EX-99.1 5 d618285dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

(Subject to Completion, Dated April 30, 2019)

 

 

LOGO

V.F. Corporation

105 Corporate Center Boulevard

Greensboro, North Carolina 27408

                    , 2019

Dear VF Shareholder:

On August 13, 2018, V.F. Corporation (“VF”) announced the strategic repositioning of VF through the spinoff of its Jeanswear and VF Outlet™ businesses from its remaining businesses (the “Separation”), which is expected to become effective on May 22, 2019. On the effective date of the Separation, Kontoor Brands, Inc., a North Carolina corporation formed in anticipation of the Separation (“Kontoor Brands”), will become an independent, publicly traded company and will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Jeanswear and VF Outlet™ businesses.

The Separation is subject to conditions as described in the enclosed information statement. Subject to the satisfaction or waiver of these conditions, the Separation will be completed by way of a pro rata distribution of all the outstanding shares of Kontoor Brands common stock to VF’s shareholders of record as of the close of business on May 10, 2019, the distribution record date (the “Distribution”). Each VF shareholder of record will receive one share of Kontoor Brands common stock, no par value, for every seven shares of VF common stock, without par value, held by such shareholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. At any time following the Distribution, shareholders may request that their shares of Kontoor Brands common stock be transferred to a brokerage or other account. No fractional shares of Kontoor Brands common stock will be issued. The distribution agent for the Distribution will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution.

VF expects to receive an opinion from counsel to the effect that, among other things, the Distribution, together with certain related transactions, will qualify as a transaction that is tax-free for U.S. federal income tax purposes, except to the extent of any cash received in lieu of fractional shares.

The Distribution does not require VF shareholder approval, nor do you need to take any action to receive your shares of Kontoor Brands common stock. VF’s common stock will continue to trade on the New York Stock Exchange under the ticker symbol “VFC.” Kontoor Brands common stock has been approved for listing on the New York Stock Exchange under the ticker symbol “KTB.”

The enclosed information statement, which we are mailing to all VF shareholders, describes the Separation in detail and contains important information about Kontoor Brands, including its historical combined financial statements. We urge you to read this information statement carefully.

We want to thank you for your continued support of VF.

Sincerely,

Steven E. Rendle

Chairman, President and Chief Executive Officer

V.F. Corporation


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   LOGO

Kontoor Brands, Inc.

400 N. Elm Street

Greensboro, North Carolina 27401

  

                    , 2019

Dear Future Kontoor Brands Shareholder:

I am excited to welcome you as a shareholder of our new company, Kontoor Brands, Inc. (“Kontoor Brands”). Following the spinoff by V.F. Corporation of its Jeanswear and VF Outlet™ businesses to us, we will be a global apparel leader focused on the design, manufacturing, sourcing, marketing, and distribution of our portfolio of brands, including our iconic brands Wrangler® and Lee®.

We endeavor to provide consumers with high-quality, innovative products at a superior value. We believe our experienced management team is executing a strategy that provides a better product and brand experience to our consumers, primarily by delivering on our high standards of product design and innovation, and offering a wide variety of compelling products across channels and categories. Our leadership team is largely a product of V.F. Corporation’s execution-focused culture, bringing a deep knowledge of the global business, strong customer relationships, and category management expertise to the enterprise. In addition, we believe the consumer appeal of our brands combined with consistent execution of our manufacturing and distribution strategies have supported our ability to produce strong financial results. We believe our consistent financial performance will provide us with the opportunity to invest in our business, return capital to shareholders, and repay debt as an independent public company.

I encourage you to learn more about Kontoor Brands and our business by reading the attached information statement. Our common stock has been approved for listing on the New York Stock Exchange under the ticker symbol “KTB.” We look forward to earning your continuing support for many years to come.

Sincerely,

Scott H. Baxter

President and Chief Executive Officer

Kontoor Brands


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

Preliminary Information Statement

(Subject to Completion, Dated April 30, 2019)

INFORMATION STATEMENT

Kontoor Brands, Inc.

Common Stock

(No Par Value)

 

 

V.F. Corporation (“VF”) is furnishing this information statement in connection with the separation of its Jeanswear and VF Outlet™ businesses from its remaining businesses and the creation of an independent, publicly traded company, named Kontoor Brands, Inc. (“Kontoor Brands”). Kontoor Brands, directly or indirectly through its subsidiaries, will hold the assets, liabilities and legal entities comprising the Jeanswear and VF Outlet™ businesses after certain restructuring transactions are completed (the “Restructuring”). All of the shares of Kontoor Brands common stock owned by VF will be distributed to the shareholders of VF (the “Distribution” and, together with the Restructuring, the “Separation”). Kontoor Brands is currently a wholly owned subsidiary of VF.

Each holder of VF common stock will receive one share of common stock of Kontoor Brands for every seven shares of VF common stock held as of the close of business on May 10, 2019, the record date for the Distribution.

The distribution of Kontoor Brands’ shares is expected to be completed after the New York Stock Exchange (the “NYSE”) market closing on May 22, 2019. Immediately after VF completes the Distribution, Kontoor Brands will be an independent, publicly traded company. We expect that, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income in connection with the Distribution, except to the extent of any cash you receive in lieu of fractional shares.

No vote or other action is required by you to receive shares of Kontoor Brands common stock in the Separation. You will not be required to pay anything for the new shares or to surrender any of your shares of VF common stock. We are not asking you for a proxy and you should not send us a proxy or your share certificates.

There currently is no trading market for Kontoor Brands common stock. Kontoor Brands’ common stock has been approved for listing on the NYSE under the ticker symbol “KTB.” We anticipate that a limited market, commonly known as a “when-issued” trading market, for Kontoor Brands’ common stock will commence on May 9, 2019 and will continue up to and including the Distribution Date (as defined herein). We expect the “regular-way” trading of Kontoor Brands’ common stock will begin on the first trading day following the Distribution Date.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 17.

Neither the U.S. Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is                     , 2019.

A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access the information statement was first mailed to VF shareholders on or about                     , 2019.


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TABLE OF CONTENTS

 

 

 

     Page  

Note Regarding the Use of Certain Terms

     ii  

Special Note Regarding Forward-Looking Statements

     iii  

Summary

     1  

Risk Factors

     17  

The Separation

     40  

Dividend Policy

     56  

Capitalization

     57  

Unaudited Pro Forma Combined Financial Statements

     58  

Selected Historical Combined Financial Data

     67  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Business

     95  

Management

     107  

Compensation Discussion and Analysis

     113  

Certain Relationships and Related Party Transactions

     135  

Ownership of Common Stock by Certain Beneficial Owners and Management

     136  

Description of Material Indebtedness

     139  

Description of Capital Stock

     141  

Where You Can Find More Information

     146  

Index to Financial Statements

     F-1  

 

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NOTE REGARDING THE USE OF CERTAIN TERMS

We use the following terms to refer to the items indicated:

 

   

“We,” “us,” “our,” “Company” and “Kontoor Brands,” unless the context otherwise requires, refer to Kontoor Brands, Inc., the entity that at the time of the Distribution will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Spin Business, as defined below, and whose shares VF will distribute in connection with the Separation. Where appropriate in the context, the foregoing terms also include the subsidiaries of this entity; these terms may be used to describe the Spin Business prior to completion of the Separation.

 

   

The “Spin Business” refers to the business, operations, products, services and activities of VF’s Jeanswear and Outlet businesses. See “Business” for more information.

 

   

Except where the context otherwise requires, the term “VF” refers to V.F. Corporation, the entity that owns Kontoor Brands prior to the Separation and that after the Separation will be a separately traded public company consisting of its remaining operations.

 

   

The term “Distribution” refers to the distribution of all of the shares of Kontoor Brands common stock owned by VF to shareholders of VF as of the record date.

 

   

The term “Restructuring” refers to the series of transactions which will result in all of the assets, liabilities and legal entities comprising the Spin Business being owned directly, or indirectly through its subsidiaries, by Kontoor Brands.

 

   

Except where the context otherwise requires, the term “Separation” refers to the separation of the Spin Business from VF and the creation of an independent, publicly traded company, Kontoor Brands, through (1) the Restructuring and (2) the Distribution.

 

   

The term “Distribution Date” means the date on which the Distribution occurs.

We own various trademark registrations and applications, and unregistered trademarks, including Wrangler®, Lee® and Rock & Republic®. All other trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. Solely for convenience, the trademarks and trade names in this information statement may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

We will operate and report using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. Except where the context otherwise requires, all references to “2018,” “2017,” “2016” and “2015” relate to the 52-week fiscal periods ended December 29, 2018, December 30, 2017, December 31, 2016 and January 2, 2016, respectively, and all references to “2014” relate to the 53-week fiscal period ended January 3, 2015.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this information statement that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections, forecasts or assumptions of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including the numerous risks discussed under the caption entitled “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Except as required by law, neither VF nor we are under any duty to update any of these forward-looking statements after the date of this information statement to conform our prior statements to actual results or revised expectations.

 

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SUMMARY

This summary highlights information contained elsewhere in this information statement. This summary does not contain all of the information that you should consider. You should read this entire information statement carefully, especially the risks of owning our common stock discussed under “Risk Factors” and our audited combined financial statements, our unaudited pro forma combined financial statements and the respective notes to those statements appearing elsewhere in this information statement. Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement assumes the completion of all the transactions referred to in this information statement in connection with the Separation.

Overview

We are a global apparel leader focused on the design, manufacturing, sourcing, marketing, and distribution of our portfolio of brands, including our iconic brands Wrangler® and Lee®. Our two key brands benefit from heritages spanning 200 combined years and together with our other brands accounted for over 170 million units of apparel produced or sourced in 2018. We endeavor to provide consumers with high-quality, innovative products at a superior value. We manufacture approximately 38% of our products in our owned and leased facilities, and distribute our products worldwide primarily through both major brick & mortar and e-commerce retailers. We believe our experienced management team is executing a strategy that provides a better product and brand experience to our consumers, primarily by delivering on our high standards of product design and innovation, and offering a wide variety of compelling products across channels and categories.

We focus on continuously improving the most important elements of our products, which include fit, fabric, finish, and overall construction, while continuing to provide consumers our products at attractive price points. We leverage innovation and design advancements as well as our unique brand heritages to create marketing campaigns that communicate our brand positioning, product attributes, and overall value proposition to consumers. We believe these marketing campaigns further elevate our brands, build our loyal global consumer base, and ultimately drive revenue growth.

We have a presence in over 65 countries and generated approximately $2.8 billion in global revenues in 2018 across our various channels. We sell our products primarily through our established wholesale and expanding digital channels, and utilize our branded brick & mortar locations to supplement our go-to-market strategy. We benefit from strong relationships with many of our customers who we believe depend on our ability to reliably and timely replenish them with our high-volume products.

Within the United States (“U.S.”), where we generated 73% of our revenues in 2018, we offer our apparel and accessories largely through our wholesale channel, which consists of mass and mid-tier retailers, specialty stores including western specialty retail, department stores, and retailer-owned and third-party e-commerce sites. We also sell our products in the U.S. through direct-to-consumer channels, including full-price stores, outlet stores and our own websites. Outside the U.S., where we generated 27% of our revenues in 2018, we operate through similar wholesale channels as in the U.S., and utilize distributors, agents, licensees, and partnerships along with our full-price and outlet stores and digital presence.

We believe our global supply chain provides us with significant competitive advantages and operating flexibility. Our internal manufacturing capabilities include owned and leased facilities, all of which are located in the Western Hemisphere, and produced approximately 38% of our total units sold in 2018. The remainder of our units sold were supplied by a range of third-party manufacturers. We distribute our products globally through our own distribution centers as well as through third-party distribution centers. We believe our flexible and balanced approach to manufacturing and distribution allows us to better manage our production, and in turn appeals to our customers who we believe view our ability to consistently meet their production needs as a point of competitive differentiation.



 

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We believe the consumer appeal of our brands combined with consistent execution of our manufacturing and distribution strategies have supported our ability to produce strong financial results. We generated over $2.75 billion in revenue and $330 million in operating income in each of the last five years. Additionally, our cash flows from operations were greater than $295 million in each of the years from 2014 through 2016. In 2017, our cash flows from operations were $168.6 million, which were impacted by a $110.6 million charge related to the transition tax component of the U.S. Tax Cut and Jobs Act (the “Tax Act”) that was deemed settled in cash with VF for purposes of carve-out financial reporting. In 2018, we reported cash flows used by operations of $96.3 million, primarily due to $323.3 million lower cash proceeds from settlement of the intercompany sale to VF of certain of the Company’s trade accounts receivable. The timing of the intercompany settlement was impacted by VF’s one-time change in fiscal year-end and does not reflect an operational deterioration in cash flows. We expect our cash flows to normalize post-Separation and intend to continue to invest in our brands, talent and capabilities, and growth strategies as well as to support a dividend to shareholders, and to repay our indebtedness over time.

Kontoor Brands is headquartered in Greensboro, North Carolina. Upon our separation from VF, we expect to trade under the ticker symbol “KTB” on the NYSE.

Our Competitive Strengths

Iconic Brands with Significant Global Scale.

Our two key brands are steeped in rich heritage and authenticity. The Wrangler® and Lee® brands generated approximately $1.6 billion and $960 million, respectively, in 2018 revenues and have an established global presence in the apparel market. Products bearing our brands are sold in more than 65 countries, and we believe they have strong consumer connectivity worldwide. We market our brands and products to highlight their differentiated position and product attributes. We strive to maximize our consumer reach by leveraging each brand’s “best practices” to drive growth across product categories and expand our overall revenues and earnings profile.

Founded over 70 years ago, Wrangler® is a classic American brand deeply rooted in U.S. western apparel and positioned as clothing ready for everyday life. Wrangler® branded products are offered in more than 20,000 retail doors worldwide and span a wide range of product categories including denim and non-denim bottoms, shirts, jackets, and other outerwear and accessories. We believe the Wrangler® brand appeals to a broad range of consumers worldwide who appreciate the brand’s western heritage, quality, and superior value. Outside the U.S., we believe the brand generally occupies a more premium positioning and carries a higher average price point.

Founded in 1889, Lee® is an authentic apparel brand with a heritage of purposeful craftsmanship and innovation. Lee® branded products offer versatile styling and superior comfort in denim and casual apparel for a multitude of activities, and target an active consumer interested in a stylish look through innovation designed for functional and visual appeal. The Lee® brand generates approximately 47% of its revenues outside the U.S., with a significant portion attributable to China and certain countries in Europe. In particular, since entering the Chinese market in 1995, the Lee® brand has developed a leading market position.

Deep Relationships with Brick & Mortar Retail and E-Commerce Leaders.

We have developed long-term relationships with many leading global brick & mortar and e-commerce retailers, whom we believe rely on our iconic brands, leading product quality and value, and innovation to address evolving consumer needs in our product categories. By fostering these relationships, we have become an important vendor for many of our customers and have built leading category positions, which in turn supports the availability of our brands to consumers and our ability to introduce new products and categories. We also endeavor to provide sophisticated logistics, planning, and merchandising expertise to support our customers,



 

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which we believe supports a level of insight that builds more integrated customer relationships. Over time, we believe we have developed an aptitude for addressing our customers’ unique and challenging inventory replenishment and planning needs, and have built a reputation as a reliable partner in a dynamic retail environment.

Integrated Supply Chain Built to Support Volume and Replenishment.

We are continually refining our supply chain to maximize efficiency and reinforce our reputation of reliability with our customers. Through our vertically integrated supply chain we manufacture, source, and distribute a significant quantity of high volume apparel products that are frequently replenished by our retail partners. Our product procurement and distribution strategies, combined with our internal manufacturing facilities and retail floor space management programs, allow us to maintain what we believe is a competitive advantage versus other apparel suppliers. Our supply chain is built to support large volumes and to meet customer needs while balancing cost and operational requirements. Our 13 internal manufacturing facilities are located in the Western Hemisphere, where their proximity to our primary markets enables us to deliver inventory in a consistent and timely manner. We also have established global third-party sourcing and distribution networks that we leverage across product categories and various regions. We believe our flexible and balanced approach to manufacturing and distribution allows us to better manage our production needs.

Many of our largest volume and highest velocity product styles continue from year to year, with design and innovation elements periodically updated to maintain our products’ relevance with consumers. We utilize real-time data provided by our customers to ensure timely delivery of our products and optimize our customers’ inventory levels. We believe our vertically integrated operations in combination with inventory and supply-demand reconciliation processes allow us to excel in meeting our retail customers’ rapid order requirements.

Highly Experienced Management Team and Board of Directors.

We have assembled a senior management team that is highly focused on continuing to grow our brands’ revenues, delivering strong and consistent financial results, and building a cohesive corporate culture. Together, our management team has over 50 years of combined experience in the apparel and accessories industry and brings deep global industry expertise to our newly independent company. Our President and Chief Executive Officer, Scott Baxter, served in various senior leadership positions at VF, including most recently as Vice President and Group President of Americas West, where he was responsible for overseeing brands such as The North Face® and Vans®, and previously as Group President of VF’s Jeanswear Americas business. Our Vice President and Chief Financial Officer, Rustin Welton, most recently served as Group Chief Financial Officer for VF’s Jeanswear, Workwear, Timberland® and VF Outlet™ businesses. Our two Vice Presidents and Global Brand Presidents, Thomas Waldron and Christopher Waldeck, maintain operational responsibility for the Wrangler® and Lee® brands, respectively, and have significant experience managing our brands domestically. We are also guided by a strong Board of Directors who bring valuable industry and management insight to Kontoor Brands. Our Board is led by our Non-Executive Chairman, Robert Shearer, who has extensive familiarity with our business and our industry, having served as Senior Vice President and Chief Financial Officer of VF from 2005 through 2015. We believe the depth of experience and deep industry knowledge of our management team and Board of Directors will drive the success of our new company.

Resilient Business Model That Delivers Consistent Results.

Our business has historically generated significant revenues, strong profits, and attractive cash flows due to our global brands, leading market positions, deep customer relationships, and the vertical integration of our supply chain. We believe we offer high product value and quality to our consumers, who respond to our value proposition by consistently purchasing our products over time. Over the last five years, we generated revenues in



 

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excess of $2.75 billion each year, and consistently delivered operating margins of 12% or greater each year. Our strong margin profile combined with our diligent approach to operational excellence and capital management have produced meaningful cash flows. We believe our consistent financial results will provide us with the opportunity to consistently invest in our business, return capital to shareholders, and repay debt.

Our Strategies

We have historically operated predominantly as a segment within VF. Following the Separation, we will become an independent publicly traded company led by a highly experienced management team fully dedicated to leveraging our capabilities and driving our strategic initiatives. We will also have increased flexibility to deploy our strong free cash flow towards our operating and capital allocation priorities.

Adopt a Global Approach for Optimizing the Wrangler® and Lee® Brands.

We believe the combination of our brands, scale, and global platform is differentiated in our industry. Historically, our brands have largely operated independently across geographic regions with regard to management, product design, and marketing. With one integrated senior leadership team to manage our brands and operations globally, there is an opportunity to implement an operating model that more efficiently leverages our global brands, scale, and platforms. We have built a leadership team based in Greensboro, North Carolina, that will include Global Presidents of both the Wrangler® and Lee® brands, as well as global leaders of the design, merchandising, digital, and direct-to-consumer departments. This centralized senior management team with global responsibility will work closely with our regional teams to deliver a unified brand and product design message while ensuring market-specific nuances are maintained. Through this integrated platform and management structure, we believe we can amplify the global strength of our brands, improve operating efficiency, and increase the overall demand for our products.

Continue to Increase Our Product Offering and Expand Our Target Consumer Base.

We see potential to enhance our existing product assortment, broaden our product offering, and expand into adjacent product categories. We leverage our Global Denim Innovation Network and Cognitive and Design Science Center to develop cognitive, design, textile, and product construction advancements that target the needs of our existing and potential new target consumer groups. We strive to create new products to attract a wide range of consumers, including women and younger generations, while seeking to ensure our core offering continues to serve the needs of our consumers. We believe we have the opportunity to also enter new categories that utilize our existing brand and product strengths, such as the outdoor and workwear categories. We have also introduced higher-end products at premium price points in the U.S. Successful execution of our product expansion strategies should broaden the appeal of our brands and products to new consumers, extend our reach into new product categories, and ultimately drive the overall revenues of our business. In addition, we also intend to opportunistically evaluate potential merger and acquisition targets to supplement our approach over the long-term.

Continue Expanding Our Distribution.

We believe there is an opportunity to expand the distribution of our products with new and existing brick & mortar and e-commerce customers internationally and in the U.S. We expect the integration and collaboration of our brands’ global leadership teams will help drive distribution opportunities for the Wrangler® and Lee® brands in both new and established markets by leveraging each brand’s relative distribution strengths across regions. Specifically, China provides an attractive geography to expand our existing presence and distribute more products across a range of price segments. In Europe, we intend to refine our strategy to become more consumer centric in addressing how and where our customers want to purchase our products. In the U.S., we see an opportunity to continue to grow with our major retail customers as well as drive distribution of our more premium products through higher-end department and specialty stores. We also expect to leverage our leading



 

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brand positions to increase our penetration with major global e-commerce players as this distribution channel continues to grow in consumer importance worldwide.

Drive Cost Savings and Efficiencies Across Our Global Organization.

We expect to realize efficiencies across our business as we create a more centralized global organization and pursue cost savings initiatives. As part of our centralized approach to our global business, our management team will oversee all brands for their respective business functions, including supply chain, digital, direct-to-consumer, and strategy while seeking to ensure we maintain our worldwide presence and regional approach. We have implemented initiatives to reduce costs and realize greater efficiencies, which have included transitioning our Central America and South America region to a distributor model, exiting certain supply chain operations, relocating Lee®’s North American headquarters to Greensboro, North Carolina and streamlining our global organizational structure. We will continue to implement various operational initiatives to address inefficiencies throughout our organization and cost savings programs that we expect to generate meaningful global cost savings. We plan to utilize such measures to fuel additional investments in our capabilities and brands while improving our overall profitability.

The Separation

On August 13, 2018, VF announced a plan to distribute to VF’s shareholders all of the shares of common stock of a newly formed company, Kontoor Brands, that would hold the Spin Business. Kontoor Brands is currently a wholly owned subsidiary of VF and, at the time of the Distribution will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Spin Business.

The Separation will be achieved through the transfer of all the assets and liabilities of the Spin Business to Kontoor Brands or its subsidiaries in the Restructuring and the distribution of 100% of the outstanding capital stock of Kontoor Brands pro rata to holders of VF common stock as of the close of business on May 10, 2019, the record date for the Distribution. At the effective time of the Distribution, VF shareholders will receive one share of Kontoor Brands common stock for every seven shares of VF common stock held on the record date. The Separation is expected to be completed on May 22, 2019. Immediately following the Separation, VF shareholders as of the record date for the Distribution will own 100% of the outstanding shares of common stock of Kontoor Brands.

Before the Distribution, we will enter into a Separation and Distribution Agreement and several other ancillary agreements with VF to effect the Separation and provide a framework for our relationship with VF after the Separation. These agreements will provide for the allocation between Kontoor Brands and VF of VF’s assets, liabilities and obligations (including with respect to employee matters, intellectual property matters, tax matters and certain other matters). Kontoor Brands and VF will also enter into a Transition Services Agreement, which will provide for various corporate, administrative, supply chain, logistics, distribution, contract manufacturing and information technology services, one or more lease, sub-lease or temporary service agreements or arrangements relating to real property and facilities used in both the Spin Business and the remaining businesses of VF, and certain additional commercial agreements.

The VF Board of Directors believes separating the Spin Business from VF’s other businesses is in the best interests of VF and its shareholders and has concluded the Separation will provide VF and Kontoor Brands with a number of potential opportunities and benefits, including the following:

 

   

Strategic and Management Focus. Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and



 

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leverage its key strengths to drive performance. The management of each resulting company will be able to concentrate on its core competencies and growth opportunities, and will have increased flexibility and speed to design and implement corporate strategies based on the characteristics of its business.

 

   

Resource Allocation and Capital Deployment. Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective markets. The Separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.

 

   

Investor Choice. Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Separating the two businesses will provide investors with a more targeted investment opportunity so that investors interested in companies in our business will have the opportunity to acquire stock of Kontoor Brands.

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For more information, see “Risk Factors—Risks Relating to the Separation” and “The Separation—Conditions to the Distribution” included elsewhere in this information statement.

Corporate Information

Kontoor Brands was incorporated in North Carolina on November 28, 2018. Kontoor Brands does not currently have any operations, has no assets and is not expected to conduct any operations until the completion of the Restructuring on or prior to the Distribution Date, pursuant to which the Spin Business assets will be contributed to and the Spin Business liabilities will be assumed by Kontoor Brands in accordance with the Separation and Distribution Agreement and other agreements entered into in connection with the Separation. Our principal executive offices are located at 400 N. Elm Street, Greensboro, North Carolina 27401 and our telephone number is 336-332-3400. Our Internet site will be www.kontoorbrands.com. Our website and the information contained therein or connected thereto is not incorporated into this information statement or the registration statement of which it forms a part.



 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION

Please see “The Separation” for a more detailed description of the matters summarized below.

Q: Why am I receiving this document?

A: You are receiving this document because you are a holder of shares of VF common stock on the record date for the Distribution and, as such, will be entitled to receive shares of Kontoor Brands common stock upon completion of the transactions described in this information statement. We are sending you this document to inform you about the Separation and to provide you with information about Kontoor Brands and its business and operations upon completion of the Separation.

Q: What do I have to do to participate in the Separation?

A: Nothing. You will not be required to pay any cash or deliver any other consideration in order to receive the shares of Kontoor Brands common stock that you will be entitled to receive upon completion of the Separation. In addition, no shareholder approval will be required for the Separation and therefore you are not being asked to provide a proxy with respect to any of your shares of VF common stock in connection with the Separation and you should not send us a proxy.

Q: Why is VF separating the Spin Business from its other businesses?

A: The VF Board of Directors believes separating our business from VF’s other businesses will provide both companies with a number of potential opportunities and benefits, such as enabling (1) the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities; (2) each company to allocate resources and deploy capital in a manner consistent with its own priorities; and (3) investors, both current and prospective, to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics.

Q: What is Kontoor Brands?

A: Kontoor Brands is a newly formed North Carolina corporation that will hold the Spin Business, directly or indirectly through its subsidiaries, and be publicly traded following the Separation.

Q: How will VF accomplish the Separation of Kontoor Brands?

A: The Separation involves the Restructuring (i.e., the transfer of the assets and liabilities related to the Spin Business to Kontoor Brands or its subsidiaries) and the Distribution (i.e., VF’s distribution to its shareholders of all the shares of Kontoor Brands’ common stock). Following this Restructuring and Distribution, Kontoor Brands will be a publicly traded company independent from VF, and VF will not retain any ownership interest in Kontoor Brands.

Q: What will I receive in the Distribution?

A: At the effective time of the Distribution, you will be entitled to receive one share of Kontoor Brands common stock for every seven shares of VF common stock held by you on the record date.

Q: How does my ownership in VF change as a result of the Separation?

A: Your ownership of VF stock will not be affected by the Separation.



 

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Q: What is the record date for the Distribution?

A: The record date for the Distribution is May 10, 2019, and ownership will be determined as of the close of business on that date. When we refer to the record date in this information statement, we are referring to that time and date.

Q: When will the Distribution occur?

A: The Distribution is expected to occur on May 22, 2019.

Q: As a holder of shares of VF common stock as of the record date for the Distribution, how will shares of Kontoor Brands be distributed to me?

A: At the effective time, we will instruct our transfer agent and distribution agent to make book-entry credits for the shares of Kontoor Brands common stock that you are entitled to receive. Since shares of Kontoor Brands common stock will be in uncertificated book-entry form, you will receive share ownership statements in place of physical share certificates.

Q: What if I hold my shares through a broker, bank or other nominee?

A: VF shareholders who hold their shares through a broker, bank or other nominee will have their brokerage account credited with Kontoor Brands common stock. For additional information, those shareholders should contact their broker or bank directly.

Q: Why is no VF shareholder vote required to approve the Separation and its material terms?

A: VF is incorporated in Pennsylvania. Pennsylvania law does not require a shareholder vote to approve the Separation as long as (i) the Distribution is made in a manner that does not cause VF to be unable to pay its debts in the usual course of its business or (ii) cause the total assets of VF to be less than the sum of its total liabilities.

Q: How will fractional shares be treated in the Distribution?

A: You will not receive fractional shares of Kontoor Brands common stock in the Distribution. The distribution agent will aggregate and sell on the open market the fractional shares of Kontoor Brands common stock that would otherwise be issued in the Distribution, and if you would otherwise be entitled to receive a fractional share of Kontoor Brands common stock in connection with the Distribution, you will instead receive the net cash proceeds of the sale attributable to such fractional share.

Q: What are the U.S. federal income tax consequences to me of the Distribution?

A: A condition to the closing of the Separation is VF’s receipt of an opinion of each of Davis Polk & Wardwell LLP and Ernst & Young LLP (each, a “Tax Adviser”, together the “Tax Advisers”), to the effect that the Distribution will qualify under the Internal Revenue Code of 1986, as amended (the “Code”), as a transaction that is tax-free to VF and to its shareholders. On the basis that the Distribution so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the Distribution, except with respect to any cash received in lieu of fractional shares. You should review the section entitled “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution.



 

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Q: How will I determine the tax basis I will have in my VF shares after the Distribution and the Kontoor Brands shares I receive in the Distribution?

A: Generally, for U.S. federal income tax purposes, your aggregate basis in your shares of VF common stock and the shares of Kontoor Brands common stock you receive in the Distribution (including any fractional shares for which cash is received) will equal the aggregate basis of VF common stock held by you immediately before the Distribution. This aggregate basis should be allocated between your shares of VF common stock and the shares of Kontoor Brands common stock you receive in the Distribution (including any fractional shares for which cash is received) in proportion to the relative fair market value of each immediately following the Distribution. See “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution.”

Q: How will VF’s common stock and Kontoor Brands’ common stock trade after the Separation?

A: There is currently no public market for Kontoor Brands common stock. Kontoor Brands’ common stock has been approved for listing on the NYSE under the ticker symbol “KTB.” VF common stock will continue to trade on the NYSE under the ticker symbol “VFC.”

Q: If I sell my shares of VF common stock before or on the Distribution Date, will I still be entitled to receive Kontoor Brands shares in the Distribution with respect to the sold shares?

A: Beginning on or shortly before the record date and continuing up to and including the Distribution Date, we expect there will be two markets in VF common stock: a “regular-way” market and an “ex-distribution” market. Shares of VF common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of our common stock to be distributed in the Distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to receive shares of our common stock to be distributed in the Distribution, so that holders who initially sell VF shares ex-distribution will still be entitled to receive shares of Kontoor Brands common stock even though they have sold their shares of VF common stock before the Distribution, because the VF shares were sold after the record date. Therefore, if you owned shares of VF common stock on the record date and sell those shares on the “regular-way” market before the Distribution Date, you will also be selling the right to receive the shares of our common stock that would have been distributed to you in the Distribution. If you own shares of VF common stock as of the close of business on the record date and sell these shares in the “ex-distribution” market on any date up to and including the Distribution Date, you will still receive the shares of our common stock that you would be entitled to receive in respect of your ownership of the shares of VF common stock that you sold. You are encouraged to consult with your financial advisor regarding the specific implications of selling your VF common stock prior to or on the Distribution Date.

Q: Will I receive a stock certificate for Kontoor Brands shares distributed as a result of the Distribution?

A: No. Registered holders of VF common stock who are entitled to participate in the Distribution will receive a book-entry account statement reflecting their ownership of Kontoor Brands common stock. For additional information, registered shareholders in the U.S., Canada or Puerto Rico should contact VF’s transfer agent, Computershare Trust Company, N.A. (“Computershare”), in writing at C/O: Shareholder Services, P.O. Box 505000, Louisville, Kentucky 40233-5000, Toll Free at 1-800-446-2617 or through its website at www.computershare.com/investor. Shareholders from outside the U.S., Canada and Puerto Rico may call 1-781- 575-2725. See “The Separation—When and How You Will Receive the Distribution of Kontoor Brands Shares.”

Q: Can VF decide to cancel the Distribution of the Kontoor Brands common stock even if all the conditions have been met?

A: Yes. VF has the right to terminate, or modify the terms of, the Separation at any time prior to the Distribution, even if all of the conditions to the Distribution are satisfied.



 

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Q: Do I have appraisal rights?

A: No, VF shareholders do not have any appraisal rights in connection with the Separation.

Q: Will Kontoor Brands incur any debt in connection with the Separation?

A: Yes. We intend to enter into new financing arrangements in anticipation of the Separation consisting of a term loan A facility, a term loan B facility (collectively with the term loan A facility, the “term loan facilities”) and a revolving facility. We expect to incur up to $1.05 billion of new debt from the proceeds of the term loan facilities, which we intend to use primarily to, directly or indirectly, fund a cash transfer to members of VF’s group as part of the Restructuring, to pay related fees and expenses and for other general corporate purposes. We expect for our revolving facility to be undrawn at the Separation, provided that it may be used, subject to a cap, as part of the Restructuring and to pay related fees and expenses at the Separation, and otherwise may be used for, among other things, working capital and general corporate purposes. See “The Separation—Incurrence of Debt.”

Following the Separation, our debt obligations could restrict our business and may adversely impact our financial condition, results of operations or cash flows. In addition, our separation from VF’s other businesses may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to the businesses collectively. Also, our business, financial condition, results of operations and cash flows could be harmed by a deterioration of our credit profile or by factors adversely affecting the credit markets generally. See “Risk Factors—Risks Relating to the Separation.”

Q: Does Kontoor Brands intend to pay cash dividends?

A: We intend to pay a quarterly dividend, in cash, at an annual rate initially equal to $2.24 per share of our common stock (representing a quarterly rate initially equal to $0.56 per share). The declaration and amount of any future dividends will be determined by our Board of Directors and will depend on our financial condition, earnings, cash flows, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors that our Board of Directors deems relevant. See “Dividend Policy.”

Q: Will the Separation affect the trading price of my VF stock?

A: Yes. The trading price of shares of VF common stock immediately following the Distribution is expected to be lower than immediately prior to the Distribution because the trading price will no longer reflect the value of the Spin Business. We cannot provide you with any assurance regarding the price at which the VF shares will trade following the Separation.

Q: What will happen to outstanding VF equity compensation awards?

A: In connection with the Separation, (i) VF equity awards held by individuals who will continue to be employed by or provide services to VF will be adjusted to reflect the difference in the trading price of VF common stock before and after the Distribution, and, if applicable, the trading price of our common stock, (ii) VF options held by retirement eligible individuals who will be transferred to Kontoor Brands will be treated in the same manner as VF equity awards held by individuals who will continue to be employed by or provide services to VF, and (iii) VF equity awards held by individuals who will be transferred to Kontoor Brands will be treated as follows: (a) stock options, restricted share units and other special awards will be converted into equity awards with respect to Kontoor Brands common stock, taking into account the difference in the trading price of VF common stock before and after the Distribution and the trading price of Kontoor Brands common stock following the Separation and (b) performance share unit awards granted in 2017 and 2018 will be pro-rated based on the portion of the performance periods that have elapsed as of the Distribution, with such pro-rated awards remaining as VF equity



 

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awards and the remaining portion of such VF awards will be converted into time-vested restricted share units with respect to Kontoor Brands Common Stock for the 2017 grant and performance share unit awards for the 2018 grant with respect to Kontoor Brands stock. VF performance share units granted in 2016 will be settled following the Distribution once the VF Compensation Committee (as defined below) has reviewed and certified VF’s performance metrics. None of the VF outstanding equity awards will be eligible to receive a dividend of Kontoor Brands Common Stock in connection with the Distribution. See “Treatment of Outstanding Equity Compensation Awards.”

Q: What will the relationship between VF and Kontoor Brands be following the Separation?

A: After the Separation, VF will not own any shares of Kontoor Brands common stock, and each of VF and Kontoor Brands will be independent, publicly traded companies with their own management teams and boards of directors. However, in connection with the Separation, we will enter into a number of agreements with VF that, among other things, govern the Separation and allocate responsibilities for obligations arising before and after the Separation, including, among others, obligations relating to our employees, taxes and real and intellectual property. See “The Separation—Agreements with VF.”

Q: Who is the transfer agent for Kontoor Brands common stock?

A: Computershare will be the transfer agent for Kontoor Brands common stock. Computershare’s mailing address is C/O: Shareholder Services, P.O. Box 505000, Louisville, Kentucky 40233-5000 and Computershare’s phone number for shareholders in the U.S., Canada or Puerto Rico is Toll Free 1-800-446-2617 and for shareholders from outside the U.S., Canada and Puerto Rico is 1-781-575-2725.

Q: Who is the distribution agent for the Distribution?

A: Computershare Trust Company, N.A.

Q: Who can I contact for more information?

A: If you have questions relating to the mechanics of the distribution of Kontoor Brands shares, you should contact the distribution agent:

Computershare Trust Company, N.A.

C/O: Shareholder Services

P.O. Box 505000

Louisville, Kentucky 40233-5000

United States

Toll Free: 1-800-446-2617

  International:

1-781-575-2879

Before the Separation, if you have questions relating to the transactions described herein, you should contact VF at:

Scott A. Deitz

V.F. Corporation

105 Corporate Center Boulevard

Greensboro, North Carolina 27408

United States

Phone: 336-424-6000



 

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SUMMARY OF THE SEPARATION

The following is a summary of the material terms of the Separation, including the Restructuring, the Distribution and certain other related transactions.

 

Distributing Company

V.F. Corporation, a Pennsylvania corporation. After the Distribution, VF will not own any shares of Kontoor Brands common stock.

 

Distributed Company

Kontoor Brands, a North Carolina corporation, is a wholly owned subsidiary of VF and, at the time of the Distribution, will hold, directly or indirectly through its subsidiaries, all of the assets and liabilities of the Spin Business. After the Distribution, Kontoor Brands will be an independent, publicly traded company.

 

Distributed Company Structure

Kontoor Brands is a holding company. At the time of the Distribution it will own the shares of a number of subsidiaries operating its businesses.

 

Record Date

The record date for the Distribution is on the close of business on May 10, 2019.

 

Distribution Date

The Distribution Date is May 22, 2019.

 

Distributed Securities

VF will distribute 100% of the shares of Kontoor Brands common stock outstanding immediately prior to the Distribution. Based on the approximately 396,479,843 shares of VF common stock (excluding restricted shares) outstanding on April 26, 2019, and applying the distribution ratio of one share of Kontoor Brands common stock for every seven shares of VF common stock, VF will distribute approximately 56,639,978 shares of Kontoor Brands common stock to VF shareholders who hold VF common stock as of the record date.

 

Distribution Ratio

Each holder of VF common stock will receive one share of Kontoor Brands common stock for every seven shares of VF common stock held as of the close of business on May 10, 2019.

 

Fractional Shares

VF will not distribute any fractional shares of Kontoor Brands common stock to VF shareholders. Instead, as soon as practicable on or after the Distribution Date, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds, net of brokerage fees and commissions, transfer taxes and other costs and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution. The distribution agent will determine when, how, through which broker-dealers and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price



 

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for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient shareholders for U.S. federal income tax purposes as described in “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution.”

 

Distribution Method

Kontoor Brands common stock will be issued only by direct registration in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share certificates are issued to shareholders, as is the case in this Distribution.

 

Conditions to the Distribution

The Distribution is subject to the satisfaction or waiver by VF of the following conditions, as well as other conditions described in this information statement in “The Separation—Conditions to the Distribution”:

 

   

The SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect, and no proceedings for such purpose will have been instituted or threatened by the SEC, and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of VF common stock as of the record date for the Distribution;

 

   

Our common stock to be delivered in the Distribution will have been approved for listing on the NYSE, subject to official notice of issuance;

 

   

VF shall have received opinions of the Tax Advisers, in each case reasonably satisfactory to VF, to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code;

 

   

Any material governmental approvals and consents and any material permits, registrations and consents from third parties, in each case, necessary to effect the distribution and to permit the operations of our business after the distribution date substantially as conducted as of the date of the Separation and Distribution Agreement shall have been obtained; and

 

   

No event or development will have occurred or exist that, in the judgment of the VF Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the Separation or other transactions contemplated by the Separation and Distribution



 

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Agreement or by any of the ancillary agreements contemplated by the Separation and Distribution Agreement.

 

  The fulfillment of the conditions to the Distribution will not create any obligations on VF’s part to effect the Separation, and the VF Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.

 

Stock Exchange Listing

Our common stock has been approved for listing on the NYSE under the ticker symbol “KTB.”

 

Dividend Policy

We intend to pay a quarterly dividend, in cash, at an annual rate initially equal to $2.24 per share of our common stock (representing a quarterly rate initially equal to $0.56 per share). The declaration and amount of all future dividends will be determined by our Board of Directors and will depend on our financial condition, earnings, cash flows, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors that our Board of Directors believes are relevant. For more information, see “Dividend Policy.”

 

Transfer Agent

Computershare Trust Company, N.A.

 

U.S. Federal Income Tax Consequences

A condition to the closing of the Separation is VF’s receipt of opinions of the Tax Advisers to the effect that the Distribution will qualify under the Code as a transaction that is tax-free to VF and to its shareholders. You should review the section entitled “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution.


 

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SUMMARY RISK FACTORS

We are subject to a number of risks, including risks related to the Separation, including the Restructuring and the Distribution, and other related transactions. The following list of risk factors is not exhaustive. Please read “Risk Factors” carefully for a more thorough description of these and other risks.

Risks Relating to the Separation

 

   

We may not realize the anticipated benefits from the Separation, and the Separation could harm our business.

 

   

We have no history of operating as an independent company, and our historical combined and unaudited pro forma financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

 

   

We have historically operated as a business segment of VF, and there are risks associated with our separation from VF.

 

   

We will incur significant costs to create the corporate infrastructure necessary to operate as an independent public company.

 

   

The obligations associated with being a public company will require significant resources and management attention.

 

   

Until the Distribution occurs, VF has sole discretion to change the terms of the Separation in ways that may be unfavorable to us.

 

   

In connection with the Separation, VF will indemnify us for certain liabilities and we will indemnify VF for certain liabilities. If we are required to act under these indemnities to VF, we may need to divert cash to meet those obligations, which could adversely affect our financial results. Moreover, the VF indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and VF may not be able to satisfy its indemnification obligations to us in the future.

 

   

Following the Separation, we will have debt obligations that could restrict our business and may adversely impact our financial condition, results of operations or cash flows. In addition, our separation from VF’s other businesses may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to us.

Risks Relating to Our Business

 

   

Kontoor Brands’ revenues and profits depend on the level of consumer spending for apparel, which is sensitive to global economic conditions and other factors. A decline in consumer spending could have a material adverse effect on Kontoor Brands.

 

   

The apparel industry is highly competitive, and Kontoor Brands’ success depends on its ability to gauge consumer preferences and product trends, and to respond to constantly changing markets.

 

   

Kontoor Brands’ results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

 

   

Kontoor Brands’ business and the success of its products could be harmed if Kontoor Brands is unable to maintain the images of its brands.

 

   

Kontoor Brands’ profitability may decline as a result of increasing pressure on margins.



 

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Kontoor Brands may not succeed in its business strategy.

 

   

A substantial portion of Kontoor Brands’ revenues and gross profit is derived from a small number of large customers. The loss of any of these customers or the inability of any of these customers to pay us could substantially reduce our revenues and profits.

 

   

Kontoor Brands relies significantly on information technology. Any inadequacy, interruption, integration failure or security failure of this technology could harm our ability to effectively operate our business.

 

   

Fluctuations in wage rates and the price, availability and quality of raw materials, including commodity costs, and finished goods could increase costs.

Risks Relating to Our Common Stock

 

   

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the Separation.

 

   

A large number of our shares are or will be eligible for future sale, which may cause the market price of our common stock to decline.

 

   

Because we do not expect our common stock will be included in the Standard & Poor’s 500 Index, and it may not be included in other stock indices, significant amounts of our common stock will likely need to be sold in the open market where there may not be offsetting demand.

 

   

Provisions in our amended and restated articles of incorporation and amended and restated bylaws and certain provisions of North Carolina Law (as defined below) could delay or prevent a change in control of Kontoor Brands.

 

   

Your percentage ownership in Kontoor Brands may be diluted in the future.



 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our separation from VF, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. Our business, prospects, results of operations, financial condition or cash flows could be materially and adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.

Risks Relating to the Separation

We may not realize the anticipated benefits from the Separation, and the Separation could harm our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at all. The Separation is expected to enhance strategic and management focus, provide a distinct investment identity and allow us to efficiently allocate resources and deploy capital. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

   

The Separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business;

 

   

Following the Separation, we may be more susceptible to economic downturns and other adverse events than if we were still a part of VF;

 

   

Following the Separation, our business will be less diversified than VF’s business prior to the Separation; our business will also experience a loss of scale and access to certain financial, managerial and professional resources from which we have benefited in the past; and

 

   

The other actions required to separate the respective businesses could disrupt our operations.

If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, our business could be harmed.

We have no history of operating as an independent company, and our historical combined and unaudited pro forma financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

Our historical combined and unaudited pro forma combined financial information included in this information statement have been derived from VF’s consolidated financial statements and accounting records and are not necessarily indicative of our future results of operations, financial condition or cash flows, nor do they reflect what our results of operations, financial condition or cash flows would have been as an independent public company during the periods presented. In particular, the historical combined financial information included in this information statement is not necessarily indicative of our future results of operations, financial condition or cash flows primarily because of the following factors:

 

   

Prior to the Separation, our business has been operated by VF as part of its broader corporate organization, rather than as an independent company. VF or one of its affiliates provide support for various corporate functions for us, such as information technology, shared services, medical insurance, procurement, logistics, marketing, human resources, legal, finance and internal audit;

 

   

Our historical combined financial results reflect the direct, indirect and allocated costs for such services historically provided by VF, and these costs may significantly differ from the comparable expenses we would have incurred as an independent company;

 

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Our working capital requirements and capital expenditures historically have been satisfied as part of VF’s corporate-wide cash management and centralized funding programs, and our cost of debt and other capital may significantly differ from that which is reflected in our historical combined financial statements;

 

   

The historical combined financial information may not fully reflect the costs associated with the Separation, including the costs related to being an independent public company;

 

   

Our historical combined financial information does not reflect our obligations under the various transitional and other agreements we will enter into with VF in connection with the Separation, though costs under such agreements are expected to be broadly similar to what was charged to the business in the past; and

 

   

Currently, our business is integrated with that of VF and we benefit from VF’s size and scale in costs, employees and vendor and customer relationships. Thus, costs we will incur as an independent company may significantly exceed comparable costs we would have incurred as part of VF and some of our customer relationships may be weakened or lost.

We based the pro forma adjustments included in this information statement on available information and assumptions that we believe are reasonable and factually supportable; actual results, however, may vary. In addition, our unaudited pro forma combined financial information included in this information statement may not give effect to various ongoing additional costs we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial statements do not reflect what our results of operations, financial condition or cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition or future results of operations.

Please refer to “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

We have historically operated within VF, and there are risks associated with our separation from VF.

We have historically operated within VF and a number of aspects of our current relationship with VF will change as a result of our separation from VF. For example, following a transition period, we will not be able to use certain VF trademarks in connection with our business, including on our products or promotional materials. In addition, some of our customers, landlords, vendors or other contract counterparties may have contracted with us because we were part of VF, and we may have difficulty marketing our products or obtaining favorable terms in our leases and other contractual arrangements in the future as a result of our separation from VF. As part of our separation from VF, we will also operate the U.S.-based VF Outlet™ business, which carries both of our primary brands as well as VF-branded products and third-party branded merchandise. Following the Separation, certain VF brands or third-party brands may decide to no longer sell products through the VF Outlet™ stores operated by us. Additionally, following a transition period, we will not be able to use the VF trademark in connection with our VF Outlet™ business and will need to either rebrand the business or enter into an arms-length trademark license with VF for the use of the VF trademark. These and other changes could have a material adverse effect on our business and results of operations.

We will incur significant costs to create the corporate infrastructure necessary to operate as an independent public company.

VF currently performs many important corporate functions for us, including internal audit, finance, accounting, tax, human resources, procurement, information technology, supply chain, logistics, distribution, litigation management, real estate, environmental and public affairs. The costs of these services has been allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenues, costs of goods sold or square footage, as applicable. Following the Separation, VF will continue to provide some of these services to us on a transitional basis, for a period of up to two years following

 

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the Distribution pursuant to a Transition Services Agreement that we will enter into with VF. See “The Separation—Agreements with VF—Transition Services Agreement.” VF may not successfully execute all of these functions during the transition period or we may have to expend significant efforts or costs materially in excess of those estimated under the Transition Services Agreement. Any interruption in these services could have a material adverse effect on our business, results of operations, financial condition and cash flows.

In addition, at the end of this transition period, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf. The costs associated with performing or outsourcing these functions may exceed the amounts reflected in our historical combined financial statements that were incurred as a business segment of VF. We expect to incur costs beginning in the second quarter of 2019 to establish the necessary infrastructure. A significant increase in the costs of performing or outsourcing these functions could materially and adversely affect our business, results of operations, financial condition and cash flows.

For example, VF will provide warehousing services to us at a facility retained by VF in Kunshan, China, our sole warehouse facility in Asia, for a period of up to 24 months following the Separation. We may have difficulty performing or outsourcing this function in a timely manner, at comparable costs or at all after the transition period. Moreover, certain of the assets, employees and liabilities transferred to us relating to our sole European distribution facility in the Czech Republic, which facility will be retained by VF and leased to us on a transitional basis, will be transferred to us subject to an option in favor of VF to purchase all of the outstanding equity interests of our subsidiary that will hold such assets, employees and liabilities. The option will be exercisable at VF’s sole discretion during the ninety day period following the expiration of our lease to such facility (which has a term of one year subject to a right for us to extend the lease term for an additional two-month period). If VF decides to exercise this option at the end of this 12-14 month period, we may have difficulty performing or outsourcing this function in a timely manner, at comparable costs or at all. Any disruption or interruption in our warehousing and distribution function could have a material adverse effect on our business, results of operations, financial condition and cash flows.

The obligations associated with being a public company will require significant resources and management attention.

Currently, we are not directly subject to the reporting and other requirements of the Exchange Act. Following the effectiveness of the registration statement of which this information statement forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of the NYSE. As an independent public company, we are required to, among other things:

 

   

Prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the federal securities laws and NYSE rules;

 

   

Have our own Board of Directors and committees thereof, which comply with federal securities laws and NYSE rules;

 

   

Maintain an internal audit function;

 

   

Institute our own financial reporting and disclosure compliance functions;

 

   

Establish an investor relations function;

 

   

Establish internal policies, including those relating to trading in our securities and disclosure controls and procedures; and

 

   

Comply with the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board and the NYSE.

These reporting and other obligations will place significant demands on our management and our administrative and operational resources, including accounting resources, and we expect to face increased legal, accounting, administrative and other costs and expenses relating to these demands that we had not incurred as a segment of VF. Our investment in compliance with existing and evolving regulatory requirements will result in

 

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increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which could have a material adverse effect on our business or the market price of our securities.

In accordance with Section 404 of the Sarbanes-Oxley Act, our management will be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls until the year following the first annual report required to be filed with the SEC. When required, this process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing and accounting staff and our outside independent registered public accounting firm, and testing of our internal controls over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If management or our independent registered public accounting firm determines that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if our controls are not effective, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our combined financial statements, a decline in our stock price, suspension or delisting of our common stock from the NYSE, and could have a material adverse effect on our business, financial condition, prospects and results of operations.

Until the Distribution occurs, VF has sole discretion to change the terms of the Separation in ways that may be unfavorable to us.

Until the Distribution occurs, Kontoor Brands’ business will be a business segment of VF. Completion of the Separation remains subject to the satisfaction or waiver of certain conditions, some of which are in the sole and absolute discretion of VF, including final approval by the VF Board of Directors. Additionally, VF has the sole and absolute discretion to change certain terms of the Separation, including the amount of any cash transfer we make to VF, the amount of our indebtedness and the allocation of contingent liabilities, which changes could be unfavorable to us. In addition, VF may decide at any time prior to the completion of the Separation not to proceed with the Separation.

In connection with the Separation, VF will indemnify us for certain liabilities and we will indemnify VF for certain liabilities. If we are required to act under these indemnities to VF, we may need to divert cash to meet those obligations, which could adversely affect our financial results. Moreover, the VF indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and VF may not be able to satisfy its indemnification obligations to us in the future.

Pursuant to the Separation and Distribution Agreement and other agreements with VF, VF will agree to indemnify us for certain liabilities, and we will agree to indemnify VF for certain liabilities, as discussed further in “The Separation—Agreements with VF.” Payments that we may be required to provide under indemnities to VF are not subject to any cap, may be significant and could negatively affect our business, particularly under indemnities relating to our actions that could affect the tax-free nature of the Separation. Third parties could also seek to hold us responsible for the liabilities that VF has agreed to retain, and under certain circumstances, we may be subject to continuing contingent liabilities of VF following the Separation that arise relating to the operations of the Spin Business during the time that it was a business segment of VF prior to the Separation, such

 

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as certain tax liabilities which relate to periods during which taxes of the Spin Business were reported as a part of VF; liabilities retained by VF which relate to contracts or other obligations entered into jointly by the Spin Business and VF’s retained business; pension and other post-employment liabilities, including unfunded liabilities, that apply to VF, including the Spin Business; environmental liabilities related to sites at which both VF and the Spin Business operated; and liabilities arising from third-party claims in respect of contracts in which both VF and the Spin Business supply goods or provide services.

VF has agreed to indemnify us for certain of such contingent liabilities. While we have no reason to expect that VF will not be able to support its indemnification obligations to us, we can provide no assurance that VF will be able to fully satisfy its indemnification obligations or that such indemnity obligations will be sufficient to cover our liabilities for matters which VF has agreed to retain, including such contingent liabilities. Moreover, even if we ultimately succeed in recovering from VF any amounts for which we are indemnified, we may be temporarily required to bear these losses ourselves. Each of these risks could have a material adverse effect on our business, results of operations and financial condition.

After the Separation, we will only have limited access to the insurance policies maintained by VF for events occurring prior to the Separation and VF’s insurers may deny coverage to us under such policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage following the Separation on terms that justify its purchase, and any such insurance may not be adequate to offset costs associated with certain events.

In connection with the Separation, we will enter into agreements with VF to address several matters associated with the Separation, including insurance coverage. The Separation and Distribution Agreement will provide that following the Distribution, Kontoor Brands will no longer have insurance coverage under VF insurance policies in connection with events occurring before, as of or after the Distribution, other than coverage for (i) events occurring prior to the Distribution and covered by occurrence-based policies of VF as in effect as of the Distribution and (ii) events or acts occurring prior to the Distribution and covered by claims-made policies of VF as in effect as of the Distribution. However, after the Separation, VF’s insurers may deny coverage to us for losses associated with occurrences prior to the Separation. Accordingly, we may be required to temporarily or permanently bear the costs of such lost coverage. In addition, we will have to obtain our own insurance policies after the Distribution is complete. Although we expect to have insurance policies in place as of the Distribution that cover certain, but not all, hazards that could arise from our operations, we can provide no assurance that we will be able to obtain such coverage, that the cost of such coverage will be similar to those incurred by VF or that such coverage will be adequate to protect us from costs incurred with certain events. Claims for losses associated with occurrences prior to the Separation may result in a substantial increase in our insurance premiums as of the Distribution. The occurrence of an event that is not insured or not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows in the future. See “The Separation—Agreements with VF.”

Following the Separation, we will have debt obligations that could restrict our business and adversely impact our results of operations, financial condition or cash flows. In addition, the Separation of our business from VF may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to us.

In connection with the Separation, we expect to incur up to $1.05 billion of new debt from the proceeds of the term loan facilities, which we intend to use primarily to, directly or indirectly, fund a cash transfer to members of VF’s group as part of the Restructuring, to pay related fees and expenses and for other general corporate purposes. We expect for our revolving facility to be undrawn at the Separation, provided that it may be used, subject to a cap, as part of the Restructuring and to pay related fees and expenses at the Separation, and otherwise may be used for, among other things, working capital and general corporate purposes. This level of debt could have significant consequences on our future operations, including:

 

   

Making it more difficult for us to meet our payment and other obligations under our outstanding debt;

 

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Resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which could result in all of our debt becoming immediately due and payable;

 

   

Reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

   

Limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

 

   

Placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have a material adverse effect on our business, financial condition and results of operations. We may also incur substantial additional indebtedness in the future.

In addition, any future indenture or credit agreements that we may enter into may include restrictive covenants that, subject to certain exceptions and qualifications, restrict or limit our ability and the ability of our restricted subsidiaries to, among other things, incur additional indebtedness, pay dividends, make certain investments, sell certain assets and enter into certain strategic transactions, including mergers and acquisitions. These covenants and restrictions could affect our ability to operate our business, and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise.

Our separation from VF may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to us.

Transfer or assignment to us of some contracts and other assets will require the consent of a third-party. If such consent is not given, we may not be entitled to the benefit of such contracts, investments and other assets in the future.

Transfer or assignment of some of the contracts and other assets in connection with the Separation will require the consent of a third-party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third-party to replicate the existing contract or assign the portion of the existing contract related to our business. While we anticipate that most of these contract assignments and new agreements will be obtained prior to the Separation, we may not be able to obtain all required consents or enter into all such new agreements, as applicable, until after the Distribution Date. Some parties may use the requirement of a consent to seek more favorable contractual terms from us, which could include our having to obtain letters of credit or other forms of credit support. If we are unable to obtain such consents or such credit support on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets and contractual commitments that are intended to be allocated to us as part of the Separation. In addition, where we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge the transaction on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely impacted.

Although we do not believe that any of the contracts or other assets requiring consent to transfer or the contracts requiring a new agreement are individually material to the Spin Business, we cannot provide assurance that all such required third-party consents and new agreements will be procured or put in place, as applicable, prior to the Distribution Date. Consequently, we may not realize certain of the benefits that are intended to be allocated to us as part of the Separation.

 

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After the Separation, some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in VF.

Because of their current or former positions with VF, following the Separation, some of our directors and executive officers may own shares of VF common stock or have options to acquire shares of VF common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. This ownership may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for VF or us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between VF and us regarding the terms of the agreements governing the Separation and the relationship thereafter between the companies.

The combined post-Distribution value of VF and Kontoor Brands shares may not equal or exceed the pre-Distribution value of VF shares.

After the Separation, we expect that VF common stock will continue to be traded on the NYSE. Our common stock has been approved for listing on the NYSE. We cannot assure you that the combined trading prices of VF common stock and our common stock after the Separation, as adjusted for any changes in the combined capitalization of both companies, will be equal to or greater than the trading price of VF common stock prior to the Separation. Until the market has fully evaluated the business of VF without our business and potentially thereafter, the price at which VF common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated our business and potentially thereafter, the price at which our common stock trades may fluctuate significantly.

We potentially could have received better terms from unaffiliated third parties than the terms we received in our agreements with VF.

The agreements we entered into with VF in connection with the Separation were negotiated while we were still part of VF’s business. See “The Separation—Agreements with VF.” Accordingly, during the period in which the terms of those agreements will have been negotiated, we did not have an independent Board of Directors or a management team independent of VF. The terms of the agreements negotiated in the context of the Separation relate to, among other things, the allocation of assets, intellectual property, liabilities, rights and other obligations between VF and us, and arm’s-length negotiations between VF and an unaffiliated third-party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third-party. For example, we have agreed to license back to a subsidiary of VF, on a royalty-free basis, all of the intellectual property (other than trademarks) transferred to us in connection with the Separation for use throughout VF’s business, even if such intellectual property is not currently used in VF’s business, and this intellectual property may be used to compete against us in the future.

If the Restructuring and Distribution, together with certain related transactions, do not qualify as transactions that are tax-free for U.S. federal income tax purposes or non-U.S. tax purposes, VF and/or holders of VF common stock could be subject to significant tax liability.

It is intended that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code. The consummation of the Separation and the related transactions is conditioned upon the receipt of opinions of the Tax Advisers to the effect that such transactions will qualify for this intended tax treatment. In addition, it is intended that the Restructuring steps will qualify as transactions that are tax-free for U.S. federal income tax and applicable non-U.S. tax purposes. The opinions will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and the opinions would not be valid if such representations, assumptions and undertakings were incorrect. Notwithstanding the opinions, the IRS could determine that the Distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings that were relied on for the opinions are false or have been violated, if it disagrees with the conclusions in the opinions, or for other reasons, including as a result of significant changes in the stock

 

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ownership of VF or us after the Distribution. For more information regarding the opinions see “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution—Tax Opinions.”

If the Restructuring and Distribution fail to qualify for tax-free treatment, for any reason, VF and/or holders of VF common stock would be subject to substantial U.S. and/or applicable non-U.S. taxes as a result of the Restructuring, Distribution and certain related transactions, and we could incur significant liabilities under applicable law or as a result of the Tax Matters Agreement. See “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution.”

If the Distribution is taxable to VF as a result of a breach by us of any covenant or representation made by us in the Tax Matters Agreement (as defined below), we will generally be required to indemnify VF; the obligation to make a payment on this indemnification obligation could have a material adverse effect on us.

As described above, it is intended that the Distribution, together with certain related transactions, will qualify as tax-free transactions to VF and to holders of VF common stock, except with respect to any cash received in lieu of fractional shares. If the Distribution and/or related transactions are not so treated or are taxable to VF (see “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution”) due to a breach by us (or any of our subsidiaries) of any covenant or representation made by us in the Tax Matters Agreement, we will generally be required to indemnify VF for all tax-related losses suffered by VF. In addition, we will not control the resolution of any tax contest relating to taxes suffered by VF in connection with the Separation, and we may not control the resolution of tax contests relating to any other taxes for which we may ultimately have an indemnity obligation under the Tax Matters Agreement. In the event that VF suffers tax-related losses in connection with the Separation that must be indemnified by us under the Tax Matters Agreement, the indemnification liability could have a material adverse effect on us.

We will be subject to significant restrictions on our actions following the Separation in order to avoid triggering significant tax-related liabilities.

The Tax Matters Agreement generally will prohibit us from taking certain actions that could cause the Distribution and certain related transactions to fail to qualify as tax-free transactions, including:

 

   

During the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

   

During the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

   

During the two-year period following the Distribution Date, we may not sell or otherwise issue our common stock, other than pursuant to issuances that satisfy certain regulatory safe harbors set forth in Treasury regulations related to stock issued to employees and retirement plans;

 

   

During the two-year period following the Distribution Date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to open-market repurchases of less than 20% of our common stock (in the aggregate);

 

   

During the two-year period following the Distribution Date, we may not amend our articles of incorporation (or other organizational documents) or take any other action, whether through a shareholder vote or otherwise, affecting the voting rights of our common stock; and

 

   

More generally, we may not take any action that could reasonably be expected to cause the Separation and certain related transactions to fail to qualify as tax-free transactions for U.S. federal income tax purposes or for non-U.S. tax purposes.

If we take any of the actions above and such actions result in tax-related losses to VF, we generally will be required to indemnify VF for such tax-related losses under the Tax Matters Agreement. See “The Separation—

 

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Agreements with VF—Tax Matters Agreement.” Due to these restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our potential indemnity obligation to VF might discourage, delay or prevent a change of control that our shareholders may consider favorable.

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Separation.

Prior to the Separation, our financial results were included within the consolidated results of VF, and we were not directly subject to reporting and other requirements of the Exchange Act. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to duplicate information technology infrastructure, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance, tax, treasury and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.

The relocation of our Lee® headquarters from Kansas City to Greensboro could adversely affect our operations, operating results and financial condition, as we may experience disruptions to our business and incur additional costs in connection with the relocation.

The process of moving our Lee® headquarters from Kansas City to Greensboro as part of the Separation is inherently complex and not part of our day-to-day operations. The relocation process could cause significant disruption to our operations, cause the temporary diversion of management resources and result in the loss of key employees who have substantial experience and expertise in our business, all of which could have a material adverse effect on our operations, operating results and financial condition. The need to replace personnel who do not relocate, train new employees and transition operating knowledge may cause disruptions in our business. While we have implemented a transition plan to provide for the move of our Lee® headquarters, we may encounter difficulties retaining employees who elect to transfer and attracting new talent in the Greensboro area to replace our employees who are unwilling to relocate. We may also experience difficulties in retaining employees who will remain in Kansas City during the transition period and who we are relying on to facilitate the transition of operating knowledge. In addition, we may incur additional costs for duplication in staff as we effect the transition. We can give no assurance that the relocation will be completed as planned or within the expected time frame. In addition, the relocation may involve significant additional costs to us and the expected benefits of the move may not be fully realized due to associated disruption to our operations and personnel.

Risks Relating to Our Business

Our revenues and profits depend on the level of consumer spending for apparel, which is sensitive to global economic conditions and other factors. A decline in consumer spending could have a material adverse effect on us.

The success of our business depends on consumer spending on apparel, and there are a number of factors that influence consumer spending, including actual and perceived economic conditions, disposable consumer income, interest rates, consumer credit availability, unemployment, stock market performance, weather conditions, energy prices, consumer discretionary spending patterns and tax rates in the international, national, regional and local markets where our products are sold. The current global economic environment is unpredictable, and adverse economic trends or other factors could negatively impact the level of consumer spending, which could have a material adverse impact on us.

 

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The apparel industry is highly competitive, and our success depends on our ability to gauge consumer preferences and product trends, and to respond to constantly changing markets.

We compete with numerous apparel brands and manufacturers. Competition is generally based upon brand name recognition, price, design, product quality, selection, service and purchasing convenience. Some of our competitors are larger and have more resources than us in some product categories and regions. In addition, we compete directly with the private label brands of our wholesale customers. Our ability to compete within the apparel industry depends on our ability to:

 

   

Anticipate and respond to changing consumer preferences and product trends in a timely manner;

 

   

Develop attractive, innovative and high-quality products that meet consumer needs;

 

   

Maintain strong brand recognition;

 

   

Price products appropriately;

 

   

Provide best-in-class marketing support and intelligence;

 

   

Ensure product availability and optimize supply chain efficiencies;

 

   

Obtain sufficient retail store space and effectively present our products at retail;

 

   

Produce or procure quality products on a consistent basis; and

 

   

Adapt to a more digitally driven consumer landscape.

Failure to compete effectively or to keep pace with rapidly changing consumer preferences, markets and product trends could have a material adverse effect on our business, financial condition and results of operations. Moreover, there are significant shifts underway in the wholesale and retail (e-commerce and retail store) channels. We may not be able to manage our brands within and across channels sufficiently, which could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

There can be no assurance that we will be able to successfully anticipate changing consumer preferences and product trends or economic conditions, and, as a result, we may not successfully manage inventory levels to meet our future order requirements. We often schedule internal production and place orders for products with independent manufacturers before our customers’ orders are firm. If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs, the sale of excess inventory at discounted prices or excess inventory held by our wholesale customers, which could have a negative impact on future sales, an adverse effect on the image and reputation of our brands and negatively impact profitability. On the other hand, if we underestimate demand for our products, our manufacturing facilities or third-party manufacturers may not be able to produce products to meet consumer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and relationships. These risks could have a material adverse effect on our brand image as well as our results of operations and financial condition.

Our business and the success of our products could be harmed if we are unable to maintain the images of our brands.

Our success to date has been due in large part to the growth of our brands’ images and our customers’ connection to our brands. If we are unable to timely and appropriately respond to changing consumer demand, the names and images of our brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brands’ images to be outdated or associate our brands with styles that

 

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are no longer popular. In addition, brand value is based in part on consumer perceptions on a variety of qualities, including merchandise quality and corporate integrity. Negative claims or publicity regarding us, our brands or our products could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our businesses may be similarly affected in the future. In addition, we have sponsorship contracts with a number of athletes, musicians and celebrities and feature those individuals in our advertising and marketing efforts. Actions taken by those individuals associated with our products could harm their reputations, which could adversely affect the images of our brands.

If we are unsuccessful in establishing effective advertising, marketing and promotional programs, our sales could be negatively affected.

Inadequate or ineffective advertising could inhibit our ability to maintain brand relevance and drive increased sales. Additionally, if our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, or if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our business, results of operations and financial condition.

Our profitability may decline as a result of increasing pressure on margins.

The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, rising commodity and conversion costs, pressure from retailers to reduce the costs of products, changes in consumer demand and shifts to online shopping and purchasing. Customers may increasingly seek markdown allowances, incentives and other forms of economic support. If these factors cause us to reduce our sales prices to retailers and consumers, and we fail to sufficiently reduce our product costs or operating expenses, our profitability will decline. This could have a material adverse effect on our results of operations, liquidity and financial condition.

We may not succeed in our business strategy.

One of our key strategic objectives is growth. We seek to grow organically and potentially, in the future, through acquisitions. We seek to grow by expanding our share with winning customers; stretching brands to new regions, channels, and categories; managing costs; leveraging our supply chain across Kontoor Brands; and expanding our direct-to-consumer business with emphasis on our e-commerce business. However, we may not be able to grow our existing businesses. For example:

 

   

We may not be able to transform our model to be more consumer- and retail-centric.

 

   

We may not be able to expand our market share with winning customers, or our wholesale customers may encounter financial difficulties and thus reduce their purchases of our products.

 

   

We may not be able to expand our brands in Asia or other geographies, transform our business in certain regions or achieve the expected results from our supply chain initiatives.

 

   

We may not be able to successfully integrate our Wrangler® and Lee® brand platforms or achieve the expected growth, cost savings or synergies from such integration.

 

   

We may have difficulty recruiting, developing or retaining qualified employees.

 

   

We may not be able to achieve our direct-to-consumer expansion goals and manage our growth effectively.

 

   

We may not be able to offset rising commodity or conversion costs in our product costs with pricing actions or efficiency improvements.

 

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We may not be able to successfully implement costs savings initiatives at the levels that we anticipate or at all.

 

   

We may have difficulty completing potential acquisitions or dispositions, and we may not be able to successfully integrate a newly acquired business or achieve the expected growth, cost savings or synergies from such integration.

Failure to implement our strategic objectives may have a material adverse effect on our business.

A substantial portion of our revenues and gross profit is derived from a small number of large customers. The loss of any of these customers or the inability of any of these customers to pay us could substantially reduce our revenues and profits.

A few of our customers account for a significant portion of revenues. Sales to our ten largest customers were 53% of total revenues in 2018, and our top customer, Walmart Inc. (“Walmart”), accounted for 32%, 33% and 33% of our total net revenues in 2018, 2017 and 2016, respectively. We expect that these customers will continue to represent a significant portion of our net sales in the future. Sales to our customers are generally on a purchase order basis and not subject to long-term agreements. A decision by any of our major customers to significantly decrease the volume of products purchased from us could substantially reduce revenues and have a material adverse effect on our financial condition and results of operations. Our larger customers generally have the scale to develop supply chains that permit them to change their buying patterns, or develop and market their own private label and other economy brands that compete with some of our products. This ability also makes it easier for them to resist our efforts to increase prices, reduce inventory levels and, potentially, de-list our products. Many of our largest customers have already developed significant private label brands under which they design and market apparel and accessories that compete directly with our products. These retailers have assumed an increasing degree of inventory risk in their private label products and, as a result, may first cancel advance orders with us in order to manage their own inventory levels downward during periods of unseasonable weather or weak economic cycles. In addition, if any of our customers devote less selling space to apparel products, our sales to those customers could be reduced even if we maintain our share of their apparel business. Any such reduction in apparel selling space could result in lower sales and our business, results of operations, financial condition and cash flows may be adversely affected.

We rely significantly on information technology. Any inadequacy, interruption, integration failure or security failure of this technology could harm our ability to effectively operate our business.

Our ability to effectively manage and operate our business depends significantly on information technology systems. We rely heavily on information technology to track sales and inventory and manage our supply chain. We are also dependent on information technology, including the Internet, for our direct-to-consumer sales, including our e-commerce operations and retail business credit card transaction authorization. We expect to upgrade or replace many of these systems. Despite our preventative efforts, our systems and those of our third-party service providers may be vulnerable to damage, failure or interruption due to viruses, data security incidents, technical malfunctions, natural disasters or other causes, or in connection with upgrades to our systems or the implementation of new systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems of acquired businesses or a breach in security of these systems could adversely impact the operations of our business, including management of inventory, ordering and replenishment of products, manufacturing and distribution of products, e-commerce operations, retail business credit card transaction authorization and processing, corporate email communications and our interaction with the public on social media.

We are subject to data security and privacy risks that could negatively affect our business operations, results of operations or reputation.

In the normal course of business, we often collect, retain and transmit certain sensitive and confidential customer information, including credit card information, over public networks. There is a significant concern by consumers and employees over the security of personal information transmitted over the Internet, identity theft

 

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and user privacy. Data security attacks are increasingly sophisticated, and if unauthorized parties gain access to our networks or databases, or those of our third-party service providers, they may be able to steal, publish, delete or modify our private and sensitive information, including credit card information and personal information. Despite the security measures we currently have in place, our facilities and systems and those of our third-party service providers may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss. In addition, employees may intentionally or inadvertently cause data security breaches that result in the unauthorized release of personal or confidential information. We and our customers could suffer harm if valuable business data or employee, customer and other proprietary information were corrupted, lost or accessed or misappropriated by third parties due to a security failure in our systems or one of our third-party service providers. It could require significant expenditures to remediate any such failure or breach, severely damage our reputation and our relationships with customers, result in unwanted media attention and lost sales and expose us to risks of litigation and liability. In addition, as a result of recent security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become increasingly uncertain, rigorous and complex. As a result, we may incur significant costs to comply with laws regarding the protection and unauthorized disclosure of personal information and we may not be able to comply with new regulations such as the General Data Protection Regulation in the European Union. Any failure to comply with the laws and regulations surrounding the protection of personal information could subject us to legal and reputational risks, including significant fines for non-compliance, any of which could have a negative impact on revenues and profits.

Our business is exposed to the risks of foreign currency exchange rate fluctuations. Our hedging strategies may not be effective in mitigating those risks.

A percentage of our total revenues (approximately 27% in 2018) is derived from markets outside the U.S. Our international businesses operate in functional currencies other than the U.S. dollar. Changes in currency exchange rates affect the U.S. dollar value of the foreign currency-denominated amounts at which our international businesses purchase products, incur costs or sell products. In addition, for our U.S.-based businesses, the majority of products are sourced from independent contractors or our manufacturing facilities located in foreign countries. As a result, the costs of these products are affected by changes in the value of the relevant currencies. Furthermore, much of our licensing revenue is derived from sales in foreign currencies. Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows.

In accordance with our operating practices, we plan to hedge a significant portion of our foreign currency transaction exposures arising in the ordinary course of business to reduce risks in our cash flows and earnings. Our hedging strategy may not be effective in reducing all risks, and no hedging strategy can completely insulate us from foreign exchange risk.

Further, our use of derivative financial instruments may expose us to counterparty risks. Although we plan to enter only into hedging contracts with counterparties having investment grade credit ratings, it is possible that the credit quality of a counterparty could be downgraded or a counterparty could default on its obligations, which could have a material adverse impact on our financial condition, results of operations and cash flows.

Our operations and earnings may be affected by legal, regulatory, political and economic risks.

Our ability to maintain the current level of operations in our existing markets and to capitalize on growth in existing and new markets is subject to legal, regulatory, political and economic risks. These include the burdens of complying with U.S. and international laws and regulations, unexpected changes in regulatory requirements, tariffs or other trade barriers and the economic uncertainty associated with the pending exit of the United Kingdom from the European Union (“Brexit”) or any other similar referendums that may be held.

A significant portion of our 2018 net income was earned in jurisdictions outside the U.S. and most of our goods are manufactured outside the U.S. We are exposed to risks of changes in U.S. policy for companies having

 

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business operations and manufacturing products outside the U.S. We cannot predict any changes to U.S. participation in or renegotiations of certain trade agreements or whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the U.S., the European Union or other countries on the import or export of our products, or what effect any of these actions would have on our business, financial condition or results of operations. Changes in regulatory, geopolitical policies and other factors may adversely affect our business or may require us to modify our current business practices. While enactment of any such change is not certain, if such changes were adopted, our costs could increase, which would reduce our earnings.

Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.

We are subject to taxation in the U.S. and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act, which includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal corporate tax rate from 35% to 21%, a one-time mandatory deemed repatriation tax on earnings of certain foreign subsidiaries that were previously tax-deferred, and a new minimum tax on certain foreign earnings. The Tax Act significantly impacts our effective tax rate for 2017 as a result of the deemed repatriation tax, and may impact several other elements of our operating model. Certain additional provisions of the Tax Act, such as a minimum tax on foreign earnings, also apply to Kontoor Brands and, as a result, could increase our effective tax rate. Taxes due over a period of time as a result of the new tax law could be accelerated upon certain triggering events, including failure to pay such taxes when due. The new law makes broad and complex changes to the U.S. tax code and we expect to see future regulatory, administrative or legislative guidance. To the extent any future guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations.

In addition, many countries in the European Union and around the globe have adopted and/or proposed changes to current tax laws. Further, organizations such as the Organisation for Economic Co-operation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our U.S. and international business activities, many of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate and harm our financial position and results of operations.

We may have additional tax liabilities.

As a global company, we determine our income tax liability in various tax jurisdictions based on an analysis and interpretation of local tax laws and regulations. This analysis requires a significant amount of judgment and estimation and is often based on various assumptions about the future actions of the local tax authorities. These determinations are the subject of periodic U.S. and international tax audits. Although we accrue for uncertain tax positions, our accrual may be insufficient to satisfy unfavorable findings. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our financial condition, results of operations or cash flows.

Our balance sheet includes intangible assets and goodwill. A decline in the fair value of an intangible asset or of a business unit could result in an asset impairment charge, which would be recorded as an operating expense in our combined statement of income and could be material.

Our policy is to evaluate indefinite-lived intangible assets and goodwill for possible impairment as of the beginning of the fourth quarter of each year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. In addition, intangible assets that are being amortized are tested for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. For these impairment tests, we use various valuation methods to estimate the fair value of our business units and intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference.

 

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It is possible that we could have an impairment charge for goodwill or trademark and trade name intangible assets in future periods if (i) overall economic conditions in 2018 or future years vary from our current assumptions, (ii) business conditions or our strategies for a specific business unit or brand change from our current assumptions, (iii) investors require higher rates of return on equity investments in the marketplace or (iv) enterprise values of comparable publicly traded companies, or of actual sales transactions of comparable companies, were to decline, resulting in lower comparable multiples of revenues and earnings before interest, taxes, depreciation and amortization and, accordingly, lower implied values of goodwill and intangible assets. A future impairment charge for goodwill or intangible assets could have a material effect on our consolidated financial position or results of operations.

We use third-party suppliers and manufacturing facilities worldwide for a substantial portion of our raw materials and finished products, which poses risks to our business operations.

During 2018, approximately 62% of our units were purchased from independent manufacturers primarily located in Asia, with substantially all of the remainder produced by Kontoor Brands-owned and -operated manufacturing facilities located in Mexico and Central America. Any of the following could impact our ability to produce or deliver our products, or our cost of producing or delivering products and, as a result, our profitability:

 

   

Political or labor instability in countries where our facilities, contractors and suppliers are located;

 

   

Changes in local economic conditions in countries where our facilities, contractors, and suppliers are located;

 

   

Political or military conflict could cause a delay in the transportation of raw materials and products to us and an increase in transportation costs;

 

   

Disruption at domestic and foreign ports of entry, such as the West Coast dockworkers labor dispute that disrupted international trade at seaports, could cause delays in product availability and increase transportation times and costs;

 

   

Heightened terrorism security concerns could subject imported or exported goods to additional, more frequent or more lengthy inspections, leading to delays in deliveries or impoundment of goods for extended periods;

 

   

Decreased scrutiny by customs officials for counterfeit goods, leading to more counterfeit goods and reduced sales of our products, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;

 

   

Disruptions at suppliers and manufacturing or distribution facilities caused by natural and man-made disasters;

 

   

Disease epidemics and health-related concerns could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargo of our goods produced in infected areas;

 

   

Imposition of regulations and quotas relating to imports and our ability to adjust timely to changes in trade regulations could limit our ability to produce products in cost-effective countries that have the required labor and expertise;

 

   

Imposition of duties, taxes and other charges on imports; and

 

   

Imposition or the repeal of laws that affect intellectual property rights.

Although no single supplier and no one country is critical to our overall production needs, if we were to lose a supplier it could result in interruption of finished goods shipments to us, cancellation of orders by customers and termination of relationships. This, along with the damage to our reputation, could have a material adverse effect on our revenues and, consequently, our results of operations.

In addition, although we audit our third-party material suppliers and contracted manufacturing facilities and set strict compliance standards, actions by a third-party supplier or manufacturer that fail to comply could expose

 

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us to claims for damages, financial penalties and reputational harm, any of which could have a material adverse effect on our business and operations.

Our business is subject to national, state and local laws and regulations for environmental, consumer protection, employment, privacy, safety and other matters. The costs of compliance with, or the violation of, such laws and regulations by us or by independent suppliers who manufacture products for us could have a material adverse effect on our operations and cash flows, as well as on our reputation.

Our business is subject to comprehensive national, state and local laws and regulations on a wide range of environmental, consumer protection, employment, privacy, safety and other matters. We could be adversely affected by costs of compliance with or violations of those laws and regulations. In addition, while we do not control their business practices, we require third-party suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. The costs of products purchased by us from independent contractors could increase due to the costs of compliance by those contractors.

Failure by us or our third-party suppliers to comply with such laws and regulations, as well as with ethical, social, product, labor and environmental standards, or related political considerations, could result in interruption of finished goods shipments to us, cancellation of orders by customers and termination of relationships. If one of our independent contractors violates labor or other laws, implements labor or other business practices or takes other actions that are generally regarded as unethical, it could jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts that may reduce demand for our merchandise. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.

Fluctuations in wage rates and the price, availability and quality of raw materials, including commodity costs, and finished goods could increase costs.

Fluctuations in the price, availability and quality of fabrics, including cottons, blends, synthetics, and wools, or other raw materials used by us in our manufactured products, or of purchased finished goods, could have a material adverse effect on our cost of goods sold or our ability to meet our customers’ demands. The prices we pay depend on demand and market prices for the raw materials used to produce them. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including general economic conditions and demand, crop yields, energy prices, weather patterns, freight rates and speculation in the commodities markets. Prices of purchased finished products also depend on wage rates in Asia and other geographic areas where our independent contractors are located, as well as freight costs from those regions. Inflation can also have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, such as cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Similarly, a significant portion of our products are manufactured in other countries and declines in the value of the U.S. dollar may result in higher manufacturing costs. In addition, fluctuations in wage rates required by legal or industry standards could increase our costs. In the future, we may not be able to offset cost increases with other cost reductions or efficiencies or to pass higher costs on to our customers. This could have a material adverse effect on our results of operations, liquidity and financial condition.

We rely on a limited number of North American mills for raw material sourcing, and we may not be able to obtain raw materials on a timely basis or in sufficient quantity.

We rely on a limited number of third-party suppliers for raw materials in North America. Such products may be available, in the short-term, from only one or a very limited number of sources. In 2018, approximately 71% of our raw materials were provided by our top three suppliers in North America. We have no long-term

 

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contracts with our suppliers or manufacturing sources, and we compete with other companies for raw materials, production and quota capacity. We may experience a significant disruption in the supply of raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier manufacturer due to consolidation, closure or otherwise, we may be unable to locate additional supplies of raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from our markets or from other participants in our supply chain. Any delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have a material adverse effect on our ability to meet customer demand for our products and could result in lower net revenue and income from operations both in the short and long term.

The retail industry has experienced financial difficulty that could adversely affect our business.

Recently there have been consolidations, reorganizations, restructurings, bankruptcies and ownership changes in the retail industry. These events individually, and together, could materially, adversely affect our business. These changes could impact our opportunities in the market and increase our reliance on a smaller number of large customers. In the future, retailers are likely to further consolidate, undergo restructurings or reorganizations or bankruptcies, realign their affiliations or reposition their stores’ target markets. In addition, consumers have continued to transition away from traditional wholesale retailers to large online retailers. These developments could result in a reduction in the number of stores that carry our products, an increase in ownership concentration within the retail industry, an increase in credit exposure to us or an increase in leverage by our customers over their suppliers.

Further, the global economy periodically experiences recessionary conditions with rising unemployment, reduced availability of credit, increased savings rates and declines in real estate and securities values. These recessionary conditions could have a negative impact on retail sales of apparel. The lower sales volumes, along with the possibility of restrictions on access to the credit markets, could result in our customers experiencing financial difficulties including store closures, bankruptcies or liquidations. This could result in higher credit risk to us relating to receivables from our customers who are experiencing these financial difficulties. If these developments occur, our inability to shift sales to other customers or to collect on our trade accounts receivable could have a material adverse effect on our financial condition and results of operations.

Our ability to obtain short-term or long-term financing on favorable terms, if needed, could be adversely affected by geopolitical risk and volatility in the capital markets.

Any disruption in the capital markets could limit the availability of funds or the ability or willingness of financial institutions to extend capital in the future. This could adversely affect our liquidity and funding resources or significantly increase our cost of capital. An inability to access capital and credit markets may have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our failure to obtain or maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs and access to capital markets.

Our credit risk is expected to be evaluated by the major independent rating agencies. Once a credit rating is obtained, any future downgrades could increase the cost of borrowing under any indebtedness we may incur in connection with the Separation or otherwise. Our credit rating is expected to be lower than that of VF. There can

 

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be no assurance that we will be able to maintain our credit ratings once established, and any additional actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.

The loss of members of our executive management and other key employees could have a material adverse effect on our business.

We depend on the services and management experience of our executive officers and business leaders who have substantial experience and expertise in our business. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently. Competition for experienced and well-qualified personnel is intense and we may not be successful in attracting and retaining such personnel.

Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.

In North America, most of our production and distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or government-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.

Our direct-to-consumer business includes risks that could have a material adverse effect on its results of operations.

We sell merchandise direct-to-consumer through our e-commerce sites. Our direct-to-consumer business is subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, (a) U.S. or international resellers purchasing merchandise and reselling it overseas outside of our control, (b) failure of the systems that operate the stores and websites, and their related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, (c) credit card fraud and (d) risks related to our direct-to- consumer distribution centers and processes. Risks specific to our e-commerce business also include (a) diversion of sales from our wholesale customers, (b) difficulty in recreating the in-store experience through direct channels, (c) liability for online content, (d) changing patterns of consumer behavior and (e) intense competition from online retailers. Our failure to successfully respond to these risks might adversely affect sales in our e-commerce business, as well as damage our reputation and brands.

We may be unable to protect our trademarks and other intellectual property rights.

Our trademarks, trade names, patents, and other intellectual property rights are important to our success and our competitive position. We are susceptible to others copying our products and infringing, misappropriating or otherwise violating our intellectual property rights, especially with the shift in product mix to higher priced brands and innovative new products in recent years.

Actions we have taken to establish and protect our intellectual property rights may not be adequate to prevent copying of our products by others or to prevent others from seeking to invalidate our trademarks or block sales of our products as a violation of the trademarks and intellectual property rights of others. In addition, unilateral actions in the U.S. or other countries, including changes to or the repeal of laws recognizing trademark or other intellectual property rights, could have an impact on our ability to enforce those rights.

Some of our brands, such as Wrangler® and Lee®, enjoy significant worldwide consumer recognition. The higher pricing of those products creates additional risk of counterfeiting and infringement, misappropriation or other violation by third parties. The counterfeiting of our products or the infringement, misappropriation or other violation of our intellectual property rights by third parties could diminish the value of our brands and adversely affect our revenues.

 

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The value of our intellectual property could diminish if others assert rights in or ownership of our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to our trademarks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the U.S. In other cases, there may be holders who have prior rights to similar trademarks.

There have been, and there may in the future be, opposition and cancellation proceedings from time to time with respect to some of our intellectual property rights. In some cases, litigation may be necessary to protect or enforce our trademarks and other intellectual property rights. Furthermore, third parties may assert intellectual property claims against us, and we may be subject to liability, required to enter into costly license agreements, if available at all, required to rebrand our products and/or prevented from selling some of our products if third parties successfully oppose or challenge our trademarks or successfully claim that we infringe, misappropriate or otherwise violate their trademarks, copyrights, patents or other intellectual property rights. Bringing or defending any such claim, regardless of merit, and whether successful or unsuccessful, could be expensive and time-consuming and have a negative effect on our business, reputation, results of operations and financial condition.

We are subject to the risk that our licensees may not generate expected sales or maintain the value of our brands.

During 2018, we generated approximately $32.7 million in revenues from licensing royalties. Although we generally have significant control over our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial controls over their businesses. Failure of our licensees to successfully market licensed products or our inability to replace existing licensees, if necessary, could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. Risks are also associated with a licensee’s ability to:

 

   

Obtain capital;

 

   

Manage its labor relations;

 

   

Maintain relationships with its suppliers;

 

   

Manage its credit risk effectively;

 

   

Maintain relationships with its customers; and

 

   

Adhere to our Global Compliance Principles.

In addition, we rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by a licensee, including through the marketing of products under one of our brand names that do not meet our quality standards, could have a material adverse effect on that brand and on us.

If we encounter problems with our distribution system, our ability to deliver our products to the market could be adversely affected.

We rely on owned or independently operated distribution facilities to warehouse and ship product to our customers. Our distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. Because substantially all of our products are distributed from a relatively small number of locations, our operations could also be interrupted by earthquakes, floods, fires or other natural disasters affecting our distribution centers. We maintain business interruption insurance, but it

 

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may not adequately protect us from the adverse effects that could be caused by significant disruptions in our distribution facilities, such as the long-term loss of customers or an erosion of brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties, including the transportation of product to and from our distribution facilities. Transportation of our products may be interrupted due to events such as marine disasters, bad weather or natural disasters, mechanical or electrical failures, grounding, capsizing, fire, explosions and collisions, piracy, cyber attacks, human error and war and terrorism resulting in delays, damages or losses. For example, in early 2019, a fire aboard a cargo ship carrying certain of our products resulted in such products being stranded in a foreign port resulting in lost sales on seasonal inventory. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could be materially adversely affected.

Our revenues and cash requirements are affected by seasonality.

Our business is affected by seasonal trends, with a higher proportion of revenues and operating cash flows generated during the second half of the fiscal year, which includes the back-to-school and holiday selling seasons. Poor sales in the second half of the fiscal year would have a material adverse effect on our full year operating results and cause higher inventories. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales.

We may be adversely affected by unseasonal or severe weather conditions.

Our business may be adversely affected by unseasonable or severe weather conditions. Periods of unseasonably warm weather in the fall or winter, or periods of unseasonably cool and wet weather in the spring or summer, can negatively impact retail traffic and consumer spending. In addition, severe weather events such as snowstorms or hurricanes typically lead to temporarily reduced retail traffic. Any of these conditions could result in negative point-of-sale trends for our merchandise and reduced replenishment shipments to our wholesale customers.

Risks Relating to Our Common Stock

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the Separation.

Prior to the Separation, there will have been no trading market for shares of our common stock. An active trading market may not develop or be sustained for our common stock after the Separation, and we cannot predict the prices at which our common stock will trade after the Separation. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:

 

   

Fluctuations in our quarterly or annual earnings results or those of other companies in our industry;

 

   

Failures of our operating results to meet the estimates of securities analysts or the expectations of our shareholders, or changes by securities analysts in their estimates of our future earnings;

 

   

Announcements by us or our customers, suppliers or competitors;

 

   

Changes in market valuations or earnings of other companies in our industry;

 

   

Changes in laws or regulations which adversely affect our industry or us;

 

   

General economic, industry and stock market conditions;

 

   

Future significant sales of our common stock by our shareholders or the perception in the market of such sales;

 

   

Future issuances of our common stock by us; and

 

   

The other factors described in these “Risk Factors” and elsewhere in this information statement.

 

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These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

The trading market for our common stock may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

A large number of our shares are or will be eligible for future sale, which may cause the market price of our common stock to decline.

Upon completion of the Separation, we estimate that we will have outstanding an aggregate of approximately 56,639,978 shares of our common stock (based on shares of VF common stock outstanding on April 26, 2019, excluding restricted shares). All of those shares (other than those held by our “affiliates”) will be freely tradable without restriction or registration under the Securities Act of 1933, as amended (the “Securities Act”). Shares held by our affiliates, which include our Directors and executive officers, can be sold subject to volume, manner of sale and notice provisions of Rule 144 under the Securities Act. We estimate that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately 9,840,160 shares of our common stock immediately following the Separation. We are unable to predict whether large amounts of our common stock will be sold in the open market following the Separation. We are also unable to predict whether a sufficient number of buyers will be in the market at that time. As discussed in the immediately following risk factor, certain index funds will likely be required to sell shares of our common stock that they receive in the Separation. In addition, other VF shareholders may sell the shares of our common stock they receive in the Separation for various reasons. For example, such shareholders may not believe our business profile or level of market capitalization as an independent company fits their investment objectives.

Because our common stock may not be included in the Standard & Poor’s 500 Index, and it may not be included in other stock indices, significant amounts of our common stock will likely need to be sold in the open market where there may not be offsetting demand.

A portion of VF’s outstanding common stock is held by index funds tied to the Standard & Poor’s 500 Index and other stock indices. Because our common stock may not be included in the Standard & Poor’s 500 Index, and it may not be included in other stock indices at the time of the Separation, index funds currently holding shares of VF common stock will likely be required to sell the shares of our common stock they receive in the Separation. There may not be sufficient buying interest to offset sales by those index funds. Accordingly, our common stock could experience a high level of volatility immediately following the Separation and, as a result, the price of our common stock could be adversely affected.

Provisions in our amended and restated articles of incorporation and amended and restated bylaws and certain provisions of North Carolina Law could delay or prevent a change in control of Kontoor Brands.

The existence of certain provisions of our amended and restated articles of incorporation and amended and restated bylaws and North Carolina Law could discourage, delay or prevent a change in control of Kontoor Brands that a shareholder may consider favorable. These include provisions:

 

   

Providing for a classified Board of Directors until our annual meeting of shareholders held in 2023;

 

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Providing that our Directors may be removed by our shareholders only for cause while our Board is classified;

 

   

Providing that the removal of our Directors with or without cause after our Board is de-classified must be approved by the holders of at least 80% of the voting power of Kontoor Brands;

 

   

Providing the right to our Board of Directors to issue one or more classes or series of preferred stock without shareholder approval;

 

   

Authorizing a large number of shares of stock that are not yet issued, which would allow our Board of Directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us;

 

   

Prohibiting shareholders from calling special meetings of shareholders or taking action by written consent;

 

   

Establishing advance notice and other requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted on by shareholders at the annual shareholder meetings; and

 

   

Requiring the affirmative vote of the holders of at least 80% of the voting power of Kontoor Brands to approve certain business combinations.

We believe these provisions will protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if a takeover offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is not in our and our shareholders’ best interests. See “Description of Capital Stock.”

Our amended and restated articles of incorporation will designate North Carolina as the exclusive forum for certain litigation that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our common stock.

Pursuant to our amended and restated articles of incorporation, as will be in effect upon the completion of the Separation, to the fullest extent permitted by law, and unless we consent in writing to the selection of an alternative forum, the North Carolina Business Court (or another state or federal court located in North Carolina, if a dispute does not qualify for designation to the North Carolina Business Court or the North Carolina Business Court otherwise lacks jurisdiction) shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers or other employees to us or our shareholders; (iii) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of North Carolina Law or our amended and restated articles of incorporation or our amended and restated bylaws; or (iv) any action asserting a claim against us or any director or officer or other employee of ours relating to the internal affairs doctrine. Our amended and restated articles of incorporation will further provide that if an action described in the preceding sentence is filed in a court other than as specified above in the name of any shareholder, such shareholder is deemed to have consented to (a) personal jurisdiction before any state or federal court located in North Carolina, as appropriate, in connection with any action brought in any such court to enforce our amended and restated articles of incorporation and (b) having service of process made upon such shareholder in any such action by service upon such shareholder’s counsel in the action as agent for such shareholder. The forum selection clause in our amended and restated bylaws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our common stock. See “Description of Capital Stock — Forum Selection” for further discussion of the forum selection clause, including as it relates to actions arising under the Securities Act or the Exchange Act.

 

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Your percentage ownership in Kontoor Brands may be diluted in the future.

In the future, your percentage ownership in Kontoor Brands may be diluted because of equity issuances for acquisitions, strategic investments, capital market transactions or otherwise, including equity awards that we may grant to our Directors, officers and employees. Our compensation committee may grant additional equity awards to our employees after the Separation. These awards would have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we may issue additional equity awards to our employees under our employee benefits plans.

In addition, our amended and restated articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, powers, preferences and relative, participating, optional and other rights, and such qualifications, limitations or restrictions as our Board of Directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our Directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend, distribution or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Capital Stock—Preferred Stock.”

Our common stock is and will be subordinate to all of our future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any class or series of preferred stock that our Board of Directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred shareholders.

We cannot assure you that our Board of Directors will declare dividends in the foreseeable future.

While we initially expect to return capital to shareholders through quarterly cash dividends, our Board of Directors may not declare dividends in the future or may decrease the amount of a dividend as compared to a prior period. The declaration and payment of dividends, if any, will always be subject to the discretion of our Board of Directors. The timing and amount of any dividends declared will depend on, among other things, our earnings, financial condition and cash requirements and availability, our ability to obtain debt and equity financing on acceptable terms as contemplated by our growth strategy and the terms of our outstanding indebtedness. We may incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have available for distribution as dividends, including as a result of the risks described herein.

 

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THE SEPARATION

General

On August 13, 2018, VF announced that it was moving forward with a plan to distribute to VF’s shareholders all of the shares of common stock of Kontoor Brands through the VF Separation, including the Restructuring and the Distribution. Kontoor Brands is currently a wholly owned subsidiary of VF and, at the time of the Distribution, VF will hold, through its subsidiaries, the assets and liabilities associated with the Spin Business. The Separation will be achieved through the transfer of all the assets and liabilities of the Spin Business to Kontoor Brands or its subsidiaries through the Restructuring and the distribution of 100% of the outstanding capital stock of VF to holders of Kontoor Brands common stock on the record date of May 10, 2019 through the Distribution. At the effective time of the Distribution, VF shareholders will receive one share of Kontoor Brands common stock for every seven shares of VF common stock held on the record date. The Separation is expected to be completed on May 22, 2019. Immediately following the Separation, VF shareholders as of the record date will own 100% of the outstanding shares of common stock of Kontoor Brands. Following the Separation, Kontoor Brands will be an independent, publicly traded company, and VF will retain no ownership interest in Kontoor Brands.

As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements to effect the Separation and provide a framework for our relationship with VF after the Separation. These agreements will provide for the allocation between us and VF of the assets, liabilities and obligations of VF and its subsidiaries, and will govern the relationship between Kontoor Brands and VF after the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with VF include:

 

   

A Tax Matters Agreement;

 

   

A Transition Services Agreement;

 

   

An Employee Matters Agreement;

 

   

Certain Intellectual Property License Agreements;

 

   

Certain Shared Facilities Agreements; and

 

   

Certain Commercial Arrangements.

The Separation as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution” below. We cannot provide any assurances that VF will complete the Separation.

Reasons for the Separation

The VF Board of Directors believes separating the Spin Business from VF’s other businesses is in the best interests of VF and its shareholders and has concluded the Separation will provide VF and Kontoor Brands with a number of potential opportunities and benefits, including the following:

 

   

Strategic and Management Focus. Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and leverage its key strengths to drive performance. The management of each resulting company will be able to concentrate on its core competencies and growth opportunities, and will have increased flexibility and speed to design and implement corporate strategies based on the characteristics of its business.

 

   

Resource Allocation and Capital Deployment. Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective

 

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markets. The Separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.

 

   

Investor Choice. Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Separating the two businesses will provide investors with a more targeted investment opportunity so that investors interested in companies in our business will have the opportunity to acquire stock of Kontoor Brands.

The financial terms of the Separation, including the new indebtedness expected to be incurred by Kontoor Brands or entities that are, or will become, prior to the completion of the Separation, subsidiaries of Kontoor Brands, and the amount of the cash transfer to VF has been, or will be, determined by the VF Board of Directors based on a variety of factors, including establishing an appropriate pro forma capitalization for Kontoor Brands as a stand-alone company considering the historical earnings of the Spin Business and the level of indebtedness relative to earnings of various comparable companies.

The Number of Shares You Will Receive

For every seven shares of VF common stock you own as of the close of business on May 10, 2019, the record date for the Distribution, you will receive one share of Kontoor Brands common stock on the Distribution Date for the Separation.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to VF shareholders. Instead, as soon as practicable on or after the Distribution Date for the Separation, the distribution agent for the Distribution will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds from the sales, net of brokerage fees and commissions, transfer taxes and other costs and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution. The distribution agent will determine when, how, through which broker-dealers and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient shareholders for U.S. federal income tax purposes as described below in “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution.”

When and How You Will Receive the Distribution of Kontoor Brands Shares

VF will distribute the shares of our common stock on May 22, 2019 to holders of record as of the close of business on the record date for the Distribution. The Distribution is expected to be completed following the NYSE market closing on the Distribution Date for the Separation. VF’s transfer agent and registrar, Computershare, will serve as transfer agent and registrar for the Kontoor Brands common stock and as distribution agent in connection with the Distribution.

If you own VF common stock as of the close of business on the record date for the Distribution, the shares of Kontoor Brands common stock that you are entitled to receive in the Distribution will be issued electronically, as of the Distribution Date for the Separation, to your account as follows:

 

   

Registered Shareholders. If you own your shares of VF stock directly, either in book-entry form through an account at Computershare and/or if you hold paper stock certificates, you will receive your

 

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shares of Kontoor Brands common stock by way of direct registration in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share certificates are issued to shareholders, as is the case in the Distribution.

On or shortly after the Distribution Date for the Separation, the distribution agent will mail to you an account statement that indicates the number of shares of Kontoor Brands common stock that have been registered in book-entry form in your name.

Shareholders having any questions concerning the mechanics of having shares of our common stock registered in book-entry form may contact Computershare at the address set forth in “Summary—Questions and Answers About the Separation” in this information statement.

 

   

Beneficial Shareholders. Many VF shareholders hold their shares of VF common stock beneficially through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your VF common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of Kontoor Brands common stock that you are entitled to receive in the Distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street name,” we encourage you to contact your bank or brokerage firm.

Treatment of Outstanding Equity Compensation Awards

None of the VF outstanding equity awards will be eligible to receive a dividend of Kontoor Brands Common Stock in connection with the Distribution. Instead, we expect that outstanding VF equity compensation awards will be equitably adjusted pursuant to the terms of the applicable compensation award and plan and the provisions of the Code. These equitable adjustments are intended to preserve each award’s intrinsic value, based on the relative fair market values of the pre- and post-Separation shares of VF, and, as applicable, Kontoor Brands, such that in the case of performance-based restricted stock units (“PSUs”) and restricted stock units (“RSUs”), the fair market value of the adjusted number of shares subject to the award (or to which the award relates) immediately after the Separation will be substantially equivalent to, but no more favorable to the award holder than, the fair market value of the shares subject to that award (or to which that award relates) immediately prior to the Separation. For outstanding stock options, the number of shares subject to the award and the applicable exercise or base price will be adjusted so that the aggregate spread value of the stock option immediately after the Separation will be substantially equivalent to, but no more favorable to the award holder than, the aggregate spread value immediately prior to the Separation. For these purposes, spread value will be the difference between the market value of the underlying shares as of the applicable date, and the exercise or base price of the stock option. Generally:

Options

Retirement Eligible and Remaining VF Service Providers. For each retirement eligible participant (i.e. each employee who is age 55 and has 10 years of service) transferring to Kontoor Brands, and for participants remaining with VF, each VF stock option which is outstanding immediately before the Distribution, whether vested or unvested, will be adjusted to reflect the difference in the fair market value of VF common stock pre- and post-Distribution. The number of shares of VF common stock subject to, and the exercise price per share of, such VF stock option will be determined by the VF Talent and Compensation Committee (the “VF Compensation Committee”) in a manner intended to preserve the value of such VF stock option by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value, and adjusted in a manner consistent with Section 409A of the Code (“Section 409A”). Each VF-adjusted stock option will be subject to the same terms and conditions (including vesting schedules) as applicable to the corresponding VF stock option as of immediately before the Distribution.

Non-Retirement Eligible Kontoor Brands Service Providers. For each non-retirement eligible participant transferring to Kontoor Brands, each VF stock option that is outstanding immediately before the Distribution will

 

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be converted into an option to acquire Kontoor Brands common stock and will be subject to the same terms and conditions (including vesting and expiration schedules) as applicable to the corresponding VF stock option as of immediately prior to the Distribution. The number of shares of Kontoor Brands common stock subject to, and the exercise price per share of, such Kontoor Brands stock option will be determined by the VF Compensation Committee in a manner consistent with Section 409A and intended to preserve the value of the VF stock option by taking into account (a) the exercise price per share of the VF stock option and (b) the relative values of the VF pre- and post-Distribution stock value and the Kontoor Brands stock value.

Performance-Based Restricted Stock Units (“PSUs”)

2016 PSUs. All VF PSU awards granted in 2016 and outstanding immediately before the Distribution, regardless of whether the participant is transferring to Kontoor Brands or remaining with VF, are expected to be settled in shares of VF’s common stock subject to the same terms and conditions as set forth in the participant’s award agreement. The shares of VF’s common stock will be adjusted, with the number of shares of VF common stock subject to such VF PSU award being determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. The VF Compensation Committee intends to review and certify the performance metrics following the Distribution.

2017 PSUs—Kontoor Brands Participants. For participants transferring to Kontoor Brands, a pro rata portion (based on the portion of the performance period that has elapsed as of the Distribution) of the participant’s VF PSU award that was granted in 2017 and is outstanding immediately before the Distribution will remain a VF PSU award, and will remain eligible to be earned based on VF’s actual performance. The number of shares of VF common stock subject to such VF PSU award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each VF-adjusted PSU award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF PSU award as of immediately before the Distribution. The remaining portion of the VF PSU award granted in 2017 and outstanding immediately before the Distribution will be converted into Kontoor Brands time-vesting RSUs, vesting as of December 31, 2019. The number of shares of Kontoor Brands common stock subject to the Kontoor Brands RSUs, based on the target number of shares, will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value, the VF post-Distribution stock value and the Kontoor Brands stock.

2017 PSUs—VF Participants. For participants remaining with VF, all of the participant’s VF PSU award that was granted in 2017 and is outstanding immediately before the Distribution will be adjusted, and the number of shares of VF common stock subject to such VF PSU award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each such VF-adjusted PSU award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF PSU award as of immediately before the Distribution.

Fiscal Year 2019 PSUs—Kontoor Brands Participants. For participants transferring to Kontoor Brands, a pro rata portion (based on the portion of the performance period that has elapsed as of the Distribution) of the participant’s VF PSU award that was granted in 2018 and is outstanding immediately before the Distribution will remain a VF PSU award, and will remain eligible to be earned based on VF’s actual performance. The number of shares of VF common stock subject to such VF PSU award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each VF-adjusted PSU award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF PSU award as of immediately before the Distribution. The remaining portion of the VF

 

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PSU award granted in 2018 and outstanding immediately before the Distribution will be converted into a Kontoor Brands PSU award. The number of shares of Kontoor Brands common stock subject to the Kontoor Brands PSU award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value, the VF post-Distribution stock value and the Kontoor Brands stock value. Each Kontoor Brands PSU award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF PSU award as of immediately before the Distribution; however, each Kontoor Brands PSU award will be subject to new performance-based vesting conditions. Such performance-based vesting conditions shall be determined, in part, by the VF Compensation Committee (with respect to specific performance goals) prior to the Distribution and, in part, by the Kontoor Brands Compensation Committee (with respect to achievement levels and performance periods) on or after the Distribution reflecting Kontoor Brands’ applicable performance metrics.

Fiscal Year 2019 PSUs—VF Participants. For participants remaining with VF, the participant’s VF PSU award that was granted in 2018 and is outstanding immediately before the Distribution will be adjusted, and the number of shares of VF common stock subject to such VF PSU award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF PSU award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each VF-adjusted PSU award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF PSU award as of immediately before the Distribution.

Restricted Stock Units (“RSUs”)

Kontoor Brands Participants. For participants transferring to Kontoor Brands, each VF RSU that is outstanding immediately before the Distribution will be converted into a new RSU with respect to Kontoor Brands common stock. The number of shares of Kontoor Brands common stock subject to such Kontoor Brands RSU will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF RSU, as applicable, by taking into account the relative values of the VF pre- and post-Distribution stock value and the Kontoor Brands stock value. Each RSU in Kontoor Brands will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the previously held VF RSUs immediately before the Distribution.

VF Participants. For participants remaining with VF, each VF RSU that is outstanding immediately before the Distribution will be adjusted, and the number of shares of VF common stock subject to such VF RSU will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF RSU by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each VF-adjusted RSU will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF RSU immediately before the Distribution.

Special Awards

VF also offers special awards to executives in the form of restricted stock and RSUs.

Kontoor Brands Participants. For each participant transferring to Kontoor Brands, all shares and units designated as a VF special award that is outstanding immediately before the Distribution will be converted into units and shares with respect to Kontoor Brands common stock. The number of shares of Kontoor Brands common stock subject to such VF special award will be determined by the VF Compensation Committee in a manner intended to preserve the value of the VF special award, as applicable, by taking into account the relative values of the VF pre-Distribution stock value, the VF post-Distribution stock value and the Kontoor Brands stock value. Each such Kontoor Brands special award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF special award as of immediately before the Distribution.

 

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VF Participants. For each participant remaining with VF, all shares and units designated as a VF special award that are outstanding immediately before the Distribution will be adjusted, and the number of shares of VF common stock subject to such VF-adjusted special award will be determined by the VF Compensation Committee in a manner intended to preserve the value of such VF special award by taking into account the relative values of the VF pre-Distribution stock value and the VF post-Distribution stock value. Each VF-adjusted special award will be subject to the same terms and conditions (including vesting and payment schedules) as applicable to the corresponding VF special award as of immediately before the Distribution.

Results of the Separation

After the Separation, we will be an independent, publicly traded company that directly or indirectly holds the assets and liabilities of the Spin Business. Immediately following the Separation, we expect to have approximately 3,282 shareholders of record, based on the number of registered shareholders of VF common stock on April 26, 2019, applying a distribution ratio of one share of our common stock for every seven shares of VF common stock. We expect to have approximately 56,639,978 shares of Kontoor Brands common stock outstanding. The actual number of shares to be distributed will be determined on the record date.

Before the completion of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with VF to effect the Separation and provide a framework for our relationship with VF after the Separation. These agreements will provide for the allocation between Kontoor Brands and VF of VF’s assets, liabilities and obligations subsequent to the Separation (including with respect to transition services, employee matters, intellectual property matters, tax matters and certain other commercial relationships).

For a more detailed description of these agreements, see “—Agreements with VF” below. The Separation will not affect the number of outstanding shares of VF common stock or any rights of VF shareholders.

Incurrence of Debt

We intend to enter into new financing arrangements in anticipation of the Separation consisting of the term loan facilities and a revolving facility. We expect to incur up to $1.05 billion of new debt from the proceeds of the term loan facilities, which we intend to use primarily, directly or indirectly, to fund a cash transfer to members of VF’s group as part of the Restructuring, to pay related fees and expenses and for other general corporate purposes. We expect for our revolving facility to be undrawn at the Separation, provided that it may be used, subject to a cap, as part of the Restructuring and to pay related fees and expenses at the Separation, and otherwise may be used for, among other things, working capital and general corporate purposes.

Material U.S. Federal Income Tax Consequences of the Distribution

The following is a discussion of the material U.S. federal income tax consequences of the Distribution to U.S. Holders (as defined below) of VF common stock. This discussion is based on the Code, applicable Treasury regulations, administrative interpretations and court decisions as in effect as of the date of this information statement, all of which may change, possibly with retroactive effect. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of VF common stock that is for U.S. federal income tax purposes:

 

   

A citizen or resident of the U.S.;

 

   

A corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state therein or the District of Columbia; or

 

   

An estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

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This discussion addresses only the consequences of the Distribution to U.S. Holders that hold VF common stock as a capital asset. It does not address all aspects of U.S. federal income taxation that may be important to a U.S. Holder in light of that shareholder’s particular circumstances or to a U.S. Holder subject to special rules, such as:

 

   

A financial institution, regulated investment company or insurance company;

 

   

A tax-exempt organization;

 

   

A dealer or broker in securities, commodities or foreign currencies;

 

   

A shareholder that holds VF common stock as part of a hedge, appreciated financial position, straddle, conversion, or other risk reduction transaction;

 

   

A shareholder that holds VF common stock in a tax-deferred account, such as an individual retirement account; or

 

   

A shareholder that acquired VF common stock pursuant to the exercise of options or similar derivative securities or otherwise as compensation.

If a partnership, or any entity treated as a partnership for U.S. federal income tax purposes, holds VF common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partners and the activities of the partnership. A partner in a partnership holding VF common stock should consult its tax adviser.

This discussion of material U.S. federal income tax consequences is not a complete analysis or description of all potential U.S. federal income tax consequences of the Distribution. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address any U.S. federal, estate, gift or other non-income tax or any non-U.S., state or local tax consequences of the Distribution. Accordingly, each holder of VF common stock should consult his, her or its tax adviser to determine the particular U.S. federal, state or local or non-U.S. income or other tax consequences of the Distribution to such holder.

Tax Opinions

The consummation of the Separation, along with certain related transactions, is conditioned upon the receipt of opinions of the Tax Advisers substantially to the effect that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, which we refer to as the “Tax Opinions.” In rendering the Tax Opinions to be given as of the closing of the Separation, which we refer to as the “Closing Tax Opinions,” the Tax Advisers will rely on (i) customary representations and covenants made by us and VF, including those contained in certificates of officers of us and VF, and (ii) specified assumptions, including an assumption regarding the completion of the Separation and certain related transactions in the manner contemplated by the transaction agreements. In addition, the Tax Advisers’ ability to provide the Closing Tax Opinions will depend on the absence of changes in existing facts or law between the date of this information statement and the closing date of the Distribution. If any of the representations, covenants or assumptions on which the Tax Advisers will rely is inaccurate, the Tax Advisers may not be able to provide the Closing Tax Opinions or the tax consequences of the Separation could differ from those described below. The opinions of the Tax Advisers do not preclude the IRS or the courts from adopting a contrary position.

 

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The Distribution

Assuming that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, and that the Restructuring steps will qualify as transactions that are tax-free for U.S. federal income tax purposes, in general, for U.S. federal income tax purposes:

 

   

The Separation will not result in the recognition of income, gain or loss to VF or us;

 

   

No gain or loss will be recognized by, and no amount will be included in the income of, U.S. Holders of VF common stock upon the receipt of our common stock in the Distribution;

 

   

The aggregate tax basis of the shares of our common stock distributed in the Distribution to a U.S. Holder of VF common stock will be determined by allocating the aggregate tax basis such U.S. Holder has in the shares of VF common stock immediately before such Distribution between such VF common stock and our common stock in proportion to the relative fair market value of each immediately following the Distribution;

 

   

The holding period of any shares of our common stock received by a U.S. Holder of VF common stock in the Distribution will include the holding period of the shares of VF common stock held by a U.S. Holder prior to the Distribution; and

 

   

A U.S. Holder of VF common stock that receives cash in lieu of a fractional share of our common stock will recognize capital gain or loss, measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, determined as described above, and such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the VF common stock is more than one year as of the closing date of the Distribution.

In general, if the Distribution, together with certain related transactions, does not qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, the Distribution will be treated as a taxable dividend to holders of VF common stock in an amount equal to the fair market value of our common stock received, to the extent of such holder’s ratable share of VF’s earnings and profits. In addition, if the Separation does not qualify as a tax-free transaction, VF will recognize taxable gain, which could result in significant tax to VF.

Even if the Separation were otherwise to qualify as a tax-free transaction, the Distribution will be taxable to VF under Section 355(e) of the Code if 50% or more of either the total voting power or the total fair market value of the stock of VF or our common stock is acquired as part of a plan or series of related transactions that includes the Distribution. If Section 355(e) applies as a result of such an acquisition, VF would recognize taxable gain as described above, but the Distribution would generally be tax-free to you. Under some circumstances, the Tax Matters Agreement would require us to indemnify VF for the tax liability associated with the taxable gain. See “—Agreements with VF—Tax Matters Agreement.”

Under the Tax Matters Agreement, we will generally be required to indemnify VF for the resulting taxes in the event that the Separation and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries (see “—Agreements with VF—Tax Matters Agreement”). If the Separation were to be taxable to VF, the liability for payment of such tax by VF or by us under the Tax Matters Agreement could have a material adverse effect on VF or us, as the case may be.

Information Reporting and Backup Withholding

U.S. Treasury regulations generally require holders who own at least 5% of the total outstanding stock of VF (by vote or value) and who receive our common stock pursuant to the Distribution to attach to their U.S. federal income tax return for the year in which the Distribution occurs a detailed statement setting forth certain information relating to the tax-free nature of the Distribution. VF and/or we will provide the appropriate

 

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information to each holder upon request, and each such holder is required to retain permanent records of this information. In addition, payments of cash to a U.S. Holder of VF common stock in lieu of fractional shares of our common stock in the Distribution may be subject to information reporting, unless the U.S. Holder provides the withholding agent with proof of an applicable exemption. Such payments that are subject to information reporting may also be subject to backup withholding, unless such U.S. Holder provides the withholding agent with a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute additional tax, but merely an advance payment, which may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely supplied to the IRS.

Appraisal Rights

No VF shareholder will have any appraisal rights in connection with the Separation.

Listing and Trading of Our Common Stock

As of the date of this information statement, there is no public market for our common stock. Our common stock has been approved for listing on the NYSE under the ticker symbol “KTB.”

Trading Between Record Date and Distribution Date

Beginning on the record date for the Distribution and continuing up to and including the Distribution Date for the Separation, we expect there will be two markets in VF common stock: a “regular-way” market and an “ex-distribution” market. Shares of VF common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of Kontoor Brands common stock in the Distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to receive shares of Kontoor Brands common stock in the Distribution. Therefore, if you sell shares of VF common stock in the “regular-way” market after the close of business on the record date for the Distribution and up to and including through the Distribution Date, you will be selling your right to receive shares of Kontoor Brands common stock in the Distribution. If you own shares of VF common stock as of the close of business on the record date for the Distribution and sell those shares in the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of Kontoor Brands common stock that you would be entitled to receive in respect of your ownership, as of the record date, of the shares of VF common stock that you sold.

Furthermore, beginning on May 9, 2019 and continuing up to and including the Distribution Date for the Separation, we expect there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Kontoor Brands common stock that will be distributed to VF shareholders on the Distribution Date. If you own shares of VF common stock as of the close of business on the record date, you would be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of Kontoor Brands common stock, without trading the shares of VF common stock you own, in the “when-issued” market. On the first trading day following the Distribution Date, we expect “when-issued” trading with respect to Kontoor Brands common stock will end and “regular-way” trading in Kontoor Brands common stock will begin.

 

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Conditions to the Distribution

We expect the Distribution will be effective on May 22, 2019, the Distribution Date, provided that, among other conditions described in the Separation and Distribution Agreement, the following conditions will have been satisfied or waived by VF in its sole discretion:

 

   

The Separation-related restructuring transactions contemplated by the Separation and Distribution Agreement (the “Restructuring Transactions”) and the consummation of certain new Kontoor Brands financing arrangements contemplated by the Separation and Distribution Agreement will each have been completed;

 

   

The VF Board of Directors will be satisfied that the Distribution will be made in a manner that does not cause VF to be unable to pay its debts in the usual course of its business or cause the total assets of VF to be less than the sum of its total liabilities, in each case in accordance with Section 1551 of the Corporations and Unincorporated Associations Law of the Commonwealth of Pennsylvania;

 

   

The VF Board of Directors will have approved the Distribution and will not have abandoned the Distribution or terminated the Separation and Distribution Agreement at any time prior to the Distribution;

 

   

The SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect and no proceedings for such purpose will have been instituted or threatened by the SEC, and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of VF common stock as of the record date for the Distribution;

 

   

All actions and filings necessary or appropriate under applicable federal, state or other securities laws or “blue sky” laws and the rules and regulations thereunder will have been taken and, where applicable, become effective or accepted;

 

   

Our common stock to be delivered in the Distribution will have been approved for listing on the NYSE, subject to official notice of issuance;

 

   

The Kontoor Brands Board of Directors, as named in this information statement, will have been duly elected, and the amended and restated articles of incorporation and amended and restated bylaws of Kontoor Brands, in substantially the form attached as exhibits to the registration statement of which this information statement is a part, will be in effect;

 

   

Each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been executed and delivered by the parties thereto;

 

   

VF will have received opinions of the Tax Advisers (each of which will not have been revoked or modified in any material respect), in each case reasonably satisfactory to VF, to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code;

 

   

A nationally recognized valuation advisory firm acceptable to VF will have delivered one or more opinions to the VF Board of Directors concerning the solvency and capital adequacy matters relating to each of (a) VF and its remaining businesses and (b) Kontoor Brands and the Spin Business after consummation of the Distribution, and such opinions will be acceptable to the VF Board of Directors in its sole and absolute discretion and such opinions will not have been withdrawn or rescinded;

 

   

No applicable law will have been adopted, promulgated or issued that prohibits the consummation of the distribution or any of the transactions contemplated by the Separation and Distribution Agreement;

 

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Any material governmental approvals and consents and any material permits, registrations and consents from third parties, in each case, necessary to effect the distribution and to permit the operation of the Spin Business after the Distribution substantially as conducted as of the date of the Separation and Distribution Agreement will have been obtained;

 

   

No event or development will have occurred or exist that, in the judgment of the VF Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the Distribution or other transactions contemplated by the Separation and Distribution Agreement; and

 

   

Certain necessary actions to complete the Separation will have occurred, including (a) the amended and restated articles of incorporation and amended and restated bylaws of Kontoor Brands, in substantially the form attached as exhibits to the registration statement of which this information statement forms a part, will be in effect and (b) VF will have entered into a distribution agent agreement with a distribution agent or otherwise provided instructions to a distribution agent regarding the Distribution.

The fulfillment of the foregoing conditions will not create any obligations on VF’s part to effect the Separation, and the VF Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.

Agreements with VF

As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with VF to effect the Separation and provide a framework for our relationships with VF after the Separation. These agreements will provide for the allocation between us and VF of the assets, liabilities and obligations of VF and its subsidiaries, and will govern the relationships between Kontoor Brands and VF subsequent to the Separation (including with respect to transition services, employee matters, intellectual property matters, tax matters and certain other commercial relationships).

In addition to the Separation and Distribution Agreement (which will contain many of the key provisions related to our Separation from VF and the distribution of our shares of common stock to VF shareholders), these agreements include, among others:

 

   

A Tax Matters Agreement;

 

   

A Transition Services Agreement;

 

   

An Employee Matters Agreement;

 

   

Certain Intellectual Property License Agreements;

 

   

Certain Shared Facilities Agreements; and

 

   

Certain Commercial Arrangements.

The forms of the principal agreements described below have been filed as exhibits to the registration statement of which this information statement forms a part. The following descriptions of these agreements are summaries of the material terms of these agreements.

The Separation and Distribution Agreement

The Separation and Distribution Agreement will govern the overall terms of the Separation. Generally, the Separation and Distribution Agreement will include VF’s and our agreements relating to the restructuring steps to be taken to complete the Separation, including the assets and rights to be transferred, liabilities to be assumed and related matters.

Subject to the receipt of required governmental and other consents and approvals and the satisfaction of other closing conditions, in order to accomplish the Separation, the Separation and Distribution Agreement will

 

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provide for VF and us to transfer specified assets between the companies that will operate the Spin Business after the Distribution, on the one hand, and VF’s remaining businesses, on the other hand. The determination of the assets to be transferred between the companies shall be made by VF in its sole discretion. The Separation and Distribution Agreement will require VF and us to use reasonable efforts to obtain consents, approvals and amendments required to assign the assets and liabilities that are to be transferred pursuant to the Separation and Distribution Agreement.

Unless otherwise provided in the Separation and Distribution Agreement or any of the related ancillary agreements, all assets will be transferred on an “as is, where is” basis. Generally, if the transfer of any assets or any claim or right or benefit arising thereunder requires a consent that will not be obtained before the distribution for the Separation, or if the transfer or assignment of any such asset or such claim or right or benefit arising thereunder would be ineffective or would adversely affect the rights of the transferor thereunder so that the intended transferee would not in fact receive all such rights, the party retaining any asset that otherwise would have been transferred shall hold such asset in trust for the use and benefit of the party entitled thereto and retain such liability for the account of the party by whom such liability is to be assumed, and take such other action as may be reasonably requested by the party to which such asset is to be transferred, or by whom such liability is to be assumed, as the case may be, in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred prior to the Distribution.

In addition, certain of the assets, employees and liabilities transferred to us relating to a distribution facility in the Czech Republic, which facility will be retained by VF and leased to us on a transitional basis, will be transferred to us subject to an option in favor of VF. The option will be exercisable at VF’s sole discretion during the ninety day period following the expiration of our lease to such facility, which has a term of one year subject to a right for us to extend the lease term for an additional two-month period. The option gives VF the right to purchase all of the outstanding equity interests of our subsidiary that will hold such assets, employees and liabilities for a purchase price equal to the fair market value of such equity interests as of the exercise of such option. Until the exercise or termination of such option, we are required to operate these assets in accordance with VF’s past practice and subject to certain other limitations.

The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by VF prior to the completion of the Separation, which are described further above in “—Conditions to the Distribution.” In addition, VF will have the right to determine the date and terms of the Separation, and will have the right, at any time until completion of the distribution, to determine to abandon or modify the distribution and to terminate the Separation and Distribution Agreement.

In addition, the Separation and Distribution Agreement will govern the treatment of indemnification, insurance and litigation responsibility and management. Generally, the Separation and Distribution Agreement will provide for uncapped cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of VF’s retained businesses with VF. The Separation and Distribution Agreement will also establish procedures for handling claims subject to indemnification and related matters.

Tax Matters Agreement

In connection with the Separation, we and VF will enter into a tax matters agreement (the “Tax Matters Agreement”) that will govern the parties’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business, and taxes, if any, incurred as a result of the failure of the Distribution (and certain related transactions) to qualify for tax-free treatment for U.S. federal income tax purposes. The Tax Matters Agreement will also set forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.

In general, the Tax Matters Agreement will govern the rights and obligations that we and VF have after the Separation with respect to taxes for both pre- and post-closing periods. Under the Tax Matters Agreement, VF

 

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generally will be responsible for all of our pre-closing income taxes that are reported on combined tax returns with VF or any of its affiliates. We will generally be responsible for all other income taxes and all non-income taxes primarily related to Kontoor Brands.

The Tax Matters Agreement will further provide that:

 

   

Without duplication for our indemnification obligations described in the prior paragraph, we will generally indemnify VF against (i) taxes arising in the ordinary course of business for which we are responsible (as described above) and (ii) any liability or damage resulting from a breach by us or any of our affiliates of a covenant or representation made in the Tax Matters Agreement; and

 

   

VF will indemnify us against taxes for which VF is responsible under the Tax Matters Agreement (as described above).

In addition to the indemnification obligations described above, the indemnifying party will generally be required to indemnify the indemnified party against any interest, penalties, additions to tax, losses, assessments, settlements or judgments arising out of or incident to the event giving rise to the indemnification obligation, along with costs incurred in any related contest or proceeding.

Further, the Tax Matters Agreement generally will prohibit us and our affiliates from taking certain actions that could cause the Separation and certain related transactions to fail to qualify for their intended tax treatment, including:

 

   

During the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

   

During the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

   

During the two-year period following the Distribution Date, we may not sell or otherwise issue our common stock, other than pursuant to issuances that satisfy certain regulatory safe harbors set forth in Treasury regulations related to stock issued to employees and retirement plans;

 

   

During the two-year period following the Distribution Date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to open-market repurchases of less than 20% of our common stock (in the aggregate);

 

   

During the two-year period following the Distribution Date, we may not amend our articles of incorporation (or other organizational documents) or take any other action, whether through a shareholder vote or otherwise, affecting the voting rights of our common stock; and

 

   

More generally, we may not take any action that could reasonably be expected to cause the Separation and certain related transactions to fail to qualify as tax-free transactions for U.S. federal income tax purposes or non-U.S. tax purposes.

In the event that the Separation and certain related transactions fail to qualify for their intended tax treatment, in whole or in part, and VF is subject to tax as a result of such failure, the Tax Matters Agreement will determine whether VF must be indemnified for any such tax by us. As a general matter, under the terms of the Tax Matters Agreement, we are required to indemnify VF for any tax-related losses in connection with the Separation due to any action by us or any of our subsidiaries following the Separation. Therefore, in the event that the Separation and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries, we will generally be required to indemnify VF for the resulting taxes.

Transition Services Agreement

The Transition Services Agreement will set forth the terms on which VF will provide to us, and we will provide to VF, on a transitional basis, certain services or functions that the companies historically have shared.

 

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Transition services will include various corporate, administrative, logistics, supply chain, distribution, contract manufacturing and information technology services. The Transition Services Agreement will provide for the provision of specified transition services, generally for a period of up to two years following the Distribution. Compensation for transition services will be determined using an internal cost allocation methodology based on fully loaded cost (e.g., including an allocation of corporate overhead), or, in certain cases, may be based on terms and conditions comparable to those that would have been arrived at by parties bargaining at arm’s-length.

Employee Matters Agreement

We intend to enter into an Employee Matters Agreement with VF prior to the Separation that will govern each company’s respective compensation and benefit obligations with respect to current and former employees, directors and consultants. The Employee Matters Agreement will set forth general principles relating to employee matters in connection with the Separation, such as the assignment of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation, leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information and duplication or acceleration of benefits.

The Employee Matters Agreement generally will allocate liabilities and responsibilities relating to employee compensation and benefit plans and programs with VF retaining liabilities (both pre- and post-Distribution) and responsibilities with respect to VF participants who will remain with VF and Kontoor Brands assuming liabilities and responsibilities with respect to participants who will transfer to Kontoor Brands in connection with the Separation. The Employee Matters Agreement will provide that, following the Distribution, Kontoor Brands active employees generally will no longer participate in benefit plans sponsored or maintained by VF and will commence participation in Kontoor Brands benefit plans.

The Employee Matters Agreement will also provide that (i) the Distribution does not constitute a change in control under VF’s plans, programs, agreements or arrangements and (ii) the Distribution and the assignment, transfer or continuation of the employment of employees with another entity will not constitute a severance event under applicable plans, programs, agreements or arrangements.

Intellectual Property License Agreements

We intend to enter into two Intellectual Property License Agreements, pursuant to which we will grant and receive licenses under certain intellectual property. The Intellectual Property License Agreements will generally provide us and VF the freedom to continue operating our respective businesses following the Distribution, including as follows:

 

   

Under one Intellectual Property License Agreement, we will grant a non-exclusive, worldwide, fully paid-up and royalty-free license to any intellectual property, excluding trademarks, transferred to us in connection with the Separation in order for VF to continue operating its business in the manner conducted as of the Distribution, as well as any natural extensions or evolutions of such business.

 

   

Under the other Intellectual Property License Agreement, we will receive a non-exclusive, worldwide, fully paid-up and royalty-free license to any intellectual property, excluding trademarks, retained by VF but used in the Spin Business as of the Distribution in order for us to continue operating the Spin Business in the manner conducted as of the Distribution, as well as any natural extensions or evolutions of the Spin Business.

 

   

Under such Intellectual Property License Agreement, we will also receive the right to use certain VF trademarks on a transitional basis for a limited period of time following the Separation, including in connection with our VF Outlet business. If we desire to use such VF trademarks, including in connection with our VF Outlet business, after the transition period, we will be required to enter into an arms-length trademark license with VF.

 

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Shared Facilities Agreements

Prior to the Restructuring, the Spin Business shared approximately 59 owned or leased facilities with VF and its remaining businesses in 25 countries (the “Shared Facilities”). We intend to continue operating the Spin Business through 12 of such Shared Facilities, on a transitionary or permanent basis, and as part of the Restructuring we intend to enter into lease, sub-lease or temporary service agreements or arrangements with VF. These shared facilities agreements will be negotiated prior to the Separation between us and VF. Compensation for such lease, sub-lease or other agreements or arrangements will generally be determined based on the space allocated to the Spin Business and the remaining businesses of VF, respectively, or, in certain cases, may be based on terms and conditions comparable to those that would have been arrived at by the parties bargaining at arm’s length.

Commercial Arrangements

We intend to enter into certain commercial arrangements with VF in connection with the Separation. These commercial arrangements will include one or more agreements with VF or a subsidiary thereof pursuant to which VF or its subsidiary will continue to distribute certain products of the Spin Business in specified geographic regions, including, among others, Israel and Russia, for a term generally ending on March 31, 2020, depending on the product and region. These agreements modify our historical intercompany arrangements and reflect pricing we believe to be arm’s length.

We do not believe that any of such commercial arrangements, individually or in the aggregate, are material to the Spin Business.

Transferability of Shares of Our Common Stock

The shares of our common stock that you will receive in the Distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act. Persons who can be considered our affiliates after the Separation generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by or are under common control with us, and may include certain of our officers and directors. In addition, individuals who are affiliates of VF on the Distribution Date may be deemed to be affiliates of ours. We estimate that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately 9,840,160 shares of our common stock immediately following the Separation. See “Ownership of Common Stock by Certain Beneficial Owners and Management” included elsewhere in this information statement. Our affiliates may sell shares of our common stock received in the Distribution only:

 

   

Under a registration statement that the SEC has declared effective under the Securities Act; or

 

   

Under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period, a number of shares of our common stock that does not exceed the greater of:

 

   

One percent of our common stock then outstanding; or

 

   

The average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 for the sale.

Rule 144 also includes notice requirements and restrictions governing the manner of sale for sales by our affiliates. Sales may not be made under Rule 144 unless certain information about us is publicly available.

 

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Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to VF shareholders who are entitled to receive shares of our common stock in the Distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither VF nor we undertake any obligation to update such information except in the normal course of our respective public disclosure obligations.

 

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DIVIDEND POLICY

We intend to pay a quarterly dividend, in cash, at an annual rate initially equal to $2.24 per share of our common stock (representing a quarterly rate initially equal to $0.56 per share). The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board of Directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and equivalents and our capitalization as of December 29, 2018 on a historical and pro forma basis to give effect to the Separation, the incurrence of debt and other matters, as discussed in “The Separation.”

The pro forma adjustments are based upon available information and assumptions that management believes are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the Separation and the agreements which define our relationship with VF after the completion of the Separation. In addition, such adjustments are estimates and may not prove to be accurate.

You should read the information in the following table together with “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical combined financial statements and the related notes included elsewhere in this information statement.

We are providing the capitalization table for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly traded company on December 29, 2018 and is not necessarily indicative of our future capitalization or financial condition.

 

     As of December 29, 2018  
     Actual     Pro Forma
(Unaudited)
 
     (In thousands, except
share amounts)
 

Cash and equivalents (1)

   $ 96,776     $ 100,000  
  

 

 

   

 

 

 

Indebtedness:

    

Short-term:

    

Short-term borrowings

     3,215       3,215  

Related party notes payable (2)

     269,112       —    

Long-term:

    

Long-term debt (3)

     —         1,033,108  
  

 

 

   

 

 

 

Total indebtedness

     272,327       1,036,323  
  

 

 

   

 

 

 

Equity:

    

Common stock, no par value; 600,000,000 shares authorized,
56,417,813 shares issued and outstanding, pro forma (4)

     —         —    

Additional paid-in-capital (4)

     —         15,449  

Parent company investment (4)

     1,868,634       —    

Accumulated other comprehensive income (loss) (5)

     (145,182     (92,384
  

 

 

   

 

 

 

Total equity

   $ 1,723,452     $ (76,935
  

 

 

   

 

 

 

Total capitalization

   $ 1,995,779     $ 959,388  
  

 

 

   

 

 

 

 

(1)

Reflects an expected cash amount of $100.0 million at Separation following receipt of debt proceeds and expected cash transfer to VF or one or more of its subsidiaries.

(2)

Reflects that VF will retain this payable at Separation.

(3)

Reflects an estimated $1.05 billion of long-term indebtedness we expect to incur in connection with the Separation, less $16.9 million of estimated debt issuance costs.

(4)

At Separation, VF’s net investment in us will be eliminated to reflect the distribution of our common stock to VF’s shareholders, at an exchange ratio of one share of our common stock for every seven shares of VF common stock.

(5)

Reflects (i) elimination of the accumulated other comprehensive loss related to our operations in Argentina since VF will retain these operations at Separation and (ii) the transfer of accumulated other comprehensive income related to the Company’s portion of VF’s hedging agreements with counterparties.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma combined financial statements consist of an unaudited pro forma combined statement of income for the year ended December 29, 2018 and an unaudited pro forma combined balance sheet as of December 29, 2018. The unaudited pro forma combined financial statements should be read in conjunction with our historical audited combined financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The unaudited pro forma combined statement of income has been prepared to give effect to the Pro Forma Transactions (as defined below) as if the Pro Forma Transactions had occurred or became effective as of December 31, 2017, the beginning of our most recently completed fiscal year. The unaudited pro forma combined balance sheet has been prepared to give effect to the Pro Forma Transactions as though the Pro Forma Transactions had occurred as of December 29, 2018. The unaudited pro forma combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Special Note Regarding Forward-Looking Statements.”

The unaudited pro forma combined financial statements presented below have been derived from our historical audited combined financial statements included elsewhere in this information statement and do not purport to represent what our financial position and results of operations would have been had the Separation occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations. In addition, the unaudited pro forma combined financial statements are provided for illustrative and informational purposes only. The pro forma adjustments are based on available information and assumptions we believe are reasonable; however, such adjustments are subject to change.

VF did not account for us as, and we were not operated as, an independent, publicly traded company for the periods presented. Our unaudited pro forma combined financial statements have been prepared to reflect adjustments to our historical audited combined financial statements that are (1) directly attributable to the Pro Forma Transactions; (2) factually supportable; and (3) with respect to the unaudited pro forma statement of income, expected to have a continuing impact on our results of operations. The unaudited pro forma combined financial statements have been adjusted to give effect to the following (the “Pro Forma Transactions”):

 

   

The contribution by VF to us of all the assets and liabilities that comprise the Spin Business and the retention by VF of certain specified assets and liabilities reflected in our historical combined financial statements, in each case, pursuant to the Separation and Distribution Agreement;

 

   

The anticipated post-Separation capital structure, including: (i) the incurrence of debt and the funding of a cash transfer to VF; and (ii) the issuance of our common stock to holders of VF common stock;

 

   

The resulting elimination of VF’s net investment in us;

 

   

Transaction costs specifically related to the Separation; and

 

   

The impact of, and transactions contemplated by, the Separation and Distribution Agreement, Tax Matters Agreement, Transition Services Agreement, Employee Matters Agreement, Intellectual Property License Agreements, and other agreements related to the Separation between us and VF and the provisions contained therein.

A final determination regarding our capital structure has not yet been made, and the Separation and Distribution Agreement, Tax Matters Agreement, Transition Services Agreement, Employee Matters Agreement and Intellectual Property License Agreements and certain other transaction agreements have not been finalized. As such, the pro forma statements may be revised in future amendments to reflect the impact on our capital structure and the final form of those agreements, to the extent any such revisions would be deemed material.

The operating expenses reported in our historical audited combined statement of income include allocations of certain VF costs, such as corporate costs, shared services, and other related costs that benefit us.

 

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As an independent, publicly traded company, we expect to incur additional recurring expenses. The significant assumptions involved in determining our estimates of the recurring costs of being an independent, publicly traded company include:

 

   

Costs to perform financial reporting, tax, regulatory compliance, corporate governance, treasury, legal, internal audit and investor relations activities;

 

   

Compensation, including equity-based awards, and benefits with respect to new and existing positions;

 

   

Depreciation and amortization related to information technology infrastructure investments;

 

   

Insurance premiums; and

 

   

Changes in our overall facility costs.

Incremental recurring expenses attributable to these additional activities are estimated to be up to $10.0 million before income taxes annually. A pro forma adjustment has not been made to the accompanying unaudited pro forma combined statement of income to reflect these additional expenses because they are projected amounts based on estimates and would not be factually supportable.

We currently estimate that we will incur between $110.0 million and $125.0 million in costs and expenses associated with becoming an independent, publicly traded company within 18 to 24 months of the Distribution. The accompanying unaudited pro forma combined statement of income has not been adjusted for these estimated costs and expenses as they are not expected to have an ongoing impact on our operating results and are projected amounts based on estimates that are not factually supportable. These costs and expenses are expected to include:

 

   

Accounting, tax, and other professional costs pertaining to our separation and establishment as an independent, publicly traded company;

 

   

Recruiting and relocation costs associated with hiring key senior management personnel new to our company; and

 

   

Costs to separate and implement information systems.

Subject to the terms of the Separation and Distribution Agreement, VF will pay all nonrecurring third-party costs and expenses related to the Separation and incurred prior to the completion of the Separation. Such nonrecurring amounts are expected to include costs to separate and/or duplicate information technology systems, investment banker fees (other than fees and expenses in connection with the debt financing), third-party legal and accounting fees, and similar costs. After the completion of the Separation, subject to the terms of the Separation and Distribution Agreement, all costs and expenses related to the Separation incurred by either VF or us will be borne by the party incurring the costs and expenses.

Our retained cash balance is subject to adjustments prior to and following the completion of the Separation. The following unaudited pro forma combined balance sheet does not reflect any such adjustments, as the amounts are not currently determinable and would represent a financial projection.

 

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Kontoor Brands

Unaudited Pro Forma Combined Balance Sheet

As of December 29, 2018

(In thousands, except share amounts)

 

     Historical     Pro Forma
Adjustments (1)
         Pro Forma  

ASSETS

         

Current assets

         

Cash and equivalents

   $ 96,776     $ 3,224     (a)    $ 100,000  

Accounts receivable, less allowance for doubtful accounts

     252,966       (3,728   (b)      249,238  

Due from related parties, current

     547,690       (547,690   (c)      —    

Related party notes receivable

     517,940       (517,940   (d)      —    

Inventories

     473,812       (4,962   (b)      468,850  

Other current assets

     52,014       (9,114   (b) (d)      42,900  
  

 

 

   

 

 

      

 

 

 

Total current assets

     1,941,198       (1,080,210        860,988  

Due from related parties, noncurrent

     611       (611   (e)      —    

Property, plant and equipment, net

     138,449       (720   (b)      137,729  

Intangible assets, net

     53,059       —            53,059  

Goodwill

     214,516       —            214,516  

Other assets

     110,632       (14,310   (b) (f)      96,322  
  

 

 

   

 

 

      

 

 

 

TOTAL ASSETS

   $ 2,458,465     $ (1,095,851      $ 1,362,614  
  

 

 

   

 

 

      

 

 

 

LIABILITIES AND EQUITY (DEFICIT)

         

Current liabilities

         

Short-term borrowings

   $ 3,215     $ —          $ 3,215  

Accounts payable

     134,129       14,580     (b) (g)      148,709  

Due to related parties, current

     16,140       (16,140   (g)      —    

Related party notes payable

     269,112       (269,112   (d)      —    

Accrued liabilities

     194,228       (8,145   (b) (d) (f)      186,083  
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     616,824       (278,817        338,007  

Other liabilities

     118,189       (49,755   (f)      68,434  

Long-term debt

     —         1,033,108     (h)      1,033,108  

Commitments and contingencies

         
  

 

 

   

 

 

      

 

 

 

Total liabilities

     735,013       704,536          1,439,549  
  

 

 

   

 

 

      

 

 

 

Equity (deficit)

         

Common stock, no par value; 600,000,000 shares authorized, 56,417,813 shares issued and outstanding, pro forma

     —         —       (i)      —    

Additional paid-in-capital

     —         15,449     (i)      15,449  

Parent company investment

     1,868,634       (1,868,634   (i)      —    

Accumulated other comprehensive income (loss)

     (145,182     52,798     (b) (j)      (92,384
  

 

 

   

 

 

      

 

 

 

Total equity (deficit)

     1,723,452       (1,800,387        (76,935
  

 

 

   

 

 

      

 

 

 

TOTAL LIABILITIES AND EQUITY (DEFICIT)

   $ 2,458,465     $ (1,095,851      $ 1,362,614  
  

 

 

   

 

 

      

 

 

 

 

(1)

The change in our cost structure related to becoming an independent, publicly traded company is not reflected above.

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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Kontoor Brands

Unaudited Pro Forma Combined Statement of Income

Year Ended December 29, 2018

(In thousands, except per share amounts)

 

     Historical     Pro Forma
Adjustments (1)
         Pro Forma  

Net revenues

   $ 2,763,998     $ (81,332 )   (b) (k)    $ 2,682,666  

Costs and operating expenses

         

Cost of goods sold

     1,649,435       (73,018   (b) (k) (l)      1,576,417  

Selling, general and administrative expenses

     781,521       (26,171 )   (b) (l) (m)      755,350  
  

 

 

   

 

 

      

 

 

 

Total costs and operating expenses

     2,430,956       (99,189        2,331,767  
  

 

 

   

 

 

      

 

 

 

Operating income

     333,042       17,857          350,899  

Related party interest income, net

     7,738       (7,738   (d)      —    

Other interest income (expense), net

     4,567       (56,104   (b) (h)      (51,537

Other income (expense), net

     (5,269     (149   (b)      (5,418
  

 

 

   

 

 

      

 

 

 

Income before income taxes

     340,078       (46,134        293,944  

Income taxes

     77,005       (10,519   (f)      66,486  
  

 

 

   

 

 

      

 

 

 

Net income

   $ 263,073     $ (35,615      $ 227,458  
  

 

 

   

 

 

      

 

 

 

Pro forma net income per share of common stock:

         

Basic

                (n)    $ 4.03  

Diluted

                (o)    $ 4.03

Weighted average number of common shares outstanding:

                  

Basic

                (n)      56,450,153  

Diluted

                (o)      56,450,153  

 

(1)

The change in our cost structure related to becoming an independent, publicly traded company is not reflected above.

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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Notes to Unaudited Pro Forma Combined Financial Statements

 

(a)

The following represents adjustments to reflect an expected cash amount of $100.0 million at Separation:

 

     As of
December 29, 2018
 
     (In thousands)  

Cash received from incurrence of debt

   $ 1,050,000  

Cash transfer to VF at Separation

     (1,029,884

Cash paid for debt issuance costs

     (16,892
  

 

 

 

Total pro forma adjustment to cash

   $ 3,224  
  

 

 

 

 

(b)

In January 2019, VF decided to cease its operations in Argentina, including those of the Company. In conjunction with the Separation, VF will retain all assets and liabilities of the Company’s operations in Argentina. Consequently, we have removed all Argentina-related assets and liabilities from the unaudited pro forma combined balance sheet as of December 29, 2018. We have also removed operating results for the Argentina business from the unaudited pro forma combined statement of income for the year ended December 29, 2018, since VF’s decision to shut down operations in Argentina will have a continuing impact. The Company does not expect to incur any costs with respect to VF’s decision to cease operations in Argentina, as VF will retain responsibility for these costs.

The following assets and liabilities related to our Argentina business have been removed from the unaudited pro forma combined balance sheet as of December 29, 2018:

 

     As of
December 29, 2018
 
     (In thousands)  

Accounts receivable, less allowance for doubtful accounts

   $ 3,728  

Inventories

     4,962  

Other current assets

     1,769  

Property, plant and equipment, net

     720  

Other assets

     540  

Accounts payable

     1,560  

Accrued liabilities

     3,697  

Accumulated other comprehensive income (loss)

     (44,626

The following operating results for our Argentina business have been removed from the unaudited pro forma combined statement of income for the year ended December 29, 2018:

 

     For the
Year Ended
December 29, 2018
 
     (In thousands)  

Net revenues

   $ 30,370  

Cost and operating expenses

  

Cost of goods sold

     19,122  

Selling, general and administrative expenses

     20,235  
  

 

 

 

Total costs and operating expenses

     39,357  

Operating income (loss)

     (8,987

Other interest income (expense), net

     (579

Other income (expense), net

     149  
  

 

 

 

Income (loss) before income taxes

   $ (9,417
  

 

 

 

 

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(c)

In connection with the Separation, the Company’s portion of VF’s hedging agreements with counterparties will be settled with VF. Additionally, VF will retain certain due from related parties, current balances. Accordingly, we have reflected the following adjustments in the unaudited pro forma combined balance sheet as of December 29, 2018:

 

     As of
December 29, 2018
 
     (In thousands)  

Sale of trade accounts receivable (retained by VF)

   $ (544,858

Hedging agreements with VF (settled with VF)

     (2,832
  

 

 

 

Total pro forma adjustment to due from related parties, current

   $ (547,690
  

 

 

 

 

(d)

In connection with the Separation, VF will retain the related party notes receivable and related party notes payable balances, along with any associated accrued interest balances. Accordingly, we have removed these amounts from the unaudited pro forma combined balance sheet as of December 29, 2018. We have also removed the related party interest income, net associated with these notes from the unaudited pro forma combined statement of income for the year ended December 29, 2018.

The following summarizes the related party accrued interest balances removed from the unaudited pro forma combined balance sheet as of December 29, 2018:

 

     As of
December 29, 2018
 
     (In thousands)  

Accrued interest receivable (other current assets)

   $ 7,345  

Accrued interest payable (accrued liabilities)

     4,280  

 

(e)

In connection with the Separation, the Company’s portion of VF’s hedging agreements with counterparties will be settled with VF.

 

(f)

In connection with the Separation, VF will retain the net liabilities associated with specific uncertain tax positions related to VF’s U.S. consolidated tax filing. Accordingly, we have removed the following uncertain tax positions from the unaudited pro forma combined balance sheet as of December 29, 2018:

 

     As of
December 29, 2018
 
     (In thousands)   

Other assets

   $ 13,770  

Accrued liabilities

     168

Other liabilities

     49,755  

 

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The pro forma income tax expense adjustment reflects a blended statutory tax rate of 22.8% based on statutory rates by jurisdiction. Management believes the blended statutory tax rate provides a reasonable basis for the pro forma adjustment. However, the effective tax rate of Kontoor could be significantly different depending on actual operating results by jurisdiction and the application of enacted tax law to those specific results. The following summarizes the calculation of our pro forma income tax expense adjustment in the unaudited pro forma combined statement of income for the year ended December 29, 2018:

 

     For the
Year Ended
December 29, 2018
 
     (In thousands)  

Total pro forma adjustments to income before income taxes

   $ (46,134 )

Blended statutory tax rate

     22.8 %
  

 

 

 

Total pro forma adjustment to income taxes

   $ (10,519 )
  

 

 

 

 

(g)

In connection with the Separation, the purchase of finished goods through VF will be replaced by purchases from third parties. Accordingly, we have reclassified the due to related parties, current balance to third-party accounts payable in the unaudited pro forma combined balance sheet as of December 29, 2018.

 

(h)

The adjustments assume that we will incur debt comprised of two term loans in an aggregate principal amount of $1.05 billion that will be used primarily, directly or indirectly, to fund a cash transfer to members of VF’s group. We currently estimate the debt will have an estimated weighted average interest rate of approximately 5.1%. The terms of such indebtedness are being negotiated and will be finalized prior to the Separation, and the pro forma adjustments may change accordingly. The adjustments also assume that we will incur estimated debt issuance fees of $16.9 million. We also expect to enter into a revolver facility, but no amount is expected to be drawn or used to fund a cash transfer to VF upon Separation.

 

     For the
Year Ended
December 29, 2018
 
     (In thousands)  

Interest expense on total debt at estimated weighted average rate of approximately 5.1%

   $ (53,727

Amortization of debt issuance costs

     (2,956
  

 

 

 

Total interest expense from debt

   $ (56,683
  

 

 

 

A 1/8% variance in the estimated weighted average interest rate on the debt would change the annual interest expense by approximately $1.3 million.

 

(i)

Reflects the reclassification of VF’s net investment in us, which was recorded in Parent company investment, into additional paid-in-capital and common stock to reflect the assumed issuance of              million shares of our common stock with no par value pursuant to the Separation and Distribution agreement immediately prior to the Separation. We have assumed the number of outstanding shares of our common stock based on the number of shares of VF common stock outstanding on December 29, 2018 and a distribution ratio of one share of our common stock for every seven shares of VF common stock.

 

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The following summarizes the pro forma adjustment to additional paid-in capital:

 

     As of
December 29, 2018
 
     (In thousands)  

Parent company investment

   $ 1,868,634  

Uncertain tax positions, net

     36,153  

Cash transfer to VF at Separation

     (1,029,884

Related party balances, net

     (800,194

Company’s portion of accumulated other comprehensive income related to VF’s hedging arrangements (see Note (j) below)

     (8,172

Argentina balance sheet, net

     (51,088
  

 

 

 

Total pro forma adjustment to additional paid-in capital

   $ 15,449  
  

 

 

 

 

(j)

Reflects the transfer of accumulated other comprehensive income related to the Company’s portion of VF’s hedging agreements with counterparties.

 

(k)

In connection with the Separation, the Company is exiting its transportation fleet operations and thus will no longer provide these services to other VF coalitions. Additionally, the Company will cease manufacturing products for other VF coalitions shortly following the Separation (currently expected to end September 2019). Accordingly, we have removed the related operating results from the unaudited pro forma combined statement of income for the year ended December 29, 2018 as follows:

 

     For the
Year Ended
December 29, 2018
 
     (In thousands)  

Net revenues

   $ 50,962  

Cost of goods sold

     48,643  

The Company does not expect to incur any costs with respect to exiting its transportation fleet, as VF will retain responsibility for these costs. In addition, the Company does not expect to incur any significant costs with respect to ceasing manufacturing products for other VF coalitions.

 

(l)

Reflects the removal of the service and non-service components of net periodic pension costs (benefit) related to the U.S. Shared Plans allocated to us by VF. During the quarter ended June 30, 2018, VF approved a freeze of all future benefit accruals under the U.S. Shared Plans, effective December 31, 2018. No portion of the U.S. Shared Plans will transfer to the Company upon Separation. Furthermore, the Company is not expected to replace the frozen pension benefits with other forms of compensation to Company employees. Accordingly, we recorded the following adjustments to remove these costs from the unaudited pro forma combined statement of income for the year ended December 29, 2018:

 

     For the
Year Ended
December 29, 2018
 
     (In thousands)  

Cost of goods sold

   $ 5,253  

Selling, general and administrative expenses

     (369

 

(m)

Reflects the removal of $6.3 million of transaction costs paid to advisors, attorneys and other third parties directly related to the Separation. Transaction costs have been eliminated as these costs are directly attributable to the Separation and are not expected to have a continuing impact on our operating results following consummation of the Separation.

 

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(n)

Pro forma basic earnings per share (EPS) and pro forma basic weighted average number of shares outstanding are based on the number of VF basic weighted average shares outstanding for the year ended December 29, 2018, adjusted for a distribution ratio of one share of our common stock for every seven shares of VF common stock.

 

(o)

Pro forma diluted EPS and pro forma diluted weighted average number of shares outstanding are based on the number of basic shares of our common stock as described in Note (m) above. The actual dilutive effect following the completion of the Separation will depend on various factors, including employees who may change employment between Kontoor and VF and the impact of equity-based compensation arrangements. We cannot fully estimate the dilutive effects at this time.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents our selected historical combined financial data as of and for each of the years in the five-year period ended December 29, 2018. We derived the selected historical combined financial data as of December 29, 2018 and December 30, 2017, and for each of the years in the three-year period ended December 29, 2018, from our audited combined financial statements included elsewhere in this information statement. We derived the selected historical combined financial data as of December 31, 2016, and as of and for the years ended January 2, 2016 and January 3, 2015, from our unaudited combined financial information that is not included in this information statement. In management’s opinion, the unaudited combined financial information has been prepared on the same basis as our audited combined financial statements and includes all adjustments necessary for a fair statement of the information for the periods presented.

Our historical audited combined financial statements and unaudited combined financial information include certain expenses of VF that have been charged to us for certain centralized functions and programs provided and administered by VF including, but not limited to, information technology, human resources, accounting shared services, supply chain, insurance, and the service cost component of net periodic pension costs. In addition, for purposes of preparing our audited combined financial statements and the unaudited combined financial information, we have allocated a portion of VF’s total corporate expenses to such financial statements, with the allocations related primarily to the support provided by VF’s executive management, finance, accounting, legal, human resources, the related benefit costs associated with such functions, such as stock-based compensation, and the cost of VF’s Greensboro, North Carolina corporate headquarters. Allocations also include the non-service components of net periodic pension costs. These costs may not be representative of the future costs we will incur as an independent, publicly traded company. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from VF, including changes in financing, operations, cost structure and personnel needs of our business. Consequently, the financial information included here may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial condition, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

The selected historical combined financial data presented below should be read in conjunction with our audited combined financial statements and the related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Condensed Combined Financial Statements” and accompanying notes included elsewhere in this information statement.

 

    2018     2017 (1)     2016     2015     2014  
    (Dollars in thousands)  

Summary of Operations

                              

Net revenues

  $ 2,763,998     $  2,830,106     $  2,926,464     $  3,008,776     $  3,011,542  

Operating income (2)

    333,042       357,418       408,698       506,025       467,298  

Net income (2)

    263,073       116,191       315,030       376,802       331,114  

EBITDA (Non-GAAP) (3)

    358,808       387,688       441,259       530,424       492,033  

Financial Position (4)

         

Working capital

  $ 1,324,374     $ 935,125     $ 864,815     $ 846,776     $ 845,045  

Current ratio

    3.1       2.5       2.4       2.3       2.3  

Total assets (5)

  $ 2,458,465     $ 2,126,410     $ 2,158,292     $ 2,083,809     $ 2,101,312  

Equity

  $ 1,723,452       1,357,893       1,392,847       1,327,722       1,332,150  

Debt to total capital ratio (6)

    13.6     16.8     16.5     17.1     17.1

Other Statistics

         

Operating margin

    12.0     12.6     14.0     16.8     15.5

Cash (used) provided by operations (1)(7)

  $ (96,303   $ 168,601     $ 323,952     $ 297,904     $ 387,067  

Capital expenditures

    21,038       25,584       27,575       23,583       21,150  

Software purchases

    1,663       879       570       1,560       395  

 

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(1) 

We recorded a $136.7 million provisional tax charge during 2017 related to the impact of the Tax Act, of which $110.6 million related to the transition tax and was deemed settled in cash with VF at December 2017 for purposes of the combined financial statements.

(2) 

We recorded restructuring charges of $20.4 million, $9.5 million and $21.6 million in 2018, 2017 and 2016, respectively. Restructuring charges were not significant in 2015 and 2014.

(3) 

See below “—Non-GAAP Financial Measures.”

(4) 

We early adopted the accounting standards update regarding intra-entity transfers in the first quarter of 2017, which resulted in a cumulative adjustment to Parent company investment within equity and reduction in other assets in the combined balance sheet at January 1, 2017 of $70.2 million. We adopted the accounting standards update regarding revenue recognition in the first quarter of 2018, which resulted in a cumulative adjustment to increase Parent company investment within equity of $3.0 million.

(5) 

Total assets include related party notes receivable of $517.9 million, $547.7 million, $517.9 million, $518.0 million and $598.3 million at December 2018, 2017, 2016, 2015 and 2014, respectively.

(6)

Total capital is defined as equity plus debt. We did not have any long-term debt in the periods presented. Short-term debt includes short-term borrowings and related party notes payable. Related party notes payable approximated $269.1 million in all periods presented.

(7) 

2018 cash used by operations was adversely impacted by $323.3 million lower cash proceeds from settlement of the intercompany sale to VF of certain of the Company’s trade accounts receivable.

Non-GAAP Financial Measures (1)

It is management’s intent to provide non-GAAP financial information to enhance the understanding of our GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Management believes that the following non-GAAP financial measures provide investors and analysts useful insight into our financial position and operating performance. Each non-GAAP financial measure is presented along with the most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies and therefore may not be comparable among companies.

 

     2018     2017     2016     2015     2014  
     (In thousands)  

Net income—GAAP

   $ 263,073     $ 116,191     $ 315,030     $ 376,802     $ 331,114  

Related party interest income, net

     (7,738     (3,372     (1,470     (3,220     (3,478

Other interest income, net

     (4,567     (1,721     (1,909     (2,628     (1,358

Income taxes

     77,005       242,962       95,457       131,189       137,249  

Depreciation and amortization

     31,035       33,628       34,151       28,281       28,506  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (Non-GAAP)

   $ 358,808     $ 387,688     $ 441,259     $ 530,424     $ 492,033  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

We evaluate performance on the basis of EBITDA. We define “EBITDA” as our net income calculated in accordance with U.S. GAAP, plus the sum of net interest income, income taxes, depreciation and amortization. We believe that EBITDA is an important indicator of operating performance because:

 

   

EBITDA excludes the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measures our operational performance; and

 

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certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects comparability of our results.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations for the three years ended December 29, 2018 should be read in conjunction with our audited combined financial statements and the notes thereto, included elsewhere in this information statement, as well as the information presented under “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data” and “Business.” The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed elsewhere in this information statement. See in particular “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

We are a global apparel leader focused on the design, manufacturing, sourcing, marketing, and distribution of our portfolio of brands, including our iconic brands Wrangler® and Lee®. Our two key brands benefit from heritages spanning 200 combined years and together with our other brands accounted for over 170 million units of apparel produced or sourced in 2018. We endeavor to provide consumers with high-quality, innovative products at a superior value. We manufacture approximately 38% of our products in our owned and leased facilities, and distribute our products worldwide primarily through both major brick and mortar and e-commerce retailers. We believe our experienced management team is executing a strategy that provides a better product and brand experience to our consumers, primarily by delivering on our high standards of product design and innovation, and offering a wide variety of compelling products across channels and categories.

We have a presence in over 65 countries and generated approximately $2.8 billion in global revenues in 2018 across our various channels. We sell our products primarily through our established wholesale and expanding digital channels, and utilize our branded brick and mortar locations to supplement our go-to-market strategy. We benefit from strong relationships with many of our customers who we believe depend on our ability to reliably replenish them with our high-volume products. Our distribution channels are as follows:

 

   

U.S. Wholesale includes sales of our Wrangler®, Lee®, and Rock and Republic® branded products to mass and mid-tier retailers, specialty stores including western specialty retail, department stores, retailer-owned and third-party e-commerce sites, as well as revenue from U.S. licensing arrangements. The U.S. Wholesale channel accounted for approximately 61% of our revenues in both 2018 and 2017, and 62% of our revenues in 2016.

 

   

Non-U.S. Wholesale includes international sales of our Wrangler® and Lee® branded products to specialty stores, department stores, mass retailers, retailer-owned and third-party e-commerce sites, independently operated partnership stores located across Europe, the Middle East and Africa (“EMEA”), Asia-Pacific (“APAC”), and non-U.S. Americas, as well as revenue from international licensing arrangements. The Non-U.S. Wholesale channel accounted for approximately 22% of our revenues in 2018, 23% of our revenues in 2017 and 22% of our revenues in 2016.

 

   

Branded Direct-to-Consumer includes the distribution of our products via concession retail locations internationally, Wrangler® and Lee® branded full-price stores globally, and Company-owned outlet stores globally. The channel also includes our branded products in our U.S.-based VF Outlet™ stores and our products that are marketed and distributed online via www.wrangler.com and www.lee.com. Our VF Outlet™ stores sell Wrangler® and Lee® branded products, VF-branded products and third-party branded merchandise, and provide a means for disposal of excess inventory. Revenues of Wrangler® and Lee® brand products sold in VF Outlet™ stores are reported as part of the Branded Direct-to-Consumer channel, while revenues of VF-branded products and third-party branded merchandise are reported in the Other channel below. The Branded Direct-to-Consumer channel accounted for approximately 11% of our revenues in 2018 and 10% of our revenues in both 2017 and 2016.

 

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Other includes (i) sales of VF-branded and third-party branded merchandise in our VF Outlet™ stores (not related to Wrangler® and Lee® brand apparel), (ii) sales to VF for products manufactured in our plants and use of our transportation fleet and (iii) revenues from fulfilling a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018. The Other channel accounted for approximately 6% of our revenues in each of 2018, 2017 and 2016.

In 2018, we generated 73% of our revenues in the U.S. and 27% of our revenues outside the U.S.

We are focused on growing our three strategic channels, with distorted growth anticipated in our Non-U.S. Wholesale and Branded Direct-to-Consumer channels, both of which we expect to become an increasing percentage of our revenue. Although the Other channel is not a strategic focus, we are committed to optimizing profitability in our VF Outlet™ stores.

We expect to realize efficiencies across our business as we create a more centralized global organization and pursue cost savings initiatives. As part of a centralized approach to our global business, our management team will oversee all brands for their respective business functions, including supply chain, digital, direct-to-consumer, and strategy while seeking to ensure we maintain our worldwide presence and regional approach. We have implemented initiatives to reduce costs and realize greater efficiencies, which have included transitioning our Central America and South America region to a distributor model, exiting certain supply chain operations, relocating Lee®’s North American headquarters to Greensboro, North Carolina and streamlining our global organizational structure. We will continue to implement various operational initiatives to address inefficiencies throughout our organization and cost savings programs that we expect to generate meaningful global cost savings. We plan to utilize such measures to fuel additional investments in our capabilities and brands while improving our overall profitability.

Background

On August 13, 2018, VF announced the repositioning of VF through the spinoff of the Spin Business from its remaining businesses to create an independent, publicly traded company. Directly or indirectly through our subsidiaries, we will hold the assets and liabilities of the Spin Business after the Separation. Each holder of VF common stock will receive one share of common stock of Kontoor Brands for every seven shares of VF common stock held as of the close of business on the record date for the Distribution. Following the Separation, we will be an independent, publicly traded company, and VF will retain no ownership interest in us. For additional information, see “The Separation.”

Basis of Presentation

We have historically operated as part of VF and not as a standalone company. The accompanying audited combined financial statements included in this information statement were prepared in connection with the Separation and were derived from the consolidated financial statements and accounting records of VF. These combined financial statements reflect our combined historical financial position, results of operations, and cash flows as they were historically managed in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The combined financial statements may not be indicative of our future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent, publicly traded company during the periods presented, particularly because of changes we expect to experience in the future as a result of the Separation, including changes in the financing, cash management, operations, cost structure and personnel needs of our business.

The combined financial statements include certain assets and liabilities that have historically been held at the VF corporate level but are specifically identifiable to or otherwise attributable to us. Our combined statements of income also include costs for certain centralized functions and programs provided and administered by VF that are charged directly to VF’s businesses, including us. These centralized functions and programs

 

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include, but are not limited to, information technology, human resources, accounting shared services, supply chain, insurance, and the service cost component of net periodic pension costs. The Company was directly charged $106.1 million in 2018, $133.1 million in 2017 and $119.7 million in 2016 for these costs that were included in cost of goods sold and selling, general and administrative expenses in the combined statements of income.

In addition, for purposes of preparing the combined financial statements on a “carve-out” basis, a portion of VF’s total corporate expenses were allocated to us. These expense allocations include the cost of corporate functions and resources provided by VF including, but not limited to, executive management, finance, accounting, legal, human resources, the related benefit costs associated with such functions, such as stock-based compensation, and the cost of VF’s Greensboro, NC corporate headquarters. The Company was allocated $29.0 million in 2018, $32.9 million in 2017 and $28.7 million in 2016 for such corporate expenses, which were included within selling, general and administrative expenses in the combined statements of income.

The Company was also allocated a benefit of $5.1 million in 2018, benefit of $0.2 million in 2017 and expense of $15.4 million in 2016 for the non-service components of net periodic pension costs, which were included in selling, general and administrative expenses in the combined statements of income. In addition, the Company was allocated $3.5 million and $1.2 million for the Company’s portion of curtailment and pension settlement charges, respectively, in 2018, and $21.5 million for the Company’s portion of a pension settlement charge in 2016 recorded by VF. The curtailment and settlement charges were included in selling, general and administrative expenses.

Costs were allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenues, cost of goods sold or square footage, as applicable. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, us during the periods presented. However, the allocations may not reflect the expenses we would have incurred if we had been a standalone company for the periods presented. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, we may perform these functions using our own resources or outsourced services. For a period following the planned separation, however, some of these functions will continue to be provided by VF under a transition services agreement. Additionally, we may provide some services to VF under a transition services agreement. We also may enter into certain commercial arrangements with VF in connection with the Separation.

Subsequent to the completion of the Separation, we expect to incur expenditures to establish certain standalone functions and information technology systems, and other one-time costs. Recurring standalone costs include accounting, financial reporting, tax, regulatory compliance, corporate governance, treasury, legal, internal audit and investor relations functions, as well as the annual expenses associated with running an independent, publicly traded company including listing fees, board of director fees and external audit costs. We expect recurring standalone costs to be higher than historical allocations, which may have an impact on profitability and operating cash flows. See “Unaudited Pro Forma Combined Financial Statements” for more information.

The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. All references to “2018”, “2017” and “2016” relate to the 52-week fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. Certain foreign subsidiaries report using a December 31 year-end due to local statutory requirements.

All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers.

 

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References to 2018 foreign currency amounts below reflect the changes in foreign exchange rates from 2017 and their impact on translating foreign currencies into U.S. dollars and on foreign currency-denominated transactions in countries with highly inflationary economies. References to 2017 foreign currency amounts below reflect the changes in foreign exchange rates from 2016 and their impact on translating foreign currencies into U.S. dollars. Our most significant foreign currency exposure relates to business conducted in euro-based countries. However, we conduct business in other developed and emerging markets around the world with exposure to foreign currencies other than the euro.

Our two reportable segments are as follows:

 

   

Wrangler® which consists of Wrangler® branded products, along with various sub-brands and collections.

 

   

Lee® which consists of Lee® branded products, along with various sub-brands and collections.

In addition, we present an “other” category for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment:

 

   

Other consists primarily of sales (i) of VF-branded and third-party branded merchandise in our VF Outlet™ stores (not related to Wrangler® and Lee® brand apparel), (ii) of Rock and Republic® brand apparel, (iii) to VF for products manufactured in our plants and use of our transportation fleet and (iv) from fulfilling a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018. Our VF Outlet™ stores in the U.S. sell Wrangler® and Lee® brand products, VF-branded products and third-party branded merchandise. Revenues and profits of Wrangler® and Lee® brand products sold in VF Outlet™ stores are reported as part of the operating results of the Wrangler® and Lee® segments above, while revenues and profits of VF-branded products and third-party branded merchandise are reported in this Other category.

Components of Results of Operations

Net Revenues

Net revenues are comprised of sales in our U.S. Wholesale, Non-U.S. Wholesale, Branded Direct-to-Consumer and Other channels described above. Our net revenues reflect adjustments for estimated allowances for trade terms, sales incentive programs, discounts, markdowns, chargebacks and returns.

Cost of Goods Sold

Cost of goods sold for Company-manufactured goods includes all materials, labor and overhead costs incurred in the production process. Cost of goods sold for purchased finished goods includes the purchase costs and related overhead. In both cases, overhead includes all costs related to manufacturing or purchasing finished goods, including costs of planning, purchasing, quality control, depreciation, freight to distribution centers and our owned stores, duties, royalties paid to third parties and shrinkage. Cost of goods sold also includes restructuring charges and the service cost component of net periodic pension costs related to these functions.

Cost of goods sold includes allocations of costs for certain centralized functions provided by and administered by VF. See “—Basis of Presentation” above and Note 1 to our audited combined financial statements for further details on the methodology for allocating these costs. Allocations of expenses from VF are not necessarily indicative of future expenses and do not necessarily reflect results that would have been achieved as an independent, publicly traded company for the periods presented. We expect recurring standalone costs to be higher than historical allocations, which may have an impact on profitability and operating cash flows. See “Unaudited Pro Forma Combined Financial Statements” for more information.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses include costs of product development, selling, marketing and advertising, branded brick & mortar and concession stores, our own websites, warehousing, distribution, shipping and handling to customers, licensing and administration. Selling, general and administrative expenses also include restructuring charges and the service cost component of net periodic pension costs related to these functions, along with the non-service components of net periodic pension costs (including settlement charges).

Selling, general and administrative expenses include allocations of costs for certain centralized functions and programs provided and administered by VF. See “—Basis of Presentation” above and Note 1 to our audited combined financial statements for further details on our methodology for allocating these costs. Allocations of expenses from VF are not necessarily indicative of future expenses and do not necessarily reflect results that would have been achieved as an independent, publicly traded company for the periods presented. We expect recurring standalone costs to be higher than historical allocations, which may have an impact on profitability and operating cash flows. See “Unaudited Pro Forma Combined Financial Statements” for more information.

Related Party Interest Income, Net

Related party interest income, net includes interest income earned on related party notes receivable from VF and interest expense incurred on related party notes payable to VF. All related party notes outstanding at December 2018 mature in 2019. All outstanding related party notes at the time of the Separation are expected to be transferred to and retained by VF.

Other Interest Income, Net

Other interest income, net primarily includes interest earned on our cash and equivalent balances and interest expense incurred on short-term borrowings. Our future capital structure is expected to include the addition of third-party debt. This will result in a substantial increase in annual interest expense.

Other Expense, Net

Other expense, net primarily consists of the funding fee related to the sale of certain of our trade accounts receivable, and nonoperating foreign currency activity.

Results of Operations

The following table summarizes our results of operations for the periods presented:

 

                      Percent Change  
    2018     2017     2016     2018      2017  
    (In thousands)  

Net revenues

  $  2,763,998     $  2,830,106     $  2,926,464       (2.3)%        (3.3)%  

Costs and operating expenses

          

Cost of goods sold

    1,649,435       1,658,144       1,711,319       (0.5)%        (3.1)%  

Selling, general and administrative expenses

    781,521       814,544       806,447       (4.1)%        1.0%  
 

 

 

   

 

 

   

 

 

      

Total costs and operating expenses

    2,430,956       2,472,688       2,517,766       (1.7)%        (1.8)%  
 

 

 

   

 

 

   

 

 

      

Operating income

    333,042       357,418       408,698       (6.8)%        (12.5)%  

Related party interest income, net

    7,738       3,372       1,470       129.5%        129.4%  

Other interest income, net

    4,567       1,721       1,909       165.4%        (9.8)%  

Other expense, net

    (5,269     (3,358     (1,590     56.9%        111.2%  
 

 

 

   

 

 

   

 

 

      

Income before income taxes

    340,078       359,153       410,487       (5.3)%        (12.5)%  

Income taxes

    77,005       242,962       95,457       (68.3)%        154.5%  
 

 

 

   

 

 

   

 

 

      

Net income

  $ 263,073     $ 116,191     $ 315,030       126.4%        (63.1)%  
 

 

 

   

 

 

   

 

 

      

Gross margin

    40.3%       41.4%       41.5%       

Operating margin

    12.0%       12.6%       14.0%       

 

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2018 Compared to 2017

Net Revenues

Net revenues decreased 2% in 2018 compared to 2017 driven by a 5% decline in Lee® brand revenues and a 1% decline in Wrangler® brand revenues. The drivers of these declines relate to a number of global macroeconomic challenges that primarily impacted our wholesale channels, which were partially offset by strength in our direct-to-consumer business.

Both our U.S. Wholesale and Non-U.S. Wholesale channels declined in 2018 compared to 2017. The U.S. Wholesale channel was unfavorably impacted in 2018 by the continued effects of a key customer’s inventory destocking decision, along with door closures following bankruptcy filings by a limited number of key retailers. This decline was partially offset by strong growth with our digital wholesale partners and growth in other key brick and mortar retail accounts. Our Non-U.S. Wholesale channel was adversely affected by foreign exchange impacts from the highly inflationary economy in Argentina, as well as inventory reduction decisions by certain retailers in the non-US Americas region and the ongoing effects of the economic demonetization in India. Our Branded Direct-to-Consumer channel continued to grow, driven by the performance of our own websites. Branded brick & mortar decreased due to declines in EMEA attributable to door closures and an unseasonably warm summer weather pattern, partially offset by growth from increased branded doors in the U.S. and our concessions business in APAC. Our Other channel, which is not a strategic growth focus, remained relatively flat as the decrease in our VF Outlet™ business, resulting from door closures and the exiting of underperforming categories, was offset by revenues generated from fulfilling a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018.

Revenues in the Americas region decreased 3% in 2018 primarily due to the aforementioned U.S. wholesale decline and the impact from the highly inflationary economy in Argentina. Our branded direct-to-consumer revenues in the Americas region grew during the period driven by strong sales from our own websites and improved sales of the Lee® brand in our VF Outlet™ stores, which offset declining sales of the Wrangler® brand in our VF Outlet™ stores. Revenues in the non-U.S. Americas region were down 15%, primarily due to declines in wholesale revenues and a 10% unfavorable impact from foreign currency principally attributable to the highly inflationary economy in Argentina. Revenues in the APAC region decreased 1% in 2018 due to declines in wholesale revenues, partially offset by solid growth in our concessions business. Foreign currency had no meaningful impact on APAC revenues in 2018. Revenues in the EMEA region declined 1% in 2018 due to declines in branded brick & mortar revenues for the reasons noted above that were partially offset by an increase in revenues from our own websites, along with a 4% favorable impact from foreign currency. Total international revenues decreased 4% in 2018. International revenues represented 27% and 28% of our total revenues in 2018 and 2017, respectively.

Additional details on revenues are provided in the section titled “—Segment Results of Operations.”

Cost of Goods Sold

Cost of goods sold decreased 1% in 2018 compared to 2017. Gross margin declined 110 basis points to 40.3% in 2018 compared to 41.4% in 2017 driven by increased manufacturing labor, overhead and product costs, partially offset by favorable pricing, the benefit of facility closures and a mix shift toward higher margin products. Additionally, restructuring charges were higher in 2018 due to the planned exit of a manufacturing facility.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 4% in 2018 compared to 2017 driven by lower advertising spend following the timing of strategic investments in late 2017 to improve our brand messaging, compensation-related costs associated with reduced headcount and a reduction in costs allocated to us by VF as

 

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we were a smaller portion of VF’s total operating results in 2018. These decreases were partially offset by higher restructuring charges for severance costs related to ongoing efforts to enhance our cost efficiency and profitability, Separation transaction costs to advisors, attorneys and other third parties that were not incurred in 2017, as well as an increase in the non-service components of net periodic pension costs.

As noted earlier, allocations of corporate expenses from VF are not necessarily indicative of future expenses and do not necessarily reflect results that would have been achieved as an independent, publicly traded company for the periods presented.

Operating Income

Operating income decreased 7% in 2018 compared to 2017 due to the reasons discussed above.

Operating margin declined 60 basis points to 12.0% in 2018 compared to 12.6% in 2017 as declines in gross margin exceeded the reduction in selling, general and administrative expenses.

Related Party Interest Income, Net

Net related party interest income increased $4.4 million in 2018 compared to 2017 primarily due to increased interest income from an approximate 110 basis point increase in the average interest rate in effect on our related party notes receivable balances in 2018 as compared to 2017, partially offset by increased interest expense due to an approximate 70 basis point increase in the average interest rate in effect on our related party notes payable balances in 2018 compared to 2017.

Other Interest Income, Net

Net other interest income increased $2.8 million in 2018 compared to 2017 due to an increase in interest earned on cash and equivalent balances and a decrease in interest expense associated with reduced short-term borrowings outstanding during 2018.

Other Expense, Net

Other expense, net increased $1.9 million in 2018 compared to 2017 primarily due to increased funding fees related to the sale of certain of our trade accounts receivable.

Income Taxes

Income taxes decreased $166.0 million in 2018 compared to 2017 primarily due to the transitional impact of the Tax Act that resulted in a provisional net charge of $136.7 million during the fourth quarter of 2017.

The effective income tax rate was 22.6% in 2018 compared to 67.6% in 2017. The effective income tax rate is substantially lower in 2018 when compared to 2017 primarily due to the discrete tax expense associated with the Tax Act recorded in 2017. The Tax Act reduced the federal tax rate on U.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. As part of the legislation, U.S. companies were required to pay a tax on historical earnings generated offshore that have not been repatriated to the U.S. Additionally, revaluation of deferred tax asset and liability positions at the lower federal base rate of 21% was also required. The transitional impact of the Tax Act resulted in a provisional net charge of $136.7 million during the fourth quarter of 2017. This amount was primarily comprised of $110.6 million related to the transition tax and $19.4 million tax expense related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. Other provisional charges of $6.7 million were primarily related to establishing a deferred tax liability for foreign withholding and state taxes as the Company is not asserting indefinite reinvestment on short-term liquid assets of certain subsidiaries. All other foreign earnings, including basis

 

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differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. The Company has not determined the deferred tax liabilities associated with these undistributed earnings and basis differences, as such determination is not practicable.

The 2018 effective income tax rate included a net discrete tax expense of $4.8 million, which included $5.5 million of net tax expense related to the Tax Act, $3.1 million of tax benefit related to stock compensation and $2.4 million of net tax expense related to unrecognized tax benefits and interest. The $4.8 million net discrete tax expense in 2018 increased the effective income tax rate by 1.4% compared to an increase of 36.2% for discrete items in 2017. Without discrete items, the effective income tax rate during 2018 decreased by approximately 10.2% primarily due to the impact of the Tax Act, including a lower U.S. corporate income tax rate that was effective beginning January 1, 2018. The international effective tax rate was 17.2% and 19.3% for 2018 and 2017, respectively.

Net Income

As a result of the above, net income in 2018 was $263.1 million compared to $116.2 million in 2017.

2017 Compared to 2016

Net Revenues

Net revenues decreased 3% in 2017 compared to 2016 driven by a 6% decline in Lee® brand revenues and a 1% decline in Wrangler® brand revenues.

Both our U.S. Wholesale and Non-U.S. Wholesale channels declined in 2017 compared to 2016. The U.S. Wholesale channel was adversely impacted throughout 2017 by a key customer’s inventory destocking decision, as well as ongoing financial pressure and continued door closures with a limited number of key retailers. This decline was partially mitigated by continuing strong growth with our digital wholesale partners, along with growth in other key brick and mortar retail accounts. Our Non-U.S. Wholesale channel was adversely affected by our efforts to manage inventory levels in a certain market, as well as an economic demonetization in India. Our Branded Direct-to-Consumer channel continued to grow, led by strong performance in our own websites. Similarly, branded brick & mortar also grew due to strong performance in our outlet and concessions business in EMEA and APAC. Our Other channel, which is not a strategic growth focus, reflected decreases in our VF Outlet™ business due to VF’s divestiture of the Majestic® brand in April 2017, relocation of our largest retail store in Reading, PA and ongoing efforts to close underperforming doors to improve profitability.

Revenues in the Americas region decreased 4% in 2017, due to the aforementioned U.S. wholesale and VF Outlet™ declines. Our branded direct-to-consumer revenues in the Americas region grew during the period led by strong sales in our own websites as well as growth in our full-price Wrangler® branded stores in the U.S. and sales of the Lee® brand in our VF Outlet™ stores. Revenues in the non-U.S. Americas region were essentially flat, reflecting operational growth in wholesale revenues offset by a 2% unfavorable impact from foreign currency. Revenues in the APAC region decreased 3% in 2017 due to declines in wholesale revenues, partially offset by robust growth in revenues from our own websites. Revenues in the EMEA region increased 4% in 2017, reflecting operational growth in our branded direct-to-consumer and wholesale revenues, along with a 2% favorable impact from foreign currency. Total international revenues increased 1% in 2017. International revenues represented 28% and 27% of our total revenues in 2017 and 2016, respectively.

Additional details on revenues are provided in the section titled “—Segment Results of Operations.”

Cost of Goods Sold

Cost of goods sold decreased 3% in 2017 compared to 2016, which is commensurate with our overall net revenue decline. Gross margin declined 10 basis points to 41.4% in 2017 compared to 41.5% in 2016 as

 

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favorable pricing, a mix shift toward higher margin products and decreased restructuring charges were offset by lower volume, higher product costs, and manufacturing downtime. Restructuring charges were higher in 2016 due to the exit of four manufacturing facilities that did not recur in 2017.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 1% in 2017 compared to 2016 due to strategic investments in our direct-to-consumer business, product development, and advertising as we invest to enhance our product offering, brand messaging, and availability of our products in new channels, segments, and markets, along with incremental general corporate allocations, compensation-related expenses, and restructuring charges for severance costs related to ongoing efforts to enhance our cost efficiency and profitability. These increases were partially offset by a $15.6 million reduction in the non-service components of net periodic pension costs and a $21.5 million pension settlement charge in 2016 that did not recur in 2017. See additional discussion in Note 11 to our audited combined financial statements.

As noted earlier, allocations of corporate expenses from VF are not necessarily indicative of future expenses and do not necessarily reflect results that would have been achieved as an independent, publicly traded company for the periods presented.

Operating Income

Operating income decreased 13% in 2017 compared to 2016 due to the reasons discussed above.

Operating margin declined 140 basis points to 12.6% in 2017 compared to 14.0% in 2016 due to reduced expense leverage on lower revenues and higher selling, general and administrative expenses.

Related Party Interest Income, Net

Net related party interest income increased $1.9 million in 2017 compared to 2016 primarily due to an approximate 40 basis point increase in the average interest rate in effect on our related party notes receivable balances in 2017 as compared to 2016.

Other Interest Income, Net

Net other interest income decreased $0.2 million in 2017 compared to 2016 due to a decline in interest earned on our cash and equivalent balances.

Other Expense, Net

Other expense, net increased $1.8 million in 2017 compared to 2016, due to additional funding fees related to the sale of certain of our trade accounts receivable and changes in our nonoperating foreign currency activity.

Income Taxes

Income taxes increased $147.5 million in 2017 compared to 2016 primarily due to the transitional impact of the Tax Act that resulted in a provisional net charge of $136.7 million during the fourth quarter of 2017.

The effective income tax rate was 67.6% in 2017 compared to 23.3% in 2016. The effective income tax rate was substantially higher in 2017 when compared to 2016 primarily due to discrete tax expense associated with the Tax Act. The Tax Act reduced the federal tax rate on U.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. As part of the legislation, U.S. companies were required to pay a tax on historical earnings generated offshore that have not been repatriated to the U.S. Additionally, revaluation of

 

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deferred tax asset and liability positions at the lower federal base rate of 21% was also required. The transitional impact of the Tax Act resulted in a provisional net charge of $136.7 million during the fourth quarter of 2017. This amount was primarily comprised of $110.6 million related to the transition tax and $19.4 million of tax expense related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. Other provisional charges of $6.7 million were primarily related to establishing a deferred tax liability for foreign withholding and state taxes as the Company is not asserting indefinite reinvestment on short-term liquid assets of certain subsidiaries. All other foreign earnings, including basis differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. The Company has not determined the deferred tax liabilities associated with these undistributed earnings and basis differences, as such determination is not practicable.

The 2017 effective income tax rate included a net discrete tax expense of $130.1 million, which included the provisional net charge of $136.7 million related to the Tax Act, $3.2 million of tax benefits related to stock compensation, $2.9 million of net tax benefit related to the realization of previously unrecognized tax benefits and interest, and $0.5 million of discrete tax benefit related to the effects of tax rate changes, exclusive of the Tax Act. The $130.1 million net discrete tax expense in 2017 increased the effective income tax rate by 36.2% compared to a favorable 3.6% impact for discrete items in 2016. Without discrete items, the effective tax rate during 2017 increased by approximately 4.5% primarily due to the mix of earnings taxed at different jurisdictional rates. The international effective tax rate was 19.3% and 15.5% for 2017 and 2016, respectively.

Net Income

As a result of the above, net income in 2017 was $116.2 million compared to $315.0 million in 2016.

Segment Results of Operations

Management at each of the brands has direct control over and responsibility for its revenues and operating income, hereinafter termed “segment revenues” and “segment profit”, respectively. Our management evaluates operating performance and makes investment and other decisions based on segment revenues and segment profit. Common costs for certain centralized functions provided and administered by VF, such as information technology, human resources, accounting shared services, supply chain, insurance, and the service cost component of net periodic pension costs are allocated to the segments based on appropriate metrics such as usage or proportion of net revenues.

 

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The following tables present a summary of the changes in segment revenues and segment profit during the last two years:

 

     Wrangler     Lee     Other     Total  
     (In millions)  

Segment revenues—2016

   $ 1,631.5     $ 1,068.2     $ 226.8     $ 2,926.5  

Operations

     (14.6     (63.1     (21.9     (99.6

Impact of foreign currency

     2.4       0.7       0.1       3.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues—2017

     1,619.3       1,005.8       205.0       2,830.1  

Operations

     (7.0     (51.1     (3.4     (61.5

Impact of foreign currency

     (10.1     5.5       —         (4.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues—2018

   $ 1,602.2     $ 960.2     $ 201.6     $ 2,764.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Wrangler     Lee     Other     Total  
     (In millions)  

Segment profit—2016

   $ 325.2     $ 150.9     $ (3.4   $ 472.7  

Operations

     (46.7     (43.8     2.3       (88.2

Impact of foreign currency

     1.8       0.1       0.3       2.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit—2017

     280.3       107.2       (0.8     386.7  

Operations

     (17.9     (18.6     0.8       (35.7

Impact of foreign currency

     3.6       4.1       —         7.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit—2018

   $ 266.0     $ 92.7     $ —       $ 358.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following section discusses changes in revenues and profitability by segment:

Wrangler    

 

                       Percent Change  
     2018     2017     2016     2018     2017  
     (In millions)              

Segment revenues

   $ 1,602.2     $ 1,619.3     $ 1,631.5       (1.1 )%      (0.8 )% 

Segment profit

     266.0       280.3       325.2       (5.1 )%      (13.8 )% 

Operating margin

     16.6     17.3     19.9    

2018 Compared to 2017

Global revenues for the Wrangler® brand decreased 1% in 2018 as growth in U.S. wholesale revenues were offset by declines in non-U.S. wholesale and branded direct-to-consumer revenues.

Revenues in the Americas region were flat in 2018, as declines in non-U.S. wholesale revenues and branded direct-to-consumer revenues were offset by growth in U.S. wholesale revenues. Branded brick & mortar revenues in the Americas region decreased, primarily due to declines in sales through our VF Outlet™ stores, partially offset by growth in our own websites. The U.S. Wholesale channel increase was attributable to strong growth with our digital wholesale partners and growth in certain key brick and mortar retail accounts. Revenues in the non-U.S. Americas region decreased 16% due to declines in wholesale and branded brick & mortar revenues, primarily due to a 13% adverse impact from foreign currency related to the highly inflationary economy in Argentina. Revenues in the APAC region decreased 4% in 2018 due to declines in wholesale revenues associated with the ongoing effects of economic demonetization in India, as well as a 3% unfavorable impact from foreign currency. Revenues in the EMEA region decreased 2% in 2018 led by declines in our wholesale and branded direct-to-consumer revenues attributed to door closures and an unseasonably warm summer weather pattern, partially offset by a 4% favorable impact from foreign currency.

 

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Operating margin decreased 70 basis points in 2018 over 2017 primarily due to increased restructuring costs primarily related to severance costs, additional strategic investments in our direct-to-consumer business and product development costs, resulting in reduced expense leverage on lower revenues.

2017 Compared to 2016

Global revenues for the Wrangler® brand decreased 1% in 2017 primarily due to declines in U.S. wholesale revenues that were partially offset by growth in branded direct-to-consumer revenues.

Revenues in the Americas region decreased 1% in 2017, driven by declines in U.S. wholesale revenues. The U.S. Wholesale channel was adversely impacted throughout 2017 by a key customer’s inventory destocking decision, as well as ongoing financial pressure and continued door closures with a limited number of key retailers. This decline was partially mitigated by continuing strong growth with our digital wholesale partners, along with growth in other key brick and mortar retail accounts. Revenues in the non-U.S. Americas region grew nearly 4% due to strength in wholesale revenues across nearly all markets, partially offset by a 3% unfavorable impact from foreign currency. Revenues in the APAC region decreased 5% in 2017 due to declines in wholesale revenues driven by an economic demonetization in India, partially offset by a 3% favorable impact from foreign currency. Revenues in the EMEA region increased 3% in 2017 due to growth in our wholesale and branded direct-to-consumer revenues, along with an approximate 2% favorable impact from foreign currency.

Operating margin decreased 260 basis points in 2017 over 2016 primarily due to lower volume, higher product costs, manufacturing downtime and higher compensation-related expenses, along with increased strategic investments in our direct-to-consumer business, product development and advertising.

Lee

 

                       Percent Change  
     2018     2017     2016     2018     2017  
     (In millions)              

Segment revenues

   $ 960.2     $ 1,005.8     $ 1,068.2       (4.5 )%      (5.8 )% 

Segment profit

     92.7       107.2       150.9       (13.5 )%      (28.9 )% 

Operating margin

     9.7     10.7     14.1    

2018 Compared to 2017

Global revenues for the Lee® brand decreased 5% in 2018, driven by declines in U.S. wholesale revenues, which were partially offset by growth in branded direct-to-consumer revenues.

Revenues in the Americas region decreased 9% in 2018 led by declines in U.S. wholesale revenues. The U.S. Wholesale channel was adversely impacted by a key customer’s inventory destocking decision related to our Lee® Riders® brand, as well as door closures following bankruptcy filings by a limited number of key retailers. This decline was partially mitigated by strong growth in our sales through our VF Outlet™ stores. Revenues in the non-U.S. Americas region decreased 14% primarily due to declines in wholesale revenues related to inventory reductions at a key retailer and a 4% unfavorable impact from foreign currency, led by the highly inflationary economy in Argentina. Revenues in the APAC region decreased 1% in 2018 due to declines in wholesale revenues that were adversely affected by higher product returns due to a market transition in a key market, partially offset by growth in branded direct-to-consumer revenues led by our concessions business and a 1% favorable impact from foreign currency. Revenues in the EMEA region were flat in 2018 as growth in wholesale revenues, along with a 4% favorable foreign currency impact, was offset by declines in our branded direct-to-consumer revenues due to door closures and an unseasonably warm summer weather pattern.

Operating margin decreased 100 basis points in 2018 over 2017 primarily due to increased manufacturing labor and overhead costs and higher product costs, while selling, general and administrative expenses remained flat on lower revenues.

 

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2017 Compared to 2016

Global revenues for the Lee® brand decreased 6% in 2017, driven by declines in wholesale revenues, which were partially offset by growth in branded direct-to-consumer revenues.

Revenues in the Americas region decreased 9% in 2017 led by declines in U.S. wholesale revenues. The U.S. Wholesale channel was adversely impacted throughout 2017 by a key customer’s inventory destocking decision, as well as ongoing financial pressure and continued door closures with a limited number of key retailers. This decline was partially mitigated by continuing strong growth with our digital wholesale partners, growth in other key brick and mortar retail accounts, and growth in our sales through our VF Outlet™ stores. Revenues in the non-U.S. Americas region decreased 6% due to declines in wholesale revenues and a 1% unfavorable impact from foreign currency. Revenues in the APAC region decreased 3% in 2017 due to declines in wholesale revenues that were adversely affected by our efforts to manage inventory levels in a certain market, as well as an economic demonetization in India, partially offset by growth in branded direct-to-consumer revenues. Foreign currency had a 1% unfavorable impact on APAC revenues. Revenues in the EMEA region increased 5% in 2017 primarily driven by growth in wholesale revenues and a 2% favorable impact from foreign currency.

Operating margin decreased 340 basis points in 2017 over 2016 primarily due to higher product costs and manufacturing downtime, along with increased strategic investments in our direct-to-consumer business, product development and advertising.

Other

 

                       Percent Change  
     2018     2017     2016     2018      2017  
     (In millions)               

Revenues

   $ 201.6     $ 205.0     $ 226.8       (1.7)%        (9.5)

Profit (loss)

     —         (0.8     (3.4     93.7%        77.3

Operating margin

     —       (0.4 )%      (1.5 )%      

The decrease in other revenues in 2018 was primarily due to a 12% decline in our VF Outlet™ store revenues resulting from exiting unprofitable doors and underperforming categories, partially offset by revenues generated from fulfilling a transition services agreement related to VF’s sale of its Nautica® brand business in mid-2018 and increased sales to VF. Our profit and operating margin improvement was primarily due to the margin earned on fulfilling the Nautica® transition services agreement.

The decrease in other revenues in 2017 was primarily due to a 10% decline in our VF Outlet™ store revenues driven in part by VF’s divestiture of the Majestic® brand in April 2017. Our loss and operating margin improvements were partially attributable to restructuring charges in 2016 related to severance costs that did not recur in 2017.

Total sales to VF included in other revenues were $51.0 million in 2018, $45.5 million in 2017 and $46.7 million in 2016.

 

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Reconciliation of Segment Profit to Combined Income Before Income Taxes

There are three types of costs necessary to reconcile total segment profit to combined income before income taxes. These costs are corporate and other expenses, discussed below, and related party interest income, net and other interest income, net, both of which were discussed in “—Components of Results of Operations” and “—Results of Operations” above. These costs are excluded from segment profit because these items are managed centrally and are not under the control of brand management.

 

                          Percent Change  
     2018      2017      2016      2018     2017  
     (In millions)               

Corporate and other expenses

   $ 30.9      $ 32.7      $ 65.6        (5.4 )%      (50.2 )% 

Related party interest income, net

     7.7        3.4        1.5        129.5     129.4

Other interest income, net

     4.6        1.7        1.9        165.4     (9.8 )% 

Corporate and Other Expenses

For purposes of preparing these combined financial statements on a “carve-out” basis, the Company has been allocated a portion of VF’s total corporate expenses. These additional allocations are reported as corporate and other expenses in the table above. See “—Basis of Presentation” above and Note 1 to our audited combined financial statements for further details on our methodology for allocating these costs.

Corporate and other expenses declined slightly in 2018 compared to 2017 as the $3.9 million decrease in the allocation of VF’s corporate expenses to us was partially offset by $2.3 million in Separation transaction costs (the remainder of the $6.3 million in total 2018 Separation transaction costs was recorded within the applicable segments that incurred the expense).

The decrease in corporate and other expenses in 2017 compared to 2016 was largely driven by a $15.6 million reduction in the non-service components of net periodic pension costs and a $21.5 million pension settlement charge in 2016 that did not recur in 2017.

Liquidity and Capital Resources

Historically, we have generated strong annual cash flow from operating activities. However, we have operated within VF’s cash management structure, which uses a centralized approach to cash management and financing of our operations. A substantial portion of the Company’s cash is transferred to VF. This arrangement is not reflective of the manner in which we would have been able to finance our operations had we been an independent, publicly traded company during the periods presented.

The cash and equivalents held by VF at the corporate level are not specifically identifiable to the Company and therefore have not been reflected in the combined balance sheet. VF’s third-party long-term debt and the related interest expense have not been allocated to the Company for any of the periods presented as it was not the legal obligor of such debt.

Following the separation from VF, our capital structure and sources of liquidity will change from the historical capital structure because we will no longer participate in VF’s centralized cash management program. Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations and obtain debt financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through the issuance of third-party debt. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

 

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In connection with the Separation, we expect to incur up to $1.05 billion of new debt from the proceeds of the term loan facilities, which we intend to use primarily to, directly or indirectly, fund a cash transfer to members of VF’s group as part of the Restructuring, to pay related fees and expenses and for other general corporate purposes. We expect for our revolving facility to be undrawn at the Separation, provided that it may be used, subject to a cap, as part of the Restructuring and to pay related fees and expenses at the Separation, and otherwise may be used for, among other things, working capital and general corporate purposes. The debt may also restrict our business and may adversely impact our financial condition, results of operations or cash flows. In addition, our separation from VF’s other businesses may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to the Company.

In addition, we also intend to pay a quarterly dividend, in cash, at an annual rate initially equal to $        per share of our common stock (representing a quarterly rate initially equal to $        per share). The declaration and amount of any future dividends will be determined by our Board of Directors and will depend on our financial condition, earnings, cash flows, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors that our Board of Directors deems relevant. See “Dividend Policy.”

We expect to utilize our cash flows to continue to invest in our brands, talent and capabilities, and growth strategies as well as to support a dividend to shareholders, and to repay our indebtedness over time.

Our cash flows for the periods below were as follows:

 

     2018      2017      2016  
     (In millions)  

Cash (used) provided by operating activities

   $ (96.3    $ 168.6      $ 324.0  

Cash provided (used) by investing activities

     11.3        (57.6      (25.2

Cash provided (used) by financing activities

     106.3        (119.8      (320.4

Management believes that our cash balances and funds provided by operating activities, along with expected borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we expect to incur in connection with the Separation, (ii) adequate liquidity to fund capital expenditures and planned dividend payouts, and (iii) flexibility to meet investment opportunities that may arise.

Cash (Used) Provided by Operating Activities

Cash flow provided by operating activities is dependent on the level of net income, adjustments to net income and changes in working capital.

Cash provided by operating activities decreased $264.9 million in 2018. The decrease was primarily due to $323.3 million lower cash proceeds from settlement of the intercompany sale to VF of certain of the Company’s trade accounts receivable. The timing of the intercompany settlement was impacted by VF’s one-time change in fiscal year-end and does not reflect an operational deterioration in cash flows. The decrease was partially offset by higher net income and changes in other working capital.

Cash provided by operating activities decreased $155.4 million in 2017 primarily due to $117.2 million of additional income taxes deemed settled in cash with VF for purposes of carve-out financial reporting, with $110.6 million specifically related to the provisional transition tax impact of the Tax Act, and $51.3 million in lower income before income taxes, partially offset by changes in working capital.

The Company sells certain of its trade accounts receivables to VF, who then sells them to a financial institution and periodically remits cash back to the Company. Proceeds from this program are classified in operating activities in the combined statements of cash flows and the receivable from VF is reflected in due from related parties in the combined balance sheet. The amounts due from VF for the sale of these receivables were $544.9 million at December 2018, $221.6 million at December 2017 and $207.1 million at December 2016. Any amounts due from related parties associated with the sale of certain of our trade accounts receivable outstanding at the time of the Separation is expected to be transferred to and retained by VF.

 

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Cash Provided (Used) By Investing Activities

Cash provided by investing activities increased $68.9 million in 2018 primarily due to receipt of $29.8 million from VF for repayment of the related party notes advanced to VF in 2017, resulting in a $59.6 million cash flow improvement, along with a $4.5 million decline in capital expenditures.

Cash used by investing activities increased $32.4 million in 2017 primarily due to $29.8 million in amounts advanced to VF for related party notes receivable.

The Company had related party notes receivable, with VF as the counterparty, of $517.9 million at December 2018, $547.7 million at December 2017 and $517.9 million at December 2016. The notes outstanding at December 2018 mature in 2019. All related party notes receivable outstanding at the time of the Separation are expected to be transferred to and retained by VF.

Cash Provided (Used) By Financing Activities

Cash provided by financing activities increased $226.1 million in 2018 primarily due to a decrease in net transfers to VF.

Cash used by financing activities decreased $200.6 million in 2017 primarily due to a decrease in net transfers to VF.

The Company had related party notes payable, with VF as the counterparty, of $269.1 million at each of December 2018, 2017 and 2016. The notes outstanding at December 2018 mature in 2019. All related party notes payable outstanding at the time of the Separation are expected to be transferred to and retained by VF.

We have $35.9 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either us or the banks. Total outstanding balances under these arrangements were $3.2 million at December 2018 and $4.9 million at December 2017. Borrowings under these arrangements included letters of credit which are non-interest bearing to the Company of $3.2 million at December 2018 and $3.0 million at December 2017. Additionally, we had $1.9 million of interest-bearing borrowings at 2017 related to short-term borrowings in Argentina that had a weighted average interest rate of 32.7%.

Contractual Obligations

The following table summarizes our estimated material contractual obligations and other commercial commitments at December 29, 2018, and the future periods in which such obligations are expected to be settled in cash:

 

            Payment Due or Forecasted by Calendar Year  
     Total      2019      2020      2021      2022      2023      Thereafter  
     (In millions)  

Recorded liabilities:

                    

Other (1)

   $ 94      $ 39      $ 16      $ 11      $ 6      $ 4      $ 18  

Unrecorded commitments:

                    

Operating leases (2)

     98        34        29        18        8        4        5  

Minimum royalty payments (3)

     14        7        4        3        —          —          —    

Inventory obligations (4)

     430        430        —          —          —          —          —    

Other obligations (5)

     8        8        —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 644      $ 518      $ 49      $ 32      $ 14      $ 8      $ 23  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Other recorded liabilities represent payments due for long-term liabilities in the combined balance sheet related to deferred compensation and other employee-related benefits and other liabilities. These amounts are based on historical and forecasted cash outflows. Amounts exclude liabilities for unrecognized income tax benefits and deferred income taxes.

 

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(2)

Operating leases represent required minimum lease payments during the noncancelable lease term. Most real estate leases also require payments of related operating expenses such as taxes, insurance, utilities and maintenance, which are not included above.

(3)

Minimum royalty payments represent obligations under license agreements to use trademarks owned by third parties and include required minimum advertising commitments. Actual payments could exceed related minimum royalty obligations.

(4)

Inventory obligations represent binding commitments to purchase raw materials, contract production and finished products that are payable upon delivery of the inventory. This obligation excludes the amount included in accounts payable at December 2018 related to inventory purchases.

(5)

Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending and (iii) advertising.

We had other financial commitments at the end of 2018 that are not included in the above table but may require the use of funds under certain circumstances:

 

   

$20.0 million of surety bonds, custom bonds, standby letters of credit and international bank guarantees are not included in the above table because they represent contingent guarantees of performance under self-insurance and other programs and would only be drawn upon if we were to fail to meet our other obligations.

 

   

Purchase orders for goods or services in the ordinary course of business are not included in the above table because they represent authorizations to purchase rather than binding commitments.

In addition, on February 12, 2018, VF entered into a 10-year power purchase agreement to procure electricity generated from renewable energy sources to meet a portion of the electricity needs for certain facilities in Mexico (including certain of our manufacturing plants). The contract has a total purchase commitment of $44.4 million over the contract term and requires delivery of electricity to commence no later than March 2020. A portion of this commitment may become the obligation of the Company upon the Separation and thus may require the use of funds in future periods.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to risks in the ordinary course of business. Management, as part of VF, regularly assesses and manages exposures to these risks through operating and financing activities and, when appropriate, by taking advantage of natural hedges within us. Potential risks are discussed below.

Insured Risks

VF is self-insured for a significant portion of its employee medical, workers’ compensation, vehicle and general liability exposures, and purchases insurance from highly-rated commercial carriers to cover other risks, including property and umbrella, and to establish stop-loss limits on self-insurance arrangements. We participate in these programs.

Cash and Equivalents Risks

We had $96.8 million of cash and equivalents at the end of 2018. Management continually monitors the credit ratings of the financial institutions with whom we conduct business. Similarly, management monitors the credit quality of cash equivalents.

 

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Defined Benefit Pension Plan Risks

Certain Company employees participate in U.S. and international defined benefit pension plans sponsored by VF (“Shared Plans”), which include participants of other VF operations. We account for our participation in the Shared Plans as a multiemployer benefit plan. Accordingly, net periodic pension costs specifically related to Company employees have been reported in the combined statements of income, and we do not record an asset or liability to recognize the funded or unfunded status of the Shared Plans. However, our reported earnings are subject to risk due to the volatility of net periodic pension costs, which ranged from $6.3 million to $44.7 million from 2016 to 2018, including the $21.5 million settlement charge in 2016. The volatility of VF’s pension expense is primarily due to varying amounts of actuarial gains and losses that are deferred and amortized to future years expense which are impacted by the rate of return on investments held by the Shared Plans, the discount rate used to value participant liabilities and demographic characteristics of the participants. These assumptions impact the amount of net periodic pension expense reported by the Company.

Deferred Compensation and Related Investment Security Risks

VF sponsors a nonqualified retirement savings plan for employees whose contributions to a 401(k) plan would be limited by provisions of the Code. This plan allows participants to defer a portion of their compensation and to receive matching contributions for a portion of the deferred amounts. Certain of the Company’s employees participate in this plan. Participants earn a return on their deferred compensation based on their selection of a hypothetical portfolio of publicly traded mutual funds, a separately managed fixed-income fund and VF common stock. Changes in the fair value of the participants’ hypothetical investments are recorded as an adjustment to deferred compensation liabilities and compensation expense. The increases and decreases in deferred compensation liabilities (except for the participants’ investment selections in VF common stock) are substantially offset by corresponding increases and decreases in the market value of VF’s investments, resulting in an insignificant net exposure to operating results and financial position.

Foreign Currency Exchange Rate Risks

We are a global enterprise subject to the risk of foreign currency fluctuations. Approximately 27% of our revenues in 2018 were generated in international markets. Most of our foreign businesses operate in functional currencies other than the U.S. dollar. In periods where the U.S. dollar strengthens relative to the euro or other foreign currencies where we have operations, there is a negative impact on our operating results upon translation of those foreign operating results into the U.S. dollar. The reported values of assets and liabilities in these foreign businesses are subject to fluctuations in foreign currency exchange rates. In 2018, 2017 and 2016, we did not enter into any derivative contracts with external counterparties. However, we have entered into contracts with VF to hedge certain foreign currency transactions, with maturities up to 20 months.

Commodity Price Risks

We are exposed to market risks for the pricing of cotton, wool and other materials, which we either purchase directly or in a converted form such as fabric. To manage risks of commodity price changes, management negotiates prices in advance when possible. We have not historically managed commodity price exposures by using derivative instruments.

Critical Accounting Policies and Estimates

We have chosen accounting policies that management believes are appropriate to accurately and fairly report our operating results and financial position in conformity with GAAP. We apply these accounting policies in a consistent manner. Significant accounting policies are summarized in Note 1 to our audited combined financial statements included elsewhere in this information statement.

The application of these accounting policies requires that we make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent

 

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assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. Management evaluates these estimates and assumptions on an ongoing basis. Because our business cycle is relatively short (i.e., from the date that inventory is received until that inventory is sold and the trade accounts receivable is collected), actual results related to most estimates are known within a few months after any balance sheet date. In addition, we may retain outside specialists to assist in impairment testing of goodwill and intangible assets. If actual results ultimately differ from previous estimates, the revisions are included in results of operations when the actual amounts become known.

We believe the following accounting policies involve the most significant management estimates, assumptions and judgments used in preparation of the combined financial statements or are the most sensitive to change from outside factors.

Inventories

Our inventories are stated at the lower of cost or net realizable value. Cost includes all material, labor and overhead costs incurred to manufacture or purchase the finished goods. Overhead allocated to manufactured product is based on the normal capacity of plants and does not include amounts related to idle capacity or abnormal production inefficiencies. We perform a detailed review, at least quarterly, of all inventories on the basis of individual styles or individual style-size-color stock keeping units to identify slow moving or excess products, discontinued and to-be-discontinued products, and off-quality merchandise. This review matches inventory on hand, plus current production and purchase commitments, with current and expected future sales orders. Management performs an evaluation to estimate net realizable value using a systematic and consistent methodology of forecasting future demand, market conditions and selling prices less costs of disposal. If the estimated net realizable value is less than cost, we reflect the lower value of that inventory. This methodology recognizes inventory exposures at the time such losses are evident rather than at the time goods are actually sold. Historically, these estimates of future demand and selling prices have not varied significantly from actual results due to our timely identification and ability to rapidly dispose of these distressed inventories.

Existence of physical inventory is verified through periodic physical inventory counts and ongoing cycle counts at most locations throughout the year. We provide for estimated inventory losses that have likely occurred since the last physical inventory date. Historically, physical inventory shrinkage has not been material.

Long-Lived Assets, Including Intangible Assets and Goodwill

We allocate the purchase price of an acquired business to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. We evaluate fair value at acquisition using three valuation techniques – the replacement cost, market and income methods – and weight the valuation methods based on what is most appropriate in the circumstances. The process of assigning fair values, particularly to acquired intangible assets, is highly subjective.

Fair value for acquired intangible assets is generally based on the present value of expected cash flows. Indefinite-lived and definite-lived trademark or trade name intangible assets (collectively referred to herein as “trademarks”) represent individually acquired trademarks, some of which are registered in multiple countries. Definite-lived customer relationship intangible assets are based on the value of relationships with wholesale customers at the time of acquisition. Goodwill represents the excess of cost of an acquired business over the fair value of net tangible assets and identifiable intangible assets acquired, and is assigned at the reporting unit level. Our depreciation policies for property, plant and equipment reflect judgments on their estimated economic lives and residual values, if any. Our amortization policies for definite-lived intangible assets reflect judgments on the estimated amounts and duration of future cash flows expected to be generated by those assets. In evaluating the amortizable life for customer relationship intangible assets, management considers historical attrition patterns for various groups of customers. In evaluating the amortizable life for definite-lived trademark intangible assets, management makes its best estimate of the duration and expected pattern of economic benefit.

 

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Testing of Definite-Lived Assets

Our policy is to review property, plant and equipment and definite-lived intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We test for potential impairment at the asset or asset group level, which is the lowest level for which there are identifiable cash flows that are largely independent, by comparing the carrying value to the estimated undiscounted cash flows expected to be generated by the asset. If the forecasted undiscounted cash flows to be generated by the asset are not expected to be adequate to recover the asset’s carrying value, a fair value analysis must be performed, and an impairment charge is recorded if there is an excess of the asset’s carrying value over its estimated fair value.

When testing property, plant and equipment for potential impairment, management uses the income-based discounted cash flow method using the estimated cash flows of the respective asset or asset group. The estimated undiscounted cash flows of the asset or asset group through the end of its useful life are compared to its carrying value. If the undiscounted cash flows of the asset or asset group exceed its carrying value, there is no impairment charge. If the undiscounted cash flows of the asset or asset group are less than its carrying value, the estimated fair value of the asset or asset group is calculated based on the discounted cash flows using the reporting unit’s weighted average cost of capital (“WACC”), and an impairment charge is recognized for the difference between the estimated fair value of the asset or asset group and its carrying value.

When testing definite-lived trademarks for potential impairment, management uses the income-based relief-from-royalty method. Under this method, forecasted revenues for products sold with the trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership), and the estimated undiscounted cash flows of the trademark (representing forecasted royalties avoided by owning the trademark) are compared to its carrying value. If the undiscounted cash flows of the trademark exceed its carrying value, there is no impairment charge. If the undiscounted cash flows of the trademark are less than its carrying value, the estimated fair value of the trademark is calculated in a manner consistent with indefinite-lived intangible assets discussed below, and an impairment charge is recognized for the difference between the estimated fair value of the trademark and its carrying value.

When testing customer relationship intangible assets for potential impairment, management uses the multi-period excess earnings method, which is a specific application of the discounted cash flow method. Under this method, we first calculate the undiscounted cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges, considering historical customer attrition rates and projected revenues and profitability related to customers that existed at acquisition. If the undiscounted cash flows of the customer relationship intangible asset exceed its carrying value, there is no impairment charge. If the undiscounted cash flows of the customer relationship intangible asset are less than its carrying value, the estimated fair value of the customer relationship intangible asset is calculated based on the discounted cash flows using the reporting unit’s WACC, and an impairment charge is recognized for the difference between the estimated fair value of the customer relationship intangible asset and its carrying value.

Testing of Indefinite-Lived Assets and Goodwill

Our policy is to evaluate indefinite-lived intangible assets and goodwill for possible impairment as of the beginning of the fourth quarter of each year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. As part of our annual impairment testing, we may elect to assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If management’s assessment of these qualitative factors indicates that it is not more likely than not that the fair value of the intangible asset or reporting unit is less than its carrying value, then no further testing is required. Otherwise, the intangible asset or reporting unit must be quantitatively tested for impairment.

An indefinite-lived intangible asset is quantitatively tested for possible impairment by comparing the estimated fair value of the asset to its carrying value. Fair value of an indefinite-lived trademark is based on an

 

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income approach using the relief-from-royalty method. Under this method, forecasted revenues for products sold with the trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership), and the estimated fair value is calculated as the present value of those forecasted royalties avoided by owning the trademark. The appropriate discount rate is based on the reporting unit’s WACC that considers market participant assumptions, plus a spread that factors in the risk of the intangible asset. The royalty rate is selected based on consideration of (i) royalty rates included in active license agreements, if applicable, (ii) royalty rates received by market participants in the apparel industry and (iii) the current performance of the reporting unit. If the estimated fair value of the trademark intangible asset exceeds its carrying value, there is no impairment charge. If the estimated fair value of the trademark is less than its carrying value, an impairment charge would be recognized for the difference.

Goodwill is quantitatively evaluated for possible impairment by comparing the estimated fair value of a reporting unit to its carrying value. Reporting units are businesses with discrete financial information that is available and reviewed by segment management.

For goodwill impairment testing, we estimate the fair value of a reporting unit using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit’s forecasted future cash flows that are discounted to present value using the reporting unit’s WACC as discussed above. For the market-based approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.

Based on the range of estimated fair values developed from the income and market-based methods, we determine the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, we calculate the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value.

The income-based fair value methodology requires management’s assumptions and judgments regarding economic conditions in the markets in which we operate and conditions in the capital markets, many of which are outside of management’s control. At the reporting unit level, fair value estimation requires management’s assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit’s strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management’s estimates and assumptions regarding:

 

   

Annual cash flows, on a debt-free basis, arising from future revenues and profitability, changes in working capital, capital spending and income taxes for at least a 10-year forecast period.

 

   

A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.

 

   

A discount rate that reflects the risks inherent in realizing the forecasted cash flows. A discount rate considers the risk-free rate of return on long-term treasury securities, the risk premium associated with investing in equity securities of comparable companies, the beta obtained from comparable companies and the cost of debt for investment grade issuers. In addition, the discount rate may consider any company-specific risk in achieving the prospective financial information.

Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of our reporting units.

 

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Rock & Republic® Impairment Analysis

The Rock & Republic® brand has an exclusive wholesale distribution and licensing arrangement with Kohl’s Corporation that covers all branded apparel, accessories and other merchandise. As of June 30, 2018, management performed a quantitative impairment analysis of the Rock & Republic® amortizing trademark intangible asset to determine if the carrying value was recoverable. We determined this testing was necessary based on the expectation that certain customer contract terms would be modified. Management used the income-based relief-from-royalty method and the contractual 4% royalty rate to calculate the pre-tax undiscounted future cash flows. Based on the analysis performed, management concluded that the trademark intangible asset did not require further testing as the undiscounted cash flows exceeded the carrying value of $49.0 million.

It is possible that management’s conclusion regarding the recoverability of the intangible asset could change in future periods as there can be no assurance that the estimates and assumptions used in the analysis as of June 30, 2018 will prove to be accurate predictions of the future.

2018 Impairment Testing

Management performed its annual goodwill and indefinite-lived intangible asset impairment testing as of the beginning of the fourth quarter of 2018. Management performed a qualitative impairment assessment for all reporting units and indefinite-lived trademark intangible assets, as discussed below in the “Qualitative Impairment Assessment” section. We did not record any impairment charges in 2018.

Qualitative Impairment Assessment

For all reporting units, we elected to perform a qualitative impairment assessment to determine whether it is more likely than not that the goodwill and indefinite-lived trademark intangible assets in those reporting units were impaired. We considered relevant events and circumstances for each reporting unit, including (i) current year results, (ii) financial performance versus management’s annual and five-year strategic plans, (iii) changes in the reporting unit carrying value since prior year, (iv) industry and market conditions in which the reporting unit and indefinite-lived trademark operates, (v) macroeconomic conditions, including discount rate changes, and (vi) changes in products or services offered by the reporting unit. If applicable, performance in recent years was compared to forecasts included in prior valuations. Based on the results of the qualitative impairment assessment, we concluded that it was not more likely than not that the carrying values of the goodwill and indefinite-lived trademark intangible assets were greater than their fair values, and that further quantitative impairment testing was not necessary.

Management’s Use Of Estimates and Assumptions

Management made its estimates based on information available as of the date of our assessment, using assumptions we believe market participants would use in performing an independent valuation of the business. It is possible that our conclusions regarding impairment or recoverability of goodwill or intangible assets in any reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in our goodwill and intangible asset impairment testing will prove to be accurate predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions in future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA.

A future impairment charge for goodwill or intangible assets could have a material effect on our combined financial position and results of operations.

 

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Stock Options

VF sponsors an employee stock plan in which certain of our employees participate. The following describes VF’s key assumptions used in accounting for stock options.

VF uses a lattice option-pricing model to estimate the fair value of stock options granted to employees. VF believes that a lattice model provides a refined estimate of the fair value of options because it can incorporate (i) historical option exercise patterns and multiple assumptions about future option exercise patterns for each of several groups of option holders and (ii) inputs that vary over time, such as assumptions for interest rates and volatility. Management performs an annual review of all assumptions employed in the valuation of option grants and believes they are reflective of the outstanding options and underlying common stock and of groups of option participants. The lattice valuation incorporates the assumptions listed in Note 13 to our audited combined financial statements.

One of the critical assumptions in the valuation process is estimating the expected average life of the options before they are exercised. For each option grant, VF estimated the expected average life based on evaluations of the historical and expected option exercise patterns for each of the groups of option holders that have historically exhibited different option exercise patterns. These evaluations included (i) voluntary stock option exercise patterns based on a combination of changes in the price of VF common stock and periods of time that options were outstanding before exercise and (ii) involuntary exercise patterns resulting from turnover, retirement and death.

Volatility is another critical assumption requiring judgment. Management bases its estimates of future volatility on a combination of implied and historical volatility. Implied volatility is based on short-term (six to nine months) publicly traded near-the-money options on VF common stock. VF measures historical volatility over a ten-year period, corresponding to the contractual term of the options, using daily stock prices. Management’s assumption for valuation purposes is that expected volatility starts at a level equal to the implied volatility and then transitions to the historical volatility over the remainder of the ten-year option term.

Defined Benefit Pension Plans

Certain Company employees participate in the Shared Plans, which includes participants of other VF operations. We account for our participation in the Shared Plans as a multiemployer benefit plan. Accordingly, net periodic pension costs specifically related to Company employees have been reported in the combined statements of income, and the Company does not record an asset or liability to recognize the funded or unfunded status of the Shared Plans. See Note 11 to our audited combined financial statements for additional information.

VF’s employee pension costs and obligations are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, salary growth, long-term return on plan assets, retirement rates, mortality rates, and other factors. VF’s selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation, as well as independent studies of trends performed by actuaries. However, actual results may differ substantially from the estimates that were based on the critical assumptions. VF used a December 31 measurement date for all plans. Actual results that differ from VF’s assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense in such future periods. While VF management believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect VF’s pension costs and obligations. Furthermore, the assumptions used by VF may not be indicative of assumptions which the Company would have made on a standalone basis.

The Company recognized $6.6 million, $6.9 million and $7.8 million for the service cost component of net periodic pension costs for the Shared Plans during 2018, 2017 and 2016, respectively, which is reflected in cost of goods sold and selling, general and administrative expenses in the combined statements of income. The

 

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Company recognized a benefit of $5.1 million in 2018, benefit of $0.2 million in 2017 and expense of $15.4 million in 2016 for the non-service components of net periodic pension costs for the Shared Plans, which are reflected in selling, general and administrative expenses in the combined statements of income. During the quarter ended June 30, 2018, VF approved a freeze of all future benefit accruals under the U.S. Shared Plans, effective December 31, 2018. This resulted in a pension curtailment loss for VF, of which $3.5 million was recorded by the Company in the combined statement of income for 2018. The Company also recorded a $1.2 million expense in 2018 reflecting the Company’s portion of pension settlement charges recorded by VF. In addition, the Company recorded a $21.5 million expense in 2016 reflecting the Company’s portion of a settlement charge recorded by VF. These curtailment and settlement charges are reflected in selling, general and administrative expenses in the combined statements of income in each respective period.

Income Taxes

As a global company, VF is subject to income taxes and files income tax returns in over 100 U.S. and foreign jurisdictions each year. For purposes of the combined financial statements, income taxes have been calculated as if we file income tax returns for the Company on a standalone basis. The Company’s U.S. operations and certain of its non-U.S. operations historically have been included in the tax returns of VF or its subsidiaries that may not be part of the spinoff transaction. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company makes an ongoing assessment to identify any significant exposure related to increases in tax rates in the jurisdictions in which the Company operates.

The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and significant management judgment. VF’s income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. The Company has evaluated these potential issues under the “more-likely-than-not” standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Income tax expense could be materially affected to the extent VF prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent VF is required to pay amounts greater than the established liability for unrecognized tax benefits. The Company does not currently anticipate any material impact on earnings from the ultimate resolution of income tax uncertainties. There are no accruals for general or unknown tax expenses.

The Company has $23.7 million of gross deferred income tax assets related to operating loss carryforwards, and $23.7 million of valuation allowances against those assets. Realization of deferred tax assets related to operating loss carryforwards is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws. If management believes that the Company will not be able to generate sufficient taxable income to offset losses during the carryforward periods, the Company records valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. If in a future period management determines that the amount of deferred tax assets to be realized differs from the net recorded amount, the Company would record an adjustment to income tax expense in that future period.

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act included a broad range of complex provisions impacting the taxation of multi-national companies. Generally, accounting for the impacts of newly enacted tax legislation is required to be completed in the period of enactment; however, in response to the complexities and ambiguity surrounding the Tax Act, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) to provide companies with relief around the initial accounting for the Tax Act. Pursuant to SAB 118, the

 

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SEC has provided a one-year measurement period for companies to analyze and finalize accounting for the Tax Act. During the one-year measurement period, SAB 118 allows companies to recognize provisional amounts when reasonable estimates can be made for the impacts resulting from the Tax Act. The Company has finalized accounting for the Tax Act during the one-year measurement period, as detailed below.

During the fourth quarter of 2017, we recognized a provisional charge of $136.7 million primarily comprised of $110.6 million related to the transition tax and $19.4 million of tax expense related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. The transition tax was treated consistently with other taxes payable (i.e., deemed settled and reflected within Parent company investment). Other provisional charges of $6.7 million were primarily related to establishing a deferred tax liability for foreign withholding and state taxes as the Company is not asserting indefinite reinvestment on short-term liquid assets of certain foreign subsidiaries. All other foreign earnings, including basis differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. The Company has not determined the deferred tax liabilities associated with these undistributed earnings and basis differences, as such determination is not practicable.

During the one-year measurement period provided for under SAB 118, we recognized additional net charges of $5.5 million, primarily comprised of $5.7 million of charges related to the transition tax, additional tax benefits of $1.5 million related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%, and other charges of $1.3 million related to establishing a deferred tax liability for foreign withholding taxes.

The Tax Act also includes the creation of a new minimum tax called the base erosion and anti-abuse tax (“BEAT”), a new provision that taxes U.S. allocated expenses (e.g., interest and general administrative expenses), a tax on global intangible low-tax income (“GILTI”) from foreign operations, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, a new limitation on deductible interest expense, and limitations on the deductibility of certain employee compensation. Under GAAP, companies are allowed to make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when they are incurred or factor such amounts into the measurement of deferred taxes. The Company completed its analysis related to this accounting policy election and treated the taxes resulting from GILTI as a current-period expense. We presently do not expect to be subject to the minimum tax imposed by BEAT provisions.

Recently Issued and Adopted Accounting Standards

Refer to Note 1 to our audited combined financial statements included elsewhere in this information statement for discussion of recently issued and adopted accounting standards.

 

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BUSINESS

Overview

We are a global apparel leader focused on the design, manufacturing, sourcing, marketing, and distribution of our portfolio of brands, including our iconic brands Wrangler® and Lee®. Our two key brands benefit from heritages spanning 200 combined years and together with our other brands accounted for over 170 million units of apparel produced or sourced in 2018. We endeavor to provide consumers with high-quality, innovative products at a superior value. We manufacture approximately 38% of our products in our owned and leased facilities, and distribute our products worldwide primarily through both major brick & mortar and e-commerce retailers. We believe our experienced management team is executing a strategy that provides a better product and brand experience to our consumers, primarily by delivering on our high standards of product design and innovation, and offering a wide variety of compelling products across channels and categories.

We focus on continuously improving the most important elements of our products, which include fit, fabric, finish, and overall construction, while continuing to provide consumers our products at attractive price points. We leverage innovation and design advancements as well as our unique brand heritages to create marketing campaigns that communicate our brand positioning, product attributes, and overall value proposition to consumers. We believe these marketing campaigns further elevate our brands, build our loyal global consumer base, and ultimately drive revenue growth.

We have a presence in over 65 countries and generated approximately $2.8 billion in global revenues in 2018 across our various channels. We sell our products primarily through our established wholesale and expanding digital channels, and utilize our branded brick & mortar locations to supplement our go-to-market strategy. We benefit from strong relationships with many of our customers who we believe depend on our ability to reliably and timely replenish them with our high-volume products.

Within the U.S., where we generated 73% of our revenues in 2018, we offer our apparel and accessories largely through our wholesale channel, which consists of mass and mid-tier retailers, specialty stores including western specialty retail, department stores, and retailer-owned and third-party e-commerce sites. We also sell our products in the U.S. through direct-to-consumer channels, including full-price stores, outlet stores and our own websites. Outside the U.S., where we generated 27% of our revenues in 2018, we operate through similar wholesale channels as in the U.S., and utilize distributors, agents, licensees, and partnerships along with our full-price and outlet stores and digital presence.

We believe our global supply chain provides us with significant competitive advantages and operating flexibility. Our internal manufacturing capabilities include owned and leased facilities, all of which are located in the Western Hemisphere, and produced approximately 38% of our total units sold in 2018. The remainder of our units sold were supplied by a range of third-party manufacturers. We distribute our products globally through our own distribution centers as well as through third-party distribution centers. We believe our flexible and balanced approach to manufacturing and distribution allows us to better manage our production, and in turn appeals to our customers who we believe view our ability to consistently meet their production needs as a point of competitive differentiation.

We believe the consumer appeal of our brands combined with consistent execution of our manufacturing and distribution strategies have supported our ability to produce strong financial results. We generated over $2.75 billion in revenue and $330 million in operating income in each of the last five years. Additionally, our cash flows from operations were greater than $295 million in each of the years from 2014 through 2016. In 2017, our cash flows from operations were $168.6 million, which were impacted by a $110.6 million charge related to the transition tax component of the Tax Act that was deemed settled in cash with VF for purposes of carve-out financial reporting. In 2018, we reported cash flows used by operations of $96.3 million, primarily due to $323.3 million lower cash proceeds from settlement of the intercompany sale to VF of certain of the Company’s

 

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trade accounts receivable. The timing of the intercompany settlement was impacted by VF’s one-time change in fiscal year-end and does not reflect an operational deterioration in cash flows. We expect our cash flows to normalize post-Separation and intend to continue to invest in our brands, talent and capabilities, and growth strategies as well as to support a dividend to shareholders, and to repay our indebtedness over time.

Kontoor Brands is headquartered in Greensboro, North Carolina. Upon our separation from VF, we expect to trade under the ticker symbol “KTB” on the NYSE.

Our Competitive Strengths

Iconic Brands with Significant Global Scale.

Our two key brands are steeped in rich heritage and authenticity. The Wrangler® and Lee® brands generated approximately $1.6 billion and $960 million, respectively, in 2018 revenues and have an established global presence in the apparel market. Products bearing our brands are sold in more than 65 countries, and we believe they have strong consumer connectivity worldwide. We market our brands and products to highlight their differentiated position and product attributes. We strive to maximize our consumer reach by leveraging each brand’s “best practices” to drive growth across product categories and expand our overall revenues and earnings profile.

Founded over 70 years ago, Wrangler® is a classic American brand deeply rooted in U.S. western apparel and positioned as clothing ready for everyday life. Wrangler® branded products are offered in more than 20,000 retail doors worldwide and span a wide range of product categories including denim and non-denim bottoms, shirts, jackets, and other outerwear and accessories. We believe the Wrangler® brand appeals to a broad range of consumers worldwide who appreciate the brand’s western heritage, quality, and superior value. Outside the U.S., we believe the brand generally occupies a more premium positioning and carries a higher average price point.

Founded in 1889, Lee® is an authentic apparel brand with a heritage of purposeful craftsmanship and innovation. Lee® branded products offer versatile styling and superior comfort in denim and casual apparel for a multitude of activities, and target an active consumer interested in a stylish look through innovation designed for functional and visual appeal. The Lee® brand generates approximately 47% of its revenues outside the U.S., with a significant portion attributable to China and certain countries in Europe. In particular, since entering the Chinese market in 1995, the Lee® brand has developed a leading market position.

Deep Relationships with Brick & Mortar Retail and E-Commerce Leaders.

We have developed long-term relationships with many leading global brick & mortar and e-commerce retailers, whom we believe rely on our iconic brands, leading product quality and value, and innovation to address evolving consumer needs in our product categories. By fostering these relationships, we have become an important vendor for many of our customers and have built leading category positions, which in turn supports the availability of our brands to consumers and our ability to introduce new products and categories. We also endeavor to provide sophisticated logistics, planning, and merchandising expertise to support our customers, which we believe supports a level of insight that builds more integrated customer relationships. Over time, we believe we have developed an aptitude for addressing our customers’ unique and challenging inventory replenishment and planning needs, and have built a reputation as a reliable partner in a dynamic retail environment.

Integrated Supply Chain Built to Support Volume and Replenishment.

We are continually refining our supply chain to maximize efficiency and reinforce our reputation of reliability with our customers. Through our vertically integrated supply chain we manufacture, source, and distribute a significant quantity of high volume apparel products that are frequently replenished by our retail

 

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partners. Our product procurement and distribution strategies, combined with our internal manufacturing facilities and retail floor space management programs, allow us to maintain what we believe is a competitive advantage versus other apparel suppliers. Our supply chain is built to support large volumes and to meet customer needs while balancing cost and operational requirements. Our 13 internal manufacturing facilities are located in the Western Hemisphere, where their proximity to our primary markets enables us to deliver inventory in a consistent and timely manner. We also have established global third-party sourcing and distribution networks that we leverage across product categories and various regions. We believe our flexible and balanced approach to manufacturing and distribution allows us to better manage our production needs.

Many of our largest volume and highest velocity product styles continue from year to year, with design and innovation elements periodically updated to maintain our products’ relevance with consumers. We utilize real-time data provided by our customers to ensure timely delivery of our products and optimize our customers’ inventory levels. We believe our vertically integrated operations in combination with inventory and supply-demand reconciliation processes allow us to excel in meeting our retail customers’ rapid order requirements.

Highly Experienced Management Team and Board of Directors.

We have assembled a senior management team that is highly focused on continuing to grow our brands’ revenues, delivering strong and consistent financial results, and building a cohesive corporate culture. Together, our management team has over 50 years of combined experience in the apparel and accessories industry and brings deep global industry expertise to our newly independent company. Our President and Chief Executive Officer, Scott Baxter, served in various senior leadership positions at VF, including most recently as Vice President and Group President of Americas West, where he was responsible for overseeing brands such as The North Face® and Vans®, and previously as Group President of VF’s Jeanswear Americas business. Our Vice President and Chief Financial Officer, Rustin Welton, most recently served as Group Chief Financial Officer for VF’s Jeanswear, Workwear, Timberland® and VF Outlet™ businesses. Our two Vice Presidents and Global Brand Presidents, Thomas Waldron and Christopher Waldeck, maintain operational responsibility for the Wrangler® and Lee® brands, respectively, and have significant experience managing our brands domestically. We are also guided by a strong Board of Directors who bring valuable industry and management insight to Kontoor Brands. Our Board is led by our Non-Executive Chairman, Robert Shearer, who has extensive familiarity with our business and our industry, having served as Senior Vice President and Chief Financial Officer of VF from 2005 through 2015. We believe the depth of experience and deep industry knowledge of our management team and Board of Directors will drive the success of our new company.

Resilient Business Model That Delivers Consistent Results.

Our business has historically generated significant revenues, strong profits, and attractive cash flows due to our global brands, leading market positions, deep customer relationships, and the vertical integration of our supply chain. We believe we offer high product value and quality to our consumers, who respond to our value proposition by consistently purchasing our products over time. Over the last five years, we generated revenues in excess of $2.75 billion each year, and consistently delivered operating margins of 12% or greater each year. Our strong margin profile combined with our diligent approach to operational excellence and capital management have produced meaningful cash flows. We believe our consistent financial results will provide us with the opportunity to consistently invest in our business, return capital to shareholders, and repay debt.

Our Strategies

We have historically operated predominantly as a segment within VF. Following the Separation, we will become an independent publicly traded company led by a highly experienced management team fully dedicated to leveraging our capabilities and driving our strategic initiatives. We will also have increased flexibility to deploy our strong free cash flow towards our operating and capital allocation priorities.

 

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Adopt a Global Approach for Optimizing the Wrangler® and Lee® Brands.

We believe the combination of our brands, scale, and global platform is differentiated in our industry. Historically, our brands have largely operated independently across geographic regions with regard to management, product design, and marketing. With one integrated senior leadership team to manage our brands and operations globally, there is an opportunity to implement an operating model that more efficiently leverages our global brands, scale, and platforms. We have built a leadership team based in Greensboro, North Carolina, that will include Global Presidents of both the Wrangler® and Lee® brands, as well as global leaders of the design, merchandising, digital, and direct-to-consumer departments. This centralized senior management team with global responsibility will work closely with our regional teams to deliver a unified brand and product design message while ensuring market-specific nuances are maintained. Through this integrated platform and management structure, we believe we can amplify the global strength of our brands, improve operating efficiency, and increase the overall demand for our products.

Continue to Increase Our Product Offering and Expand Our Target Consumer Base.

We see potential to enhance our existing product assortment, broaden our product offering, and expand into adjacent product categories. We leverage our Global Denim Innovation Network and Cognitive and Design Science Center to develop cognitive, design, textile, and product construction advancements that target the needs of our existing and potential new target consumer groups. We strive to create new products to attract a wide range of consumers, including women and younger generations, while seeking to ensure our core offering continues to serve the needs of our consumers. We believe we have the opportunity to also enter new categories that utilize our existing brand and product strengths, such as the outdoor and workwear categories. We have also introduced higher-end products at premium price points in the U.S. Successful execution of our product expansion strategies should broaden the appeal of our brands and products to new consumers, extend our reach into new product categories, and ultimately drive the overall revenues of our business. In addition, we also intend to opportunistically evaluate potential merger and acquisition targets to supplement our approach over the long-term.

Continue Expanding Our Distribution.

We believe there is an opportunity to expand the distribution of our products with new and existing brick & mortar and e-commerce customers internationally and in the U.S. We expect the integration and collaboration of our brands’ global leadership teams will help drive distribution opportunities for the Wrangler® and Lee® brands in both new and established markets by leveraging each brand’s relative distribution strengths across regions. Specifically, China provides an attractive geography to expand our existing presence and distribute more products across a range of price segments. In Europe, we intend to refine our strategy to become more consumer centric in addressing how and where our customers want to purchase our products. In the U.S., we see an opportunity to continue to grow with our major retail customers as well as drive distribution of our more premium products through higher-end department and specialty stores. We also expect to leverage our leading brand positions to increase our penetration with major global e-commerce players as this distribution channel continues to grow in consumer importance worldwide.

Drive Cost Savings and Efficiencies Across Our Global Organization.

We expect to realize efficiencies across our business as we create a more centralized global organization and pursue cost savings initiatives. As part of our centralized approach to our global business, our management team will oversee all brands for their respective business functions, including supply chain, digital, direct-to-consumer, and strategy while seeking to ensure we maintain our worldwide presence and regional approach. We have implemented initiatives to reduce costs and realize greater efficiencies, which have included transitioning our Central America and South America region to a distributor model, exiting certain supply chain operations, relocating Lee®’s North American headquarters to Greensboro, North Carolina and streamlining our global

 

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organizational structure. We will continue to implement various operational initiatives to address inefficiencies throughout our organization and cost savings programs that we expect to generate meaningful global cost savings. We plan to utilize such measures to fuel additional investments in our capabilities and brands while improving our overall profitability.

Our Brands

We own and operate a portfolio of apparel brands that each aim to address the differentiated needs of their consumers. Our two main brands, Wrangler® and Lee®, have product designs targeted at specific consumers, and also offer various collections for specific retailers.

Wrangler®

Wrangler® is an iconic American heritage brand rooted in the western lifestyle, with over 70 years of history offering denim, apparel, and accessories for men and women. Wrangler® branded products are available through wholesale arrangements with mass and mid-tier retailers, specialty stores, department stores, independently owned and operated partnership stores, and e-commerce platforms, as well as through owned retail stores and websites. Wrangler® branded products are available in the U.S., Canada, Mexico, Central America and South America, the United Kingdom and continental Europe, the Middle East, India, and through licensees across Australia, Asia and Africa. We offer multiple sub-brands and collections within the main Wrangler® brand that we develop to target specific consumer demographics and consumer end-uses, including: 20X®, Aura from the Women at Wrangler®, Cowboy Cut®, Premium Patch®, Riggs Workwear®, Rock 47®, Rustler®, W1947®, Wrangler Retro®, and Wrangler Rugged Wear®.

Lee®

Lee® is an iconic American denim and apparel brand celebrating 130 years of heritage and authenticity in 2019. Lee® product collections include a uniquely styled range of jeans, pants, shirts, shorts, and jackets for men, women, boys and girls, with the latter currently licensed in the U.S. The Lee® brand delivers trend-forward styles with exceptional fit and comfort through innovative fabric solutions and advanced design technology. Lee® branded products are distributed domestically and internationally through the wholesale channel including department stores, mass merchants, specialty stores, independently owned and operated partnership stores, and e-commerce platforms, as well as through owned retail stores and websites. Lee® branded products are available in the U.S., Canada, Mexico, Central and South America, the United Kingdom and continental Europe, the Middle East, India, China, and through licensees across Australia, Asia, and Africa. The Lee® brand offers multiple sub-brands and collections, making it attractive for a broader consumer base, including: Body OptixTM, Lee101TM, Lee Modern Series®, and Lee® Riders®.

Rock & Republic®

Rock & Republic® is a premium apparel brand known for its edgy styles and is marketed as a modern and active lifestyle brand to consumers. Since 2012, Rock & Republic® products have been sold in the U.S. exclusively through Kohl’s. We believe there remains an opportunity to expand the brand’s presence outside the U.S. by leveraging our retail and e-commerce relationships.

Other Brands

We also own and operate various smaller brands worldwide, which include Gitano® and Chic®.

Distribution Channels

Our distribution channels include U.S. Wholesale, Non-U.S. Wholesale, Branded Direct-to-Consumer, and Other. We utilize these channels based on the optimal route to reach our consumers in the physical and digital

 

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locations they frequent within their geographies. As part of our separation from VF, we will also operate the U.S.-based VF Outlet™ business, which carries both of our primary brands as well as VF-branded products and third-party branded merchandise.

U.S. Wholesale

The U.S. Wholesale channel is our largest distribution channel and accounted for approximately 61% of our revenues in 2018. Within this channel, our Wrangler® and Lee® branded products are marketed and sold by mass and mid-tier retailers, specialty stores including western specialty retail, department stores, and retailer-owned and third-party e-commerce sites. A portion of our U.S. Wholesale revenue is attributable to digital sales from our wholesale partners’ websites, third-party e-commerce platforms such as Amazon, and other smaller pure-play digital retailers. Third-party e-commerce platforms and pure-play digital retailers are a growing and important portion of this channel.

Our mass merchant customers include national retailers such as Walmart and Target, as well as various regional retail partners. Our mid-tier and traditional department store customers include national retailers such as Kohl’s, JCPenney, Belk, Macy’s, and various other retail partners. Rock & Republic® branded products are distributed through an exclusive agreement with Kohl’s. The specialty store channel, which includes revenue from Wrangler® Riggs Workwear® and Wrangler® Western branded products, consists primarily of national accounts such as Tractor Supply Company and Boot Barn as well as upscale modern specialty stores.

We aim to foster close and longstanding relationships with our wholesale customers, having partnered with each of our top three brick & mortar wholesale customers for over 25 years. In addition, we engage in an active dialogue with many of our key wholesale customers and receive proprietary insights about how our products are performing on a timely basis. Our brands’ top U.S. Wholesale customers include Walmart, Kohl’s, Target, and Amazon, and Walmart was our only customer representing greater than 10% of our total revenue in each of the last three years (approximately 32%, 33% and 33% of total revenue in 2018, 2017 and 2016, respectively). Sales to our customers are generally on a purchase order basis and not subject to long-term agreements.

In addition, a small portion of sales in our U.S. Wholesale channel are from licensing arrangements where we receive royalties based on a percentage of the licensed products’ revenues. Most of the agreements provide for a minimum royalty requirement. See “—Licensing Arrangements” below for more information.

Non-U.S. Wholesale

The Non-U.S. Wholesale channel represents the majority of our international business and accounted for approximately 22% of our revenues in 2018. The majority of the Wrangler® and Lee® international product business is located in EMEA and APAC, where we sell our products through department stores and specialty stores. In Canada and Mexico, our branded products are marketed through mass merchants, department stores, and specialty stores, while in South America our branded products are sold in department and specialty stores. Additionally, our Non-U.S. Wholesale channel includes non-U.S. sales on digital platforms operated by our wholesale partners, as well as sales in partnership stores located across EMEA, APAC, and South America. Partnership stores are owned and operated by our licensees, distributors, and other independent parties. They are primarily mono-brand retail locations selling our Wrangler® and Lee® branded products that have the appearance of Kontoor Brands-operated stores, and as such represent an important vehicle for presenting our brands to international consumers. Similar to the U.S. Wholesale channel, we use proprietary insights from our wholesale customers to strategically refine our products and adjust our go-to-market approach.

Geographically, our revenue in EMEA is concentrated in developed markets such as Germany, Poland, Italy, Scandinavia, France, Spain, the Netherlands, and the United Kingdom. We access the APAC market primarily through our business in China and India, which we anticipate will continue to be countries of growth for this distribution channel. Canada is the largest international market for Wrangler® branded products, while China is the largest international market for Lee® branded products.

 

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In addition, a small portion of sales in our Non-U.S. Wholesale channel are from international licensing arrangements where Kontoor Brands receives royalties based on a percentage of the licensed products’ revenues. Most of the agreements provide for a minimum royalty requirement. See “—Licensing Arrangements” below for more information.

Branded Direct-to-Consumer

Our Branded Direct-to-Consumer channel represents the distribution of our products via concession retail locations internationally, Wrangler® and Lee® branded full-price stores globally, and Company-owned outlet stores globally. The channel also includes our branded products in VF Outlet™ locations, and our products that are marketed and distributed online via www.wrangler.com and www.lee.com. Our Branded Direct-to-Consumer channel allows us to display the brands’ product lines in a manner that supports the brands’ positioning, providing an in-store and online experience that enables us to address the needs and preferences of our consumers. The channel accounted for approximately 11% of our revenues in 2018.

The Branded Direct-to-Consumer channel includes 241 concession retail stores, which are located internationally and consist of mono-brand and dual-brand stores. Under a typical concession arrangement, we have a dedicated sales area within our customers’ stores, and pay a concession fee for use of the space based on a percentage of retail sales. The concession model allows our partners to dedicate specific sales areas to our brands and helps differentiate and enhance the presentation of our products.

Our 41 owned full-price Wrangler® and Lee® branded retail stores are located in the U.S., South America, Europe, and Asia, and consist of both mono-brand stores, which exclusively carry either Wrangler® or Lee® branded products, and dual-brand stores, which carry both Wrangler® and Lee® branded products. In addition, we also have a limited number of dual-branded Wrangler® and Lee® outlet stores in the U.S., as well as a limited number of Wrangler® and Lee® branded clearance center stores.

We also operate multiple outlet stores in the U.S., in both premium outlet malls and more value-based outlet locations. The majority of our sites in the U.S. are traditional VF Outlet™ locations featuring Wrangler® and Lee® branded products, as well as VF-branded and third-party branded products. Branded Direct-to-Consumer channel revenues include all sales from VF Outlet™ locations excluding the VF-branded and third-party branded merchandise, which are reported in the Other channel described below.

We continue to prioritize serving our customers through digital platforms and include digitally enabled transactions through our own websites as part of this channel. This represents a growing portion of our revenues, and helps elevate the consumer experience with our brands. Wrangler® and Lee® branded products are currently available through our own e-commerce websites in 14 countries.

Other

Our Other distribution channel consists of sales of VF-branded and third-party branded merchandise in our VF Outlet™ stores, as well as sales to VF for products manufactured in our plants and use of our transportation fleet. This channel accounted for approximately 6% of our revenues in 2018, and while the Other channel is not a strategic focus, we are committed to optimizing profitability in our VF Outlet™ stores.

Design and Product Development

Our product design and innovation effort across fit, fabric, finish, and quality is an important element of our strategy. We leverage our expertise in these important areas to provide our consumers high-quality and high-value products. We operate a multi-site approach to product design and development, with hubs located in the U.S., Belgium, Hong Kong, and India. In the U.S. and EMEA, product design is housed within the merchandising, marketing, consumer insights, innovation, and executive teams to ensure product design delivers against brand positioning, consumer needs, and target costs.

 

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Our product development team, which includes technical development, pattern-making, and engineering, works closely with our product design team to facilitate collaboration between the two functions. These two teams collaborate from initial concept to product creation in order to craft a lifestyle association to our Wrangler® and Lee® branded products. Our vigorous product development is supported by a robust go-to-market process that seeks to ensure brand continuity across business units and strong, consistent execution. We have two primary selling seasons, spring and fall, but certain product lines offer more frequent introductions of new merchandise.

In addition to our design functions within existing collections, we operate a strategic Global Denim Innovation Network in Greensboro, North Carolina, as well as a Cognitive and Design Science Center in Irvine, California, with a focus on cognitive, design, textile, and construction advancements that we can leverage across our portfolio. These locations are staffed with dedicated scientists, engineers, and designers who leverage our proprietary consumer insights to create new designs, manufacturing, and material technologies. These centers are integral to our long-term growth as they allow us to deliver new products and experiences that aim to meet our consumers’ needs, which we believe drives demand for our products.

Manufacturing, Sourcing, and Distribution

Our global supply chain organization is responsible for the operational planning, manufacturing, sourcing, and distribution of products to our customers. We believe we have developed a high degree of expertise in managing the complexities associated with a global supply chain that produced or sourced more than 170 million apparel units in 2018. Our supply chain employs a centralized leadership model with localized regional expertise. Within our internal manufacturing facilities, we innovate and design our own proprietary equipment to drive our production output and capabilities. We focus on engineering and on efficiency, which we believe provides an ongoing competitive advantage in our internal manufacturing facilities. We leverage our manufacturing expertise to our sourcing operations, where we have developed longstanding relationships with third-party manufacturers and distributors. We believe this manufacturing and sourcing approach, coupled with strategic inventory and retail floor space management programs with many of our major retail customers, gives us a competitive advantage in our business.

Sourcing and Manufacturing

We believe the combination of our internal manufacturing and contracted production across different geographic regions provides a well-balanced, flexible approach to product procurement. Within our own manufacturing facilities, we purchase raw materials from numerous U.S. and international suppliers to meet our production needs. Raw materials include products made from cotton, polyester, spandex, and lycra blends, as well as thread and trim (such as product identification, buttons, zippers and snaps). Fixed price commitments for fabric and certain supplies are generally set on a quarterly basis for the next quarter’s purchases. No single contracted manufacturer supplier represents more than 10% of our total cost of goods sold. We operate global sourcing hubs, which are responsible for managing the contracted vendor manufacturing and procurement of product, including supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing, and transportation and shipping functions.

We operate 13 manufacturing facilities (ten owned facilities in Mexico and three leased facilities in Nicaragua). We also source products from approximately 200 contractor manufacturing facilities in over 30 countries. In 2018, approximately 38% of our global units were manufactured in our internal manufacturing facilities, and approximately 62% of global units were sourced from third-party contractors. Products obtained from contractors in the Western Hemisphere frequently have a higher cost than products obtained from contractors in Asia. However, internal manufacturing combined with contracting in the Western Hemisphere gives us greater flexibility, shorter lead times, and allows for enhanced inventory management in the U.S. market. In making decisions about the location of manufacturing operations and suppliers, we consider a number of factors including the raw material source, the final destination, production lead times, duties and tariffs,

 

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product cost, product complexity, and the ability to pursue upside demand. Additionally, we continually monitor political risks and developments related to duties, tariffs and quotas and we often manufacture and source products from countries with tariff preferences and free trade agreements.

Distribution

Products are shipped from our independent suppliers and internal manufacturing facilities to distribution centers around the world. We directly operate the majority of the distribution centers and we carefully select the remaining third-party contracted centers depending on our presence in the region. All of our distribution centers are strategically located to provide speed and service to our consumers at the most efficient cost possible. Additionally, our established long-term third-party distribution relationships ensure maximum capacity, connectivity, responsiveness, and overall service coverage around the globe. In international markets where we do not have brick & mortar operations, our products are marketed through our distributors, as well as agents, licensees, and single-brand or multi-brand partnership stores.

Advertising and Customer Support

Our advertising and marketing effort focuses on differentiating our brands’ positioning and highlighting our product qualities. We are focused on creating globally unified brand messages with appropriate regional nuances in order to maximize our brand recognition, and drive brand demand from initial end consumer awareness to long-term loyalty. In conjunction with the appointment of our new global heads of marketing, we will continue to develop integrated, multi-channel marketing strategies designed to effectively reach the target consumers of each of our brands. We pursue this strategy through our use of a variety of media channels and other public endorsements, including traditional media such as television, print, and radio, as well as digital media channels such as display, online video, social media, paid search, and influencers. We employ marketing analytics to optimize the impact of advertising and promotional spending, and to identify the types of spending that provide the greatest return on our marketing investments.

We also participate in cooperative advertising on a shared cost basis with major retailers in print and digital media, radio, and television. We provide advertising support to our wholesale customers in the form of point-of-sale fixtures and signage to enhance the presentation and brand image of our products. Our websites, www.wrangler.com, www.lee.com, and corresponding regional websites, enhance consumer understanding of our brands and help consumers find and buy our products. We employ a support team for each brand that is responsible for customer service at the consumer level as well as a sales force that manages our customer relationships.

Social Responsibility and Community Outreach

Operating as a socially conscious company and working within our communities will remain an integral part of our values as an independent company. We are committed to environmental sustainability, labor welfare, and community development, not only because today’s consumers demand the highest standards from the brands they utilize, but because we believe these values are consistent with what our brands represent and are the right thing to do to enhance global welfare.

Licensing Arrangements

We seek to maximize our brands’ market penetration and consumer reach by entering into licensing agreements with independent parties. Pursuant to these licensing agreements, we generally grant our licensing partner an exclusive or non-exclusive license to use one of our brands in connection with specific licensed categories of products in specific geographic regions. Our licensing partners leverage the strength of our brands and our customer relationships to sell products in their licensed categories and/or geographic regions. Categories in which we currently have licensing agreements include jeanswear, casual apparel, belts, footwear, small leather goods and jewelry.

 

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We retain oversight and approvals of the design, quality control, advertising, marketing, and distribution of licensed products to ensure adherence to our brand and product quality standards. License agreements are for fixed terms of generally two to five years. Each licensee pays royalties based on its sales of licensed products, with the majority of agreements requiring a minimum royalty payment. Licensing income was $32.7 million in 2018.

Competition

The apparel industry is highly competitive, highly fragmented and characterized by low barriers to entry with many regional, local, and global competitors. We believe we compete in the apparel and accessories sector by leveraging our brands, scale, and ability to develop high-quality, innovative products at competitive prices that meet consumer needs.

Our primary branded competitors are large, globally focused apparel companies that also participate in a variety of categories, including, but not limited to, athletic wear, denim, exclusive or private labels, and workwear. A select list of key competitors includes Calvin Klein, Carhartt, Diesel, Guess, Levi’s, Tommy Hilfiger, and Uniqlo. Additionally, we see a large and growing offering from private label apparel created for retailers such as Walmart, Amazon, H&M, Old Navy, and Gap.

Employees

We employed approximately 17,000 people as of December 29, 2018, of which approximately 4,200 were located in the U.S. In international markets, a significant percentage of employees are covered by trade sponsored or governmental bargaining arrangements. Employee relations are considered to be good.

 

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Properties

We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate 13 manufacturing-related facilities and nine distribution centers around the world. Our global headquarters are located in Greensboro, North Carolina, and house our various sales, marketing and corporate business functions. The following table sets forth our principal properties as of the date of this information statement.

 

Location

  Approximate
Square Feet
   

Use

  Owned
or
Leased
 

Greensboro, North Carolina

    140,000     Global Headquarters     Owned  

Hong Kong, China

    44,000     Office/Sourcing Hub     Leased  

Panama City, Panama

    6,000     Sourcing Hub     Leased  

Kansas City, Kansas*

    146,000     Office     Owned  

Antwerp, Belgium

    38,000     Office     Leased  

Reading, Pennsylvania

    25,000     Office     Leased  

Shanghai, China

    13,000     Office     Leased  

Mexico City, Mexico

    13,000     Office     Leased  

Mocksville, North Carolina

    503,000     Distribution Center     Owned  

Hackleburg, Alabama

    443,000     Distribution Center     Owned  

Seminole, Oklahoma

    394,000     Distribution Center     Owned  

El Paso, Texas

    385,000     Distribution Center     Leased  

Luray, Virginia

    435,000     Distribution Center     Owned  

Prague, Czech Republic

    275,000     Distribution Center     Leased  

Mexico City, Mexico

    162,000     Distribution Center     Leased  

Bangalore, India

    116,000     Distribution Center     Leased  

Buenos Aires, Argentina*

    29,000     Distribution Center     Owned  

Delicias, Mexico

    378,000     Manufacturing Facility     Owned  

Acanceh, Mexico

    306,000     Manufacturing Facility     Owned  

Torreon, Mexico

    304,000     Manufacturing Facility     Owned  

Izamal, Mexico

    93,000     Manufacturing Facility     Owned  

Jimenez, Mexico

    92,000     Manufacturing Facility     Owned  

Tekax, Mexico

    92,000     Manufacturing Facility     Owned  

LaRosita, Mexico

    90,000     Manufacturing Facility     Owned  

Saucillo, Mexico

    89,000     Manufacturing Facility     Owned  

San Pedro, Mexico

    88,000     Manufacturing Facility     Owned  

San Antonio del Coyote, Mexico

    88,000     Manufacturing Facility     Owned  

Managua, Nicaragua

    122,000     Manufacturing Facility     Leased  

San Marcos, Nicaragua

    118,000     Manufacturing Facility     Leased  

Masatepe City, Nicaragua

    108,000     Manufacturing Facility     Leased  

 

*

We expect to exit each of these properties in connection with or subsequent to the Separation.

We believe that all of these facilities, whether owned or leased, are well maintained and in good operating condition and expect they will accommodate our ongoing and foreseeable business needs. In addition, as of December 29, 2018, we operated 147 retail stores across the Americas, EMEA, and APAC regions. Retail stores are generally leased under operating leases and include renewal options.

Intellectual Property

We believe trademarks, trade names, patents and domain names, as well as related logos, designs and graphics, provide substantial value in the development and marketing of our products, and are important to our continued success. We have registered our intellectual property in the U.S. and in other countries where our products are manufactured and/or sold. In particular, our trademark portfolio consists of over 7,000 trademarks registrations and applications in the United States and other countries around the world, including U.S. and

 

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foreign trademark registrations for our two main brands, Wrangler® and Lee®. Although the laws vary by jurisdiction, in general, trademarks remain valid and enforceable as long as the marks are used in connection with the related products and services and the required registration renewals are filed. Generally, trademark registrations can be renewed indefinitely as long as the trademarks are in use. We also place high importance on product innovation and design, and a number of these innovations and designs are the subject of patents. However, we do not regard any segment of our business as being dependent upon any single patent or group of related patents.

Due to the worldwide consumer recognition of our products, we face an increased risk of counterfeiting by third parties. We vigorously monitor and enforce our intellectual property and proprietary rights against counterfeiting, infringement, misappropriation and other violations by third parties where and to the extent legal, feasible and appropriate. However, the actions we take to protect our intellectual property rights may not be adequate to prevent third parties from copying our products or infringing, misappropriating or otherwise violating our trademarks or other intellectual property rights, and the laws of foreign countries may not protect intellectual property rights to the same extent as do the laws of the U.S.

Legal Proceedings

There are no pending material legal proceedings. The Company continues to have ordinary, routine litigation incidental to the business, to which we or any of our subsidiaries is a party or to which any of our property is the subject.

 

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MANAGEMENT

Executive Officers Following the Separation

The following table sets forth information, as of the date of this information statement, regarding certain individuals who are expected to serve as our executive officers following the Separation. We expect that those individuals noted below who are current employees of VF will transfer from their respective employment with VF to Kontoor Brands and, immediately prior to the Separation, resign from any officer roles with VF.

 

Name

   Age     

Position

Scott H. Baxter

     54      President and Chief Executive Officer

Rustin Welton

     49      Vice President and Chief Financial Officer

Thomas E. Waldron

     51      Vice President and Global Brand President—Wrangler

Christopher Waldeck

     52      Vice President and Global Brand President—Lee

Laurel Krueger

     44      Vice President, General Counsel and Corporate Secretary

There are no family relationships among any of the officers named above. Each of our officers will hold office from the date of election until a successor is elected. Set forth below is information about the executive officers identified above.

Scott H. Baxter will be the President and Chief Executive Officer of Kontoor Brands. Mr. Baxter has been VF’s Group President of Jeanswear since August 2018. He previously served as VF’s Group President—Americas West from January 2018 to August 2018, Vice President and Group President—Outdoor & Action Sports Americas from March 2016 until December 2017, Vice President and Group President—Jeanswear Americas, Imagewear and South America from May 2013 until March 2016, Vice President and Group President —Jeanswear Americas and Imagewear from 2011 until May 2013, President of Imagewear, composed of both the Imagewear and VF’s former Licensed Sports Group businesses, from 2008 to 2011 and President of VF’s former Licensed Sports Group business from 2007 to 2008. He earned an M.B.A. from Northwestern University’s Kellogg School of Management and a B.A. in History from the University of Toledo. Mr. Baxter joined VF in 2007.

Rustin Welton will be the Vice President and Chief Financial Officer of Kontoor Brands. Mr. Welton has been VF’s Vice President and Chief Financial Officer—Americas East since January 2017. He previously served as VF’s Vice President and Chief Financial Officer for the Jeanswear Coalition, Imagewear Coalition, and Central America/South America from December 2014 to January 2017 and Chief Financial Officer—Jeanswear North and South America from 2012 to 2015. He earned an M.B.A. from Indiana University’s Kelley School of Business and a B.A. in Finance from the University of Illinois at Urbana-Champaign. Mr. Welton joined VF in 2012.

Thomas E. Waldron will be the Vice President and Global Brand President—Wrangler of Kontoor Brands. Mr. Waldron has been VF’s Global Brand President—Wrangler since October 2018. He previously served as President—Wrangler since March 2016, Vice President—Mass Brands from July 2010 until March 2016, Vice President General Manager—Wrangler Male Bottoms from July 2005 until July 2010, Merchandise Manager—Wrangler Men’s from January 2003 until July 2005, National Account Executive—Walmart from January 2000 until January 2003, National Account Executive from November 1996 until January 2000 and Replenishment Manager from September 1995 to November 1996. He earned a B.S. in Economics from the University of North Carolina at Greensboro. Mr. Waldron joined VF in 1995.

Christopher Waldeck will be the Vice President and Global Brand President—Lee of Kontoor Brands. Mr. Waldeck has been VF’s Global Brand President, Lee and Rock & Republic since October 2018. He previously served as President—Lee and Rock & Republic since May 2017. Before joining VF, Mr. Waldeck was with the Adidas Group as Vice President, General Manager, Reebok USA from October 2013 until April 2017, Brand Director, Reebok Korea from May 2010 until October 2013 and Senior Director of Marketing for Equipment, Cleated Footwear from May 2004 until May 2010. He earned a B.S. in Business from Emporia State University. Mr. Waldeck joined VF in 2017.

 

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Laurel Krueger will be the Vice President, General Counsel and Corporate Secretary of Kontoor Brands. Ms. Krueger previously served as Executive Vice President, General Counsel and Corporate Secretary of Signet Jewelers Limited from May 2012 until January 2019, a leading global retailer of diamond jewelry. Ms. Krueger previously held a variety of legal leadership roles at publicly traded companies in retail and manufacturing, including Federal-Mogul Corporation, Tecumseh Products Company and Borders Group, Inc. Ms. Krueger earned a bachelor’s degree with high distinction from the University of Michigan-Dearborn. She earned a law degree from the University of Michigan Law School, and a Master of Business Administration with distinction from the University of Michigan-Dearborn School of Management. Ms. Krueger joined VF in 2019.

Board of Directors Following the Separation

The following individuals are expected to serve as members of our Board of Directors at the time of effectiveness of the registration statement and following the Separation.

 

Name

   Age     

Position

Robert K. Shearer

     67      Chairman and Director

Scott H. Baxter

     54      Director

Richard T. Carucci

     61      Director

Juliana L. Chugg

     51      Director

Kathleen S. Barclay

     63      Director

Shelley Stewart, Jr.

     66      Director

Set forth below is additional information regarding the directors identified above, as well as a description of the specific skills and qualifications such candidates are expected to provide the Board of Directors of Kontoor Brands.

Robert K. Shearer will serve as the Chairman of the Board of Directors of Kontoor Brands. Mr. Shearer previously served as VF’s Senior Vice President and Chief Financial Officer from May 2005 until he retired in March 2015, Vice President—Finance and Chief Financial Officer from 1998 to 2005, Vice President—Controller from 1994 to 1998, Controller from 1989 to 1994 and Assistant Controller from 1986 to 1989. Before joining VF, Mr. Shearer was a Senior Audit Manager for Ernst & Young. He has served on the boards of directors of YETI Holdings, Inc. since October 2018 and Church & Dwight Co., Inc. since 2008, and previously served on the board of directors of The Fresh Market from May 2015 until April 2016. He earned a B.S. in Accounting from Catawba College and was a Certified Public Accountant from 1975 until 1986. Mr. Shearer’s qualifications for election include his prior service as Chief Financial Officer of VF and his 12 years of experience in public accounting, which enable him to provide important insights on a range of financial and internal control matters, as well as on matters relating to capital structure, information systems, risk management and public reporting.

Scott H. Baxter will serve on the Board of Directors of Kontoor Brands. For Mr. Baxter’s biography, see “—Executive Officers Following the Separation” above. Mr. Baxter’s qualifications for election include his service as President and Chief Executive Officer of Kontoor Brands and his previous service in various leadership roles at VF since 2007.

Richard T. Carucci will serve on the Board of Directors of Kontoor Brands. Mr. Carucci has served on the VF Board of Directors since 2009. He previously served as President of Yum! Brands, Inc. (previously named Tricon Global Restaurants), a company that operates quick service restaurants globally, from 2012 until his retirement in 2014. Mr. Carucci joined Yum! Brands in 1997 and held a series of finance positions, including Chief Financial Officer, prior to being appointed President in 2012. He earned an M.B.A. from the University of California’s Berkeley Haas School of Business and a B.S. in Applied Mathematics-Economics from Brown University. Mr. Carucci’s qualifications for election include his experience as a leader of a large global multi-brand publicly traded company serving retail consumers.

 

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Juliana L. Chugg will serve on the Board of Directors of Kontoor Brands. Ms. Chugg has served on the VF Board of Directors since 2009. She previously served as EVP, Chief Brands Officer of Mattel, Inc., a world-wide leader in the design, manufacture and marketing of toys and family products, from September 2015 until April 2018, a Partner of Noble Endeavors LLC from January 2015 until September 2015, a Senior Vice President of General Mills, Inc. from June 2006 to December 2014, President of General Mills, Inc.’s Frozen Frontier Division from May 2013 to December 2014, and had previously held a progression of leadership roles with General Mills and Pillsbury since 1996. Ms. Chugg has also served on the board of directors of Caesars Entertainment Corporation since December 2018 and previously served as a director of H.B. Fuller Company from April 2007 until January 2013. She earned a B.B.A. from the University of South Australia. Ms. Chugg’s qualifications for election include her extensive experience leading major functions and divisions of large publicly traded multi-brand consumer products companies and service on other public company boards of directors.

Kathleen S. Barclay will serve on the Board of Directors of Kontoor Brands. Ms. Barclay previously served as Senior Vice President, Human Resources of The Kroger Co., one of the largest retailers in the world, from December 2009 until October 2015, Vice President, Global Human Resources of General Motors Company, a multinational automotive corporation, from October 1998 until November 2009 and had previously held a progression of leadership roles with General Motors Company since 1985. Ms. Barclay has also served on the board of directors of Five Below, Inc. since March 2015. She earned a MBA from the Massachusetts Institute of Technology and a B.B.A. from Michigan State University. Ms. Barclay’s qualifications for election include her extensive experience in human resource management, retail management and senior leadership experience at large publicly-traded companies and service on other public company boards of directors.

Shelley Stewart, Jr. will serve on the Board of Directors of Kontoor Brands. Mr. Stewart previously served as Chief Procurement Officer at E. I. du Pont de Nemours & Co., which engages in agriculture, materials science, and specialty products businesses, from June 2012 until September 2018, Senior Vice President of Operational Excellence and Chief Procurement Officer at Tyco International plc, which includes electronics, healthcare and fire and security businesses, from August 2005 until June 2012, Vice President of Supply Chain Management of Tyco International plc from June 2003 until August 2005, Senior Vice President of Supply Chain at Invensys PLC, an engineering and information technology company, from May 2001 until June 2003, Vice President of Supply Chain Management at Raytheon Company, a company specializing in defense and other government markets, from July 2000 until June 2001, and had previously held a progression of leadership roles with United Technologies Corporation, a provider of technology products in the building systems and aerospace industries, since 1981. Mr. Stewart has previously served as a director of Cleco Corporation from April 2010 until April 2016. He earned a MBA from the University of New Haven and earned a B.S. and a M.S. from Northeastern University. Mr. Stewart’s qualifications for election include his extensive experience in senior-level supply chain and operational positions with leading industrial companies and service on other public company boards of directors.

Board Structure

Upon completion of the Separation, our Board of Directors is expected to consist of six members.

Upon completion of the Separation, our Board of Directors will initially be classified and will transition to an annually elected board through a gradual phase-out that will take place over the first four years of Kontoor Brands’ existence. Our Board of Directors will initially be divided into three classes, each of roughly equal size. The Directors designated as Class I Directors will have terms expiring at the annual meeting of shareholders in 2020, which will be the first annual meeting of shareholders following the Separation; the Directors designated as Class II Directors will have terms expiring at the annual meeting of shareholders in 2021; the Directors designated as Class III Directors will have terms expiring at the annual meeting of shareholders in 2022. Ms. Chugg and Mr. Stewart will serve as Class I Directors, Mr. Carucci and Ms. Barclay will serve as Class II Directors and Mr. Shearer and Mr. Baxter will serve as Class III Directors. At the annual meetings of shareholders held in 2020, 2021 and 2022, Directors will be elected for a

 

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term of office to expire at the annual meeting of shareholders in 2023. Beginning with the 2023 annual meeting, Directors will be elected for a term expiring at the next annual meeting of shareholders. Commencing with the annual meeting of shareholders held in 2024, the classification of the Board will cease. Before the phase-out, this classification of our Board of Directors could have the effect of increasing the length of time necessary to change the composition of a majority of the Board of Directors. In general, prior to 2023, at least two annual meetings of shareholders will be necessary for shareholders to effect a change in a majority of the members of the Board of Directors. This temporary classified Board structure is intended to provide better continuity of leadership during Kontoor Brands’ first years of operation as an independent, publicly held business, versus annually elected Directors. We have not yet set the date of the first annual meeting of shareholders to be held following the Separation.

Board Independence

Upon completion of the Separation, our Board of Directors will consist of six members. Our Board has determined that each of Mr. Shearer, Mr. Carucci, Ms. Chugg, Ms. Barclay and Mr. Stewart is independent under NYSE rules. In determining independence, the Board will consider whether each director has a material relationship with Kontoor Brands that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. The Board will consider all relevant facts and circumstances including, without limitation, transactions between Kontoor Brands and the director, family members of the director, and organizations with which the director is affiliated. All directors identified as independent will meet the categorical standards adopted by the Board to assist it in making determinations of director independence. A copy of these standards will be posted on our website after the Separation.

Director Compensation

Each of our directors is expected to receive an annual retainer of $245,000, $85,000 of which will be paid in cash quarterly in arrears and $160,000 of which will be provided as an annual equity retainer. The annual equity retainer is expected to be delivered 100% in RSUs. Such RSUs are vested and non-forfeitable at grant, and will be settled in shares of Kontoor Brands Common Stock one year after the date of grant. Such equity awards will be pro-rated in the year of initial election and will vest in the same manner as other awards subject to the annual equity grant. The non-executive Chairman is expected to receive an additional $175,000 cash retainer. The Chairs of the Audit, Talent and Compensation, and Corporate Governance and Nominating Committees will each receive an additional $20,000 cash retainer. Directors will also be entitled to an additional $1,500 for each Board meeting they attend in excess of 10 meetings per year.

Board Committees

Effective upon the completion of the Separation, the Board will have three standing committees which will operate under written charters approved by the full Board: Audit, Talent and Compensation, and Corporate Governance and Nominating. In accordance with current NYSE listing standards, all of the directors who serve on each Committee will be independent from us and our management. The charters of all the Committees will be posted on the our website after the Separation.

Each Committee operates under a written charter that details the scope of authority, composition and procedures of the Committee. The Committees may, when appropriate in their discretion, delegate authority with respect to specific matters to one or more members, provided that all decisions of any such members are presented to the full Committee at its next scheduled meeting. The Committees will report to the Board of Directors regularly, review and reassess the adequacy of their charters at least annually and will conduct an annual evaluation of their performance.

Audit Committee

The members of our Audit Committee will be Mr. Shearer, Mr. Carucci and Mr. Stewart. Mr. Shearer will be the Chair of our Audit Committee. Each member of our Audit Committee meets the requirements for

 

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independence under the current NYSE listing standards and SEC rules and regulations and our Director Independence Standards. Each member of our Audit Committee is financially literate. In addition, our Board of Directors expects to determine that each of Mr. Shearer and Mr. Carucci is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. This designation does not impose on him any duties, obligations or liabilities that are greater than are generally imposed on members of our Audit Committee and our Board of Directors. The responsibilities of the Audit Committee will be more fully described in our Audit Committee charter and will include, among other duties:

 

   

Selecting the independent registered public accounting firm for us;

 

   

Reviewing the scope of the audit to be conducted by the independent registered public accounting firm;

 

   

Meeting with the independent registered public accounting firm concerning the results of their audit and our selection and disclosure of critical accounting policies;

 

   

Reviewing with management and the independent registered public accounting firm our annual and quarterly statements prior to filing with the SEC;

 

   

Overseeing the scope and adequacy of our system of internal controls over external financial reporting;

 

   

Reviewing the status of compliance with laws, regulations, and internal procedures, contingent liabilities and risks that may be material to us;

 

   

Preparing a report to shareholders annually for inclusion in the proxy statement; and

 

   

Serving as the principal liaison between the Board of Directors and our independent registered public accounting firm.

Talent and Compensation Committee

The members of our Talent and Compensation Committee (the “Kontoor Brands Compensation Committee”) will be Ms. Barclay and Ms. Chugg. Ms. Barclay will be the Chair of the Kontoor Brands Compensation Committee. Each member of the Kontoor Brands Compensation Committee is a non-employee director, as defined by Rule 16b-3 promulgated under the Exchange Act, and meets the requirements for independence under the current NYSE listing standards and SEC rules and regulations and our Director Independence Standards. The responsibilities of the Kontoor Brands Compensation Committee will be more fully described in the Kontoor Brands Compensation Committee Charter and will include, among other duties:

 

   

Reviewing and approving our goals and objectives relative to the compensation of the Chief Executive Officer, evaluating him in light of these goals and objectives, and setting his compensation level based on this evaluation;

 

   

Annually reviewing the performance evaluations of our other executive officers;

 

   

Annually recommending to the Board of Directors the salary of each of our named executive officers and reviewing management’s recommendations regarding the salaries of other senior officers;

 

   

Making recommendations to the Board of Directors with respect to incentive compensation-based plans and equity-based plans;

 

   

Periodically reviewing all of our compensation and benefit plans insofar as they relate to key employees to confirm that such plans remain equitable and competitive;

 

   

Administering and interpreting our Kontoor Brands Stock Plan, Kontoor Brands MIC Plan, and Kontoor Brands MTIP (each as defined below), in accordance with the terms of each plan;

 

   

Preparing a report to shareholders annually for inclusion in the proxy statement;

 

   

Reviewing our Compensation Discussion and Analysis in the proxy statement and discussing with management;

 

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Periodically reviewing the competitiveness and appropriateness of the compensation program for non-employee directors and recommending to the Board of Directors compensation to be paid to non-employee directors; and

 

   

Reviewing and recommending to the Board of Directors our submissions to shareholders on executive compensation matters.

Corporate Governance and Nominating Committee

The members of our Corporate Governance and Nominating Committee will be Ms. Chugg, Mr. Carucci, Ms. Barclay and Mr. Stewart. Ms. Chugg will be the Chair of our Corporate Governance and Nominating Committee. Each member of the Corporate Governance and Nominating Committee meets the requirements for independence under the current NYSE listing standards and our Director Independence Standards. The responsibilities of the Corporate Governance and Nominating Committee will be more fully described in our Corporate Governance and Nominating Committee Charter and will include, among other duties:

 

   

Recommending to the Board of Directors criteria for Board of Directors membership, screening potential candidates for director and recommending candidates to the Board of Directors;

 

   

Recommending to the Board of Directors a succession plan for the Chief Executive Officer; and

 

   

Reviewing developments in corporate governance and making recommendations to the Board on governance policies and principles for us.

Code of Ethics

In connection with the Separation, our Board of Directors will adopt one or more codes of ethics that will apply to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. Upon completion of the Separation, the full text of our codes of business conduct and ethics will be posted on the investor relations section of our website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by disclosing future amendments to our codes of business conduct and ethics, or any waivers of such codes, on our website or in public filings.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation committee (or if no committee performs that function, the Board of Directors) of any other entity that has an executive officer serving as a member of our Board of Directors.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Overview

This section presents information concerning VF’s existing compensation arrangements, the expected compensation arrangements for the named executive officers of Kontoor Brands and explains Kontoor Brands’ anticipated executive compensation arrangements, compensation philosophy and objectives, the components of executive compensation, and executive stock ownership. The focus of the analysis is on Kontoor Brands’ named executive officers listed in the Summary Compensation Table (the “NEOs”):

 

Name

  

Title

Scott H. Baxter

   President and Chief Executive Officer

Rustin Welton

   Vice President and Chief Financial Officer

Thomas E. Waldron

   Vice President and Global Brand President—Wrangler

Christopher Waldeck

   Vice President and Global Brand President—Lee

As set forth below, Messrs. Baxter, Welton, Waldron and Waldeck were previously employees of VF prior to the Separation. Thus, the historical information provided in this CD&A reflects the VF compensation policies applicable to our NEOs. This historical information is provided to give context to our new pay practices at Kontoor Brands, which are based on VF’s historical pay practices. Kontoor Brands’ pay practices are being developed and revised to fit with the pay philosophy of Kontoor Brands, which will be substantially similar to VF’s philosophy. Upon completion of the Separation, Kontoor Brands’ Board of Directors will establish a Talent and Compensation Committee (the “Kontoor Brands Compensation Committee”) which will review the impact of the Separation from VF and all aspects of compensation and make any adjustments that it believes are appropriate in structuring executive compensation arrangements. With respect to future compensation from Kontoor Brands we have presented information below under “—Components of Total Direct Compensation” concerning anticipated compensation for each of the NEOs. Each of our NEOs holds various long-term equity based incentive awards that were granted by VF. Treatment of these awards in the Separation is described under “Treatment of Outstanding Equity Compensation Awards held by NEOs.” As noted in “Note Regarding the Use of Certain Terms”, references to 2018 generally refer to the period ended December 29, 2018. As used in the CD&A and the related compensation tables, references to decisions and awards with respect to 2018 also include VF’s 2019 Fiscal Year ending March 30, 2019 (“VF’s Fiscal Year 2019”), except as otherwise specifically indicated.

Executive Summary

Compensation Philosophy—VF’s Executive Compensation Program (the “VF Program”) is designed to:

 

   

Enable VF to attract and retain talented executives;

 

   

Align its executives’ interests with those of shareholders by paying for performance; and

 

   

Provide a high percentage of its executives’ total direct compensation in pay at risk and long-term equity-based compensation to reward performance over the short- and long-term and align the compensation of our executives with shareholder returns.

Going forward: We share our compensation philosophy with VF. We intend to design the Kontoor Brands Executive Compensation Program (the “Kontoor Brands Program”) to be substantially similar to the VF Program’s design after the Separation.

Balance of Base Salary and At-Risk Pay for Performance Components—VF’s philosophy is that a significant portion of each executive’s total direct compensation should be at-risk, meaning subject to fluctuation based on VF’s financial performance and stock price performance. The at-risk components of total compensation targets are annual cash incentives and long-term equity compensation. The at-risk portion of target total compensation is progressively greater for higher-level positions.

Going forward: We intend to adopt VF’s philosophy and allocate a significant portion of each executive’s total direct compensation to at-risk components.

 

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Governance Practices—VF’s executive compensation practices support good governance and mitigate excessive risk-taking. Below we highlight key compensation practices that VF has implemented in the VF Program to promote the interests of shareholders and ensure responsible compensation and governance practices:

 

WHAT VF DOES

  Annual “say-on-pay” advisory vote for shareholders      Pay-for-performance emphasis with a balance of short- and long-term incentives, using an array of key performance metrics
  Alignment of executive compensation with shareholder returns through equity ownership and equity-based awards      Significant stock ownership guidelines for executives
  Long-term incentive compensation tied to VF’s total shareholder return (“TSR”) relative to TSR of S&P 500 companies      Clawback provisions for cash and equity performance-based compensation
  “Double trigger” required for severance under change-in-control agreements and for accelerated vesting of equity awards      Compensation consultant to the Committee will be independent and free of conflicts

 

WHAT VF DOES NOT DO

û   No excise tax gross-up payments under new or materially enhanced change-in-control agreements   û    No back dating or re-pricing of stock options and stock appreciation rights
û   No hedging or pledging of VF common stock   û    No employment agreements for U.S.-based executive officers

Going forward: We believe that VF’s governance practices support good governance and mitigate excessive risk-taking. We expect to adopt similar good governance practices, but, as a new, smaller company, Kontoor Brands will review its long-term compensation practices to determine what metrics are most appropriate going forward.

Compensation Program

Compensation Philosophy and Objectives

VF’s fundamental philosophy is to pay for performance, through the alignment of its executives’ pay to the achievement of overall short- and long-term business strategies of VF. The VF Program has incorporated the following objectives:

 

   

Motivate executives to accomplish VF’s short-term and long-term business objectives;

 

   

Provide annual incentives to executives based on corporate, business group and individual performance;

 

   

Provide executives with long-term equity-based compensation that aligns the interests of shareholders and executives; and

 

   

Offer total compensation that is competitive with other large U.S.-based companies with which VF may compete for executive talent.

The VF Program had been designed to balance fixed and performance-based compensation components, and incentivize responsible achievement of multiple operating goals over one- and three-year periods. For the purpose of valuing total direct compensation, the performance-based elements are valued at their grant date at target levels. Such awards also provide for above- and below-target payout levels and thereby directly motivate executives to achieve VF’s business goals, reward them for achieving and exceeding these goals and reduce compensation below target levels if goals are not achieved.

 

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Going forward: We expect that the Kontoor Brands Program will be designed with the same philosophies and objectives.

Compensation Decision-Making Process—Roles and Responsibilities

Talent and Compensation Committee

The VF Talent and Compensation Committee (the “VF Compensation Committee”), which is composed entirely of independent directors, reviews all components of the VF Program annually to confirm that they are necessary and appropriate to promote VF’s strategic objectives, while considering the competitive marketplace for executive talent.

Going forward: The Kontoor Brands Compensation Committee will be composed entirely of independent directors and will review all components of the Kontoor Brands Program annually to confirm that they are necessary and appropriate to promote Kontoor Brands’ strategic objectives while considering the competitive marketplace for executive talent.

Independent Committee Consultant

The VF Compensation Committee has historically retained Frederic W. Cook & Co. Inc. (“FW Cook”) as its independent compensation consultant.

Going forward: Once we are a separate public company, the Kontoor Brands Compensation Committee will determine whether to continue to engage FW Cook or another compensation consultant and will consider the six-factor test prescribed under the NYSE rules at such time.

Competitive Compensation Targets and the Role of the Industry Group

In 2018, FW Cook and VF management each independently utilized data from the Willis Towers Watson (“Towers”) executive compensation database, which includes executive compensation data for over 700 U.S.-based companies (the “Comparison Data”), to assist in establishing compensation targets for 2018.

 

   

The Comparison Data was provided by Towers on an aggregated basis: it reported actual salary levels and target levels of performance-based compensation and was adjusted to April 2018 using a 3% annual update factor.

 

   

Towers used regression analysis to size-adjust the compensation data due to significant variance in size among the companies compared to VF’s approximate annual revenue range.

 

   

Neither the VF Compensation Committee nor management receives or uses information on any subset of the Towers database and the VF Compensation Committee and management are not aware of the identities of the individual companies in the database.

 

   

FW Cook utilized that data to recommend compensation targets for VF’s Chairman and Chief Executive Officer, and the Chairman and Chief Executive Officer utilized the data to recommend compensation targets for the other NEOs.

VF Industry Group Fiscal Year 2019

In addition, the VF Compensation Committee has historically utilized an Industry Group to evaluate whether executive officer pay levels are reasonable on a relative basis. The VF Compensation Committee primarily identified companies that are of comparable size (based on revenue and market capitalization), and meet a majority of several criteria, such as:

 

   

Having significant non-U.S. (greater than 30%) revenue;

 

   

Having similar products and/or customers;

 

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Having a significant number of brands (at least 10, excluding licensed brands to the extent possible);

 

   

Considers VF as a compensation peer;

 

   

Is a peer of peers being listed as a compensation peer in at least four other current peer companies; and

 

   

Is a 2018 peer company identified by Institutional Shareholder Services (ISS), a leading independent proxy advisory firm.

The Industry Group falls into the following business types:

 

 

LOGO

The VF Compensation Committee has historically set target total direct compensation (base salary, target annual cash incentive awards and target annual long-term equity incentive award values) for senior executives generally between the 50th and 75th percentile of the Comparison Data (subject to the fluctuation of foreign exchange rates for executives paid in currency other than the U.S. dollar). The VF Compensation Committee has historically considered the scope of the executive’s duties, the executive’s experience in his or her role and individual performance relative to his or her peers to establish the appropriate point within that range of percentiles, or outside the range under circumstances that justify a deviation.

The VF Compensation Committee has historically targeted total direct compensation for each VF executive officer to be competitive with compensation paid to executives in comparable positions according to the Comparison Data based on targeted performance goals established by the VF Compensation Committee. Thus, the VF Compensation Committee balanced the elements of total direct compensation—salary, annual cash incentives and long-term equity incentives—in this process. Benefits have been set at levels intended to be competitive but are not included in the VF Compensation Committee’s evaluation of total direct compensation.

The components of the target total direct compensation opportunity set by the VF Compensation Committee annually for each executive are short-term cash compensation (annual base salary and target annual cash incentive award) and long-term equity incentive compensation (which have been composed of stock options, restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) under VF’s Mid-Term Incentive Plan). The VF Compensation Committee has historically generally allocated between total cash compensation and equity compensation in a way intended to be competitive with the Comparison Data and the Industry Group. The VF Compensation Committee also considered historical compensation levels, relative compensation levels among VF’s senior executives, and VF’s corporate performance as compared to the performance of companies in VF’s Industry Group.

 

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Going forward: Once we are a separate public company, we expect that our management and FW Cook (or such other compensation consultant as the Kontoor Brands Compensation Committee may select) will each independently utilize the same data from the Towers executive compensation database to assist in establishing compensation targets in the future.

Kontoor Brands Industry Group 2019

The Kontoor Brands Compensation Committee anticipates utilizing an Industry Group to evaluate whether executive officer pay levels are reasonable on a relative basis considering the following criteria:

 

   

having strong brand(s) that are respected and well-known;

 

   

having similar products and/or customers;

 

   

having significant wholesale and domestic/U.S. sales; and

 

   

having manufacturing operations.

The VF Compensation Committee, on a preliminary basis, has determined that the Industry Group may fall into the following business types:

 

 

LOGO

We expect that the Kontoor Brands Compensation Committee will set target total direct compensation (base salary, target annual cash incentive awards and target annual long-term equity incentive award values) for senior executives generally between the 50th and 75th percentile of the Comparison Data, and will consider the scope of the executive’s duties, the executive’s experience in his or her role and individual performance relative to his or her peers to establish the appropriate point within that range of percentiles, or outside the range under circumstances that justify a deviation.

For 2019, the target total direct compensation is expected to be set at the 50th percentile range for the President and CEO, and between the 25th and 50th percentile for the remaining NEOs who are new to their roles. In general, we believe that we should set total direct compensation targets for our senior executives within the 50th to 75th percentile range to appropriately motivate and reward strong performance and retain top talent at a reasonable cost to Kontoor Brands as indicated by the available data. We intend to target total direct compensation for each Kontoor Brands executive officer to be competitive with compensation paid to executives in comparable positions according to the Comparison Data based on targeted performance goals established by the Kontoor Brands Compensation Committee. Thus, the Kontoor Brands Compensation Committee will balance the elements of total direct compensation—salary, annual cash incentives and long-term equity incentives—in this process. Benefits are expected to be set at levels intended to be competitive but are not included in the Kontoor Brands Compensation Committee’s evaluation of total direct compensation. The Kontoor Brands

 

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Compensation Committee may also provide retention awards, but these are not considered in Kontoor Brands’ total d