UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2012

OR

[  ]    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	(I.R.S. Employer
incorporation or organization)	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. [X] Yes [ ] 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). [X] Yes [ ] 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 [X]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company[ ]

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

The number of outstanding shares of the registrant's common stock, par value $0.01 per share, as of November 1, 2012 is as follows:  40,966,440. 

THE WARNACO GROUP, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2012

PART I –FINANCIAL INFORMATION

		PAGE
		NUMBER
Item 1.	Financial Statements:
	Consolidated Condensed Balance Sheets as of September 29, 2012, December 31, 2011 and October 1, 2011	1
	Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 29, 2012 and for the Three and Nine Months Ended October 1, 2011	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 29, 2012 and for the Three and Nine Months Ended October 1, 2011	3
	Consolidated Statements of Redeemable Non-Controlling Interest and Stockholders’ Equity for the Nine Months Ended September 29, 2012 and for the Nine Months Ended October 1, 2011	4
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 29, 2012 and for the Nine Months Ended October 1, 2011	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Controls and Procedures	69
	PART II–OTHER INFORMATION
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
SIGNATURES		74

PART I

FINANCIAL INFORMATION\

Item 1. Financial Statements.

 THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, excluding per share data)

(Unaudited) 

	September 29, 2012			December 31, 2011			October 1, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	311,011		$	232,531		$	179,326
Accounts receivable, net of reserves of $91,386, $94,739 and $89,798 as of September 29, 2012, December 31, 2011 and October 1, 2011, respectively	323,719			322,976			341,406
Inventories	388,827			350,835			392,073
Prepaid expenses and other current assets	106,693			99,686			114,574
Deferred income taxes	60,124			58,602			59,781
Total current assets	1,190,374			1,064,630			1,087,160
Property, plant and equipment, net	135,054			133,022			129,205
Other assets:
Licenses, trademarks and other intangible assets, net	311,960			320,880			360,508
Goodwill	141,103			139,948			143,688
Deferred income taxes	25,043			21,885			24,695
Other assets	48,959			67,485			67,515
Total assets	$	1,852,493		$	1,747,850		$	1,812,771
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	49,393		$	47,513		$	47,773
Accounts payable	173,616			141,797			182,517
Accrued liabilities	192,099			212,655			209,842
Liabilities of discontinued operations	—			6,797			7,048
Accrued income taxes payable	15,290			41,762			33,586
Deferred income taxes	1,589			1,476			1,320
Total current liabilities	431,987			452,000			482,086
Long-term debt	205,299			208,477			209,552
Deferred income taxes	38,246			37,000			76,410
Other long-term liabilities	133,003			137,973			130,119
Total liabilities	808,535			835,450			898,167
Commitments and contingencies
Redeemable non-controlling interest	15,275			15,200			15,200
Stockholders' equity:
Preferred stock	—			—			—
Common stock: $0.01 par value, 112,500,000 shares authorized, 53,057,174, 52,184,730 and 52,134,522 shares issued as of September 29, 2012, December 31, 2011 and October 1, 2011, respectively	531			522			521
Additional paid-in capital	773,821			721,356			704,741
Accumulated other comprehensive income	23,200			16,242			20,421
Retained earnings	712,420			625,760			633,776
Treasury stock, at cost 12,090,834, 11,790,428 and 11,653,871 shares as of September 29, 2012, December 31, 2011 and October 1, 2011, respectively	(481,289		)	(466,680		)	(460,055		)
Total stockholders' equity	1,028,683			897,200			899,404
Total liabilities, redeemable non-controlling interest and stockholders' equity	$	1,852,493		$	1,747,850		$	1,812,771

 See Notes to Consolidated Condensed Financial Statements. 

1

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSEDSTATEMENTS OF OPERATIONS

(Dollars in thousands, excluding per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Net revenues	$	611,538		$	645,121		$	1,790,990		$	1,898,669
Cost of goods sold	344,581			365,412			1,017,609			1,065,552
Gross profit	266,957			279,709			773,381			833,117
Selling, general and administrative expenses	197,773			212,000			609,738			637,491
Amortization of intangible assets	2,537			3,263			12,086			9,548
Pension income	(55		)	(310		)	(164		)	(931		)
Operating income	66,702			64,756			151,721			187,009
Other loss	13			1,357			12,638			498
Interest expense	4,614			4,986			13,708			11,142
Interest income	(831		)	(986		)	(2,705		)	(2,542		)
Income from continuing operations before provision for income taxes and redeemable non-controlling interest	62,906			59,399			128,080			177,911
Provision for income taxes	21,676			10,770			44,489			39,184
Income from continuing operations  before redeemable non-controlling interest	41,230			48,629			83,591			138,727
Income (loss) from discontinued operations, net of taxes	(2		)	(4,177		)	3,023			(4,741		)
Net income	41,228			44,452			86,614			133,986
Less: income (loss) attributable to redeemable non-controlling interest	100			(159		)	(46		)	(159		)
Net income attributable to Warnaco Group	$	41,128		$	44,611		$	86,660		$	134,145
Amounts attributable to Warnaco Group common shareholders:
Income from continuing operations, net of tax	$	41,130		$	48,788		$	83,637		$	138,886
Income (loss) from discontinued operations, net of taxes	(2		)	(4,177		)	3,023			(4,741		)
Net income	$	41,128		$	44,611		$	86,660		$	134,145
Basic income per common share (see Note 17):
Income from continuing operations	$	0.99		$	1.15		$	2.02		$	3.18
Income (loss) from discontinued operations	—			(0.10		)	0.08			(0.11		)
Net income	$	0.99		$	1.05		$	2.10		$	3.07
Diluted income per common share (see Note 17):
Income from continuing operations	$	0.98		$	1.13		$	1.99		$	3.11
Income (loss) from discontinued operations	—			(0.10		)	0.07			(0.11		)
Net income	$	0.98		$	1.03		$	2.06		$	3.00
Weighted average number of shares outstanding used in computing income per common share (see Note 17):
Basic	40,908,995			41,713,958			40,800,528			43,076,120
Diluted	41,498,354			42,581,100			41,525,805			44,023,646

See Notes to Consolidated Condensed Financial Statements.

2

THE WARNACO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)

(Dollars in thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Net income	$	41,228		$	44,452		$	86,614		$	133,986
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	15,175			(64,774		)	11,342			(23,057		)
Change in cash flow hedges	(2,090		)	440			(4,277		)	(1,169		)
Other	2			(3		)	14			(5		)
Other comprehensive income (loss), net of tax:	13,087			(64,337		)	7,079			(24,231		)
Total comprehensive income (loss)	54,315			(19,885		)	93,693			109,755
Less: comprehensive income attributable to redeemable non-controlling interest	75			—			75			—
Total comprehensive income (loss) attributable to Warnaco Group	$	54,240		$	(19,885	)	$	93,618		$	109,755

See Notes to Consolidated Condensed Financial Statements.

3

THE WARNACO GROUP, INC.

CONSOLIDATEDSTATEMENTS OF REDEEMABLE NON-CONTROLLING INTEREST

ANDSTOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

				Warnaco Group Stockholders' Equity
	Redeemable Non-controlling Interest			Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total
Balance as of January 1, 2011	$	—		$	517	$	674,508	$	43,048		$	501,394		$	(246,861	)	$	972,606
Net income (loss)	(159		)								134,145						134,145
Other comprehensive income	(1,604		)					(22,627		)							(22,627		)
Stock issued in connection with stock compensation plans				4		9,018											9,022
Compensation expense in connection with employee stock compensation plans						21,215											21,215
Purchase of treasury stock related to stock compensation plans														(2,406		)	(2,406		)
Other repurchases of common stock														(210,788		)	(210,788		)
Acquisition date fair value of redeemable non-controlling interest in joint venture in India	15,200
Adjustment to redemption value	1,763										(1,763		)				(1,763		)
Balance as of October 1, 2011	$	15,200		$	521	$	704,741	$	20,421		$	633,776		$	(460,055	)	$	899,404

				Warnaco Group Stockholders' Equity
	Redeemable Non-controlling Interest			Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock			Total
Balance as of December 31, 2011	$	15,200		$	522	$	721,356	$	16,242	$	625,760	$	(466,680	)	$	897,200
Net income (loss)	(46		)							86,660					86,660
Other comprehensive income	121							6,958							6,958
Tax benefit related to exercise of equity awards						21,527									21,527
Stock issued in connection with stock compensation plans				9		17,811									17,820
Compensation expense in connection with employee stock compensation plans						13,127									13,127
Purchase of treasury stock related to  stock compensation plans												(5,783		)	(5,783		)
Other repurchases of common stock												(8,826		)	(8,826		)
Balance as of September 29, 2012	$	15,275		$	531	$	773,821	$	23,200	$	712,420	$	(481,289	)	$	1,028,683

See Notes to Consolidated Condensed Financial Statements.

4

THE WARNACO GROUP, INC.

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended
	September 29, 2012			October 1, 2011
Cash flows from operating activities:
Net income	$	86,614		$	133,986
Adjustments to reconcile net income to net cash provided by operating activities:
Foreign exchange loss	263			2,185
(Income) loss from discontinued operations	(3,023		)	4,741
Depreciation and amortization	49,920			43,669
Stock compensation	13,127			21,215
Provision for bad debts	1,707			2,259
Inventory writedown	14,217			14,581
Write-down of note receivable from Palmers	12,046			—
Excess tax benefit from share-based payment arrangements	(21,527		)	—
Other	(21		)	(1,697		)
Changes in operating assets and liabilities:
Accounts receivable	(3,963		)	(32,383		)
Inventories	(45,865		)	(101,375		)
Prepaid expenses and other assets	(914		)	(13,125		)
Accounts payable, accrued expenses and other liabilities	5,047			14,766
Accrued income taxes	(5,685		)	(12,139		)
Net cash provided by operating activities from continuing operations	101,943			76,683
Net cash (used in) operating activities from discontinued operations	—			(16,501		)
Net cash provided by operating activities	101,943			60,182
Cash flows from investing activities:
Proceeds from disposal of assets	564			146
Purchases of property, plant & equipment	(39,749		)	(36,311		)
Business acquisitions, net of cash acquired	(2,795		)	(21,454		)
Loan to non-controlling shareholder	—			(6,000		)
Proceeds from disposal of businesses	340			2,000
Net cash (used in) investing activities from continuing operations	(41,640		)	(61,619		)
Net cash (used in) investing activities from discontinued operations	—			—
Net cash (used in) investing activities	(41,640		)	(61,619		)
Cash flows from financing activities:
Change in short-term notes payable	4,302			24,340
Repayment of Italian Note	—			(13,370		)
Proceeds from 2011 Term Loan	—			200,000
Payments on 2011 Term Loan	(1,500		)	(500		)
Payment of deferred premium on Interest Rate Cap Agreement	(1,779		)	—
Proceeds from the exercise of employee stock options	16,978			8,231
Payment of deferred financing costs	—			(5,385		)
Excess tax benefit from share-based payment arrangements	21,527			—
Purchase of treasury stock	(14,609		)	(211,206		)
Contingent payment related to acquisition of non-controlling interest in Brazilian subsidiary	(10,123		)	(11,467		)
Net cash provided by (used in) financing activities from continuing operations	14,796			(9,357		)
Net cash provided by financing activities from discontinued operations	—			—
Net cash provided by (used in) financing activities	14,796			(9,357		)
Effect of foreign exchange rate changes on cash and cash equivalents	3,381			(1,107		)
Increase (decrease) in cash and cash equivalents	78,480			(11,901		)
Cash and cash equivalents at beginning of period	232,531			191,227
Cash and cash equivalents at end of period	$	311,011		$	179,326

 See Notes to Consolidated Condensed Financial Statements.

5

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding 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. 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 2011 (as defined below).  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, as of 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 from January 1, 2012 to December 29, 2012 (“Fiscal 2012”), the period from January 2, 2011 to December 31, 2011 (“Fiscal 2011”) and the period from January 3, 2010 to January 1, 2011 (“Fiscal 2010”) each contained 52 weeks of operations. Additionally,  the period from July 1, 2012 to September 29, 2012 (the “Three Months Ended September 29, 2012”) and the period from July 3, 2011 to October 1, 2011 (the “Three Months Ended October 1 2011”) each contained 13 weeks of operations and the period from January 1, 2012 to September 29, 2012 (the “Nine Months Ended September 29 2012”) and the period from January 2, 2011 to October 1, 2011 (the “Nine Months Ended October 1, 2011”) each contained 39 weeks of operations. 

6

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

Recent Accounting Pronouncement

During July 2012, the FASB issued Accounting Standards Update 2012-02 Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) which is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how the Company tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. Under ASU 2012-02, the Company has the option first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of ASU 2012-02 to have a material effect on its financial position, results of operations and cash flows.

Note 3—Acquisitions

Acquisition of Remaining Non-ControllingInterest in Brazil

During the fourth quarter of the fiscal year ended January 2, 2010 (“Fiscal 2009”), the Company acquired the remaining non-controlling interest in a Brazilian subsidiary (“WBR”) and eight retail stores in Brazil, collectively, the “Brazilian Acquisition.” As part of the consideration for the Brazilian Acquisition, the Company was required to make three payments through March 31, 2012, which were contingent on the level of operating income achieved (as specified in the acquisition agreement) by WBR during the fourth quarter of Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively. The Company made the second contingent payment of 18,500 Brazilian real (approximately $11,470 as of March 31, 2011), based on the operating results of WBR for Fiscal 2010, on March 31, 2011. The Company made the third contingent payment of 18,500 Brazilian real (approximately $10,123 as of March 31, 2012), based on the operating results of WBR for Fiscal 2011, in two separate payments: (i) $7,592 on March 30, 2012 and (ii) $2,531 on April 2, 2012.

Note 4—Discontinued Operations

As disclosed in its Annual Report on Form 10-K for Fiscal 2011, the Company discontinued certain operations in prior periods. Summarized operating results for the discontinued operations are presented in the Consolidated Condensed Statements of Operations as follows:

	Three Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012		October 1, 2011
Net revenues	$	—		$	—		$	—	$	—
Income (loss) before income tax (benefit) (a)	$	(2	)	$	(4,214	)	$	3,023	$	(5,090	)
Income tax (benefit)	—			(37		)	—		(349		)
Income (loss) from discontinued operations	$	(2	)	$	(4,177	)	$	3,023	$	(4,741	)

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

	September 29, 2012		December 31, 2011		October 1, 2011
Accounts payable	$	—	$	5	$	5
Accrued liabilities (b)	—		6,792		7,043
Liabilities of discontinued operations	$	—	$	6,797	$	7,048

7

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

(a) The  amount in income (loss) before income tax (benefit) for the Nine Months Ended September 29, 2012 reflects (i) a gain related to the reversal of a reserve for litigation matters; (ii) a gain related to the reversal of a reserve related to a French tax liability, partially offset by (iii) a loss in connection with the write-off of a working capital receivable, items (i) through (iii) associated with the Company’s discontinuedLejabybusiness . SeeNote 18ofNotes to Consolidated Condensed Financial Statements – Legal Mattersregarding the Company’sLejabybusiness.

(b) The decrease in accrued liabilities between December 31, 2012 and September 29, 2012 is primarily due to the reversal of a reserve related to a French tax liability and the write-off of a reserve for litigation matters, both of which are associated with the Company’s discontinuedLejabybusiness. SeeNote 18ofNotes to Consolidated Condensed Financial Statements – Legal Mattersregarding the Company’sLejabybusiness.

Note 5—Restructuring Expenses and Other Exit Costs

During the Three and Nine Months EndedSeptember 29, 2012, the Company incurred restructuring charges and other exit costs of $8,029 and $30,831, respectively, related to (i) the rationalization and consolidation of the Company’s international operations, primarily in Europe ($5,442 and $14,319, respectively); (ii) charges in connection with employee termination and reorganization of management structure ($1,615 and $4,087, respectively); (iii) charges related to the cessation of the Company’s existing operations of its calvinkleinjeans.com e-commerce site ($(208) and $5,516, respectively) ; (iv) non-cash  impairment charges associated with store closures, including stores that were related to its CK/Calvin Klein “bridge” business, and office space in connection with consolidation of the Company's sourcing/design/merchandising functions ($1,365 and $2,867, respectively); (v) severance, lease contract termination and related costs in connection with retail store, office and warehouse closures ($(746) and $2,225, respectively); and (vi)  legal, professional and other exit costs ($561 and $1,817, respectively).

As previously disclosed in the Company’s Annual Report on Form 10-K for Fiscal 2011, during Fiscal 2010 and Fiscal 2011, the Company did not meet the minimum sales thresholds required under the Bridge Licenses (as defined below).  As a result, the Company and Calvin Klein, Inc. (“CKI”) began discussions at such time regarding the transition of the Company’s “bridge” business back to CKI.  On August  3, 2012, the Company and CKI entered into an agreement (the “Termination Agreement”), pursuant to which effective December 31, 2012, the parties agreed to terminate (i) the wholesale license agreements for “bridge” apparel and “bridge” accessories (covering Europe, Eastern Europe, Middle East, Africa, India, and Central and South America) and (ii) the corresponding retail license agreements for “bridge” apparel-only retail stores and “bridge” accessories-only retail stores ((i) and (ii), collectively, the “Bridge Licenses”).

Following the termination of the Bridge Licenses, the Company will no longer have the right to produce, commercialize or sell “bridge” apparel or “bridge” accessories and CKI will reacquire the right to produce, commercialize and sell “bridge” apparel and “bridge” accessories in the previously licensed territories.  However, the Company will have the right to sell any and all remaining inventory of “bridge” apparel and “bridge” accessories until August 31, 2013.  CKI will continue to license other Calvin Klein products to the Company, including Calvin Klein Jeans apparel and Calvin Klein Jeans accessories. During the Nine Months Ended September 29, 2012, combined net revenues and operating loss of the “bridge” business were $84,475 and $1,393, respectively, while during the Nine Months Ended October 1, 2011, combined net revenues and operating loss of the “bridge” business were $92,375 and $4,710, respectively The terms of the settlement agreement were consistent with amounts previously recorded by the Company and no charges were recorded as a result of the execution of the settlement agreement.

As of June 30, 2012, the Company ceased the existing operations of its calvinkleinjeans.com internet site in the U.S. The Company recorded (i) a non-cash impairment charge of $4,284, which was equal to the carrying value of the intangible asset; (ii) an impairment charge of $120, related to the write-down of the net carrying value of the property, plant and equipment of the internet site and (iii) a charge of $1,112 related to termination of the Company’s relationship with the service provider for the internet site.

During the Three and Nine Months EndedOctober 1, 2011, the Company incurred restructuring charges and other exit costs of $7,547 and $18,990 respectively, primarily related to (i) the rationalization and consolidation of the Company’s international operations, primarily in Europe ($2,191 and $7,054, respectively); (ii) job eliminations in the U.S. ($840 and $2,871, respectively); (iii) impairment charges and lease contract termination costs in connection with retail store, office and warehouse closures ($4,396 and $8,748, respectively) and (iv) other exit costs ($120 and $317, respectively).

8

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

Restructuring charges and other exit costs have been recorded in the Consolidated Condensed Statements of Operations for the Three and Nine Months EndedSeptember 29, 2012 and the Three and Nine Months EndedOctober 1, 2011, as follows:

	Three Months Ended				Nine Months Ended
	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Cost of goods sold	$	2,676	$	376	$	6,244	$	1,842
Selling, general and administrative expenses	5,353		7,171		20,303		17,148
Amortization of intangible assets	—		—		4,284		—
	$	8,029	$	7,547	$	30,831	$	18,990
Cash portion of restructuring items	$	6,664	$	7,547	$	23,977	$	17,823
Non-cash portion of restructuring items	1,365		—		6,854		1,167

Changes in liabilities related to restructuring expenses and other exit costs for the Nine Months EndedSeptember 29, 2012 and the Nine Months EndedOctober 1, 2011 are summarized below:

Balance as of January 1, 2011	$	3,582
Charges for the Nine Months Ended October 1, 2011	18,437
Cash reductions for the Nine Months Ended October 1, 2011	(11,720		)
Non-cash changes and foreign currency effects	277
Balance as of October 1, 2011	$	10,576
Balance as of December 31, 2011	$	9,160
Charges for the Nine Months Ended September 29, 2012	23,977
Cash reductions for the Nine Months Ended September 29, 2012	(17,434		)
Non-cash changes and foreign currency effects	133
Balance as September 29, 2012 (a)	$	15,836

(a) The balance as of September 29, 2012 includes approximately $13,082 recorded in accrued liabilities (part of current liabilities) which amounts are expected to be settled over the next 12 months and approximately $2,754 recorded in other long term liabilities which amounts are expected to be settled over the following two 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, which groupings reflect the manner in which the Company’s business is managed and the manner in which the Company’s Chief Executive Officer (“CEO”), who is the chief operating decision maker, reviews the Company’s business.

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 September 29, 2012, the Sportswear Group operated 775Calvin Klein retail stores worldwide (consisting of 182 full-price free-standing stores, 63 outlet free-standing stores and 530 concession /shop-in-shop stores).  As of September 29, 2012, there were also 408Calvin Klein 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 September 29, 2012, the Intimate Apparel Group operated 895Calvin Klein retail stores worldwide (consisting of 105 full-price free-standing stores, 59 outlet free-standing stores and 730 concession /shop-in-shop stores and, in the U.S., and one on-line store).  As of September 29, 2012, there were also 256Calvin Klein retail stores operated by third parties under retail licenses or distributor agreements. 

9

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

The Swimwear Group designs, licenses, sources and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under the Speedo® and Calvin Klein brand names. As of September 29, 2012, the Swimwear Group operated 181Calvin Klein retail concession /shop-in-shop stores in Europe and one on-line store in the U.S.

Information by business segment is set forth below:  

	Sportswear   Group		Intimate Apparel Group		Swimwear   Group			Group  Total		Unallocated Corporate / Other			Total
Three Months Ended September 29, 2012
Net revenues	$	337,377	$	232,203	$	41,958		$	611,538	$	—		$	611,538
Operating income (loss)  (a)	29,528		41,204		(429		)	70,303		(3,601		)	66,702
Depreciation and amortization	8,961		4,955		523			14,439		1,368			15,807
Restructuring expense	5,551		1,702		(545		)	6,708		1,321			8,029
Capital expenditures	11,685		5,179		51			16,915		1,454			18,369
Three Months Ended October 1, 2011
Net revenues	$	357,935	$	247,880	$	39,306		$	645,121	$	—		$	645,121
Operating income (loss)	34,129		38,620		(3,352		)	69,397		(4,641		)	64,756
Depreciation and amortization	8,347		4,413		589			13,349		393			13,742
Restructuring expense	3,545		699		2,988			7,232		315			7,547
Capital expenditures	6,014		7,379		245			13,638		443			14,081
Nine Months Ended September 29, 2012
Net revenues	$	903,208	$	667,206	$	220,576		$	1,790,990	$	—		$	1,790,990
Operating income (loss)  (a)	31,828		97,151		28,053			157,032		(5,311		)	151,721
Depreciation and amortization	31,840		14,095		1,829			47,764		2,156			49,920
Restructuring expense	21,228		7,954		282			29,464		1,367			30,831
Capital expenditures	22,619		12,947		337			35,903		3,406			39,309
Nine Months Ended October 1, 2011
Net revenues	$	983,695	$	695,317	$	219,657		$	1,898,669	$	—		$	1,898,669
Operating income (loss)  (b), (c)	88,686		103,627		21,421			213,734		(26,725		)	187,009
Depreciation and amortization	27,010		13,751		1,889			42,650		1,019			43,669
Restructuring expense	7,169		3,619		7,254			18,042		948			18,990
Capital expenditures	17,687		14,863		390			32,940		1,294			34,234
Balance Sheet
Total Assets:
September 29, 2012	$	1,082,857	$	493,581	$	112,293		$	1,688,731	$	163,762		$	1,852,493
December 31, 2011	994,425		486,636		148,982			1,630,043		117,807			1,747,850
October 1, 2011	1,068,298		494,482		117,949			1,680,729		132,042			1,812,771
Property, Plant and Equipment:
September 29, 2012	$	67,844	$	42,507	$	1,158		$	111,509	$	23,545		$	135,054
December 31, 2011	64,149		43,966		2,220			110,335		22,687			133,022
October 1, 2011	62,317		38,486		2,472			103,275		25,930			129,205

10

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

(a)During the Nine Months EndedSeptember 29, 2012, the Company continues to be in the process of consolidating its sourcing/design/merchandising functions related toCalvinKleinJeans, which are currently located in both Europe and New York, entirely in New York. During the period of transition, which is expected to occur from April through December 2012, the Company expects to incur costs which otherwise would not have been incurred if the consolidation were not implemented (the “Transition Sourcing/Design Costs”). The Transition Sourcing/Design Costs include, among other things, salary/fringe, relocation, retention, occupancy and recruitment fees as well as travel and consulting fees. Certain of the Transition Sourcing/Design Costs are considered to be duplicative costs. None of the estimated Transition Sourcing/Design Costs are expected to expand the capacity of the consolidated New York sourcing/design/merchandising functions beyond the combined capacity of the European sourcing/design/merchandising functions that are being eliminated and the New York sourcing/design/merchandising functions prior to the consolidation activities. The reports presented to the CEO, which are used for the purpose of allocating resources to the Company’s operating segments, reflect the Transition Sourcing/Design Costs as “unallocated corporate expenses” and such costs were not allocated to the Sportswear Group. During the Three and Nine Months Ended September 29, 2012, the amount of the Transition Sourcing/Design Costs was $991 and $1,338, respectively, and is reflected in Unallocated/corporate other in the table above. The Transition Sourcing/Design Costs are expected to total approximately $5,500 for Fiscal 2012.

(b)Includes a gain of $2,000 in the Intimate Apparel Group related to the sale and assignment of the Company’s Nancy Ganz® trademarks in Australia and New Zealand to the Company’s former licensee for cash consideration of $2,000. 

(c)Includes a gain of $1,630 related to the recovery of an insurance claim for a fire in a warehouse in Peru, attributable partly to the Sportswear Group and partly to the Intimate Apparel Group.

All inter-company revenues and expenses are eliminated in consolidation. Management does not include inter-company sales when evaluating segment performance. Each segment’s operating income is presented in the table above and includes restructuring charges and allocations of corporate expenses but does not include unallocated corporate/other expenses.   The amount of unallocated corporate/other expenses that reconciles total business segment operating income to the Company’s total operating income primarily includes employee compensation, other general administrative and professional fees and foreign exchange gains or losses. The significant reductions during the Three and Nine Months EndedSeptember 29, 2012 in the amount of unallocated corporate/other expenses is due to reductions, during those periods, in the estimated amounts of certain corporate-wide expenses, primarily employee compensation and health benefits, compared to the estimates of the amounts of those expenses that had been made during the comparable periods in Fiscal 2011.

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

	Three Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Operating income by business segments	$	70,303		$	69,397		$	157,032		$	213,734
Unallocated corporate/other expenses	(3,601		)	(4,641		)	(5,311		)	(26,725		)
Operating income	66,702			64,756			151,721			187,009
Other loss (a)	13			1,357			12,638			498
Interest expense	4,614			4,986			13,708			11,142
Interest income	(831		)	(986		)	(2,705		)	(2,542		)
Income from continuing operations before provision for income taxes and redeemable non-controlling interest	$	62,906		$	59,399		$	128,080		$	177,911

(a) For the Nine Months EndedSeptember 29, 2012, includes an adjustment to the Company’s loan receivable related to the sale of its discontinuedLejabybusiness (seeNote 18ofNotes to Consolidated Condensed Financial Statements).

11

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

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

	Three Months Ended
	September 29, 2012		%		October 1, 2011		%
Net revenues:
United States	$	237,298	38.8	%	$	241,764	37.5	%
Europe	161,464		26.4	%	182,265		28.3	%
Asia	130,164		21.3	%	129,985		20.1	%
Mexico, Central and South America	58,812		9.6	%	62,848		9.7	%
Canada	23,800		3.9	%	28,259		4.4	%
	$	611,538	100.0	%	$	645,121	100.0	%

	Nine Months Ended
	September 29, 2012		%		October 1, 2011		%
Net revenues:
United States	$	733,534	40.9	%	$	777,552	41.0	%
Europe	415,504		23.2	%	478,827		25.2	%
Asia	384,359		21.5	%	370,546		19.5	%
Mexico, Central and South America	173,893		9.7	%	176,698		9.3	%
Canada	83,700		4.7	%	95,046		5.0	%
	$	1,790,990	100.0	%	$	1,898,669	100.0	%

Note 7—Income Taxes

The effective tax rates for the Three Months EndedSeptember 29, 2012 and October 1, 2011 were 34.5% and 18.1% respectively.  The higher effective tax rate for the Three Months EndedSeptember 29, 2012 primarily reflects a shift in earnings from lower to higher taxing jurisdictions, as well as certain discrete tax benefits of $8,600 recorded during the Three Months EndedOctober 1, 2011 that did not recur in the Three Months Ended September 29, 2012. Those discrete tax benefits included (i) a tax benefit recorded during the Three Months Ended October 1, 2011 related to the reduction in the reserve for uncertain tax positions in certain foreign tax jurisdictions; and (ii) a tax benefit recorded during the Three Months Ended October 1, 2011 relating to a change in various domestic and foreign tax provision estimates for Fiscal 2010 following the filing of certain of the Company's tax returns during the Three Months Ended October 1, 2011.

The effective tax rates for the Nine Months EndedSeptember 29, 2012 and October 1, 2011 were 34.7% and 22.0% respectively. The higher effective tax rate for the Nine Months EndedSeptember 29, 2012 primarily reflects (i) a shift in earnings from lower to higher taxing jurisdictions; (ii) a tax benefit of approximately $4,000 recorded during the Nine Months EndedSeptember 29, 2012 resulting from an audit settlement with a foreign tax authority; (iii) a tax benefit of approximately $11,000 recorded during the Nine Months EndedOctober 1, 2011 due to a favorable tax ruling in a foreign jurisdiction and (iv) certain discrete tax benefits of $8,600 recorded during the Nine Months Ended October 1, 2011 that did not recur in the Nine Months Ended September 29, 2012. During the Nine Month Ended September 29, 2012, the Company recorded a tax benefit in excess of compensation expense related to the exercise of stock options and the vesting of restricted stock of $21,527. During the Nine Months Ended October 1, 2011, the Company had unrealized tax benefits related to share-based compensation, which were offset by the Company's net operating loss carryforwards. Therefore, the Company did not record any amount of those tax benefits to additional paid in capital.

As of September 29, 2012, the Company remains under audit in various taxing jurisdictions. It is 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 future events, it is reasonably possible that within the next 12 months the reserve for uncertain

12

tax positions may decrease between $2,000 and $4,000 due to (i) tax positions the Company expects to take during the next 12 months, (ii) the reevaluation of current uncertain tax positions arising from developments in examinations, (iii) the finalization of tax examinations, or (iv) the closure of tax statutes.

Note8—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 have 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 former employees of its United Kingdom and other European entities  (the “Foreign Plans”).  The Foreign Plans were not considered to be material for any period presented in this Form 10-Q. 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 "Post-retirement Plans"). The Post-retirement 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.

The Company made contributions of $1,660 and $18,890 to the Pension Plan during the Three and Nine Months EndedSeptember 29, 2012 and $1,650 and $7,150 for the Three and Nine Months EndedOctober 1, 2011, respectively. The Company’s contributions to the Pension Plan are expected to be $20,250 in total for Fiscal 2012.

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

	Pension Plan						Postretirement Plans
	Three Months Ended						Three Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Service cost	$	—		$	—		$	55		$	62
Interest cost	2,221			2,334			64			70
Expected return on plan assets	(2,350		)	(2,703		)	—			—
Amortization of actuarial gain	—			—			(24		)	(25		)
Net benefit (income) cost  (a)	$	(129	)	$	(369	)	$	95		$	107

	Pension Plan						Postretirement Plans
	Nine Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Service cost	$	—		$	—		$	165		$	186
Interest cost	6,663			7,002			192			210
Expected return on plan assets	(7,050		)	(8,109		)	—			—
Amortization of actuarial gain	—			—			(72		)	(75		)
Net benefit (income) cost  (a)	$	(387	)	$	(1,107	)	$	285		$	321

13

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

(a) Net benefit (income) cost does not include costs related to the Foreign Plans of $74 and $223 for the Three and Nine Months EndedSeptember 29, 2012, respectively, and $59 and $176 for the Three and Nine Months EndedOctober 1, 2011, respectively.

Deferred Compensation Plans

The Company’s liability under the employee deferred compensation plan was $3,013, $4,602 and  $4,185 as of September 29, 2012, December 31, 2011 and October 1, 2011, respectively.  This liability is included in other long-term liabilities. The Company’s cash liability under the director deferred compensation plan was $1,558, $1,237 and $1,068 as of September 29, 2012, December 31, 2011 and October 1, 2011, respectively. This liability is included in other long-term liabilities.

Note9—Accumulated OtherComprehensive Income 

The components of accumulated other comprehensive income as of September 29, 2012, December 31, 2011 and October 1, 2011 are summarized below:

	September 29, 2012			December 31, 2011			October 1, 2011
Foreign currency translation adjustments (a)	$	32,577		$	21,356		$	24,529
Actuarial losses related to post retirement medical plans, net of tax of $1,232 as of September 29, 2012, December 31, 2011 and October 1, 2011	(1,299		)	(1,299		)	(1,099		)
Loss on cash flow hedges, net of taxes of $5,108, $2,930 and $2,175 as of September 29 2012, December 31, 2011 and October 1, 2011, respectively	(8,214		)	(3,937		)	(3,016		)
Other	136			122			7
Total accumulated other comprehensive income	$	23,200		$	16,242		$	20,421

(a)Foreign currency translation adjustments related to the Company’s assets and liabilities reflect the change in the U.S. dollar relative to functional currencies in countries where the Company conducts certain of its operations and the fact thatthe majority of the Company’s assets are related to the Company’s business outside of the U.S.

Note10—Fair Value Measurement

The Company utilizes the market approach to measure fair value for financial assets and liabilities, which primarily include derivative contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company uses the income approach to measure fair value of the Interest Rate Cap Agreement (as defined below) (see Note 14 of Notes to ConsolidatedCondensedFinancial Statements).  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.
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.

14

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

Valuation Techniques

The fair value of foreign currency exchange forward 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 dates 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 the Interest Rate Cap Agreement was determined using broker quotes, which use discounted cash flows, an income approach, and the then-applicable forward LIBOR rates and, therefore, meets the definition of Level 2 fair value, as defined above.

The fair value of long-lived assets was based on the Company’s best estimates of future cash flows and, therefore, meets the definition of Level 3 fair value, as defined above.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis, as of September 29, 2012, December 31, 2011 and October 1, 2011:  

	September 29, 2012						December 31, 2011						October 1, 2011
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)
Assets
Foreign currency exchange contracts	$	—	$	429	$	—	$	—	$	5,587	$	—	$	—	$	4,761	$	—
Interest Rate Cap Agreement	—		2,654		—		—		6,276		—		—		7,399		—
Liabilities
Foreign currency exchange contracts	$	—	$	2,339	$	—	$	—	$	532	$	—	$	—	$	495	$	—

The following table represents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of September 29, 2012, December 31, 2011 and October 1, 2011. See Note 1 of Notes to Consolidated Financial Statements – Nature of Operations and Summary of Significant Accounting Policies – Long-Lived Assets in the Company’s Annual Report on Form 10-K for Fiscal 2011 for a description of the testing of retail stores and intangible assets for impairment.

	Nine Months Ended							Year Ended							Nine Months Ended
	September 29, 2012							December 31, 2011							October 1, 2011
	Fair  Value		(Level 3)		Total (Losses)			Fair  Value		(Level 3)		Total (Losses)			Fair  Value		(Level 3)		Total (Losses)
Assets
Long-lived assets, retail stores and offices	$	76	$	76	$	(2,867	)	$	665	$	665	$	(5,950	)	$	—	$	—	$	(1,140	)
Long-lived assets, intangible assets	1,500		1,500		(5,285		)	3,579		3,579		(35,225		)	—		—		—
					$	(8,152	)					$	(41,175	)					$	(1,140	)

The impairment charges for long-lived assets of retail stores and offices relate to leasehold improvements and furniture and fixtures of certain retail stores which were scheduled to close or office space, both of which were part of restructuring plans. Those charges recorded during the Nine Months EndedSeptember 29, 2012, Fiscal 2011 and the Nine Months EndedOctober 1, 2011 related to (i) the Sportswear Group, including the Company’s CK/Calvin Klein “bridge” business, and Unallocated Corporate; (ii) the Sportswear Group and the Intimate Apparel Group and (iii) the Sportswear Group and Intimate Apparel Group, respectively. See Note 5 of Notes to Consolidated Condensed Financial Statements  - Restructuring Expenses and Other Exit Costs.

15

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

The impairment charges for intangible assets relate to the write off or write down of the carrying values of licenses related to (i) the Company’s decision to cease existing operations of its calvinkleinjeans.com e-commerce site as of June 30, 2012, (ii) a change in estimate during the Nine Months Ended September 29, 2012 of the expected consideration to be paid for the rights received from CKI in connection with the formation of the Company’s joint venture in India and (iii) the Company’s agreement with CKI in which the Company will transition its CK/Calvin Klein “bridge” business back to CKI (see Note 5 of Notes to Consolidated Condensed Financial Statements) and are related to the Sportswear Group.

Note11— Financial Instruments

The carrying amounts and fair values of the Company's financial instruments as of September 29, 2012, December 31, 2011 and October 1, 2011 are as follows: 

		September 29, 2012					December 31, 2011				October 1, 2011
						Level in
	Balance Sheet Location	Carrying Amount		Fair Value		Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Accounts receivable	Accounts receivable, net of reserves	$	323,719	$	323,719		$	322,976	$	322,976	$	341,406	$	341,406
Open foreign currency exchange contracts	Prepaid expenses and other current assets	429		429		2	5,587		5,587		4,761		4,761
Interest Rate Cap Agreement	Other assets	2,654		2,654		2	6,276		6,276		7,399		7,399
Liabilities:
Accounts payable	Accounts payable	$	173,616	$	173,616		$	141,797	$	141,797	$	182,517	$	182,517
Short-term debt	Short-term debt	47,393		47,393		1	43,021		43,021		43,355		43,355
Open foreign currency exchange contracts	Accrued liabilities	2,339		2,339		2	532		532		495		495
2011 Term Loan, current portion	Short-term debt	2,000		2,000		2	2,000		1,980		2,000		1,950
2011 Term Loan	Long-term debt	195,500		195,500		2	197,000		195,030		197,500		194,513

See Note 17 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2011 for the methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments.

Derivative Financial Instruments

Foreign Currency ExchangeForwardContracts

During the Nine Months EndedSeptember 29, 2012 and the Nine Months EndedOctober 1, 2011, the Company’s Korean, European, Canadian and Mexican subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed to satisfy either up to the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period or payment of 100% of certain minimum royalty and advertising expenses. In addition, during the Nine Months EndedSeptember 29, 2012, one of the Company’s Mexican subsidiaries began a program, using foreign exchange forward contracts, to hedge up to 75% of the royalty payments due on net sales of Calvin Klein Jeans and Calvin Klein Underwear apparel. All of the foregoing forward contracts were designated as cash flow hedges, with gains and losses accumulated on the Consolidated Condensed Balance Sheets in Accumulated Other Comprehensive Income (“AOCI”) and recognized in Cost of Goods Sold, with the exception of the Mexican royalty forward contracts, for which gains and losses released from AOCI are recognized in Selling, general and administrative expense, in the Consolidated Condensed Statement of Operations during the periods in which the underlying transactions occur.

16

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Currencies in thousands, excluding per share amounts)

(Unaudited)

During the Nine Months EndedSeptember 29, 2012 and the Nine Months EndedOctober 1, 2011, the Company also continued hedging programs, which were accounted for as economic hedges, with gains and losses recorded directly in Other loss (income) in the Consolidated Condensed Statements of Operations in the period in which they are incurred. Those hedging programs included foreign currency exchange forward contracts that were designed to fix the number of Euros, Korean won, Canadian dollars, Mexican pesos or Singaporean dollars required to satisfy either (i) the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period; (ii) 50% of intercompany sales of inventory by a Euro functional currency subsidiary to a British subsidiary, whose functional currency is the British pound; or (iii) U.S. dollar denominated intercompany and third-party loans and payables. 

Interest Rate CapAgreement

On July 1, 2011, the Company entered into the Interest Rate Cap Agreement, which is intended to limit the interest rate payable on average over the term of the Interest Rate Cap Agreement to 5.6975% per annum with respect to the portion of the 2011 Term Loan (as defined below) that equals the notional amount of the Interest Rate Cap Agreement. The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%.  See Note 14 of Notes to Consolidated Condensed Financial Statements - Interest Rate CapAgreement.  

The following table summarizes the Company’s derivative instruments as of September 29, 2012, December 31, 2011 and October 1, 2011:

		Asset Derivatives							Liability Derivatives
			Fair Value							Fair Value
	Type (a)	Balance Sheet Location	September 29, 2012		December 31, 2011		October 1, 2011		Balance Sheet Location	September 29, 2012		December 31, 2011		October 1, 2011
Derivatives designated as hedging instruments under FASB ASC 815-20
Foreign exchange contracts	CF	Prepaid expenses and other current assets	$	71	$	1,308	$	1,873	Accrued liabilities	$	1,404	$	—	$	—
Interest Rate Cap Agreement	CF	Other assets	2,654		6,276		7,399			—		—		—
			$	2,725	$	7,584	$	9,272		$	1,404	$	—	$	—
Derivatives not designated as hedging instruments under FASB ASC 815-20