profit

$

163,233

$

203,251

(20)%

(20)%

Non-cash impairment of intangible asset (c)

(32,636

)

*

*

Corporate and other expenses

(90,917

)

(64,232

)

42%

42%

Interest income from former parent, net

3,762

*

*

Interest expense

(37,308

)

(21,876

)

71%

70%

Interest income

1,255

3,543

(65)%

(64)%

Loss related to other revenues (b)

(13,121

)

(437

)

*

*

Income before income taxes

$

23,142

$

91,375

(75)%

(76)%

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

(b) We report an "Other" category in order to reconcile segment revenues and segment profit to the Company's operating results, but the Other category is not considered a reportable segment based on evaluation of aggregation criteria. Other includes sales of third-party branded merchandise at VF Outlet™ stores, sales and licensing of Rock & Republic® branded apparel, and sales of products manufactured for third parties. Sales of Wrangler® and Lee® branded products at VF Outlet™ stores are not included in Other and are reported in their respective segments. Prior to 2020, the Other category also included transactions with VF for pre-Separation activities, none of which continued in 2020. These transactions included sales of VF-branded products at VF Outlet™ stores, as well as sales to VF for products manufactured in our plants, use of our transportation fleet and fulfillment of a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018.

(c) Represents an impairment charge recorded during the third quarter of 2019 related to the Rock & Republic® trademark.

* Calculation not meaningful.

 
 
 

KONTOOR BRANDS, INC.

Supplemental Financial Information

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

(Unaudited)

Three Months Ended September 2020

As Reported

Adjust for Foreign

(In thousands)

under GAAP

Currency Exchange

Constant Currency

Segment revenues:

Wrangler

$

346,629

$

(803

)

$

345,826

Lee

214,440

(1,121

)

213,319

Total reportable segment revenues

561,069

(1,924

)

559,145

Other revenues

22,153

17

22,170

Total net revenues

$

583,222

$

(1,907

)

$

581,315

Segment profit:

Wrangler

$

76,908

$

(163

)

$

76,745

Lee

40,968

(517

)

40,451

Total reportable segment profit

$

117,876

$

(680

)

$

117,196

Corporate and other expenses

(31,347

)

4

(31,343

)

Interest expense

(13,249

)

4

(13,245

)

Interest income

283

283

Loss related to other revenues

(4,416

)

(1

)

(4,417

)

Income before income taxes

$

69,147

$

(673

)

$

68,474

Nine Months Ended September 2020

As Reported

Adjust for Foreign

under GAAP

Currency Exchange

Constant Currency

Segment revenues:

Wrangler

$

901,670

$

1,149

$

902,819

Lee

483,162

2,604

485,766

Total reportable segment revenues

1,384,832

3,753

1,388,585

Other revenues

52,142

35

52,177

Total net revenues

$

1,436,974

$

3,788

$

1,440,762

Segment profit:

Wrangler

$

139,709

$

(417

)

$

139,292

Lee

23,524

(857

)

22,667

Total reportable segment profit

$

163,233

$

(1,274

)

$

161,959

Corporate and other expenses

(90,917

)

(54

)

(90,971

)

Interest expense

(37,308

)

15

(37,293

)

Interest income

1,255

18

1,273

Loss related to other revenues

(13,121

)

16

(13,105

)

Income before income taxes

$

23,142

$

(1,279

)

$

21,863

Constant Currency Financial Information

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

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

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

 
 
 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reconciliation of Adjusted Financial Measures - Quarter-to-Date (Non-GAAP)

(Unaudited)

Three Months Ended September

(In thousands, except for per share amounts)

2020

2019

Net revenues - as reported under GAAP

$

583,222

$

638,138

Cost of goods sold - as reported under GAAP

$

325,512

$

382,181

Restructuring & separation costs (a)

5,384

(4,867

)

Adjusted cost of goods sold

$

330,896

$

377,314

Selling, general and administrative expenses - as reported under GAAP

$

174,846

$

192,293

Restructuring & separation costs (a)

(25,340

)

(14,490

)

Adjusted selling, general and administrative expenses

$

149,506

$

177,803

Other expense, net - as reported under GAAP

$

(751

)

$

(1,456

)

Other adjustments (b)

442

1,183

Adjusted other expense, net

$

(309

)

$

(273

)

Diluted earnings per share - as reported under GAAP

$

1.05

$

0.25

Restructuring & separation costs (a)

0.27

0.26

Non-cash impairment of intangible asset (c)

0.44

Adjusted diluted earnings per share

$

1.33

$

0.95

Net income - as reported under GAAP

$

60,785

$

14,502

Income taxes

8,362

1,642

Interest expense

13,249

14,140

Interest income

(283

)

(712

)

EBIT

$

82,113

$

29,572

Depreciation and amortization - as reported under GAAP

$

9,165

$

6,995

Restructuring & separation costs (a)

(2,238

)

Adjusted depreciation and amortization

$

6,927

$

6,995

EBITDA

$

91,278

$

36,567

Restructuring & separation costs (a)

17,718

19,357

Non-cash impairment of intangible asset (c)

32,636

Other adjustments (b)

442

1,183

Adjusted EBITDA

$

109,438

$

89,743

Non-GAAP Financial Information: The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures. See “Notes to Supplemental Financial Information - Reconciliation of Adjusted Financial Measures" within the following pages. Amounts herein may not recalculate due to the use of unrounded numbers.

KONTOOR BRANDS, INC.
Supplemental Financial Information
Reconciliation of Adjusted Financial Measures - Quarter-to-Date (Non-GAAP)
(Unaudited)

Notes to Supplemental Financial Information - Reconciliation of Adjusted Financial Measures

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

(a) For the three months ended September 2020, restructuring (benefits) costs related to strategic actions taken by the Company, which included a $6.6 million gain on the sale of manufacturing assets and charges related to cost optimization business activities primarily related to the Company's VF Outlet business and COVID-19. For the three months ended September 2020 and September 2019, separation costs related to the spin-off from VF Corporation and establishment of Kontoor as a separate public company, which for the 2020 period primarily included costs associated with the ongoing implementation of the Company's global ERP system and information technology infrastructure. These restructuring and separation costs resulted in a corresponding tax impact of $4.2 million and $4.5 million for the three months ended September 2020 and September 2019, respectively.

(b) Other adjustments have been made for the three months ended September 2020 and September 2019 to remove the funding fees related to the accounts receivable sale arrangement, as they are treated as interest expense in the calculation of adjusted EBITDA for debt compliance purposes.

(c) Non-cash impairment of intangible asset for the three months ended September 2019 represents a write-down of the Rock & Republic® trademark intangible asset to reflect fair value. The $32.6 million impairment charge resulted in a tax impact of $(7.4) million for the three months ended September 2019.

 
 
 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Summary of Select GAAP and Non-GAAP Measures

(Unaudited)

Three Months Ended September

2020

2019

(Dollars in thousands)

GAAP

Adjusted

GAAP

Adjusted

Net revenues

$

583,222

$

583,222

$

638,138

$

638,138

Gross profit

$

257,710

$

252,326

$

255,957

$

260,824

As a percentage of total net revenues

44.2

%

43.3

%

40.1

%

40.9

%

Selling, general and administrative expenses

$

174,846

$

149,506

$

192,293

$

177,803

As a percentage of total net revenues

30.0

%

25.6

%

30.1

%

27.9

%

Non-cash impairment of intangible asset

$

$

$

32,636

$

Operating income

$

82,864

$

102,820

$

31,028

$

83,021

As a percentage of total net revenues

14.2

%

17.6

%

4.9

%

13.0

%

Earnings per common share - diluted

$

1.05

$

1.33

$

0.25

$

0.95

EBIT

$

82,113

$

102,511

$

29,572

$

82,748

EBITDA

$

91,278

$

109,438

$

36,567

$

89,743

As a percentage of total net revenues

15.7

%

18.8

%

5.7

%

14.1

%

 

Non-GAAP Financial Information: The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures. See “Notes to Supplemental Financial Information - Reconciliation of Adjusted Financial Measures" within the previous pages.

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

 
 
 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Disaggregation of Revenue

(Unaudited)

Three Months Ended September 2020

Revenues - As Reported Under GAAP

(In thousands)

Wrangler

Lee

Other

Total

Channel revenues

U.S. Wholesale

$

285,639

$

105,757

$

2,259

$

393,655

Non-U.S. Wholesale

35,724

70,555

1,124

107,403

Branded Direct-to-Consumer

25,266

38,128

8

63,402

Other

18,762

18,762

Total

$

346,629

$

214,440

$

22,153

$

583,222

Geographic revenues

U.S.

$

307,512

$

126,912

$

21,029

$

455,453

International

39,117

87,528

1,124

127,769

Total

$

346,629

$

214,440

$

22,153

$

583,222

Three Months Ended September 2019

Revenues - As Reported Under GAAP

(In thousands)

Wrangler

Lee

Other

Total

Channel revenues

U.S. Wholesale

$

283,616

$

93,931

$

5,970

$

383,517

Non-U.S. Wholesale

60,523

99,386

340

160,249

Branded Direct-to-Consumer

23,067

38,904

9

61,980

Other

32,392

32,392

Total

$

367,206

$

232,221

$

38,711

$

638,138

Geographic revenues

U.S.

$

302,819

$

115,700

$

38,263

$

456,782

International

64,387

116,521

448

181,356

Total

$

367,206

$

232,221

$

38,711

$

638,138

 
 

KONTOOR BRANDS, INC.
Supplemental Financial Information
Additional Information about Liquidity (Non-GAAP)
(Unaudited)

(In millions)

June

2019

September

2019

December

2019

March

2020

June

2020

September

2020

Outstanding Borrowings under the Credit Facilities: (1)

Revolving Credit Facility

$

$

$

$

475

$

225

$

125

Term Loan A (2)

694

695

695

695

693

694

Term Loan B (2)

293

293

218

218

218

218

Total long-term debt, including current portion

$

987

$

988

$

913

$

1,388

$

1,136

$

1,037

Less: cash and equivalents

77

41

107

479

256

285

Net debt at quarter-end (3)

$

910

$

947

$

806

$

909

$

880

$

752

Available borrowing capacity under the Revolving Credit Facility (4)

$

499

$

499

$

499

$

24

$

273

$

368

Cash and equivalents

77

41

107

479

256

285

Available liquidity at quarter-end (5)

$

576

$

540

$

606

$

503

$

529

$

653

 

Non-GAAP Financial Information: The Company's primary sources of liquidity are cash generated from global operations and cash available under our Revolving Credit Facility. Management reviews net debt and available liquidity at quarter-end, as defined below, in its budgeting and review process. While management believes that these non-GAAP measures are useful in evaluating the business, this information should be viewed in addition to, and not as an alternate for, reported results under GAAP. The non-GAAP measures used by the Company in this release may be different from similarly titled measures used by other companies.

(1) On May 17, 2019, the Company entered into a $1.55 billion senior secured credit facility (the "Credit Agreement") under which it incurred $1.05 billion of indebtedness. At inception, this facility consisted of a five-year $750.0 million term loan A facility (“Term Loan A”), a seven-year $300.0 million term loan B facility (“Term Loan B”) and a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”) (collectively, the “Credit Facilities”) with the lenders and agents party thereto. The Company entered into an amendment to the Credit Agreement on May 5, 2020 (the "Amendment") that established a temporary relief period for certain provisions regarding certain financial covenants, including the addition of a minimum liquidity floor as defined in the Amendment, which differs from the liquidity calculation presented in the table above.

(2) As of September 2020, Term Loan A and Term Loan B had remaining outstanding principal balances of $700.0 million and $223.0 million, respectively, and are recorded net of unamortized original issue discount and deferred financing costs.

(3) Net debt at quarter-end is calculated as total long-term debt, including current portion, outstanding under the Credit Facilities less the Company's cash and equivalents balance.

(4) Available borrowing capacity under the Revolving Credit Facility is calculated as the total borrowing limit under the Revolving Credit Facility less outstanding borrowings and standby letters of credit issued on behalf of the Company under the facility.

(5) Available liquidity at quarter-end is defined as the sum of the Company's available borrowing capacity under the Revolving Credit Facility plus the Company's cash and equivalents balance.

Contacts:

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

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