10-Q 1 wrc_9292012x10q.htm 10-Q WRC_9.29.2012_10Q
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II  OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




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 CONDENSED STATEMENTS 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 COMPREHENSIVE INCOME (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. 
CONSOLIDATED STATEMENTS OF REDEEMABLE NON-CONTROLLING INTEREST
AND STOCKHOLDERS’ 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.
CONSOLIDATED CONDENSED 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-Controlling Interest 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 discontinued Lejaby business . See Note 18 of Notes to Consolidated Condensed Financial Statements – Legal Matters regarding the Company’s Lejaby business.
(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 discontinued Lejaby business. See Note 18 of Notes to Consolidated Condensed Financial Statements – Legal Matters regarding the Company’s Lejaby business.
  
Note 5—Restructuring Expenses and Other Exit Costs
 
During the Three and Nine Months Ended September 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 Ended October 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 Ended September 29, 2012 and the Three and Nine Months Ended October 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 Ended September 29, 2012 and the Nine Months Ended October 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 775 Calvin 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 408 Calvin 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 895 Calvin 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 256 Calvin 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 181 Calvin 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 Ended September 29, 2012, the Company continues to be in the process of consolidating its sourcing/design/merchandising functions related to Calvin Klein Jeans, 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 Ended September 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 Ended September 29, 2012, includes an adjustment to the Company’s loan receivable related to the sale of its discontinued Lejaby business (see Note 18 of Notes 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 Ended September 29, 2012 and October 1, 2011 were 34.5% and 18.1% respectively.  The higher effective tax rate for the Three Months Ended September 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 Ended October 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 Ended September 29, 2012 and October 1, 2011 were 34.7% and 22.0% respectively. The higher effective tax rate for the Nine Months Ended September 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 Ended September 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 Ended October 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.

Note 8—Employee Benefit and Retirement Plans 
 
 Defined Benefit Pension Plans 
 
The Company has a defined benefit pension plan covering certain full-time non-union domestic employees and certain domestic employees covered by a collective bargaining agreement who 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 Ended September 29, 2012 and $1,650 and $7,150 for the Three and Nine Months Ended October 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 Ended September 29, 2012, respectively, and $59 and $176 for the Three and Nine Months Ended October 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.
 
Note 9—Accumulated Other Comprehensive 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 that the majority of the Company’s assets are related to the Company’s business outside of the U.S.

Note 10—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 Consolidated Condensed Financial 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 Ended September 29, 2012, Fiscal 2011 and the Nine Months Ended October 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.
 
Note 11— 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 Exchange Forward Contracts
 
During the Nine Months Ended September 29, 2012 and the Nine Months Ended October 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 Ended September 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 Ended September 29, 2012 and the Nine Months Ended October 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 Cap Agreement
 
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 Cap Agreement.  
 
The following table summarizes the Company’s derivative instruments as of September 29, 2012, December 31, 2011 and October 1, 2011:
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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