UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 29,October 28, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:0-21764

 

 

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida 59-1162998

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3000 N.W. 107 Avenue

Miami, Florida

 33172
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (305)592-2830

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares outstanding of the registrant’s common stock is 15,712,67815,668,000 (as of August 23,November 24, 2017).

 

 

 


PERRY ELLIS INTERNATIONAL, INC.

INDEXINDEX

 

   PAGE 

PART I: FINANCIAL INFORMATION

  

Item 1:

  

Condensed Consolidated Balance Sheets (Unaudited)
as of July  29,October  28, 2017 and January 28, 2017

   1 

Condensed Consolidated Statements of Operations (Unaudited)
for the three and sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016

   2 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
for the three and sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016

   3 

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016

   4 

Notes to Unaudited Condensed Consolidated Financial Statements

   6 

Item 2:

  

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

   2426 

Item 3:

  

Quantitative and Qualitative Disclosures About Market Risk

   3335 

Item 4:

  

Controls and Procedures

   3436 

PART II: OTHER INFORMATION

36

Item 2:

  
Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

   3536 

Item 6:

  

Exhibits

   3637 


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share data)

 

  July 29,
2017
 January 28,
2017
   October 28,
2017
 January 28,
2017
 

ASSETS

      

Current Assets:

      

Cash and cash equivalents

  $23,812  $30,695   $26,524  $30,695 

Investments, at fair value

   28,870  10,921    25,596  10,921 

Accounts receivable, net

   131,455  140,240    133,843  140,240 

Inventories

   131,197  151,251    129,293  151,251 

Prepaid income taxes

   —    1,647    —    1,647 

Prepaid expenses and other current assets

   6,819  6,462    5,718  6,462 
  

 

  

 

   

 

  

 

 

Total current assets

   322,153  341,216    320,974  341,216 
  

 

  

 

   

 

  

 

 

Property and equipment, net

   59,272  61,835    57,511  61,835 

Other intangible assets, net

   186,633  187,051    186,425  187,051 

Deferred income tax

   462  334    446  334 

Other assets

   2,226  2,269    1,942  2,269 
  

 

  

 

   

 

  

 

 

TOTAL

  $570,746  $592,705   $567,298  $592,705 
  

 

  

 

   

 

  

 

 

LIABILITIES AND EQUITY

      

Current Liabilities:

      

Accounts payable

  $69,358  $92,843   $51,440  $92,843 

Accrued expenses and other liabilities

   25,906  20,861    34,563  20,861 

Accrued interest payable

   1,407  1,450    400  1,450 

Accrued income taxes payable

   1,334   —      1,055   —   

Unearned revenues

   3,579  2,710    2,591  2,710 
  

 

  

 

   

 

  

 

 

Total current liabilities

   101,584  117,864    90,049  117,864 
  

 

  

 

   

 

  

 

 

Senior subordinated notes payable, net

   49,744  49,673    49,780  49,673 

Senior credit facility

   —    22,504    7,917  22,504 

Real estate mortgages

   33,153  33,591    32,937  33,591 

Other long-term liabilities

   19,358  18,271    15,327  18,271 

Deferred income taxes

   36,572  37,115    36,759  37,115 
  

 

  

 

   

 

  

 

 

Total long-term liabilities

   138,827  161,154    142,720  161,154 
  

 

  

 

   

 

  

 

 

Total liabilities

   240,411  279,018    232,769  279,018 
  

 

  

 

   

 

  

 

 

Commitment and contingencies

      

Equity:

      

Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

   —     —      —     —   

Common stock $.01 par value; 100,000,000 shares authorized; 15,762,678 shares issued and outstanding as of July 29, 2017 and 15,530,273 shares issued and outstanding as of January 28, 2017

   158  155 

Common stock $.01 par value; 100,000,000 shares authorized; 15,688,189 shares issued and outstanding as of October 28, 2017 and 15,530,273 shares issued and outstanding as of January 28, 2017

   157  155 

Additional paid-in-capital

   149,992  147,300    150,173  147,300 

Retained earnings

   190,077  176,327    193,292  176,327 

Accumulated other comprehensive loss

   (8,955 (10,095   (9,093 (10,095
  

 

  

 

 

Total

   331,272  313,687 
  

 

  

 

 

Treasury stock at cost; 50,000 as of July 29, 2017 and no shares as of January 28, 2017

   (937  —   
  

 

  

 

   

 

  

 

 

Total equity

   330,335  313,687    334,529  313,687 
  

 

  

 

   

 

  

 

 

TOTAL

  $570,746  $592,705   $567,298  $592,705 
  

 

  

 

   

 

  

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

1


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

  Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended 
  July 29,
2017
   July 30,
2016
 July 29,
2017
   July 30,
2016
   October 28,
2017
   October 29,
2016
 October 28,
2017
   October 29,
2016
 

Revenues:

              

Net sales

  $198,394   $193,341  $432,217   $444,216   $190,389   $185,298  $622,606   $629,514 

Royalty income

   8,215    8,312  16,482    18,731    8,449    8,661  24,931    27,392 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total revenues

   206,609    201,653  448,699    462,947    198,838    193,959  647,537    656,906 

Cost of sales

   130,129    127,822  281,131    294,032    124,760    122,856  405,891    416,888 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   76,480    73,831  167,568    168,915    74,078    71,103  241,646    240,018 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating expenses:

              

Selling, general and administrative expenses

   68,412    72,654  139,611    142,588    65,172    72,846  204,783    215,434 

Depreciation and amortization

   3,496    3,716  6,964    7,183    3,586    3,534  10,550    10,717 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total operating expenses

   71,908    76,370  146,575    149,771    68,758    76,380  215,333    226,151 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating income (loss)

   4,572    (2,539 20,993    19,144    5,320    (5,277 26,313    13,867 

Interest expense

   1,869    1,889  3,825    3,914    1,613    1,738  5,438    5,652 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income (loss) before income taxes

   2,703    (4,428 17,168    15,230    3,707    (7,015 20,875    8,215 

Income tax provision (benefit)

   1,724    (863 3,418    4,545    492    (1,850 3,910    2,695 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income (loss)

  $979   $(3,565 $13,750   $10,685   $3,215   $(5,165 $16,965   $5,520 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income (loss) per share:

              

Basic

  $0.06   $(0.24 $0.91   $0.72   $0.21   $(0.34 $1.13   $0.37 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Diluted

  $0.06   $(0.24 $0.90   $0.71   $0.21   $(0.34 $1.11   $0.36 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Weighted average number of shares outstanding

              

Basic

   15,075    14,953  15,042    14,882    15,115    14,991  15,066    14,920 

Diluted

   15,289    14,953  15,296    15,139    15,413    14,991  15,335    15,169 

See Notes to Unaudited Condensed Consolidated Financial Statements

2


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(amounts in thousands)

 

   Three Months Ended  Six Months Ended 
   July 29,
2017
  July 30,
2016
  July 29,
2017
  July 30,
2016
 

Net income (loss)

  $979  $(3,565 $13,750  $10,685 

Other Comprehensive income:

     

Foreign currency translation adjustments, net

   1,273   (3,093  1,552   (1,430

Unrealized gain on pension liability, net of tax

   —     155   —     310 

Unrealized loss on forward contract

   (50  —     (412  —   

Unrealized (loss) gain on investments

   (6  10   —     17 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss)

   1,217   (2,928  1,140   (1,103
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $2,196  $(6,493 $14,890  $9,582 
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended  Nine Months Ended 
   October 28,
2017
  October 29,
2016
  October 28,
2017
  October 29,
2016
 

Net income (loss)

  $3,215  $(5,165 $16,965  $5,520 

Other comprehensive (loss) income:

     

Foreign currency translation adjustments, net

   (276  (2,342  1,276   (3,772

Unrealized gain on pension liability, net of tax

   —     8,142   —     8,452 

Unrealized gain (loss) on forward contract

   47   255   (357  255 

Unrealized gain (loss) on investments

   5   (10  5   7 

Reclassification adjustment, net of tax

   86   —     78   —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive (loss) income

   (138  6,045   1,002   4,942 
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $3,077  $880  $17,967  $10,462 
  

 

 

  

 

 

  

 

 

  

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

3


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

  Six Months Ended   Nine Months Ended 
  July 29,
2017
 July 30,
2016
   October 28,
2017
 October 29,
2016
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

  $13,750  $10,685   $16,965  $5,520 

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

      

Depreciation and amortization

   7,130  7,382    10,793  11,013 

Provision for bad debts

   1,686  478    1,794  680 

Amortization of debt issue cost

   202  205    303  309 

Amortization of premiums and discounts

   53  28    78  42 

Amortization of unrealized (gain) loss on pension liability

   —    310 

Amortization of unrealized loss on pension liability

   —    465 

Pension settlement charge

   —    8,300 

Deferred income taxes

   (671 1,042    (468 1,221 

Share-based compensation

   3,425  3,786    4,768  5,104 

Changes in operating assets and liabilities, net of acquisitions

      

Accounts receivable, net

   8,527  10,087    5,485  506 

Inventories

   21,342  47,604    22,959  69,012 

Prepaid income taxes

   1,611  1,874    1,684  17 

Prepaid expenses and other current assets

   (300 110    792  402 

Other assets

   (85 37    (118 121 

Deferred pension obligation

   —    (5,516

Accounts payable and accrued expenses

   (19,746 (51,626   (28,675 (61,656

Accrued interest payable

   (43 (34   (1,050 (993

Income taxes payable

   1,418  344    1,043   —   

Unearned revenues and other liabilities

   2,021  3,469    (2,998 3,640 

Deferred pension obligation

   —    99 
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   40,320  35,880    33,355  38,187 
  

 

  

 

 
  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchases of property and equipment

   (3,901 (6,609   (5,571 (9,334

Purchases of investments

   (28,124 (9,039   (36,972 (12,467

Proceeds from investment maturities

   10,136  5,205    22,246  9,341 

Proceeds from note receivable

   250  250 
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (21,889 (10,443   (20,047 (12,210
  

 

  

 

 
  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Borrowings from senior credit facility

   141,588  179,380    201,888  250,012 

Payments on senior credit facility

   (164,092 (207,273   (216,475 (273,933

Purchase of treasury stock

   (937 (2,151

Payments for employee taxes on shares withheld

   (980 (946

Payments on real estate mortgages

   (435 (423   (650 (634

Purchase of treasury shares

   (937  —   

Payments for employee taxes on shares withheld

   (753 (946

Payments on capital leases

   (140 (129   (212 (196

Proceeds from exercise of stock options

   23  5    24  5 
  

 

  

 

   

 

  

 

 

Net cash used in financing activities

   (24,746 (29,386   (17,342 (27,843
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   (568 (71   (137 (212
  

 

  

 

 
  

 

  

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

   (6,883 (4,020   (4,171 (2,078

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

   30,695  31,902    30,695  31,902 
  

 

  

 

   

 

  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $23,812  $27,882   $26,524  $29,824 
  

 

  

 

   

 

  

 

 

Continued

4


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

  Six Months Ended   Nine Months Ended 
  July 29,
2017
   July 30,
2016
   October 28,
2017
   October 29,
2016
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

        

Cash paid during the period for:

        

Interest

  $3,613   $3,715   $6,107   $6,294 
  

 

   

 

   

 

   

 

 

Income taxes

  $771   $700   $1,133   $904 
  

 

   

 

   

 

   

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

        

Accrued purchases of property and equipment

  $138   $407   $173   $1,172 
  

 

   

 

   

 

   

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

5


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

The information presented reflects all adjustments, which are in the opinion of management are of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09, “Revenue from Contracts with Customers.” ASUNo. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASUNo. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach. The Company has begun its initial assessment of the guidance. While the Company has not completed its evaluation, it expects that the adoption of this ASU iswill not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In July 2015, the FASB issued ASU2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory”,Inventory,” which requires inventory measured using any method other thanlast-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption, during the first quarter of fiscal 2018, of ASUNo. 2015-11 did not have a material impact on the Company’s results of operations or the Company’s financial position.

In February 2016, the FASB issued ASUNo. 2016-02, “Leases“Leases (Topic 842),”which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is currently evaluating the effect that the adoption will have on its consolidated financial statements and related disclosures.

6


In March 2016, the FASB issued ASUNo. 2016-09,Compensation — Stock—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which is part of the FASB’s Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the provisions of ASU2016-09 in the first quarter of fiscal 2018 using a modified retrospective approach. For the three months ended April 29, 2017, the Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete item. Given the Company’s valuation allowance position, there was no net tax expense or benefit recognized as a result of the adoption of ASU2016-09. Furthermore, there was no change to retained earnings with respect to excess tax benefits due to the Company’s valuation allowance position. The effect on the condensed consolidating statement of cash flows for the six months ended July 30, 2016, as a result of this adoption, iswas an increase of approximately $0.9 million in cash provided by operating activities, with a corresponding increase of approximately $0.9 million in cash used in financing activities from the previously reported amounts.

In April 2016, the FASB issued ASUNo. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,, which amends certain aspects of the FASB’s new revenue standard, ASU2014-09,Revenue from Contracts with Customers”,Customers,”specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments clarify when promised goods or services are separately identifiable (i.e., distinct within the context of a contract), an important step in determining whether goods and services should be accounted for as separate performance obligations. In addition, the amendments allow entities to disregard goods or services that are immaterial in the context of a contract and provide an accounting policy election for accounting for certain shipping and handling activities. The amendments also clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property (IP)(“IP”), which will determine whether the entity recognizes revenue over time or at a point in time. The amendments revise the guidance to address how entities should apply the exception for sales- and usage-based royalties to licenses of IP, recognize revenue for licenses that are not separate performance obligations and evaluate different types of license restrictions (e.g., time-based, geography-based). The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In May 2016, the FASB issued ASUNo. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain aspects of the new revenue standard, ASU2014-09,“Revenue from Contracts with Customers”.Customers.” The amendments are intended to provide clarifying guidance in a few narrow areas such as collectability, contract modifications, completed contracts at transition, andnon-cash considerations. The new guidance’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In June 2016, the FASB issued ASUNo. 2016-13,Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which provides guidance for the accounting for credit losses on instruments within its scope. The amendments guide on reporting credit losses for assets held at amortized cost basis andavailable-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses onavailable-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASUNo. 2016-15,“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.

7


In October 2016, the FASB issued ASUNo. 2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company has chosen to early adopt the provisions of ASU2016-16 in the first quarter of fiscal 2018. The adoption of ASU2016-16 resulted in a decrease to prepaid income taxes of $1.7 million and a decrease to deferred tax liabilities of $1.7 million.

In May 2017, the FASB issued ASUNo. 2017-09,Compensation – Stock Compensation (Topic718): Scope of Modification Accounting,” which amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions, of share-based payment awards, after adoption. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or the Company’s financial position.

In July 2017, the FASB issued ASUNo. 2017-11,Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,”which is intended to reduce the complexity of accounting for certain financial instruments with down round features and address the difficulty of accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2017, the FASB issued ASUNo. 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,”which simplifies the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

8


3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of:

 

  July 29,
2017
   January 28,
2017
   October 28,
2017
   January 28,
2017
 
  (in thousands)   (in thousands) 

Trade accounts

  $144,757   $151,370   $145,547   $151,370 

Royalties

   5,293    6,659    6,509    6,659 

Other receivables

   1,153    712    1,181    712 
  

 

   

 

   

 

   

 

 

Total

   151,203    158,741    153,237    158,741 

Less: allowances

   (19,748   (18,501   (19,394   (18,501
  

 

   

 

   

 

   

 

 

Total

  $131,455   $140,240   $133,843   $140,240 
  

 

   

 

   

 

   

 

 

4. INVENTORIES

Inventories are stated at the lower of cost (weighted moving average cost) or market.net realizable value. Cost principally consists of the purchase price, customs, duties, freight, and commissions to buying agents.

Inventories consisted of the following as of:

 

   July 29,
2017
   January 28,
2017
 
   (in thousands) 

Finished goods

  $131,197   $151,251 
   October 28,
2017
   January 28,
2017
 
   (in thousands) 

Finished goods

  $129,293   $151,251 

5. INVESTMENTS

The Company’s investments at July 29,October 28, 2017 and January 28, 2017 include marketable securities and certificates of deposit with maturity dates of less than one year. Marketable securities consist of corporate and government bonds. Investments are stated at fair value. The estimated fair value of the marketable securities is based on quoted prices in an active market.

Investments consisted of the following as of July 29,October 28, 2017:

 

  Cost   Gross
Unrealized Gains
   Gross
Unrealized Losses
   Estimated
Fair Value
   Cost   Gross
Unrealized Gains
   Gross
Unrealized Losses
   Estimated
Fair Value
 
  (in thousands)   (in thousands) 

Marketable securities

  $22,752   $—     $(11  $22,741   $16,907   $—     $(8  $16,899 

Certificates of deposit

   6,130    —      (1   6,129    8,696    2    (1   8,697 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total investments

  $28,882   $—     $(12  $28,870   $25,603   $2   $(9  $25,596 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

9


Investments consisted of the following as of January 28, 2017:

 

   Cost   Gross
Unrealized Gains
   Gross
Unrealized Losses
   Estimated
Fair Value
 
   (in thousands) 

Marketable securities

  $3,258   $—     $(8  $3,250 

Certificates of deposit

   7,675    —      (4   7,671 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $10,933   $—     $(12  $10,921 
  

 

 

   

 

 

   

 

 

   

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

  July 29,
2017
   January 28,
2017
   October 28,
2017
   January 28,
2017
 
  (in thousands)   (in thousands) 

Furniture, fixtures and equipment

  $94,973   $91,639   $95,534   $91,639 

Buildings and building improvements

   21,295    21,359    21,882    21,359 

Vehicles

   537    523    537    523 

Leasehold improvements

   48,215    48,799    47,633    48,799 

Land

   9,430    9,430    9,430    9,430 
  

 

   

 

   

 

   

 

 

Total

   174,450    171,750    175,016    171,750 

Less: accumulated depreciation and amortization

   (115,178   (109,915   (117,505   (109,915
  

 

   

 

   

 

   

 

 

Total

  $59,272   $61,835   $57,511   $61,835 
  

 

   

 

   

 

   

 

 

The above table of property and equipment includes assets held under capital leases as of:

 

   July 29,
2017
   January 28,
2017
 
   (in thousands) 

Furniture, fixtures and equipment

  $810   $810 

Less: accumulated depreciation and amortization

   (587   (452
  

 

 

   

 

 

 

Total

  $223   $358 
  

 

 

   

 

 

 

   October 28,
2017
   January 28,
2017
 
   (in thousands) 

Furniture, fixtures and equipment

  $810   $810 

Less: accumulated depreciation and amortization

   (655   (452
  

 

 

   

 

 

 

Total

  $155   $358 
  

 

 

   

 

 

 

For the three months ended July 29,October 28, 2017 and July 30,October 29, 2016, depreciation and amortization expense relating to property and equipment amounted to $3.4 million and $3.6 million, respectively.$3.5 million. For the sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016, depreciation and amortization expense relating to property and equipment amounted to $6.7$10.2 million and $6.9$10.4 million, respectively. These amounts include amortization expense for leased property under capital leases.

7. OTHER INTANGIBLE ASSETS

Trademarks

Trademarks included in other intangible assets, net, are considered indefinite-lived assets and totaled $184.1 million at July 29,October 28, 2017 and January 28, 2017.

Other

Other intangible assets represent customer lists as of:

 

  July 29,
2017
   January 28,
2017
   October 28,
2017
   January 28,
2017
 
  (in thousands)   (in thousands) 

Customer lists

  $8,450   $8,450   $8,450   $8,450 

Less: accumulated amortization

   (5,962   (5,545   (6,171   (5,545
  

 

   

 

   

 

   

 

 

Total

  $2,488   $2,905   $2,279   $2,905 
  

 

   

 

   

 

   

 

 

10


For the three months ended July 29,October 28, 2017 and July 30,October 29, 2016, amortization expense relating to customer lists amounted to approximately $0.2 million for each of the periods.and $0.3 million, respectively. For the sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016, amortization expense relating to customer lists amounted to $0.4$0.6 million for each of the periods.and $0.7 million, respectively. Other intangible assets are amortized over their estimated useful lives of 10 years. Assuming no impairment, the following table sets forth the estimated amortization expense for future periods based on recorded amounts as of January 28, 2017:

 

   (in thousands) 
2018  $835 
2019  $793 
2020  $734 
2021  $543 

8. LETTER OF CREDIT FACILITIES

Borrowings and availability under letter of credit facilities consisted of the following as of:

 

  July 29,
2017
   January 28,
2017
   October 28,
2017
   January 28,
2017
 
  (in thousands)   (in thousands) 

Total letter of credit facilities

  $30,000   $30,000   $30,000   $30,000 

Outstanding letters of credit

   (10,727   (10,788   (10,568   (10,788
  

 

   

 

   

 

   

 

 

Total credit available

  $19,273   $19,212   $19,432   $19,212 
  

 

   

 

   

 

   

 

 

9. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $3.8 million and $3.7$4.2 million for the three months ended July 29,October 28, 2017 and July 30,October 29, 2016 respectively, and $7.8$12.0 million and $8.0$12.2 million for the sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016, respectively, and are included in selling, general and administrative expenses.

10. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares of outstanding common stock. The calculation of diluted net income (loss) per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock. The potentially dilutive common stock included in the Company’s computation of diluted net income (loss) per share includes the effects of stock options, stock appreciation rights (“SARS”), and unvested restricted shares as determined using the treasury stock method.

11


The following table sets forth the computation of basic and diluted income (loss) per share:

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 
  July 29,
2017
   July 30,
2016
   July 29,
2017
   July 30,
2016
   October 28,
2017
   October 29,
2016
   October 28,
2017
   October 29,
2016
 
  (in thousands, except per share data)   (in thousands, except per share data) 

Numerator:

                

Net income (loss)

  $979   $(3,565  $13,750   $10,685   $3,215   $(5,165  $16,965   $5,520 

Denominator:

                

Basic-weighted average shares

   15,075    14,953    15,042    14,882    15,115    14,991    15,066    14,920 

Dilutive effect: equity awards

   214    —      254    257    298    —      269    249 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Diluted-weighted average shares

   15,289    14,953    15,296    15,139    15,413    14,991    15,335    15,169 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Basic income (loss) per share

  $0.06   $(0.24  $0.91   $0.72   $0.21   $(0.34  $1.13   $0.37 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Diluted income (loss) per share

  $0.06   $(0.24  $0.90   $0.71   $0.21   $(0.34  $1.11   $0.36 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Antidilutive effect:(1)

   404    1,103    398    604    165    1,015    265    532 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Represents weighted average of stock options to purchase shares of common stock, SARS and restricted stock that were not included in computing diluted income (loss) per share because their effects were antidilutive for the respective periods.

11. EQUITY

The following table reflects the changes in equity:

 

  Changes in Equity   Changes in Equity 
  (in thousands)   (in thousands) 

Equity at January 28, 2017

  $313,687   $313,687 

Comprehensive income

   14,890    17,967 

Share transactions under employee equity compensation plans

   2,695    3,812 

Purchase of treasury stock

   (937   (937
  

 

   

 

 

Equity at July 29, 2017

  $330,335 

Equity at October 28, 2017

  $334,529 
  

 

   

 

 

Equity at January 30, 2016

  $291,481   $291,481 

Comprehensive income

   9,582    10,462 

Share transactions under employee equity compensation plans

   2,845    4,163 

Purchase of treasury stock

   (2,151
  

 

   

 

 

Equity at July 30, 2016

  $303,908 

Equity at October 29, 2016

  $303,955 
  

 

   

 

 

12


The Board of Directors has authorized the Company to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017.2018. Although The Board of Directors allocated a maximum of $70 million to carry out the program, the Company is not obligated to purchase any specific number of outstanding shares and reevaluates the program on an ongoing basis.

During the second quarter of fiscal 2018, the Company repurchased 50,000 shares of common stock at a cost of $0.9 million. During the third quarter of fiscal 2018, the Company retired the 50,000 shares of treasury stock recorded at a cost of approximately $0.9 million. Accordingly, during the third quarter of fiscal 2018, the Company reduced additional paid in capital by $0.9 million. There were no treasury shares outstanding as of January 28, 2017. Total purchases under the plan to date amount to approximately $61.7 million.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss by component, net of tax:

 

  Unrealized
(Loss) Gain on
Pension Liability
   Foreign
Currency Translation
Adjustments, Net
 Unrealized
(Loss) Gain on
Investments
 Unrealized
(Loss) Gain on
Forward Contract
 Total   Unrealized
(Loss) Gain on
Pension Liability
 Foreign
Currency Translation
Adjustments, Net
 Unrealized
(Loss) Gain on
Investments
 Unrealized
(Loss) Gain on
Forward Contract
 Total 
  (in thousands)   (in thousands) 

Balance, January 28, 2017

  $—     $(9,902 $(12 $(181 $(10,095  $—    $(9,902 $(12 $(181 $(10,095

Other comprehensive income (loss) before reclassifications

   —      1,552   —    (404 1,148 

Other comprehensive loss (income) before reclassifications

   —    1,276  5  (357 924 

Amounts reclassified from accumulated other comprehensive loss

   —      —     —    (8 (8   —     —     —    78  78 
  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance, July 29, 2017

  $—     $(8,350 $(12 $(593 $(8,955

Balance, October 28, 2017

  $—    $(8,626 $(7 $(460 $(9,093
  

 

   

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 
  Unrealized
(Loss) Gain on
Pension Liability
 Foreign
Currency Translation
Adjustments, Net
 Unrealized
(Loss) Gain on
Investments
 Unrealized
Gain on
Forward Contract
 Total 
  (in thousands)   

Balance, January 30, 2016

  $(7,368 $(7,131 $(9  —    $(14,508

Other comprehensive loss (income) before reclassifications

   (313 (3,772 7  255  (3,823

Amounts reclassified from accumulated other comprehensive loss

   8,765   —     —     —    8,765 
  

 

  

 

  

 

  

 

  

 

 

Balance, October 29, 2016

  $1,084  $(10,903 $(2 $255  $(9,566
  

 

  

 

  

 

  

 

  

 

 

 

   Unrealized
(Loss) Gain on
Pension Liability
   Foreign
Currency Translation
Adjustments, Net
   Unrealized
(Loss) Gain on
Investments
   Total 
   (in thousands) 

Balance, January 30, 2016

  $(7,368  $(7,131  $(9  $(14,508

Other comprehensive (loss) income before reclassifications

   —      (1,430   17    (1,413

Amounts reclassified from accumulated other comprehensive loss

   310    —      —      310 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 30, 2016

  $(7,058  $(8,561  $8   $(15,611
  

 

 

   

 

 

   

 

 

   

 

 

 

13


A summary of the impact on the condensed consolidated statements of operations line items is as follows:

 

      Three Months Ended 
   

Statement of Operations Location

  July 29,
2017
   July 30,
2016
 
Amortization of defined benefit pension items actuarial gains  Selling, general and administrative expenses  $—     $155 
Forward contract loss reclassified from accumulated other comprehensive loss to income  Cost of goods sold   33    —   
    

 

 

   

 

 

 
Total, net of tax  $33   $155 
    

 

 

   

 

 

 

     Three Months Ended 
  

Statement of Operations Location

  October 28,
2017
   October 29,
2016
 
     (in thousands) 

Amortization of defined benefit pension items actuarial gains

  

Selling, general and administrative expenses

  $—     $8,455 

Forward contract loss reclassified from accumulated other comprehensive loss to income

  

Cost of goods sold

   86    —   
    

 

   

 

 

Total, net of tax

    $86   $8,455 
    

 

   

 

 
     Nine Months Ended 
     Six Months Ended   

Statement of Operations Location

  October 28,
2017
   October 29,
2016
 
  

Statement of Operations Location

  July 29,
2017
 July 30,
2016
      (in thousands) 
Amortization of defined benefit pension items actuarial gains  Selling, general and administrative expenses  $—    $310   

Selling, general and administrative expenses

  $—     $8,765 
Forward contract gain reclassified from accumulated other comprehensive loss to income  Cost of goods sold   (8  —     

Cost of goods sold

   78    —   
    

 

  

 

     

 

   

 

 
Total, net of taxTotal, net of tax  $(8 $310     $78   $8,765 
    

 

  

 

     

 

   

 

 

13. DERIVATIVE FINANCIAL INSTRUMENT – Cash Flow Hedges

The Company has a risk management policy to manage foreign currency risk relating to inventory purchases by its subsidiaries that are denominated in foreign currencies. As such, the Company may employ hedging and derivative strategies to limit the effects of changes in foreign currency on its operating income and cash flows. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. The Company achieves this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. The Company does not use derivative instruments for trading or speculative purposes.

For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents at inception the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company will formally assess at least quarterly whether the financial instruments used in hedging are “highly effective” at offsetting changes in cash flows of the related underlying exposures. For purposes of assessing hedge effectiveness, the Company uses the forward method, and assesses effectiveness based on the changes in both spot and forward points of the hedging instrument. If and when a derivative is no longer expected to be “highly effective,” hedge accounting is discontinued and hedge ineffectiveness, if any, is included in current period earnings. As of July 29,October 28, 2017, there was no hedge ineffectiveness.

The Company’s United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, the Company entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These are formally designated and “highly effective” as cash flow hedges. The Company will hedge approximately 45% of its U.S. dollar denominated purchases. All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. The Company records the foreign currency forward exchange contracts at fair value in its Consolidated Balance Sheets. The cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows

14


from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. The Company considers the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. The Company classifies derivative instrument cash flows from hedges of foreign currency risk on the settlement of inventory as operating activities.

The Company’s Hedging Instruments were classified within Level 2 of the fair value hierarchy. The following table summarizes the effects, fair value and balance sheet classification of the Company’s Hedging Instruments.

 

Derivatives Designated As Hedging Instruments

  

Balance sheet location

  July 29,
2017
   January 28,
2017
   

Balance sheet location

  October 28,
2017
   January 28,
2017
 
     (in thousands)      (in thousands) 
Foreign currency forward exchange contract (inventory purchases)  Accounts Payable  $593   $181   Accounts Payable  $460   $181 
    

 

   

 

     

 

   

 

 
TotalTotal  $593   $181     $460   $181 
    

 

   

 

     

 

   

 

 

The following table summarizes the effect and classification of the Company’s Hedging Instruments.

 

      Three Months Ended   Six Months Ended 

Derivatives Designated As Hedging Instruments

  

Statement of

Operations Location

  July 29,
2017
   July 30,
2016
   July 29,
2017
  July 30,
2016
 
      (in thousands)   (in thousands) 
Foreign currency forward exchange contract (inventory purchases):         
Loss (gain) reclassified from accumulated other comprehensive loss to income  Cost of goods sold  $33   $—     $(8 $—   
    

 

 

   

 

 

   

 

 

  

 

 

 
    $33     $(8 
    

 

 

   

 

 

   

 

 

  

 

 

 
      Three Months Ended   Nine Months Ended 

Derivatives Designated As Hedging
Instruments

  

Statement of Operations Location

  October 28,
2017
   October 29,
2016
   October 28,
2017
   October 29,
2016
 
      (in thousands)   (in thousands) 

Foreign currency forward exchange contract (inventory purchases):

          

Loss reclassified from accumulated other comprehensive loss to income

  Cost of goods sold  $86   $—     $78   $—   
    

 

 

   

 

 

   

 

 

   

 

 

 
    $86   $—     $78   $—   
    

 

 

   

 

 

   

 

 

   

 

 

 

The notional amounts outstanding of foreign exchange forward contracts were $15.1$11.8 million and $15.0 million at July 29,October 28, 2017 and January 28, 2017, respectively. Such contracts expire through July 2018.

Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.6$0.5 million and $0.2 million at July 29,October 28, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

14. INCOME TAXES

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s U.S. federal income tax returns for fiscal 2011 through fiscal 2018 are open tax years. The Company’s state tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to open tax years from fiscal 2006 through fiscal 2017, depending on each state’s particular statute of limitation.limitations. As of July 29,October 28, 2017, the examination by the Internal Revenue Service for the Company’s fiscal 2011 2012, and 2013through 2015 U.S. federal tax years is still ongoing. During fiscalthe three months ended October 28, 2017, the Company received a revised Notice of Proposed Adjustment from the Internal Revenue Service, which proposed adjustmentsan adjustment to taxable income for fiscal 2011, 2012 and 2013 of $6.1$12.6 million, $5.3 million and $6.8 million, respectively. Duringto which the three months ended July 29, 2017,Company agreed. Additionally, the Company engaged in further conversations with the Internal Revenue Service concerningto extend the proposed adjustments. Based upon those conversations,years under audit to include fiscal 2014 and 2015, to allow for the carryback of beneficial tax attributes. During fiscal 2017, the Company has established a reserve of $1$1.1 million for the amount it would be willing to pay to settle the issue.this adjustment and associated interest. While the Company still believes its position would be sustained upon appeal or, if necessary, through litigation, it has madeagreed to this determinationadjustment based upon the desire to reach an ultimate resolution and limit the costs associated with continuing the examination. Furthermore, various other state and local income tax returns are also under examination by taxing authorities.

15


The Company hashad a $1.2 million liability recorded for unrecognized tax benefits as of January 28, 2017, which includesincluded interest and penalties of $0.3 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three and sixnine months ended July 29,October 28, 2017, the total amount of unrecognized tax benefits increaseddecreased by approximately $5.0 million$18,000 and increased by $5.0 million, respectively. The change to the total amount of the unrecognized tax benefit for the three and six months ended July 29,October 28, 2017 included a decrease in interest and penalties of approximately $11,000 and for the nine months ended October 28, 2017 included an increase in interest and penalties of approximately $171,000 and $187,000, respectively.$176,000. The amount of the unrecognized tax benefits, if recognized, that would affect the Company’s effective tax rate as of January 28, 2017 and July 29,October 28, 2017 is $1.2 million and $2.3 million, respectively.

The Company currently anticipates a resolution within the next twelve months for the unrecognized tax benefits relating to the Internal Revenue Service Proposed Adjustment, but does not currently anticipate a resolution for any of the remaining unrecognized tax benefits as of July 29,October 28, 2017. The statute of limitations related to the Company’s fiscal 2011 2012, 2013, and 2014through 2015 U.S. federal tax years has been extended as part of the examination and is not expected to lapse within the next twelve months.

At the end of fiscal 2017, the Company maintained a $38.6 million valuation allowance against its remaining domestic deferred tax asset; including, but not limited to, the federal net operating loss carryforward and the U.S. state net operating loss carryforwards, whose utilization is not restricted by factors beyond the Company’s control. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pretax losses is considered strong negative evidence in that evaluation. Although the Company recognized pretax earnings through the sixnine months ended July 29,October 28, 2017, by itself that does not represent sufficient positive evidence that athe deferred tax assetassets will be realized to warrant removing the valuation allowances established against the U.S. deferred tax assets. Additionally, the Company’s cumulative domestic pretax results for the past 36 months still remain in a loss position. The Company would be able to remove the valuation allowances in future periods when positive evidence outweighs the negative evidence from the relevant look-back period. The Company believes that there is a reasonable possibility that within the next twelve months, sufficient positive evidence may become available to allow it to reach the conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period released. Deferred tax assets without valuation allowances remain in certain foreign tax jurisdictions, where supported by the evidence.

15. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED SHARES

In 2005, the Company adopted the 2005 Long-Term Incentive Compensation Plan (the “2005 Plan”). The 2005 Plan allowed the Company to grant options and other awards to purchase or receive up to an aggregate of 2,250,000 shares of the Company’s common stock, reduced by any awards outstanding under the 2002 Stock Option Plan. On March 13, 2008, the Board of Directors unanimously adopted an amendment and restatement of the 2005 Plan that increased the number of shares available for grants to an aggregate of 4,750,000 shares of common stock. On March 17, 2011, the Board of Directors unanimously adopted the second amendment and restatement of the 2005 Plan, which increased the number of shares available for grants by an additional 500,000 shares to an aggregate of 5,250,000 shares of common stock. On May 20, 2015, the Board of Directors unanimously adopted, subject to shareholder approval at the annual meeting, the Perry Ellis International, Inc. 2015 Long Term Incentive Compensation Plan, which is an amendment and restatement of the 2005 Plan (the “2015 Plan, and collectively with the 2002 Plan and the prior 2005 Plan, as amended, the “Stock Plans”). The amendment2015 Plan was approved by the shareholders at the Company’s 2015 annual meeting.

The 2015 Plan extends the term of the 2005 Plan until July 17, 2025 as well as increases the number of shares of common stock reserved for issuance by an additional 1,000,000 shares to an aggregate of 6,250,000 shares.

16


On March 16, 2017, the Board of Directors unanimously adopted an amendment and restatement of the 2015 Plan (as amended and restated, the “Amended Plan”). The Amended Plan increases the number of shares available for grants by an additional 1,400,000 shares to an aggregate of 7,650,000 shares of common stock and makes other clarifications and technical revisions designed primarily to improve administration and ensure compliance with recent changes in the law including Internal Revenue Code Section 409A. Other than the amendments noted above, the Amended Plan generally contains the same features, terms and conditions as the 2015 Plan. The amendmentAmended Plan was approved by the shareholders at the Company’s 2017 annual meeting.

During the first and second quarters of fiscal 2018, the Company granted an aggregate of 72,307 and 10,681 shares of restricted stock to certain key employees, which vest primarily over a three-year period, at an estimated value of $1.5 million and $0.2 million, respectively. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

Also, during the second quarter of fiscal 2018, the Company awarded to five directors an aggregate of 28,995 shares of restricted stock. The restricted stock vests primarily over aone-year period, at an estimated value of $0.6 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the first quarter of fiscal 2018, the Company granted performance based restricted stock to certain key employees. Such stock generally vests 100% in April 2020, provided that each employee is still an employee of the Company on such date, and the Company has met certain performance criteria. A total of 154,401 shares of performance-based restricted stock were issued at an estimated value of $3.3 million.

During the first quarter of fiscal 2018, the Company granted an aggregate of 10,953 shares of restricted stock units to a key employee that vest primarily over a three-year period, at an estimated value of $0.2 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During the first, second and secondthird quarters of fiscal 2018, a total of 77,655, 31,448 and 31,44826,672 shares of restricted stock vested, of which 25,241, 11,259 and 11,2599,691 shares were withheld to cover the employees’ statutory income tax requirements, respectively. The estimated value of the withheld shares was $0.5 million, $0.2 million and $0.2 million, respectively.

16. SEGMENT INFORMATION

The Company has four reportable segments: Men’s Sportswear and Swim, Women’s Sportswear,Direct-to-Consumer and Licensing. The Men’s Sportswear and Swim and Women’s Sportswear segments derive revenues from the design, import and distribution of apparel to department stores and other retail outlets, principally throughout the United States. TheDirect-to-Consumer segment derives its revenues from the sale of the Company’s branded and licensed products through the Company’s retail stores ande-commerce platforms. The Licensing segment derives its revenues from royalties associated from the use of the Company’s brand names, principally Perry Ellis, Original Penguin, Laundry, Gotcha, Pro Player, Farah, Ben Hogan, and John Henry.

The Company allocates certain corporate selling, general and administrative expenses based primarily on the revenues generated by the segments.

 

   Three Months Ended   Six Months Ended 
   July 29,
2017
   July 30,
2016
   July 29,
2017
   July 30,
2016
 
   (in thousands) 

Revenues:

        

Men’s Sportswear and Swim

  $155,466   $145,148   $341,332   $343,073 

Women’s Sportswear

   19,718    24,136    49,457    56,625 

Direct-to-Consumer

   23,210    24,057    41,428    44,518 

Licensing

   8,215    8,312    16,482    18,731 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $206,609   $201,653   $448,699   $462,947 
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Men’s Sportswear and Swim

  $1,786   $2,006   $3,637   $3,903 

Women’s Sportswear

   866    764    1,661    1,378 

Direct-to-Consumer

   784    889    1,550    1,785 

Licensing

   60    57    116    117 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

  $3,496   $3,716   $6,964   $7,183 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) :

        

Men’s Sportswear and Swim

  $3,869   $(2,425  $19,384   $14,517 

Women’s Sportswear

   (3,409   (3,106   (4,378   (3,457

Direct-to-Consumer

   (1,960   (2,933   (6,061   (6,305

Licensing

   6,072    5,925    12,048    14,389 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

  $4,572   $(2,539  $20,993   $19,144 

Total interest expense

   1,869    1,889    3,825    3,914 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net income (loss) before income taxes

  $2,703   $(4,428  $17,168   $15,230 
  

 

 

   

 

 

   

 

 

   

 

 

 

17


   Three Months Ended   Nine Months Ended 
   October 28,
2017
   October 29,
2016
   October 28,
2017
   October 29,
2016
 
   (in thousands) 

Revenues:

        

Men’s Sportswear and Swim

  $141,549   $135,717   $482,881   $478,790 

Women’s Sportswear

   28,104    28,676    77,561    85,301 

Direct-to-Consumer

   20,736    20,905    62,164    65,423 

Licensing

   8,449    8,661    24,931    27,392 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $198,838   $193,959   $647,537   $656,906 
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Men’s Sportswear and Swim

  $1,870   $1,814   $5,507   $5,717 

Women’s Sportswear

   939    729    2,600    2,107 

Direct-to-Consumer

   716    932    2,266    2,717 

Licensing

   61    59    177    176 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

  $3,586   $3,534   $10,550   $10,717 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Men’s Sportswear and Swim(1)

  $3,450   $(7,683  $22,834   $6,834 

Women’s Sportswear

   (2,393   (1,289   (6,771   (4,746

Direct-to-Consumer

   (2,543   (3,370   (8,604   (9,675

Licensing

   6,806    7,065    18,854    21,454 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

  $5,320   $(5,277  $26,313   $13,867 

Total interest expense

   1,613    1,738    5,438    5,652 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net income (loss) before income taxes

  $3,707   $(7,015  $20,875   $8,215 
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)Operating income (loss) for the Men’s Sportswear and Swim segment for the three and nine months ended October 29, 2016, includes a settlement charge related to the pension plan in the amount of $8.3 million. See footnote 17 to the consolidated financial statements for further information.

17. BENEFIT PLAN

The Company sponsored two qualified pension plans as a result of the Perry Ellis Menswear acquisition that occurred in June 2003. The plans were frozen and merged as of December 31, 2003.

During fiscal 2015, the Board of Directors resolved to terminate the pension plan. As of January 28, 2017, the Company satisfied the regulatory requirements prescribed by the Internal Revenue Service and the Pension Benefit Guaranty Corporation, and the distribution of plan assets was completed.

The following table provides the components of net benefit cost for the plan during the three and sixnine months of fiscal 2018 and 2017:

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 
  July 29,
2017
   July 30,
2016
   July 29,
2017
   July 30,
2016
   October 28,
2017
   October 29,
2016
   October 28,
2017
   October 29,
2016
 
  (in thousands)   (in thousands) 

Service cost

  $—     $63   $—     $126   $—     $63   $—     $189 

Interest cost

   —      124    —      248    —      124    —      372 

Expected return on plan assets

   —      (87   —      (174   —      (87   —      (261

Amortization of net gain

   —      155    —      310 

Settlement

   —      8,300    —      8,300 

Amortization of net loss

   —      155    —      465 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net periodic benefit cost

  $—     $255   $—     $510   $—     $8,555   $—     $9,065 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

18


Settlement accounting, which accelerates recognition of a plan’s unrecognized net gain or loss, is triggered if the lump sums paid during a year exceed the sum of the plan’s service and interest cost. Since the lump sums paid in fiscal 2017 exceeded that threshold, the Company recognized a settlement charge of $8.3 million in anticipation of the plan’s termination in fiscal 2017.

18. FAIR VALUE MEASUREMENTS

Accounts receivable, accounts payable, accrued interest payable and accrued expenses. The carrying amounts reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments.

Investments. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of theavailable-for-sale investments are measured at fair value on a recurring basis in the consolidated balance sheets.

Real estate mortgages. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the real estate mortgages were approximately $34.0$33.8 million and $34.5 million at July 29,October 28, 2017 and January 28, 2017, respectively. The carrying values of the real estate mortgages at July 29,October 28, 2017 and January 28, 2017, approximate their fair values since the interest rates approximate market.market rates.

Senior credit facility. The carrying amount of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate.

Senior subordinated notes payable. (classified within Level 2 of the valuation hierarchy)—The carrying amounts of the 77/8% senior subordinated notes payable were approximately $49.8 million and $49.7 million at July 29,October 28, 2017 and January 28, 2017.2017, respectively. The fair value of the 77/8% senior subordinated notes payable was approximately $50.2 million and $50.1 million as of July 29,October 28, 2017 and January 28, 2017, respectively, based on quoted market prices.

See footnote 13 to the consolidated financial statements for disclosure of the fair value and line item caption of derivative instruments recorded in the consolidated balance sheets.

These estimated fair value amounts have been determined using available market information and appropriate valuation methods.

19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company and several of its subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis. These guarantees are subject to release in limited circumstances (only upon the occurrence of certain customary conditions). The following are condensed consolidating financial statements, which present, in separate columns: Perry Ellis International, Inc., (Parent Only), the Guarantors on a combined, or where appropriate, consolidated basis, and theNon-Guarantors on a combined, or where appropriate, consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of July 29,October 28, 2017 and January 28, 2017 and for the three and sixnine months ended July 29,October 28, 2017 and July 30,October 29, 2016. The combined Guarantors are 100% owned subsidiaries of Perry Ellis International, Inc., and have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis.

The Company adopted the provisions of ASU2016-09 in the first quarter of fiscal 2018 and the change was retrospectively applied to the condensed consolidating financial statements for all periods presented. The effect on the condensed consolidating statement of cash flows, as a result of the adoption, is an increase of approximately $0.9 million in cash provided by operating activities to the guarantor subsidiariesGuarantors for the sixnine months ended July 30,October 29, 2016, with a corresponding increase in cash used in financing activities to the guarantorGuarantors for the respective periods from the previously reported amounts.

19


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF JULY 29,OCTOBER 28, 2017

(amounts in thousands)

 

  Parent Only   Guarantors   Non-Guarantors   Eliminations Consolidated   Parent Only   Guarantors   Non-
Guarantors
   Eliminations Consolidated 

ASSETS

                  

Current Assets:

                  

Cash and cash equivalents

  $—     $8,229   $15,583   $—    $23,812   $—     $3,136   $23,388   $—    $26,524 

Investment, at fair value

   —      —      28,870    —    28,870    —      —      25,596    —    25,596 

Accounts receivable, net

   —      103,110    28,345    —    131,455    —      108,209    25,634    —    133,843 

Intercompany receivable, net

   89,162    —      —      (89,162  —      88,713    —      —      (88,713  —   

Inventories

   —      107,531    23,666    —    131,197    —      107,185    22,108    —    129,293 

Prepaid expenses and other current assets

   —      5,978    841    —    6,819    —      4,724    994    —    5,718 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total current assets

   89,162    224,848    97,305    (89,162 322,153    88,713    223,254    97,720    (88,713 320,974 

Property and equipment, net

   —      56,722    2,550    —    59,272    —      55,241    2,270    —    57,511 

Other intangible assets, net

   —      154,301    32,332    —    186,633    —      154,093    32,332    —    186,425 

Deferred income taxes

   —      —      462    —    462    —      —      446    —    446 

Investment in subsidiaries

   292,983    —      —      (292,983  —      296,198    —      —      (296,198  —   

Other assets

   —      1,641    585    —    2,226    —      1,549    393    —    1,942 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

TOTAL

  $382,145   $437,512   $133,234   $(382,145 $570,746   $384,911   $434,137   $133,161   $(384,911 $567,298 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

LIABILITIES AND EQUITY

                  

Current Liabilities:

                  

Accounts payable

  $—     $56,906   $12,452   $—    $69,358   $—     $44,261   $7,179   $—    $51,440 

Accrued expenses and other liabilities

   —      19,930    5,976    —    25,906    —      26,265    8,298    —    34,563 

Accrued interest payable

   1,407    —      —      —    1,407    400    —      —      —    400 

Income taxes payable

   659    583    92    —    1,334    202    589    264    —    1,055 

Unearned revenues

   —      3,074    505    —    3,579    —      2,243    348    —    2,591 

Intercompany payable, net

   —      76,594    18,999    (95,593  —      —      76,153    19,268    (95,421  —   
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total current liabilities

   2,066    157,087    38,024    (95,593 101,584    602    149,511    35,357    (95,421 90,049 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Senior subordinated notes payable, net

   49,744    —      —      —    49,744    49,780    —      —      —    49,780 

Senior credit facility

   —      7,917    —      —    7,917 

Real estate mortgages

   —      33,153    —      —    33,153    —      32,937    —      —    32,937 

Unearned revenues and other long-term liabilities

   —      19,074    284    —    19,358    —      15,201    126    —    15,327 

Deferred income taxes

   —      36,572    —      —    36,572    —      36,759    —      —    36,759 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total long-term liabilities

   49,744    88,799    284    —    138,827    49,780    92,814    126    —    142,720 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total liabilities

   51,810    245,886    38,308    (95,593 240,411    50,382    242,325    35,483    (95,421 232,769 
  

 

   

 

   

 

   

 

  

 

 
  

 

   

 

   

 

   

 

  

 

 

Total equity

   330,335    191,626    94,926    (286,552 330,335    334,529    191,812    97,678    (289,490 334,529 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

TOTAL

  $382,145   $437,512   $133,234   $(382,145 $570,746   $384,911   $434,137   $133,161   $(384,911 $567,298 
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

20


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF JANUARY 28, 2017

(amounts in thousands)

 

   Parent Only   Guarantors   Non-
Guarantors
   Eliminations  Consolidated 

ASSETS

         

Current Assets:

         

Cash and cash equivalents

  $—     $2,578   $28,117   $—    $30,695 

Investment, at fair value

   —      —      10,921    —     10,921 

Accounts receivable, net

   —      116,874    23,366    —     140,240 

Intercompany receivable, net

   85,028    —      —      (85,028  —   

Inventories

   —      126,557    24,694    —     151,251 

Prepaid income taxes

   549    —      25    1,073   1,647 

Prepaid expenses and other current assets

   —      5,584    878    —     6,462 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current assets

   85,577    251,593    88,001    (83,955  341,216 

Property and equipment, net

   —      59,651    2,184    —     61,835 

Other intangible assets, net

   —      154,719    32,332    —     187,051 

Deferred income taxes

   —      —      334    —     334 

Investment in subsidiaries

   279,233    —      —      (279,233  —   

Other assets

   —      1,797    472    —     2,269 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

TOTAL

  $364,810   $467,760   $123,323   $(363,188 $592,705 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

LIABILITIES AND EQUITY

         

Current Liabilities:

         

Accounts payable

  $—     $79,600   $13,243   $—    $92,843 

Accrued expenses and other liabilities

   —      15,543    5,318    —     20,861 

Accrued interest payable

   1,450    —      —      —     1,450 

Income taxes payable

   —      623    —      (623  —   

Unearned revenues

   —      2,353    357    —     2,710 

Intercompany payable, net

   —      77,398    15,614    (93,012  —   
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current liabilities

   1,450    175,517    34,532    (93,635  117,864 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Senior subordinated notes payable, net

   49,673    —      —      —     49,673 

Senior credit facility

   —      22,504    —      —     22,504 

Real estate mortgages

   —      33,591    —      —     33,591 

Unearned revenues and other long-term liabilities

   —      17,945    326    —     18,271 

Deferred income taxes

   —      35,419    —      1,696   37,115 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total long-term liabilities

   49,673    109,459    326    1,696   161,154 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

   51,123    284,976    34,858    (91,939  279,018 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total equity

   313,687    182,784    88,465    (271,249  313,687 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

TOTAL

  $364,810   $467,760   $123,323   $(363,188 $592,705 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

21


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)    

FOR THE THREE MONTHS ENDED OCTOBER 28, 2017

(amounts in thousands)

   Parent Only  Guarantors   Non-
Guarantors
  Eliminations  Consolidated 

Revenues:

       

Net sales

  $—    $165,455   $24,934  $—    $190,389 

Royalty income

   —     5,230    3,219   —     8,449 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenues

   —     170,685    28,153   —     198,838 

Cost of sales

   —     109,470    15,290   —     124,760 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit

   —     61,215    12,863   —     74,078 

Operating expenses:

       

Selling, general and administrative expenses

   —     56,007    9,165   —     65,172 

Depreciation and amortization

   —     3,279    307   —     3,586 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total operating expenses

   —     59,286    9,472   —     68,758 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Operating income

   —     1,929    3,391   —     5,320 

Interest expense (income)

   —     1,700    (87  —     1,613 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —     229    3,478   —     3,707 

Income tax provision

   —     43    449   —     492 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   3,215   —      —     (3,215  —   
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   3,215   186    3,029   (3,215  3,215 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income

   (138  —      (138  138   (138
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $3,077  $186   $2,891  $(3,077 $3,077 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE THREE MONTHS ENDED JULYOCTOBER 29, 2017

(amounts in thousands)

   Parent Only   Guarantors  Non-Guarantors  Eliminations  Consolidated 

Revenues:

       

Net sales

  $—     $172,708  $25,686  $—    $198,394 

Royalty income

   —      5,108   3,107   —     8,215 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   —      177,816   28,793   —     206,609 

Cost of sales

   —      113,243   16,886   —     130,129 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   —      64,573   11,907   —     76,480 

Operating expenses:

       

Selling, general and administrative expenses

   —      59,259   9,153   —     68,412 

Depreciation and amortization

   —      3,252   244   —     3,496 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   —      62,511   9,397   —     71,908 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   —      2,062   2,510   —     4,572 

Interest expense (income)

   —      1,920   (51  —     1,869 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —      142   2,561   —     2,703 

Income tax provision

   —      1,322   402   —     1,724 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   979    —     —     (979  —   
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   979    (1,180  2,159   (979  979 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income

   1,217    —     1,217   (1,217  1,217 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $2,196   $(1,180 $3,376  $(2,196 $2,196 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS ) INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED JULY 30, 2016

(amounts in thousands)

 

  Parent Only Guarantors Non-Guarantors Eliminations   Consolidated   Parent Only Guarantors Non-
Guarantors
 Eliminations Consolidated 

Revenues:

             

Net sales

  $—    $169,237  $24,104  $—     $193,341   $—    $162,185  $23,113  $—    $185,298 

Royalty income

   —    5,061  3,251   —      8,312    —    5,230  3,431   —    8,661 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Total revenues

   —    174,298  27,355   —      201,653    —    167,415  26,544   —    193,959 

Cost of sales

   —    111,729  16,093   —      127,822    —    107,489  15,367   —    122,856 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Gross profit

   —    62,569  11,262   —      73,831    —    59,926  11,177   —    71,103 

Operating expenses:

             

Selling, general and administrative expenses

   —    62,361  10,293   —      72,654    —    63,475  9,371   —    72,846 

Depreciation and amortization

   —    3,276  440   —      3,716    —    3,220  314   —    3,534 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Total operating expenses

   —    65,637  10,733   —      76,370    —    66,695  9,685   —    76,380 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Operating (loss) income

   —    (3,068 529   —      (2,539   —    (6,769 1,492   —    (5,277
  

 

  

 

  

 

  

 

  

 

 

Interest expense (income)

   —    1,901  (12  —      1,889    —    1,756  (18  —    1,738 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Net (loss) income before income taxes

   —    (4,969 541   —      (4,428   —    (8,525 1,510   —    (7,015

Income tax (benefit) provision

   —    (1,441 578   —      (863   —    (2,189 339   —    (1,850
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Equity in earnings of subsidiaries, net

   (3,565  —     —    3,565    —      (5,165  —     —    5,165   —   
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Net loss

   (3,565 (3,528 (37 3,565    (3,565

Net (loss) income

   (5,165 (6,336 1,171  5,165  (5,165
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Other comprehensive (loss) income

   (2,928 155  (3,083 2,928    (2,928

Other comprehensive income (loss)

   6,045  8,142  (2,097 (6,045 6,045 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Comprehensive loss

  $(6,493 $(3,373 $(3,120 $6,493   $(6,493

Comprehensive income (loss)

  $880  $1,806  $(926 $(880 $880 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

22


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED JULY 29,OCTOBER 28, 2017

(amounts in thousands)

 

   Parent Only   Guarantors   Non-Guarantors  Eliminations  Consolidated 

Revenues:

        

Net sales

  $—     $379,394   $52,823  $—    $432,217 

Royalty income

   —      10,494    5,988   —     16,482 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total revenues

   —      389,888    58,811   —     448,699 

Cost of sales

   —      247,170    33,961   —     281,131 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit

   —      142,718    24,850   —     167,568 

Operating expenses:

        

Selling, general and administrative expenses

   —      120,858    18,753   —     139,611 

Depreciation and amortization

   —      6,462    502   —     6,964 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total operating expenses

   —      127,320    19,255   —     146,575 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Operating income

   —      15,398    5,595   —     20,993 

Interest expense (income)

   —      3,909    (84  —     3,825 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —      11,489    5,679   —     17,168 

Income tax provision

   —      2,647    771   —     3,418 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   13,750    —      —     (13,750  —   
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   13,750    8,842    4,908   (13,750  13,750 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive income

   1,140    —      1,140   (1,140  1,140 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income

  $14,890   $8,842   $6,048  $(14,890 $14,890 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

   Parent Only   Guarantors   Non-
Guarantors
  Eliminations  Consolidated 

Revenues:

        

Net sales

  $—     $544,849   $77,757  $—    $622,606 

Royalty income

   —      15,724    9,207   —     24,931 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total revenues

   —      560,573    86,964   —     647,537 

Cost of sales

   —      356,640    49,251   —     405,891 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit

   —      203,933    37,713   —     241,646 

Operating expenses:

        

Selling, general and administrative expenses

   —      176,865    27,918   —     204,783 

Depreciation and amortization

   —      9,741    809   —     10,550 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total operating expenses

   —      186,606    28,727   —     215,333 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Operating income

   —      17,327    8,986   —     26,313 

Interest expense (income)

   —      5,609    (171  —     5,438 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —      11,718    9,157   —     20,875 

Income tax provision

   —      2,690    1,220   —     3,910 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   16,965    —      —     (16,965  —   
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   16,965    9,028    7,937   (16,965  16,965 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive income

   1,002    —      1,002   (1,002  1,002 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income

  $17,967   $9,028   $8,939  $(17,967 $17,967 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

23


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED JULY 30,OCTOBER 29, 2016

(amounts in thousands)

 

   Parent Only  Guarantors   Non-Guarantors  Eliminations  Consolidated 

Revenues:

       

Net sales

  $—    $394,142   $50,074  $—    $444,216 

Royalty income

   —     12,275    6,456   —     18,731 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenues

   —     406,417    56,530   —     462,947 

Cost of sales

   —     260,705    33,327   —     294,032 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit

   —     145,712    23,203   —     168,915 

Operating expenses:

       

Selling, general and administrative expenses

   —     123,794    18,794   —     142,588 

Depreciation and amortization

   —     6,467    716   —     7,183 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total operating expenses

   —     130,261    19,510   —     149,771 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Operating income

   —     15,451    3,693   —     19,144 

Interest expense (income)

   —     3,935    (21  —     3,914 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —     11,516    3,714   —     15,230 

Income tax provision

   —     3,025    1,520   —     4,545 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   10,685   —      —     (10,685  —   
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   10,685   8,491    2,194   (10,685  10,685 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income

   (1,103  310    (1,413  1,103   (1,103
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income

  $9,582  $8,801   $781  $(9,582 $9,582 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

   Parent Only   Guarantors   Non-
Guarantors
  Eliminations  Consolidated 

Revenues:

        

Net sales

  $—     $556,327   $73,187  $—    $629,514 

Royalty income

   —      17,505    9,887   —     27,392 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total revenues

   —      573,832    83,074   —     656,906 

Cost of sales

   —      368,194    48,694   —     416,888 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Gross profit

   —      205,638    34,380   —     240,018 

Operating expenses:

        

Selling, general and administrative expenses

   —      187,269    28,165   —     215,434 

Depreciation and amortization

   —      9,687    1,030   —     10,717 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total operating expenses

   —      196,956    29,195   —     226,151 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Operating income

   —      8,682    5,185   —     13,867 

Interest expense (income)

   —      5,691    (39  —     5,652 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income before income taxes

   —      2,991    5,224   —     8,215 

Income tax provision

   —      836    1,859   —     2,695 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Equity in earnings of subsidiaries, net

   5,520    —      —     (5,520  —   
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   5,520    2,155    3,365   (5,520  5,520 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss)

   4,942    8,452    (3,510  (4,942  4,942 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $10,462   $10,607   $(145 $(10,462 $10,462 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED JULY 29,OCTOBER 28, 2017

(amounts in thousands)

 

  Parent Only Guarantors Non-Guarantors Eliminations Consolidated   Parent Only Guarantors Non-
Guarantors
 Eliminations Consolidated 

NET CASH PROVIDED BY OPERATING ACTIVITIES:

  $1,236  $35,631  $3,453  $—    $40,320 

NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES:

  $(192 $26,124  $7,423  $—    $33,355 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

Purchase of property and equipment

   —    (3,121 (780  —    (3,901   —    (4,744 (827  —    (5,571

Purchase of investments

   —     —    (28,124  —    (28,124   —     —    (36,972  —    (36,972

Proceeds from investments maturities

   —     —    10,136   —    10,136    —     —    22,246   —    22,246 

Proceeds on note receivable

   —     —    250   —    250 

Intercompany transactions

   246   —     —    (246  —      1,242   —     —    (1,242  —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net cash provided by (used in) investing activities

   246  (3,121 (18,768 (246 (21,889   1,242  (4,744 (15,303 (1,242 (20,047
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

Borrowings from senior credit facility

   —    141,588   —     —    141,588    —    201,888   —     —    201,888 

Payments on senior credit facility

   —    (164,092  —     —    (164,092   —    (216,475  —     —    (216,475

Payments on real estate mortgages

   —    (435  —     —    (435   —    (650  —     —    (650

Purchase of treasury shares

   (937  —     —     —    (937   (937  —     —     —    (937

Payments for employee taxes on shares withheld

   (753  —     —    (753   —    (980  —     —    (980

Payments on capital leases

   —    (140  —     —    (140   —    (212  —     —    (212

Proceeds from exercise of stock options

   23   —     —     —    23    24   —     —     —    24 

Intercompany transactions

   (3,027 3,349  (322  —      —    (4,393 3,288  1,105   —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net cash (used in) provided by financing activities

   (914 (26,859 3,349  (322 (24,746   (913 (20,822 3,288  1,105  (17,342

Effect of exchange rate changes on cash and cash equivalents

   (568  —    (568 568  (568   (137  —    (137 137  (137
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

   —    5,651  (12,534  —    (6,883

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   —    558  (4,729  —    (4,171

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

   —    2,578  28,117   —    30,695    —    2,578  28,117   —    30,695 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $—    $8,229  $15,583  $—    $23,812   $—    $3,136  $23,388  $—    $26,524 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

24


PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED JULY 30,OCTOBER 29, 2016

(amounts in thousands)

 

  Parent Only Guarantors Non-Guarantors Eliminations Consolidated   Parent Only Guarantors Non-
Guarantors
 Eliminations Consolidated 

NET CASH PROVIDED BY OPERATING ACTIVITIES:

  $4,543  $29,241  $4,802  $(2,706 $35,880   $1,155  $33,914  $5,824  $(2,706 $38,187 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

Purchase of property and equipment

   —    (5,854 (755  —    (6,609   —    (8,292 (1,042  —    (9,334

Purchase of investments

   —     —    (9,039  —    (9,039   —     —    (12,467  —    (12,467

Proceeds from investments maturities

   —     —    5,205   —    5,205 

Proceeds from investment maturities

   —     —    9,341   —    9,341 

Proceeds from note receivable

   —     —    250   —    250 

Intercompany transactions

   (4,477  —     —    4,477   —      1,203   —     —    (1,203  —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net cash used in investing activities

   (4,477 (5,854 (4,589 4,477  (10,443
  

 

  

 

  

 

  

 

  

 

 

Net cash provided by (used in) investing activities

   1,203  (8,292 (3,918 (1,203 (12,210
  

 

  

 

  

 

  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

Borrowings from senior credit facility

   —    179,380   —     —    179,380    —    250,012   —     —    250,012 

Payments on senior credit facility

   —    (207,273  —     —    (207,273   —    (273,933  —     —    (273,933

Payments on real estate mortgages

   —    (423  —     —    (423   —    (634  —     —    (634

Payments for employee taxes on shares withheld

   —    (946  —     —    (946

Payments on capital leases

   —    (129  —     —    (129   —    (196  —     —    (196

Dividends paid to stockholder

   —     —    (2,706 2,706   —      —     —    (2,706 2,706   —   

Purchase of treasury stock

   (2,151  —     —     —    (2,151

Payments for employee taxes on shares withheld

   —    (946  —     —    (946

Proceeds from exercise of stock options

   5   —     —     —    5    5   —     —     —    5 

Intercompany transactions

   —    9,178  (4,630 (4,548  —      —    3,539  (4,530 991   —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net cash provided by (used in) financing activities

   5  (20,213 (7,336 (1,842 (29,386

Net cash used in financing activities

   (2,146 (22,158 (7,236 3,697  (27,843

Effect of exchange rate changes on cash and cash equivalents

   (71  —    (71 71  (71   (212  —    (212 212  (212
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   —    3,174  (7,194  —    (4,020   —    3,464  (5,542  —    (2,078

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

   —    775  31,127   —    31,902    —    775  31,127   —    31,902 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $—    $3,949  $23,933  $—    $27,882   $—    $4,239  $25,585  $—    $29,824 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

25


Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form10-K for the year ended January 28, 2017, filed with the Securities and Exchange Commission on April 10, 2017.

Forward–Looking Statements

We caution readers that the forward-looking statements (statements which are not historical facts) in this releasequarterly report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “proforma,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology. Such forward-looking statements include, but are not limited to, statements regarding Perry Ellis’ strategic operating review, growth initiatives and internal operating improvements intended to drive revenues and enhance profitability, the implementation of Perry Ellis’ profitability improvement plan and Perry Ellis’ plans to exit underperforming, low growth brands and businesses. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. These factors include:

 

general economic conditions,

 

a significant decrease in business from or loss of any of our major customers or programs,

anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,

 

recent and future economic conditions, including turmoil in the financial and credit markets,

 

the effectiveness of our planned advertising, marketing and promotional campaigns,

 

our ability to contain costs,

 

disruptions in the supply chain, including, but not limited to those caused by port disruptions,

 

disruptions due to weather patterns,

 

our future capital needs and our ability to obtain financing,

 

our ability to protect our trademarks,

 

our ability to integrate acquired businesses, trademarks, trade names, and licenses,

 

26


our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

 

the termination ornon-renewal of any material license agreements to which we are a party,

 

changes in the costs of raw materials, labor and advertising,

 

our ability to carry out growth strategies including expansion in international anddirect-to-consumer retail markets,

 

the effectiveness of our plans, strategies, objectives, expectations and intentions, which are subject to change at any time at our discretion,

 

potential cyber risk and technology failures that could disrupt operations or result in a data breach,

 

the level of consumer spending for apparel and other merchandise,

 

our ability to compete,

 

exposure to foreign currency risk and interest rates risk,

 

the impact to our business resulting from the United Kingdom’s referendum vote to exit the European Union and the uncertainty surrounding the terms and conditions of such a withdrawal, as well as the related impact to global stock markets and currency exchange rates,

 

possible disruption in commercial activities due to terrorist activity and armed conflict,

 

actions of activist investors and the cost and disruption of responding to those actions, and

 

other factors set forth in Perry Ellis’ filings with the Securities and Exchange Commission.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those risks and uncertainties detailed in Perry Ellis’ filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form10-K for the year ended January 28, 2017 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas in which we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets and the measurement of retirement related benefits. We believe that there have been no significant changes to our critical accounting policies during the three and sixnine months ended July 29,October 28, 2017 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form10-K for the year ended January 28, 2017.

27


Results of Operations

The following table sets forth, for the periods indicated, selected financial data expressed by segments and includes a reconciliation of EBITDA to operating income by segment, the most directly comparable GAAP financial measure:

 

  Three Months Ended Nine Months Ended 
  Three Months Ended Six Months Ended   October 28, October 29, October 28, October 29, 
  July 29,
2017
 July 30,
2016
 July 29,
2017
 July 30,
2016
   2017 2016 2017 2016 
  (in thousands)   (in thousands) 

Revenues by segment:

          

Men’s Sportswear and Swim

  $155,466  $145,148  $341,332  $343,073   $141,549  $135,717  $482,881  $478,790 

Women’s Sportswear

   19,718  24,136  49,457  56,625    28,104  28,676  77,561  85,301 

Direct-to-Consumer

   23,210  24,057  41,428  44,518    20,736  20,905  62,164  65,423 

Licensing

   8,215  8,312  16,482  18,731    8,449  8,661  24,931  27,392 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total revenues

  $206,609  $201,653  $448,699  $462,947   $198,838  $193,959  $647,537  $656,906 
  

 

  

 

  

 

  

 

 
  Three Months Ended Nine Months Ended 
  

 

  

 

  

 

  

 

   October 28, October 29, October 28, October 29, 
  2017 2016 2017 2016 
  Three Months Ended Six Months Ended   (in thousands) 
Reconciliation of operating income (loss) to EBITDA  July 29,
2017
 July 30,
2016
 July 29,
2017
 July 30,
2016
   
Operating income (loss) by segment:  (in thousands)   

Men’s Sportswear and Swim

  $3,869  $(2,425 $19,384  $14,517   $3,450  $(7,683 $22,834  $6,834 

Women’s Sportswear

   (3,409 (3,106 (4,378 (3,457   (2,393 (1,289 (6,771 (4,746

Direct-to-Consumer

   (1,960 (2,933 (6,061 (6,305   (2,543 (3,370 (8,604 (9,675

Licensing

   6,072  5,925  12,048  14,389    6,806  7,065  18,854  21,454 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating income (loss)

  $4,572  $(2,539 $20,993  $19,144   $5,320  $(5,277 $26,313  $13,867 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Add:

          

Depreciation and amortization

          

Men’s Sportswear and Swim

  $1,786  $2,006  $3,637  $3,903   $1,870  $1,814  $5,507  $5,717 

Women’s Sportswear

   866  764  1,661  1,378    939  729  2,600  2,107 

Direct-to-Consumer

   784  889  1,550  1,785    716  932  2,266  2,717 

Licensing

   60  57  116  117    61  59  177  176 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total depreciation and amortization

  $3,496  $3,716  $6,964  $7,183   $3,586  $3,534  $10,550  $10,717 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

EBITDA by segment:

          

Men’s Sportswear and Swim

  $5,655  $(419 $23,021  $18,420   $5,320  $(5,869 $28,341  $12,551 

Women’s Sportswear

   (2,543 (2,342 (2,717 (2,079   (1,454 (560 (4,171 (2,639

Direct-to-Consumer

   (1,176 (2,044 (4,511 (4,520   (1,827 (2,438 (6,338 (6,958

Licensing

   6,132  5,982  12,164  14,506    6,867  7,124  19,031  21,630 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total EBITDA

  $8,068  $1,177  $27,957  $26,327   $8,906  $(1,743 $36,863  $24,584 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

EBITDA margin by segment

          

Men’s Sportswear and Swim

   3.6 (0.3%)  6.7 5.4   3.8 (4.3%)  5.9 2.6

Women’s Sportswear

   (12.9%)  (9.7%)  (5.5%)  (3.7%)    (5.2%)  (2.0%)  (5.4%)  (3.1%) 

Direct-to-Consumer

   (5.1%)  (8.5%)  (10.9%)  (10.2%)    (8.8%)  (11.7%)  (10.2%)  (10.6%) 

Licensing

   74.6 72.0 73.8 77.4   81.3 82.3 76.3 79.0

Total EBITDA margin

   3.9 0.6 6.2 5.7   4.5 (0.9%)  5.7 3.7

EBITDA consists of earnings before interest, depreciation and amortization, and income taxes. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. The most directly comparable GAAP financial measure, presented above, is operating income. EBITDA and EBITDA margin are presented solely as a supplemental disclosure because management believes that they are a common measuremeasures of operating performance in the apparel industry.

28


The following is a discussion of the results of operations for the three and sixnine month periods ended July 29,October 28, 2017 of the fiscal year ending February 3, 2018 (“fiscal 2018”) compared with the three and sixnine month periods ended July 30,October 29, 2016 of the fiscal year ended January 28, 2017 (“fiscal 2017”).

Results of Operations—Operations - three and sixnine months ended July 29,October 28, 2017 compared to the three and sixnine months ended July 30,October 29, 2016.

Net sales.sales. Men’s Sportswear and Swim net sales for the three months ended July 29,October 28, 2017 were $155.5$141.5 million, an increase of $10.4$5.8 million, or 7.2%4.3%, from $145.1$135.7 million for the three months ended July 30,October 29, 2016. The net sales increase was attributed to strong sell through rates throughout the spring season and some movement up in shipments that were originally anticipated for third quarter.fall seasons. Of particular strength were our core brands, specifically Perry Ellis, Original Penguin, Nike and golf lifestyle apparel businesses.

Men’s Sportswear and Swim net sales for the sixnine months ended July 29,October 28, 2017 were $341.3$482.9 million, a decreasean increase of $1.8$4.1 million, or 0.5%0.9%, from $343.1$478.8 million for the sixnine months ended July 30,October 29, 2016. Although we had anThis increase inwas a result of our strong sell through rates during the second quarter, itspring and fall season. This increase was offset by our customer’s preferenceattributed to receive product closer to their needs resulting in a shift in sales from the first half of the year to the second half. The decrease was partially offset by increases in our Perry Ellis, Original Penguin, golf lifestyle apparel business, Nike swim, and other core global brands as described above.brands.

Women’s Sportswear net sales for the three months ended July 29,October 28, 2017 were $19.7$28.1 million, a decrease of $4.4$0.6 million, or 18.3%2.1%, from $24.1$28.7 million for the three months ended July 30,October 29, 2016. The net sales decrease was attributed primarily to planned reductions as we continue to focus on re-launchingin the Laundry brand, as well as, a shiftoffset by increases in planned sales from the second quarter to the third quarter.Rafaella.

Women’s Sportswear net sales for the sixnine months ended July 29,October 28, 2017 were $49.5$77.6 million, a decrease of $7.1$7.7 million, or 12.5%9.1%, from $56.6$85.3 million for the sixnine months ended July 30,October 29, 2016. The net sales decrease was primarily due to planned reductions in the Laundry brand as we work on the re-launchtransition of the brand.brand to a licensing partner. The decrease was partially offset by increases in the Rafaella driven by the earlier timing of spring shipments.brand.

Direct-to-Consumer net sales for the three months ended July 29,October 28, 2017 were $23.2$20.7 million, a decrease of $0.9$0.2 million, or 3.7%0.9%, from $24.1$20.9 million for the three months ended July 30,October 29, 2016. This decrease is attributed to the closure of ten stores, as well as the temporary closing of certain stores due to the effects of Hurricanes Harvey, Irma and Maria. This decrease was offset by a 3.7% increase in comparable same store sales.

Direct-to-Consumer net sales for the nine months ended October 28, 2017 were $62.2 million, a decrease of $3.2 million, or 4.9%, from $65.4 million for the nine months ended October 29, 2016. Comparable same store sales remained flat. The decrease was driven by ten store closings since the second quarter of fiscal 2017, partially offset by a 5% increase in e-commerce. Comparable same store sales remained flat while comparable margins increased 4% due to strong consumer response to our product assortments.

Direct-to-Consumer net sales for the six months ended July 29, 2017 were $41.4 million, a decrease of $3.1 million, or 7.0%, from $44.5 million for the six months ended July 30, 2016. The decrease was driven by a retail stores sales decline of 1.9% in comparable same store sales for the direct-to-consumer business, coupled with ten fewer stores as compared to the prior period.period and the impact of the hurricanes as discussed above.

Royalty income. Royalty income for the three months ended July 29,October 28, 2017 was $8.2$8.4 million, a decrease of $0.1$0.3 million, or essentially flat,3.4%, from $8.3$8.7 million for the three months ended July 30,October 29, 2016.

Royalty income for the sixnine months ended July 29,October 28, 2017 was $16.5$24.9 million, a decrease of $2.2$2.5 million, or 11.8%9.1%, from $18.7$27.4 million for the sixnine months ended July 30,October 29, 2016. RoyaltyFor the three and nine months ended October 28, 2017 royalty income decreases were attributed to the transition of two of our licensed partners; one broughtin-house and one to a new licensing partnership.

Gross profit.Gross profit was $76.5$74.1 million for the three months ended July 29,October 28, 2017, an increase of $2.7$3.0 million, or 3.7%4.2%, from $73.8$71.1 million for the three months ended July 30,October 29, 2016. This increase iswas attributed to a strong sales performance by our core brands coupled with strong inventory management.

Gross profit was $167.6$241.6 million for the sixnine months ended July 29,October 28, 2017, a decreasean increase of $1.3$1.6 million, or 0.8%0.7%, from $168.9$240.0 million for the sixnine months ended July 30,October 29, 2016. This decrease isincrease was attributed to the sales reductionsincreases described above and the factors described within the gross profit margin section below.

Gross profit margin. As a percentage of total revenue, gross profit margins were 37.0%37.3% for the three months ended July 29,October 28, 2017, as compared to 36.6%36.7% for the three months ended July 30,October 29, 2016 which represents an expansion of 4060 basis points. The expansion was driven by stronger product margins in our men’s collection, golf apparel, NikeOriginal Penguin and direct-to-consumertheDirect-to-Consumer businesses.

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For the sixnine months ended July 29,October 28, 2017, gross profit margins were 37.3% as a percentage of total revenue, as compared to 36.5% for the sixnine months ended July 30,October 29, 2016, an expansionincrease of 80 basis points. The increase iswas attributed to the disciplined management of inventory across all channels, increased sales of higher margin core brands and efficiencies achieved within our supply chain infrastructure. Additionally, our direct-to-consumerDirect-to-Consumer gross profit margin increased due to improved pricing strategies and a move away from highly promotional events.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended July 29,October 28, 2017 were $68.4$65.2 million, a decrease of $4.3$7.6 million, or 5.9%10.4%, from $72.7$72.8 million for the three months ended July 30,October 29, 2016. The decrease was attributed primarily to reduced employee expenses resulting fromof $8.3 million associated with the termination of our continued focus on our core infrastructure. Additionally,defined pension plan during the three months ended July 30,October 29, 2016, we had a required accelerationpartially offset by an increase in certain unplanned legal fees of compensation costs relating to$0.5 million during the new contract for our executive chairman, which was not repeated in the comparable period ofthree months ended October 28, 2017.

Selling, general and administrative expenses for the sixnine months ended July 29,October 28, 2017 were $139.6$204.8 million, a decrease of $3.0$10.6 million, or 2.1%4.9%, from $142.6$215.4 million for the sixnine months ended July 30,October 29, 2016. The decrease was attributed primarily to reduced employee expenses resulting from our continued focus on our core infrastructure, the pension expense as explained above, and, during three months ended July 30, 2016, we had a required acceleration of compensation costs relating to the new contract for our executive chairman.chairman during three months ended July 30, 2016.

EBITDA. Men’s Sportswear and Swim EBITDA margin for the three months ended July 29,October 28, 2017, increased 390810 basis points to 3.6%3.8%, from (0.3%(4.3%) for the three months ended July 30,October 29, 2016. The EBITDA margin was favorablyunfavorably impacted by sourcing efficiencies and strong performancethe settlement charge related to the termination of our core brands, specifically Perry Ellis, Original Penguin, Nike and golf apparel businesses.defined benefit plan in the amount of $8.3 million during the three months ended October 29, 2016. Such expense did not occur during the three months ended October 28, 2017.

Men’s Sportswear and Swim EBITDA margin for the sixnine months ended July 29,October 28, 2017, increased 130330 basis points to 6.7%5.9%, from 5.4%2.6% for the sixnine months ended July 30,October 29, 2016. The EBITDA margin was favorably impacted by sourcing efficiencies and the strong sales performance of our core brands, specifically our Perry Ellis, Original Penguin, Nike and golf apparel businesses.

Women’s Sportswear EBITDA margin for the three months ended July 29,October 28, 2017 decreased 320 basis points to (12.9%(5.2%) from (9.7%(2.0%) for the three months ended July 30, 2016. The EBITDA margin was unfavorably impacted by planned reductions and shifts in sales as discussed above.

Women’s Sportswear EBITDA margin for the six months ended JulyOctober 29, 2017 decreased 180 basis points to (5.5%) from (3.7%) for the six months ended July 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in net sales described above. As a result of this decrease in revenue,net sales, we were not able to realize favorable leverage in selling, general and administrative expenses.

Women’s Sportswear EBITDA margin for the nine months ended October 28, 2017 decreased 230 basis points to (5.4%) from (3.1%) for the nine months ended October 29, 2016. The EBITDA margin was unfavorably impacted by the decrease in net sales described above. As a result of this decrease in net sales, we were not able to realize favorable leverage in selling, general and administrative expenses.

Direct-to-Consumer EBITDA margin for the three months ended July 29,October 28, 2017, increased 340290 basis points to (5.1%(8.8%), from (8.5%(11.7%) for the three months ended July 30,October 29, 2016. The EBITDA margin was favorably impacted by the product sales mix as we focus to beon being less dependent on everyday promotions.

Direct-to-Consumer EBITDA margin for the sixnine months ended July 29,October 28, 2017 decreased 70increased 40 basis points to (10.9%)(10.2)%, from (10.2%(10.6%) for the sixnine months ended July 30,October 29, 2016. The EBITDA margin was favorably impacted by the product sales mix as we focus on being less dependent on everyday promotions and thus increased our gross profit margin and achieved favorable leverage in selling, general and administrative expenses.

Licensing EBITDA margin for the three months ended October 28, 2017, decreased 100 basis points to 81.3%, from 82.3% for the three months ended October 29, 2016. The EBITDA margin was unfavorably impacted by the decrease in revenue from our stores, asroyalty income described above.

Licensing EBITDA margin for the threenine months ended July 29,October 28, 2017, increased 260decreased 270 basis points to 74.6%76.3%, from 72.0%79.0% for the threenine months ended July 30,October 29, 2016. The EBITDA margin was favorably impacted by reductions in selling, general and administrative expenses associated with the licensing segment.

Licensing EBITDA margin for the six months ended July 29, 2017 decreased 360 basis points to 73.8%, from 77.4% for the six months ended July 30, 2016. The EBITDA margin was unfavorably impacted by the decrease in royalty income described above.

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Depreciation and amortization. Depreciation and amortization for the three months ended July 29,October 28, 2017, was $3.5$3.6 million, a decreasean increase of $0.2$0.1 million, or 5.4%2.9%, from $3.7$3.5 million for the three months ended July 30,October 29, 2016. The increase was attributed to depreciation related to our capital expenditures, primarily in fixtures, made during fiscal 2018.

Depreciation and amortization for the nine months ended October 28, 2017, was $10.6 million, a decrease of $0.1 million, or 0.9%, from $10.7 million for the nine months ended October 29, 2016. The decrease is primarily reflected in the direct-to-consumer segment as a result of ten store closures since the second half of fiscal 2017.

Depreciation and amortization for the six months ended July 29, 2017, was $7.0 million, a decrease of $0.2 million, or 2.8%, from $7.2 million for the six months ended July 30, 2016. The decrease is primarily reflected in the direct-to-consumerDirect-to-Consumer segment as a result of ten store closures since the second half of fiscal 2017.

Interest expense. Interest expense for the three months ended July 29, 2017 and the three months ended July 30, 2016 remained flat at $1.9 million. Interest expense for the six months ended July 29,October 28, 2017, was $3.8$1.6 million, a decrease of $0.1 million, or 2.6%5.9%, from $3.9$1.7 million for the sixthree months ended July 30,October 29, 2016. ThisInterest expense for the nine months ended October 28, 2017, was $5.4 million, a decrease wasof $0.3 million, or 5.3%, from $5.7 million for the nine months ended October 29, 2016. These decreases were attributed to the lower average amount borrowed on our credit facility as compared to the prior year period.periods.

Income taxes.taxes. The income tax expense for the three months ended July 29,October 28, 2017, was $1.7$0.5 million, an increase of $2.6$2.4 million, as compared to a tax benefit of $0.9$1.9 million for the three months ended July 30,October 29, 2016. For the three months ended July 29,October 28, 2017, our effective tax rate was 63.8%13.3% as compared to 19.5%26.4% for the three months ended July 30,October 29, 2016. ThisThe income tax expense for the nine months ended October 28, 2017, was $3.9 million, an increase isof $1.2 million, as compared to $2.7 million for the nine months ended October 29, 2016. For the nine months ended October 28, 2017, our effective tax rate was 18.7% as compared to 32.8% for the nine months ended October 29, 2016. These increases in tax expense were attributed to the net impact of the increase in the reserve for uncertain tax positions associated with our Internal Revenue Service examination in the amount of $1 million, as well as, the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates. The income tax expense for the six months ended July 29, 2017, was $3.4 million, a decrease of $1.1 million, as compared to $4.5 million for the six months ended July 30, 2016. For the six months ended July 29, 2017, our effective tax rate was 19.9% as compared to 29.8% for the six months ended July 30, 2016.million. The overall change in the effective tax rate for both periods is attributed to the current year impact of the valuation allowance on domestic taxes and a change in the ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates.

Net income (loss).Net income (loss) for the three months ended July 29,October 28, 2017, was $1.0$3.2 million, an increase of $4.6$8.4 million, or 127.8%161.5%, as compared to a net loss of $3.6($5.2) million for the three months ended July 30,October 29, 2016. Net income for the sixnine months ended July 29,October 28, 2017, was $13.8$17.0 million, an increase of $3.1$11.5 million, or 29.0%209.1%, as compared to $10.7$5.5 million for the sixnine months ended July 30,October 29, 2016. TheThese changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, acquisitions, and capital expenditures. We believe that our working capital requirements will increase for next year as we continue to expand internationally. As of July 29,October 28, 2017, our total working capital was $220.6$230.9 million as compared to $223.4 million as ofat January 28, 2017 and $208.3$213.5 million as of July 30,October 29, 2016. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilitiesfacility are sufficient to meet our working capital needs and capital expenditure needs over the next year.

We consider the undistributed earnings of our foreign subsidiaries as of July 29,October 28, 2017, to be indefinitely reinvested and, accordingly, no United States income taxes have been provided thereon. As of July 29,October 28, 2017, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $15.6$23.3 million. We have not, nor do we anticipate the need to, repatriate these funds to the United States to satisfy our domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Net cash provided by operating activities was $40.3$33.4 million for the sixnine months ended July 29,October 28, 2017, as compared to cash provided by operating activities of $35.9$38.2 million for the sixnine months ended July 30,October 29, 2016.

The cash provided by operating activities for the sixnine months ended July 29,October 28, 2017, iswas primarily attributable to a decreased inventory of $21.3$23.0 million, due to improved inventory management, a decrease in accounts receivable of $8.5 million, an increased income taxes payable of $1.4 million and an increase in unearned revenues of $2.0$5.5 million, as well as a decrease in prepaid income taxes, and prepaid expenses of $1.6$1.7 million and $0.8 million, respectively. Additionally, cash was provided by an increase in income taxes payable of $1.0 million. This was partially offset by a decrease in accounts payable and accrued expenses of $19.7$28.7 million, a decrease in unearned revenues of $3.0 million and a decrease in accrued interest payable of $1.1 million. Our inventory turnover ratio increased to 4.03.9 as compared to 3.63.8 in the prior period because of our continued focus on inventory management.

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The cash provided by operating activities for the sixnine months ended July 30,October 29, 2016, iswas primarily attributable to a decrease in accounts receivable of $10.1 million, decreased inventory of $47.6$69.0 million due to improved inventory management, an increase in unearned revenues and other liabilities of $3.5 million, as well as a decrease in prepaid income taxes of $1.9 million.management. This was partially offset by a decrease in accounts payable and accrued expenses of $51.6$61.7 million, as well as a reduction in deferred pension obligation of $5.5 million due to our funding of our pension in anticipation of its termination and a reduction in accrued interest of $1.0 million.

Net cash used in investing activities was $21.9$20.0 million for the sixnine months ended July 29,October 28, 2017, as compared to cash used in investing activities of $10.4$12.2 million for the sixnine months ended July 30,October 29, 2016. The net cash used in investing activities during the first sixnine months of fiscal 2018 primarily reflectsreflected the purchase of investments of $28.1$37.0 million and the purchase of property and equipment of $3.9$5.6 million primarily for leasehold improvements and store fixtures; offset by the proceeds from the maturities of investments in the amount of $10.1$22.2 million and proceeds from notes receivable of $0.3 million.

We anticipate capital expenditures during the remainder of fiscal 2018 of $8.0$4.0 million to $9.0$5.0 million in new office leasehold improvements, technology, systems, retail store leasehold improvements,stores, and other expenditures.

Net cash used in investing activities was $10.4$12.2 million for the sixnine months ended July 30,October 29, 2016. The net cash used in investing activities during the first sixnine months of fiscal 2017 primarily reflectsreflected the purchase of investments of $9.0$12.5 million and the purchase of property and equipment of $6.6$9.3 million primarily for leasehold improvements and store fixtures; partially offset by the proceeds from the maturities of investments in the amount of $5.2$9.3 million.

Net cash used in financing activities was $24.7$17.3 million for the sixnine months ended July 29,October 28, 2017, as compared to cash used in financing activities of $29.4$27.8 million for the sixnine months ended July 30,October 29, 2016. The net cash used during the first sixnine months of fiscal 2018 primarily reflectsreflected net payments on our senior credit facility of $22.5$14.6 million, purchasepurchases of treasury sharesstock of $0.9 million, payments for employee taxes on shares withheld upon vesting of $0.8$1.0 million, payments of $0.4$0.7 million on our mortgage loans and payments on capital leases of $0.1 million.$0.2 million; partially offset by the proceeds from exercises of stock options of $24,000.

Net cash used in financing activities was $29.4$27.8 million for the sixnine months ended July 30,October 29, 2016. The net cash used during the first sixnine months of fiscal 2017 primarily reflectsreflected net payments on our senior credit facility of $27.9$23.9 million, purchases of treasury stock of $2.2 million, payments for employee taxes on shares withheld upon vesting of $0.9 million, payments of $0.4$0.6 million on our mortgage loans and payments on capital leases of $0.1 million.$0.2 million; partially offset by the proceeds from exercises of stock options of $5,000.

Our Board of Directors has authorized us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017.2018. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basisbasis.

During the second quarter of fiscal 2018, we repurchased 50,000 shares of common stock at a cost of $0.9 million. During the third quarter of fiscal 2018, we retired 50,000 shares of treasury stock recorded at a cost of approximately $0.9 million. Accordingly, during the third quarter of fiscal 2018, we reduced additional paid in capital by $0.9 million. There were no treasury shares outstanding as of January 28, 2017. Total purchases under the plan to date amount to approximately $61.7 million.

Acquisitions

None.

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77/8% $150 Million Senior Subordinated Notes Payable

In March 2011, we issued $150 million 77/8% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 87/8% senior subordinated notes due September 15, 2013 and to repay a portion of the outstanding balance on the senior credit facility. The net proceeds to us were $146.5 million yielding an effective interest rate of 8.0%.

On April 6, 2015, we elected to call for the partial redemption of $100 million of our $150 million 77/8% senior subordinated notes due 2019 and a notice of redemption was sent to all registered holders of the senior subordinated notes. The redemption terms provided for the payment of a redemption premium of 103.938% of the principal amount redeemed. On May 6, 2015, we completed the redemption of the $100 million of our senior subordinated notes. We incurred debt extinguishment costs of approximately $5.1 million in connection with the redemption, including the redemption premium as well as thewrite-off of note issuance costs. At July 29,October 28, 2017 and January 28, 2017, the balance of the 77/8% senior subordinated notes totaled $49.8 million and $49.7 million, respectively, net of debt issuance costs in the amount of $0.2 million and $0.3 million, respectively.

Certain Covenants.The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. We are not aware of anynon-compliance with any of our covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under theour senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Senior Credit Facility

On April 22, 2015, we amended and restated our existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $200 million. The Credit Facility has been extended through April 30, 2020 (“Maturity Date”). In connection with this amendment and restatement, we paid fees in the amount of $0.6 million. These fees will be amortized over the term of the Credit Facility as interest expense. At July 29,October 28, 2017 we had no outstanding borrowings under the Credit Facility. Atand January 28, 2017, we had outstanding borrowings of $7.9 million and $22.5 million under the Credit Facility.Facility, respectively.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require us to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. We are not aware of anynon-compliance with any of our covenants in thisthe Credit Facility. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. We may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of a default. We could be materially harmed if we violate any covenants, as the lenders under the Credit Facility could declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets and the assets of our subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of our other outstanding indebtedness, such as the indenture relating to our 77/8% senior subordinated notes due April 1, 2019, our letter of credit facilities, or our real estate mortgage loans. A cross-default could result in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy. Additionally, our Credit Facility includes a subjective acceleration clause if a “material adverse change” in our business occurs. We believe that the likelihood of the lender exercising this right is remote.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables plus (b) 87.5% of eligible foreign accounts up to $1.5 million plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, and (ii) a maximum of 70.0% of eligible finished goods inventory with an inventory limit not to exceed $125 million, or 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

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Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues at the prime rate and at the rate quoted by the agent for Eurodollar loans. The margin adjusts quarterly, in a range of 0.50% to 1.00% for prime rate loans and 1.50% to 2.00% for Eurodollar loans, based on the previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

Security. As security for the indebtedness under the Credit Facility, we granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of our existing and future assets, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries, and real estate, but excluding ournon-U.S. subsidiaries and all of our trademark portfolio.

Letter of Credit Facilities

As of July 29,October 28, 2017, we maintained one U.S. dollar letter of credit facility totaling $30.0 million. Each documentary letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets.

At July 29,October 28, 2017 and January 28, 2017, there was $19.3$19.4 million and $19.2 million, respectively, available under the existing letter of credit facilities.

Real Estate Mortgage Loans

In November 2016, we paid off our existing real estate mortgage loan and refinanced our main administrative office, warehouse and distribution facility in Miami with a $21.7 million mortgage loan. The loan is due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $112,000, based on a25-year amortization with the outstanding principal due at maturity. At July 29,October 28, 2017, the balance of the real estate mortgage loan totaled $21.1$21.0 million, net of discount, of which $546,000$552,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan was due on January 23, 2019. In January 2014, we amended the mortgage loan to modify the interest rate. The interest rate was reduced to 3.25% per annum and the terms were restated to reflect new monthly payments of principal and interest of approximately $68,000, based on a20-year amortization, with the outstanding principal due at maturity.

In November 2016, we amended the mortgage loan to increase the amount to $13.2 million. The loan is due on November 22, 2026. The interest rate is 3.715% per annum. Monthly payments of principal and interest approximate $68,000, based on a25-year amortization with the outstanding principal due at maturity. At July 29,October 28, 2017, the balance of the real estate mortgage loan totaled $12.9$12.8 million, net of discount, of which approximately $333,000$336,000 is due within one year.

We used the excess funds generated from the new mortgage loans described above to pay down our senior credit facility.

The real estate mortgage loans contain certain covenants. We are not aware of anynon-compliance with any of the covenants. If we violate any covenants, the lender under the real estate mortgage loans could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. A covenant violation could constitute a cross-default under our senior credit facility, our letter of credit facilities and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance“off-balance sheet arrangements,” as defined by applicable GAAP and SEC rules.

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Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and sixnine months ended July 29,October 28, 2017.

Item 7A.3. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates or foreign currency. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate and foreign currency.

Cash Flow Hedges

Our United Kingdom subsidiary is exposed to foreign currency risk from inventory purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, we entered into foreign currency forward exchange contracts (the “Hedging Instruments”). These contracts are formally designated and “highly effective” as cash flow hedges.

All changes in the Hedging Instruments’ fair value associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. We record the hedging instrumentsHedging Instruments at fair value in our Consolidated Balance Sheet. The cash flows from such hedges are presented in the same category in our Consolidated Statement of Cash Flows as the items being hedged.

The notional amounts outstanding of foreign exchange forward contracts were $15.1$11.8 million and $15.0 million at July 29,October 28, 2017 and January 28, 2017, respectively. Such contracts expire through July 2018.

Accumulated other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.6$0.5 million and $0.2 million at July 29,October 28, 2017 and January 28, 2017, respectively. The net deferred loss will be reclassified from accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.

The total gain (loss)loss relating to hedging instrumentsHedging Instruments reclassified to earnings duringfor the firstthree and second quarter of fiscal 2018nine months ended October 28, 2017 was $41,000$86,000 and ($33,000),$78,000, respectively. There was no gain or loss relating to hedging instrumentsHedging Instruments reclassified to earnings duringfor the firstthree and second quarter of fiscal 2017.nine months ended October 29, 2016.

Commodity Price Risk

We are exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. Fabric is a portion of the overall product cost, which includes various components. We manage our fabric prices by using a combination of different strategies including the utilization of sophisticated logistics and supply chain management systems, which allow us to maintain maximum flexibility in our global sourcing of products. This provides us with the ability tore-direct our sourcing of products to the most cost-effective jurisdictions. In addition, we may modify our product offerings to our customers based on the availability of new fibers, yield enhancement techniques and other technological advances that allow us to utilize more cost effective fibers. Finally, we also have the ability to adjust our price points of such products, to the extent market conditions allow. These factors, along with our foreign-based sourcing offices, allow us to procure product from lower cost countries or capitalize on certain tariff-free arrangements, which help mitigate any commodity price increases that may occur. We have not historically managed, and do not currently intend to manage, commodity price exposures by using derivative instruments.

Other

We have a risk management policy to manage foreign currency risk relating to inventory purchases by our subsidiaries whichthat are denominated in foreign currencies. As such, we may employ hedging and derivative strategies to limit the effects of changes in foreign currency on our operating income and cash flows. However, we consider our current exposure to foreign exchange risk as not significant.

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Item 4: Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule13a-15(b) of the Securities Exchange Act. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 29,October 28, 2017 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended July 29,October 28, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Period

  

Total Number of
Shares Purchased

   

Average
Price Paid
per Share

   

Total Number of
Shares Purchased
as Part of  Publicly
Announced Plans
or Programs(1)

   

Maximum
Approximate Dollar
Value that May Yet
Be Purchased under
the Plans or
Programs

 

April 30, 2017 to May 27, 2017

   50,000   $18.74    50,000   $8,278,199 

July 2, 2017 to July 29, 2017(2)

   11,259   $19.17    —     $8,278,199 

Period

  Total Number of
Shares Purchased
   Average
Price Paid
per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum
Approximate Dollar
Value of Shares that
May Yet Be
Purchased under the
Plans or Programs
 

July 30, 2017 to August 26, 2017(1)

   71   $17.72    —     $8,278,199 

August 27, 2017 to September 30, 2017(1)

   9,243   $21.97     $8,278,199 

October 1, 2017 to October 28, 2017(1)

   377   $22.29     $8,278,199 

 

(1)During fiscal 2017, our Board of Directors extended the stock repurchase program to authorize us to purchase, from time to time and as market and business conditions warrant, up to $70 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2017. Although our Board of Directors allocated a maximum of $70 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis. Total purchases under the plan to date amount to $61.7 million.
(2) Represents shares withheld to pay statutory income taxes resulting from vesting of restricted shares.

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Item 6. Exhibits

Index to Exhibits

 

Exhibit
Number

  

Exhibit Description

  

Where Filed

31.1  Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
31.2  Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
32.1  Certification of Principal Executive Officer pursuant to Section 1350 Filed herewith.
32.2  Certification of Principal Financial Officer pursuant to Section 1350 Filed herewith.
101.INS  XBRL Instance Document  Filed herewith.
101.SCH  XBRL Taxonomy Extension Schema  Filed herewith.
101.CAL  XBRL Taxonomy Extension Calculation Linkbase  Filed herewith.
101.DEF  XBRL Taxonomy Extension Definition Linkbase  Filed herewith.
101.LAB  XBRL Taxonomy Extension Label Linkbase  Filed herewith.
101.PRE  XBRL Taxonomy Extension Presentation Linkbase  Filed herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Perry Ellis International, Inc.
August 31,December 1, 2017    
By: /S/ DAVID RATTNER

/S/ JORGE NARINO

    David Rattner,Jorge Narino, Interim Chief Financial Officer
    (Principal Financial Officer and Duly Authorized Officer)

 

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