Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended October 31, 2015 or

 

o

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

 

For the transition period from                   to                  

 

Commission file number 1-16097

 

THE MEN’S WEARHOUSE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas

 

74-1790172

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

6380 Rogerdale Road

 

 

Houston, Texas

 

77072-1624

(Address of Principal Executive Offices)

 

(Zip Code)

 

(281) 776-7000

(Registrant’s telephone number, including area code)

 

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 x. No o.

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer         x

 

 

 

Accelerated filer    o

 

 

 

 

 

Non-accelerated filer       o

 

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

The number of shares of common stock of the Registrant, par value $.01 per share, outstanding at November 27, 2015 was 48,380,202 excluding 124,693 shares classified as Treasury Stock.

 

 

 



Table of Contents

 

REPORT INDEX

 

Part and Item No.

 

Page No.

 

 

 

PART I — Financial Information

 

 

 

 

 

Item 1 — Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 31, 2015, November 1, 2014 and January 31, 2015

 

2

 

 

 

Condensed Consolidated Statements of (Loss) Earnings for the Three and Nine Months Ended October 31, 2015 and November 1, 2014

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended October 31, 2015 and November 1, 2014

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2015 and November 1, 2014

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

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

 

27

 

 

 

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

 

Item 4 — Controls and Procedures

 

42

 

 

 

PART II — Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

 

42

 

 

 

Item 1A — Risk Factors

 

42

 

 

 

Item 6 — Exhibits

 

42

 

 

 

SIGNATURES

 

43

 



Table of Contents

 

Forward-Looking and Cautionary Statements

 

Certain statements made in this Quarterly Report on Form 10-Q and in other public filings and press releases by the Company (as defined below) contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty.  These forward-looking statements reflect our current views regarding certain events that could affect our financial condition or results of operations and may include, but are not limited to, references to future sales, comparable sales, earnings, margins, costs, number and costs of store openings, closings, and expansions, capital expenditures, acquisitions, synergies, demand for clothing, market trends in the retail and corporate apparel clothing business, currency fluctuations, inflation and various economic and business trends.  Forward-looking statements may be made by management orally or in writing, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and other sections of our filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended.

 

Forward-looking statements are not guarantees of future performance and a variety of factors could cause actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to: actions by governmental entities; domestic and international economic activity and inflation; success, or lack thereof, in executing our internal operating plans and new store and new market expansion plans, as well as integration of acquisitions, including Jos. A. Bank Clothiers, Inc.; cost reduction initiatives; store rationalization plans; revenue enhancement strategies; the impact of opening tuxedo shops within Macy’s stores; changes in demand for clothing; market trends in the retail business; customer confidence and spending patterns; changes in traffic trends in our stores; customer acceptance of our strategies; performance issues with key suppliers; disruptions in our supply chain; severe weather; foreign currency fluctuations; government export and import policies; advertising or marketing activities of competitors; and legal proceedings.  Future results will also be dependent upon our ability to continue to identify and complete successful expansions and penetrations into existing and new markets and our ability to integrate such expansions with our existing operations.

 

These forward-looking statements are based upon management’s current beliefs or expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies and third party approvals, many of which are beyond our control.  Refer to “Risk Factors” contained in Part I of our Annual Report on Form 10-K for the year ended January 31, 2015, Part 1A of our Quarterly Report on Form 10-Q for the quarter ended May 2, 2015 and Part 1A of our Quarterly Report on Form 10-Q for the quarter ended August 1, 2015 and elsewhere herein for a more complete discussion of these and other factors that might affect our performance and financial results. These forward-looking statements are intended to convey the Company’s expectations about the future and speak only as of the date they are made.  We undertake no obligation to publicly update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice.

 

1



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,654

 

$

64,716

 

$

62,261

 

Accounts receivable, net

 

66,902

 

84,054

 

73,266

 

Inventories

 

1,060,247

 

1,082,354

 

938,336

 

Other current assets

 

168,071

 

107,107

 

169,809

 

 

 

 

 

 

 

 

 

Total current assets

 

1,348,874

 

1,338,231

 

1,243,672

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

548,481

 

569,779

 

566,074

 

 

 

 

 

 

 

 

 

RENTAL PRODUCT, net

 

147,344

 

129,579

 

132,672

 

GOODWILL

 

890,991

 

892,766

 

887,936

 

INTANGIBLE ASSETS, net

 

568,171

 

673,057

 

668,259

 

OTHER ASSETS

 

8,518

 

10,032

 

9,599

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,512,379

 

$

3,613,444

 

$

3,508,212

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

233,520

 

$

263,645

 

$

209,867

 

Accrued expenses and other current liabilities

 

264,978

 

283,271

 

268,935

 

Income taxes payable

 

14,233

 

13,590

 

1,609

 

Current maturities of long-term debt

 

7,000

 

11,000

 

11,000

 

 

 

 

 

 

 

 

 

Total current liabilities

 

519,731

 

571,506

 

491,411

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, net

 

1,649,206

 

1,638,606

 

1,637,686

 

DEFERRED TAXES AND OTHER LIABILITIES

 

358,059

 

367,612

 

409,326

 

 

 

 

 

 

 

 

 

Total liabilities

 

2,526,996

 

2,577,724

 

2,538,423

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

Common stock

 

485

 

481

 

482

 

Capital in excess of par

 

452,666

 

435,755

 

440,907

 

Retained earnings

 

541,672

 

581,956

 

537,263

 

Accumulated other comprehensive (loss) income

 

(6,356

)

20,829

 

(5,671

)

Treasury stock, at cost

 

(3,084

)

(3,301

)

(3,192

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

985,383

 

1,035,720

 

969,789

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

3,512,379

 

$

3,613,444

 

$

3,508,212

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

Net sales:

 

 

 

 

 

 

 

 

 

Retail clothing product

 

$

615,874

 

$

634,447

 

$

1,931,926

 

$

1,598,199

 

Rental services

 

132,443

 

132,690

 

392,621

 

395,449

 

Alteration and other services

 

53,070

 

52,025

 

160,024

 

135,585

 

Total retail sales

 

801,387

 

819,162

 

2,484,571

 

2,129,233

 

Corporate apparel clothing product

 

64,059

 

71,475

 

186,038

 

194,956

 

Total net sales

 

865,446

 

890,637

 

2,670,609

 

2,324,189

 

 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Retail clothing product

 

274,348

 

287,309

 

850,782

 

722,140

 

Rental services

 

21,431

 

33,538

 

62,866

 

75,083

 

Alteration and other services

 

36,260

 

37,173

 

109,528

 

97,794

 

Occupancy costs

 

114,629

 

114,325

 

341,980

 

282,595

 

Total retail cost of sales

 

446,668

 

472,345

 

1,365,156

 

1,177,612

 

Corporate apparel clothing product

 

45,787

 

49,087

 

132,229

 

135,466

 

Total cost of sales

 

492,455

 

521,432

 

1,497,385

 

1,313,078

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

Retail clothing product

 

341,526

 

347,138

 

1,081,144

 

876,059

 

Rental services

 

111,012

 

99,152

 

329,755

 

320,366

 

Alteration and other services

 

16,810

 

14,852

 

50,496

 

37,791

 

Occupancy costs

 

(114,629

)

(114,325

)

(341,980

)

(282,595

)

Total retail gross margin

 

354,719

 

346,817

 

1,119,415

 

951,621

 

Corporate apparel clothing product

 

18,272

 

22,388

 

53,809

 

59,490

 

Total gross margin

 

372,991

 

369,205

 

1,173,224

 

1,011,111

 

 

 

 

 

 

 

 

 

 

 

Advertising expense

 

47,991

 

42,075

 

143,628

 

109,072

 

Selling, general and administrative expenses

 

271,301

 

281,955

 

822,485

 

786,879

 

Tradename impairment charge

 

90,100

 

 

90,100

 

 

Operating (loss) income

 

(36,401

)

45,175

 

117,011

 

115,160

 

Interest income

 

50

 

125

 

140

 

305

 

Interest expense

 

(26,457

)

(25,131

)

(79,475

)

(39,459

)

Loss on extinguishment of debt

 

 

 

(12,675

)

(2,158

)

(Loss) earnings before income taxes

 

(62,808

)

20,169

 

25,001

 

73,848

 

(Benefit) provision for income taxes

 

(35,654

)

13,168

 

(5,993

)

38,021

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings including non-controlling interest

 

(27,154

)

7,001

 

30,994

 

35,827

 

Net earnings attributable to non-controlling interest

 

 

(208

)

 

(292

)

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to common shareholders

 

$

(27,154

)

$

6,793

 

$

30,994

 

$

35,535

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per common share allocated to common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

$

0.14

 

$

0.64

 

$

0.74

 

Diluted

 

$

(0.56

)

$

0.14

 

$

0.64

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

48,339

 

48,009

 

48,258

 

47,852

 

Diluted

 

48,339

 

48,254

 

48,513

 

48,124

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.54

 

$

0.54

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings including non-controlling interest

 

$

(27,154

)

$

7,001

 

$

30,994

 

$

35,827

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

(2,024

)

(12,872

)

(378

)

(6,881

)

 

 

 

 

 

 

 

 

 

 

Unrealized loss on cash flow hedge, net of tax

 

(222

)

 

(307

)

 

 

 

 

 

 

 

 

 

 

 

Settlement of cash flow hedge, net of tax

 

 

 

 

399

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income including non-controlling interest

 

(29,400

)

(5,871

)

30,309

 

29,345

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to non-controlling interest:

 

 

 

 

 

 

 

 

 

Net earnings

 

 

(208

)

 

(292

)

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

321

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to non-controlling interest

 

 

113

 

 

(292

)

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income attributable to common shareholders

 

$

(29,400

)

$

(5,758

)

$

30,309

 

$

29,053

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

October 31,
2015

 

November 1,
2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net earnings including non-controlling interest

 

$

30,994

 

$

35,827

 

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

 

 

 

 

 

Depreciation and amortization

 

98,162

 

80,622

 

Rental product amortization

 

30,496

 

30,038

 

Tradename impairment charge

 

90,100

 

 

Loss on extinguishment of debt

 

12,675

 

2,158

 

Amortization of deferred financing costs

 

5,151

 

3,014

 

Amortization of discount on long-term debt

 

848

 

589

 

Share-based compensation

 

12,614

 

12,254

 

Excess tax benefits from share-based plans

 

(1,104

)

(3,736

)

(Gain) loss on disposition of assets

 

(833

)

12,247

 

Asset impairment charges

 

1,695

 

302

 

Deferred tax benefit

 

(61,108

)

(25,763

)

Deferred rent expense and other

 

3,141

 

2,914

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

7,116

 

(14,430

)

Inventories

 

(122,294

)

(158,449

)

Rental product

 

(45,704

)

(27,587

)

Other assets

 

6,210

 

14,133

 

Accounts payable, accrued expenses and other current liabilities

 

28,763

 

76,565

 

Income taxes payable

 

14,372

 

16,725

 

Other liabilities

 

942

 

1,594

 

 

 

 

 

 

 

Net cash provided by operating activities

 

112,236

 

59,017

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(86,406

)

(72,397

)

Acquisition of business, net of cash

 

 

(1,491,393

)

Proceeds from sales of property and equipment

 

2,613

 

160

 

 

 

 

 

 

 

Net cash used in investing activities

 

(83,793

)

(1,563,630

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from new term loan

 

 

1,089,000

 

Payments on new term loan

 

(6,250

)

 

Payments on previous term loan

 

 

(97,500

)

Proceeds from asset-based revolving credit facility

 

5,500

 

340,000

 

Payments on asset-based revolving credit facility

 

(5,500

)

(340,000

)

Proceeds from issuance of senior notes

 

 

600,000

 

Deferred financing costs

 

(3,566

)

(51,072

)

Cash dividends paid

 

(26,269

)

(26,119

)

Purchase of non-controlling interest

 

 

(6,651

)

Proceeds from issuance of common stock

 

2,454

 

7,115

 

Tax payments related to vested deferred stock units

 

(4,538

)

(6,907

)

Excess tax benefits from share-based plans

 

1,104

 

3,736

 

Repurchases of common stock

 

(277

)

(251

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(37,342

)

1,511,351

 

 

 

 

 

 

 

Effect of exchange rate changes

 

292

 

(1,274

)

 

 

 

 

 

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(8,607

)

5,464

 

Balance at beginning of period

 

62,261

 

59,252

 

 

 

 

 

 

 

Balance at end of period

 

$

53,654

 

$

64,716

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation — The condensed consolidated financial statements herein include the accounts of The Men’s Wearhouse, Inc. and its subsidiaries (the “Company”) and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  As applicable under such regulations, certain information and footnote disclosures have been condensed or omitted.  We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented.  Certain prior period amounts have been reclassified to conform to the current period presentation, as further described below in Recent Accounting Pronouncements.

 

Our business historically has been seasonal in nature and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 31, 2015.

 

Unless the context otherwise requires, “Company”, “we”, “us” and “our” refer to The Men’s Wearhouse, Inc. and its subsidiaries.

 

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts and related disclosures.  Actual amounts could differ from those estimates.

 

Recent Accounting Pronouncements — We have considered all new accounting pronouncements and have concluded there are no new pronouncements that may have a material impact on our results of operations, financial condition, or cash flows, based on current information, except for those listed below.

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet.  ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years.  The guidance may be adopted prospectively or retrospectively and early adoption is permitted.  We are currently evaluating ASU 2015-17 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method.  ASU 2015-11 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption of ASU 2015-11 is permitted.  We are currently evaluating ASU 2015-11 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs related to a recognized debt liability be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and is required to be applied retrospectively.  Early adoption is permitted and we adopted ASU 2015-03 in the second quarter of 2015.  Subsequently, in August 2015, the FASB issued No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.  ASU 2015-15 codifies the SEC’s position that it would be allowable for an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For the current quarter, we retrospectively adjusted our November 1, 2014 balance sheet by decreasing current assets by $5.8 million, other assets by $34.2 million and long-term debt by $40.0 million, and upon adoption, adjusted our January 31, 2015 balance sheet by decreasing current assets by $5.7 million, other assets by $32.8 million and long-term debt by $38.5 million.  In accordance with ASU 2015-15, we will continue presenting debt issuance costs for our asset-based revolving credit facility as an asset because of the potential volatility of borrowings and repayments under the facility.  The adoption of this guidance had no impact on our results of operations or cash flows.  See Note 4 for a summary of the reclassifications for all periods presented.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities.  In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of ASU 2014-09 by one year.  As a result of this deferral, ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  The guidance allows for either a full retrospective or a modified retrospective transition method.  We are currently evaluating the impact of this guidance, including the transition method, on our financial position, results of operations and cash flows.

 

2.  Acquisition

 

Jos. A. Bank

 

On June 18, 2014, we acquired 100% of the outstanding common stock of Jos. A. Bank, a men’s specialty apparel retailer, for $65.00 net per share in cash, or total consideration of approximately $1.8 billion. The acquisition was funded primarily by a $1.1 billion term loan facility, the issuance of $600.0 million in senior unsecured notes and borrowings under an asset-based credit facility (see Note 4).

 

We incurred integration and other costs related to Jos. A. Bank totaling $4.7 million and $15.5 million for the three and nine months ended October 31, 2015, respectively, which is included in selling, general and administrative expenses (“SG&A”) in the condensed consolidated statement of (loss) earnings.  For the three and nine months ended November 1, 2014, we incurred $27.3 million and $44.7 million, respectively, of integration and other costs related to Jos. A. Bank of which $10.6 million is included in cost of sales for the three and nine months ended November 1, 2014, respectively, and the remainder is included in SG&A in the condensed consolidated statement of (loss) earnings.  For the nine months ended November 1, 2014, we incurred acquisition-related costs for Jos. A. Bank totaling $43.5 million.    For the three and nine months ended October 31, 2015 and the three months ended November 1, 2014, we did not incur any acquisition-related costs.

 

The following table summarizes the final allocation of fair values of the identifiable assets acquired and liabilities assumed in the Jos. A. Bank acquisition (amounts in millions):

 

Cash

 

$

328.9

 

Accounts receivable (mainly credit card receivables)

 

8.3

 

Inventories

 

328.0

 

Other current assets

 

56.4

 

Property and equipment

 

165.3

 

Goodwill

 

769.0

 

Intangible assets

 

622.2

 

Accounts payable, accrued expenses and other current liabilities

 

(155.0

)

Other liabilities (mainly deferred income taxes)

 

(302.8

)

Total purchase price

 

1,820.3

 

Less: Cash acquired

 

(328.9

)

Total purchase price, net of cash acquired

 

$

1,491.4

 

 

Within the measurement period which closed during the second quarter of 2015, we made purchase accounting adjustments primarily related to deferred income taxes.  None of these measurement period adjustments had a material impact on the purchase price allocation. Goodwill is calculated as the excess of the purchase price over the net assets acquired.  The goodwill recognized is attributable to growth opportunities and expected synergies.  All of the goodwill has been assigned to our retail reporting segment and is non-deductible for tax purposes.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents unaudited pro forma consolidated financial information as if the closing of our acquisition of Jos. A. Bank had occurred on February 3, 2013 (in thousands, except per share data):

 

 

 

For the Nine
Months Ended
November 1, 2014

 

 

 

 

 

Total net sales

 

$

2,668,460

 

Net earnings attributable to common shareholders

 

$

76,349

 

Net earnings per common share allocated to common shareholders:

 

 

 

Basic

 

$

1.59

 

Diluted

 

$

1.58

 

 

The pro forma financial information presented above has been prepared by combining our historical results and the historical results of Jos. A. Bank and further reflects the effect of purchase accounting adjustments and the elimination of transaction costs, among other items.  This pro forma information is not necessarily indicative of the results of operations that actually would have resulted had the Jos. A. Bank acquisition occurred on the date indicated above or that may result in the future and does not reflect potential synergies, integration costs or other such costs and savings.

 

3.  (Loss) Earnings per Share

 

Basic (loss) earnings per common share allocated to common shareholders is determined using the two-class method and is computed by dividing net (loss) earnings allocated to common shareholders by the weighted-average common shares outstanding during the period.  Diluted (loss) earnings per common share reflect the more dilutive (loss) earnings per common share amount calculated using the treasury stock method or the two-class method.

 

The following table sets forth the computation of basic and diluted (loss) earnings per common share allocated to common shareholders (in thousands, except per share amounts). Basic and diluted (loss) earnings per common share allocated to common shareholders are computed using the actual net (loss) earnings allocated to common shareholders and the actual weighted-average common shares outstanding rather than the rounded numbers presented within our condensed consolidated statement of (loss) earnings and the accompanying notes.  As a result, it may not be possible to recalculate (loss) earnings per common share allocated to common shareholders in our condensed consolidated statement of (loss) earnings and the accompanying notes.

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

Total net (loss) earnings attributable to common shareholders

 

$

(27,154

)

$

6,793

 

$

30,994

 

$

35,535

 

Net earnings allocated to participating securities (restricted stock and deferred stock units)

 

 

(14

)

(31

)

(100

)

Net (loss) earnings allocated to common shareholders

 

$

(27,154

)

$

6,779

 

$

30,963

 

$

35,435

 

Denominator

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

48,339

 

48,009

 

48,258

 

47,852

 

Dilutive effect of share-based awards

 

 

245

 

255

 

272

 

Diluted weighted-average common shares outstanding

 

48,339

 

48,254

 

48,513

 

48,124

 

Net (loss) earnings per common share allocated to common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

$

0.14

 

$

0.64

 

$

0.74

 

Diluted

 

$

(0.56

)

$

0.14

 

$

0.64

 

$

0.74

 

 

For the three and nine months ended October 31, 2015, 0.4 million and 0.3 million anti-dilutive shares of common stock were excluded from the calculation of diluted (loss) earnings per common share, respectively.  For each of the three and nine months ended November 1, 2014, 0.2 million anti-dilutive shares of common stock were excluded from the calculation of diluted (loss) earnings per common share.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.  Debt

 

On June 18, 2014, we entered into a term loan credit agreement that provides for a senior secured term loan in the aggregate principal amount of $1.1 billion (the “Term Loan”) and a $500.0 million asset-based revolving credit agreement (the “ABL Facility”, and together with the Term Loan, the “Credit Facilities”) with certain of our U.S. subsidiaries and Moores the Suit People Inc., one of our Canadian subsidiaries, as co-borrowers.  Proceeds from the Term Loan were reduced by an $11.0 million original issue discount (“OID”), which is presented as a reduction of the outstanding balance on the Term Loan on the balance sheet and will be amortized to interest expense over the contractual life of the Term Loan.  In addition, on June 18, 2014, we issued $600.0 million in aggregate principal amount of 7.00% Senior Notes due 2022 (the “Senior Notes”).

 

The Credit Facilities and the Senior Notes contain customary non-financial and financial covenants, including fixed charge coverage ratios, total leverage ratios and secured leverage ratios, as well as a restriction on our ability to pay dividends on our common stock in excess of $10.0 million per quarter.  Since entering into these financing arrangements and as of October 31, 2015, our total leverage ratio and secured leverage ratio were above the maximums specified in the agreements, which was anticipated when we entered into these arrangements.  As a result, we are currently subject to certain additional restrictions, including limitations on our ability to make acquisitions and incur additional indebtedness.

 

We used the net proceeds from the Term Loan, the offering of the Senior Notes and the net proceeds from $340.0 million drawn on the ABL Facility to pay the approximately $1.8 billion purchase price for the acquisition of Jos. A. Bank and to repay all of our obligations under our Third Amended and Restated Credit Agreement, dated as of April 12, 2013 (as amended, the “Previous Credit Agreement”), including $95.0 million outstanding under the Previous Credit Agreement as well as settlement of the then existing interest rate swap.

 

Credit Facilities

 

The Term Loan is guaranteed, jointly and severally, by certain of our U.S. subsidiaries and will mature on June 18, 2021.  The interest rate on the Term Loan is based on 3-month LIBOR, which was approximately 0.33% at October 31, 2015.    However, the Term Loan interest rate is subject to a LIBOR floor of 1% per annum, plus the applicable margin which is currently 3.50%, resulting in a total interest rate of 4.50%.  In January 2015, we entered into an interest rate swap agreement to swap variable-rate interest payments for fixed-rate interest payments on a notional amount of $520.0 million, effective in February 2015.  The interest rate swap agreement matures in August 2018 and has periodic interest settlements.  Under this interest rate swap agreement, we receive a floating rate based on 3-month LIBOR and pay a fixed rate of 5.03% (including the applicable margin of 3.50%) on the outstanding notional amount.

 

On April 7, 2015, we entered into Incremental Facility Agreement No. 1 (the “Incremental Agreement”) resulting in a refinancing of $400.0 million aggregate principal amount of the Term Loan from a variable rate to a fixed rate of 5.0% per annum.  The Incremental Agreement did not impact the total amount borrowed under the Term Loan, the maturity date of the Term Loan of June 18, 2021, or collateral and guarantees under the Term Loan.  In connection with the Incremental Agreement, we incurred deferred financing costs of $3.6 million, which will be amortized over the life of the remaining term using the interest method.  In addition, as a result of entering into the Incremental Agreement, we recorded a loss on extinguishment of debt totaling $12.7 million consisting of the elimination of unamortized deferred financing costs and OID related to the Term Loan, which is included as a separate line in the condensed consolidated statement of (loss) earnings.

 

As a result of the interest rate swap and the Incremental Agreement, we have converted a majority of the variable interest rate under the Term Loan to a fixed rate and, as of October 31, 2015, the Term Loan had a weighted average interest rate of 4.92%.

 

The ABL Facility provides for a senior secured asset-based revolving credit facility of $500.0 million, with possible future increases to $650.0 million with an expansion feature, which matures on June 18, 2019, and is guaranteed, jointly and severally, by certain of our U.S. subsidiaries.  The ABL Facility has several borrowing and interest rate options including the following indices:  (i) adjusted LIBOR, (ii) Canadian Dollar Offered Rate, (iii) Canadian prime rate or (iv) alternate base rate (equal to the greater of the prime rate, the federal funds effective rate plus 0.5% or adjusted LIBOR for a one-month period plus 1.0%).  Advances under the ABL Facility bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of up to 2.00%.  The ABL Facility also provides for fees applicable to amounts available to be drawn under outstanding letters of credit which range from 1.50% to 2.00%, and a fee on unused commitments which ranges from 0.25% to 0.375%.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We utilize letters of credit primarily to secure inventory purchases and as collateral for workers compensation claims.  Except for letters of credit totaling approximately $25.7 million issued and outstanding, no amounts were drawn on the ABL Facility as of October 31, 2015 and we have approximately $436.5 million of borrowing availability under the ABL Facility as of October 31, 2015.

 

Senior Notes

 

The Senior Notes contain customary non-financial covenants and the Senior Notes are guaranteed, jointly and severally, on an unsecured basis by certain of our U.S. subsidiaries.   The Senior Notes will mature on July 1, 2022.  Interest on the Senior Notes is payable on January 1 and July 1 of each year.

 

We had entered into a registration rights agreement regarding the Senior Notes pursuant to which we agreed, among other things, to use our commercially reasonable efforts to consummate an exchange offer of the Senior Notes for substantially identical notes registered under the Securities Act of 1933, as amended, on or before July 13, 2015.  On June 24, 2015, the exchange offer was completed.

 

Long-Term Debt

 

The following table provides details on our long-term debt as of October 31, 2015, November 1, 2014 and January 31, 2015 (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

Term Loan (net of unamortized original issue discount of $5.6 million at

 

 

 

 

 

 

 

October 31, 2015, $10.4 million at November 1, 2014 and $10.0 million at January 31, 2015

 

$

1,085,392

 

$

1,089,589

 

$

1,087,232

 

Senior Notes

 

600,000

 

600,000

 

600,000

 

Less: Deferred financing costs related to the Term Loan and Senior Notes

 

(29,186

)

(39,983

)

(38,546

)

Total long-term debt, net

 

1,656,206

 

1,649,606

 

1,648,686

 

Current portion of long-term debt

 

(7,000

)

(11,000

)

(11,000

)

Total long-term debt, net of current portion

 

$

1,649,206

 

$

1,638,606

 

$

1,637,686

 

 

5.  Supplemental Cash Flows

 

Supplemental disclosure of cash flow information is as follows (in thousands):

 

 

 

For the Nine Months Ended

 

 

 

October 31,
2015

 

November 1,
2014

 

 

 

 

 

 

 

Cash paid for interest

 

$

61,895

 

$

8,409

 

Cash paid for income taxes, net

 

$

32,932

 

$

32,085

 

 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

Cash dividends declared

 

$

9,028

 

$

8,882

 

Increase in capital in excess of par due to purchase of non-controlling interest

 

$

 

$

7,410

 

 

We had unpaid capital expenditure purchases included in accounts payable and accrued expenses and other current liabilities of approximately $7.3 million and $8.4 million at October 31, 2015 and November 1, 2014, respectively.  Capital expenditure purchases are recorded as cash outflows from investing activities in the condensed consolidated statement of cash flows in the period they are paid.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.  Inventories

 

The following table provides details on our inventories as of October 31, 2015, November 1, 2014 and January 31, 2015 (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

Finished goods

 

$

1,006,182

 

$

1,039,871

 

$

883,323

 

Raw materials and merchandise components

 

54,065

 

42,483

 

55,013

 

Total inventories

 

$

1,060,247

 

$

1,082,354

 

$

938,336

 

 

7.  Income Taxes

 

Our effective income tax rate decreased to 56.8% for the third quarter of 2015 from 65.3% for the third quarter of 2014 and to a benefit of (24.0)% for the first nine months of 2015 from 51.5% for the first nine months of 2014.  Our effective income tax rates in 2014 were significantly impacted by non-deductible transaction costs related to the Jos. A. Bank acquisition.  In the third quarter of 2015, we recorded a $90.1 million non-cash tradename impairment charge for the Jos. A. Bank tradename (see Note 12), which generated a book loss for our combined U.S. entities.  This loss in the U.S. combined with income in foreign jurisdictions with lower tax rates resulted in a negative effective income tax rate for the first nine months of 2015.

 

8.  Other Current Assets, Accrued Expenses and Other Current Liabilities and Deferred Taxes and Other Liabilities

 

Other current assets consist of the following (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

 

 

 

 

 

 

 

 

Tax receivable

 

$

69,830

 

$

26,556

 

$

87,916

 

Prepaid expenses

 

42,824

 

48,354

 

39,375

 

Current deferred tax assets

 

38,736

 

12,929

 

23,777

 

Other

 

16,681

 

19,268

 

18,741

 

Total other current assets

 

$

168,071

 

$

107,107

 

$

169,809

 

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

Accrued salary, bonus, sabbatical, vacation and other benefits

 

$

71,921

 

$

79,165

 

$

83,515

 

Unredeemed gift certificates

 

34,477

 

32,511

 

39,563

 

Sales, value added, payroll, property and other taxes payable

 

34,472

 

31,075

 

28,765

 

Accrued workers compensation and medical costs

 

28,408

 

25,331

 

28,814

 

Accrued interest

 

27,207

 

27,572

 

15,715

 

Customer deposits, prepayments and refunds payable

 

25,715

 

24,275

 

24,540

 

Cash dividends declared

 

9,028

 

8,882

 

8,987

 

Loyalty program reward certificates

 

8,181

 

8,073

 

6,889

 

Accrued royalties

 

6,630

 

8,392

 

2,825

 

Accrued strategic professional fees

 

1,141

 

12,126

 

7,566

 

Other

 

17,798

 

25,869

 

21,756

 

Total accrued expenses and other current liabilities

 

$

264,978

 

$

283,271

 

$

268,935

 

 

Deferred taxes and other liabilities consist of the following (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

Non-current deferred and other income tax liabilities

 

$

275,213

 

$

287,851

 

$

328,271

 

Deferred rent and landlord incentives

 

65,764

 

60,189

 

61,475

 

Unfavorable lease liabilities

 

9,129

 

12,966

 

12,040

 

Other

 

7,953

 

6,606

 

7,540

 

Total deferred taxes and other liabilities

 

$

358,059

 

$

367,612

 

$

409,326

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Accumulated Other Comprehensive (Loss) Income

 

The following table summarizes the components of accumulated other comprehensive (loss) income for the nine months ended October 31, 2015 (in thousands and net of tax):

 

 

 

Foreign
Currency
Translation

 

Interest Rate
Swap

 

Pension
Plan

 

Total

 

BALANCE — January 31, 2015

 

$

(4,232

)

$

(1,665

)

$

226

 

$

(5,671

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

(378

)

(734

)

 

(1,112

)

Amounts reclassified from accumulated other comprehensive loss

 

 

427

 

 

427

 

Net current-period other comprehensive loss

 

(378

)

(307

)

 

(685

)

 

 

 

 

 

 

 

 

 

 

BALANCE — October 31, 2015

 

$

(4,610

)

$

(1,972

)

$

226

 

$

(6,356

)

 

The following table summarizes the components of accumulated other comprehensive income for the nine months ended November 1, 2014 (in thousands and net of tax):

 

 

 

Foreign
Currency
Translation

 

Interest Rate
Swap

 

Pension
Plan

 

Total

 

BALANCE — February 1, 2014

 

$

27,710

 

$

(399

)

$

 

$

27,311

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

(6,881

)

 

 

(6,881

)

Amounts reclassified from accumulated other comprehensive income

 

 

399

 

 

399

 

Net current-period other comprehensive (loss) income

 

(6,881

)

399

 

 

(6,482

)

 

 

 

 

 

 

 

 

 

 

BALANCE — November 1, 2014

 

$

20,829

 

$

 

$

 

$

20,829

 

 

Amounts reclassified from other comprehensive (loss) income for the nine months ended October 31, 2015 and November 1, 2014, respectively, relate to changes in fair value for interest rate swaps which were recorded within interest expense in the condensed consolidated statement of (loss) earnings.

 

10.  Non-Controlling Interest

 

In September 2014, we exercised our option and completed the purchase of the remaining 14% interest in our UK operations from the minority interest holders.  As a result, we eliminated the non-controlling interest balance and recorded an increase in capital in excess of par of $7.4 million less the $6.7 million in cash consideration paid to the former minority interest holders.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.  Share-Based Compensation Plans

 

For a discussion of our share-based compensation plans refer to Note 11 in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

We account for share-based awards in accordance with the authoritative guidance regarding share-based payments, which requires the compensation cost resulting from all share-based payment transactions be recognized in the financial statements. The amount of compensation cost is measured based on the grant-date fair value of the instrument issued and is recognized over the vesting period.  Share-based compensation expense recognized for the three and nine months ended October 31, 2015 was $4.2 million and $12.6 million, respectively.  Share-based compensation expense recognized for the three and nine months ended November 1, 2014 was $4.3 million and $12.3 million, respectively.

 

Non-Vested Deferred Stock Units, Performance Units and Restricted Stock

 

The following table summarizes the activity of time-based and performance-based awards for the nine months ended October 31, 2015:

 

 

 

Units

 

Weighted-Average
Grant-Date Fair Value

 

 

 

Time-
Based

 

Performance-Based

 

Time-
Based

 

Performance- Based

 

Non-Vested at January 31, 2015

 

378,518

 

170,789

 

$

42.67

 

$

43.94

 

Granted

 

360,967

 

36,844

 

52.60

 

57.32

 

Vested (1)

 

(231,764

)

(18,977

)

43.69

 

46.41

 

Forfeited

 

(19,552

)

(20,000

)

40.17

 

33.09

 

Non-Vested at October 31, 2015

 

488,169

 

168,656

 

$

49.63

 

$

47.87

 

 


(1)          Includes 86,035 shares relinquished for tax payments related to vested deferred stock units for the nine months ended October 31, 2015.

 

On April 3, 2013, our Board of Directors approved a change in the form of award agreements to be issued for grants of deferred stock units (“DSUs”) to participants under our 2004 Long-Term Incentive Plan.  As revised, the award agreements provide that dividend equivalents, if any, will be accrued during the vesting period for such DSU awards and paid out only upon vesting of the underlying DSUs.  As such, grants of DSU awards on or after April 3, 2013 earn dividends throughout the vesting period which are subject to the same vesting terms as the underlying share award.  Grants of DSUs generally vest over a period of three years.  DSU awards granted prior to April 3, 2013 are entitled to receive non-forfeitable dividend equivalents, if any, when and if paid to shareholders of record at the payment date.  Included in the non-vested time-based awards as of October 31, 2015 are 17,576 DSUs granted prior to April 3, 2013.

 

Of the 36,844 performance units granted in the first nine months of 2015, 22,645 units represent a contingent right to receive one share of common stock and vest after our 2017 fiscal year, subject to our achievement of a cumulative performance target for fiscal years 2015-2017.

 

The remaining 14,199 performance units granted in the first nine months of 2015 represent a contingent right to receive up to 2.25 shares of common stock and vest after our 2017 fiscal year, subject to our achievement of a performance target for fiscal 2017.  Assuming the performance target is achieved, the number of performance units earned will be adjusted based on multipliers related to (1) the Company’s adjusted earnings per share for fiscal 2017 and (2) the Company’s relative total shareholder return (“TSR”) compared to the TSR of certain peer companies over a pre-defined period.

 

Performance units that are unvested at the end of the performance period will lapse and be forfeited.  The performance units earn dividends throughout the vesting period and are subject to the same vesting terms as the underlying performance-based awards.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Performance-based DSUs granted in April 2014 (“April 2014 performance-based DSUs”) represented a contingent right to receive one share of common stock and vested over a one year period, subject to our achievement of a performance target for 2014.  Having met the performance target for 2014, the April 2014 performance-based DSUs vested in accordance with their terms in April 2015.

 

The following table summarizes the activity of restricted stock for the nine months ended October 31, 2015:

 

 

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Non-Vested at January 31, 2015

 

67,790

 

$

37.05

 

Granted

 

12,425

 

50.31

 

Vested

 

(44,398

)

40.25

 

Forfeited

 

(19,360

)

27.77

 

Non-Vested at October 31, 2015

 

16,457

 

$

49.37

 

 

Restricted stock awards receive non-forfeitable dividends, if any, when and if paid to shareholders of record at the payment date.

 

As of October 31, 2015, we have unrecognized compensation expense related to non-vested DSUs, performance units, and shares of restricted stock of approximately $22.3 million, which is expected to be recognized over a weighted-average period of 1.7 years.

 

Stock Options

 

The following table summarizes the activity of stock options for the nine months ended October 31, 2015:

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at January 31, 2015

 

660,283

 

$

38.28

 

Granted

 

41,951

 

57.91

 

Exercised

 

(19,617

)

33.02

 

Forfeited

 

 

 

Expired

 

 

 

Outstanding at October 31, 2015

 

682,617

 

$

39.64

 

Exercisable at October 31, 2015

 

301,070

 

$

31.83

 

 

The weighted-average grant date fair value of the 41,951 stock options granted during the nine months ended October 31, 2015 was $18.63 per share.  The following table summarizes the weighted-average assumptions used to fair value stock options at the date of grant using the Black-Scholes option pricing model for the nine months ended October 31, 2015:

 

 

 

For the Nine
Months Ended

 

 

 

October 31,
2015

 

 

 

 

 

Risk-free interest rate

 

1.51

%

Expected lives

 

5.0 years

 

Dividend yield

 

1.38

%

Expected volatility

 

39.74

%

 

As of October 31, 2015, we have unrecognized compensation expense related to non-vested stock options of approximately $3.9 million, which is expected to be recognized over a weighted-average period of 1.5 years.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.  Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill allocated to our reportable segments and changes in the net carrying amount of goodwill for the nine months ended October 31, 2015 are as follows (in thousands):

 

 

 

Retail

 

Corporate
Apparel

 

Total

 

Balance at January 31, 2015

 

$

861,180

 

$

26,756

 

$

887,936

 

Adjustments to purchase price allocation of acquired businesses

 

3,062

 

 

3,062

 

Translation adjustment

 

(608

)

601

 

(7

)

Balance at October 31, 2015

 

$

863,634

 

$

27,357

 

$

890,991

 

 

Goodwill is evaluated for impairment at least annually.  A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, new significant negative industry or economic trends, unanticipated changes in the competitive environment, decisions to significantly modify or dispose of operations and a significant sustained decline in the market price of our stock.

 

Based on Jos. A. Bank’s results, as well as the recent significant decline in our market capitalization, we concluded that a triggering event occurred that required an interim goodwill impairment test.  During the third quarter of 2015, Jos. A. Bank’s results were impacted by significantly lower than forecasted revenue results primarily due to a greater than expected decline in traffic resulting from our transition away from the historical promotional strategy at Jos. A. Bank.  While the short term decline is greater than we expected, we have implemented several strategies that we expect to offset the decline in revenues resulting in a stable profit model to generate cash flows over the long-term.  Based on the results of our interim goodwill impairment test, as of October 31, 2015, we concluded that our goodwill was not impaired.  However, if we determine we are not likely to meet our projections of future cash flows or if our market capitalization remains at current levels, among other factors, it is possible our annual impairment test in the fourth quarter of 2015 could result in a material impairment of the Jos. A. Bank goodwill.  As of October 31, 2015, goodwill associated with the Jos. A. Bank reporting unit totaled $769.0 million.

 

Intangible Assets

 

The gross carrying amount and accumulated amortization of our identifiable intangible assets are as follows (in thousands):

 

 

 

October 31,
2015

 

November 1,
2014

 

January 31,
2015

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

Trademarks and tradenames

 

$

16,516

 

$

16,628

 

$

16,448

 

Favorable leases

 

24,118

 

24,400

 

24,400

 

Customer relationships

 

85,515

 

86,699

 

84,788

 

Total carrying amount

 

126,149

 

127,727

 

125,636

 

Accumulated amortization:

 

 

 

 

 

 

 

Trademarks and tradenames

 

(9,679

)

(9,261

)

(9,331

)

Favorable leases

 

(4,025

)

(1,130

)

(1,883

)

Customer relationships

 

(24,507

)

(14,659

)

(16,468

)

Total accumulated amortization

 

(38,211

)

(25,050

)

(27,682

)

Total amortizable intangible assets, net

 

87,938

 

102,677

 

97,954

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

Trademarks and tradename, gross

 

570,333

 

570,380

 

570,305

 

Impairment of Jos. A. Bank tradename

 

(90,100

)

 

 

Trademarks and tradename, net

 

480,233

 

570,380

 

570,305

 

Total intangible assets, net

 

$

568,171

 

$

673,057

 

$

668,259

 

 

15



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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As discussed above, during the third quarter of 2015, we concluded that a triggering event occurred that required an interim impairment test for the Jos. A. Bank tradename.  The fair value of the Jos. A. Bank tradename was estimated using a relief from royalty method, which calculates the present value of savings resulting from the right to sell products without having to pay a royalty fee.  Critical assumptions that are used in this method include future sales projections, an estimated royalty rate and a discount rate.  Based on our analysis, we concluded the Jos. A. Bank tradename was impaired and recorded a non-cash impairment charge of $90.1 million, which is included as a separate line in the condensed statement of (loss) earnings, and relates to our retail segment.  In addition, should the downward revenue trend accelerate during the fourth quarter of 2015 from what we expect or if other valuation inputs such as the royalty rate or discount rate change, it is possible our annual impairment test in the fourth quarter of 2015 could result in an additional impairment charge for the Jos. A. Bank tradename.  As of October 31, 2015, after giving effect to the impairment charge, the book value of the Jos. A. Bank tradename was $449.0 million.

 

The pre-tax amortization expense associated with intangible assets subject to amortization totaled $3.4 million and $10.5 million for the three and nine months ended October 31, 2015, respectively.  The pre-tax amortization expense associated with intangible assets subject to amortization totaled $3.5 million and $6.5 million for the three and nine months ended November 1, 2014, respectively.  Pre-tax amortization associated with intangible assets subject to amortization at October 31, 2015 is estimated to be $3.9 million for the remainder of fiscal year 2015, $13.7 million for fiscal year 2016, $13.2 million for fiscal year 2017, $12.8 million for fiscal year 2018 and $12.6 million for fiscal year 2019.

 

For further information on our goodwill and tradename analysis, see the discussion in Management’s Discussion and Analysis in the “Executive Overview” section beginning on page 27 and the “Critical Accounting Policies and Estimates” section beginning on page 40, of this Form 10-Q.

 

13.  Derivative Financial Instruments

 

As discussed in Note 4, in January 2015, we entered into an interest rate swap agreement on a notional amount of $520.0 million that matures in August 2018 with periodic interest settlements.  We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.  At October 31, 2015, the fair value of the interest rate swap was a liability of $3.2 million with $2.4 million recorded in accrued expenses and other current liabilities and $0.8 million in other liabilities in our consolidated balance sheet.  The effective portion of the swap is reported as a component of accumulated other comprehensive (loss) income.  There was no hedge ineffectiveness at October 31, 2015.  Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings.

 

Over the next 12 months, $2.4 million of the effective portion of the interest rate swap is expected to be reclassified from accumulated other comprehensive (loss) income into earnings.  If, at any time, the interest rate swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of earnings for the applicable period.

 

14.  Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, categorizing the inputs used to measure fair value.  The hierarchy can be described as follows:  Level 1- observable inputs such as quoted prices in active markets; Level 2- inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3- unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.  The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value of Financial Instruments

 

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and other current liabilities and long-term debt.  Management estimates that, as of October 31, 2015, November 1, 2014, and January 31, 2015, the carrying value of cash, accounts receivable, accounts payable and accrued expenses and other current liabilities approximated their fair value due to the highly liquid or short-term nature of these instruments.

 

The fair values of our Term Loan and the term loan under the Previous Credit Agreement were valued based upon observable market data provided by a third party for similar types of debt, which we classify as a Level 2 input within the fair value hierarchy.   Beginning in June 2015, the fair value of our Senior Notes is based on quoted prices in active markets, which we classify as a Level 1 input within the fair value hierarchy.  In prior periods, the fair value of our Senior Notes was based on trading data in active markets, which we classified as a Level 2 input within the fair value hierarchy.  The table below shows the fair value and carrying value of our long-term debt, including current maturities (in thousands):

 

 

 

October 31, 2015

 

November 1, 2014

 

January 31, 2015

 

 

 

Carrying
Amount

 

Estimated Fair
Value

 

Carrying
Amount

 

Estimated Fair
Value

 

Carrying
Amount

 

Estimated Fair
Value

 

Long-term debt, net

 

1,656,206

 

1,711,104

 

1,649,606

 

1,718,902

 

1,648,686

 

1,706,546

 

 

Assets and Liabilities that are Measured at Fair Value on a Non-Recurring Basis

 

Long-lived assets, such as property and equipment, goodwill and identifiable intangibles, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.  As discussed in Note 12, during the third quarter of 2015, we recorded an impairment charge related to our Jos. A. Bank tradename totaling $90.1 million.  The fair value of the Jos. A. Bank tradename was based on our own judgments about the assumptions that market participants would use in pricing the asset, which we classified as Level 3 within the fair value hierarchy.

 

15.  Segment Reporting

 

Our operations are conducted in two reportable segments, retail and corporate apparel, based on the way we manage, evaluate and internally report our business activities.

 

The retail segment includes the results from our four retail merchandising brands: Men’s Wearhouse/Men’s Wearhouse and Tux, Jos. A. Bank, Moores Clothing for Men (“Moores”) and K&G.  These four brands are operating segments that have been aggregated into the retail reportable segment.  MW Cleaners is also aggregated in the retail segment as these operations have not had a significant effect on our revenues or expenses.  Specialty apparel merchandise offered by our four retail merchandising concepts include suits, suit separates, sport coats, slacks, business casual, sportswear, outerwear, dress and casual shirts, shoes and accessories for men.  Ladies’ career apparel, sportswear and accessories, including shoes, as well as children’s apparel is also offered at most of our K&G stores.  Tuxedo and suit rentals are offered at our Men’s Wearhouse/Men’s Wearhouse and Tux, Jos. A. Bank and Moores retail stores and tuxedo shops within Macy’s stores.

 

The corporate apparel segment includes the results from our corporate apparel and uniform operations conducted by Twin Hill in the U.S. and Dimensions, Alexandra, and Yaffy in the United Kingdom (“UK”).  The two corporate apparel and uniform concepts are operating segments that have been aggregated into the reportable corporate apparel segment.  The corporate apparel segment provides corporate clothing uniforms and workwear to workforces.

 

We measure segment profitability based on operating income, defined as income before interest expense, interest income, income taxes and non-controlling interest.  Corporate expenses and assets are allocated to the retail segment.

 

17



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net sales by brand and reportable segment are as follows (in thousands):

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

Net sales:

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

MW(1)

 

$

465,396

 

$

436,107

 

$

1,391,782

 

$

1,307,417

 

Jos. A. Bank

 

198,936

 

233,313

 

636,704

 

347,005

 

K&G

 

72,733

 

72,835

 

257,448

 

251,474

 

Moores

 

55,862

 

68,724

 

173,281

 

199,302

 

MW Cleaners

 

8,460

 

8,183

 

25,356

 

24,035

 

Total retail segment

 

801,387

 

819,162

 

2,484,571

 

2,129,233

 

 

 

 

 

 

 

 

 

 

 

Dimensions and Alexandra (UK)

 

53,444

 

59,704

 

155,474

 

163,809

 

Twin Hill

 

10,615

 

11,771

 

30,564

 

31,147

 

Total corporate apparel segment

 

64,059

 

71,475

 

186,038

 

194,956

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

865,446

 

$

890,637

 

$

2,670,609

 

$

2,324,189

 

 


(1)          MW includes Men’s Wearhouse stores, Men’s Wearhouse and Tux stores, Joseph Abboud store, tuxedo shops within Macy’s and JA Holding.

 

The following table sets forth supplemental products and services sales information for the Company (in thousands):

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

Net sales:

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

Men’s tailored clothing product

 

$

351,269

 

$

351,071

 

$

1,109,665

 

$

878,746

 

Men’s non-tailored clothing product

 

245,250

 

263,053

 

756,699

 

655,566

 

Ladies’ clothing product

 

16,228

 

16,575

 

56,827

 

56,224

 

Other

 

3,127

 

3,748

 

8,735

 

7,663

 

Total retail clothing product

 

615,874

 

634,447

 

1,931,926

 

1,598,199

 

 

 

 

 

 

 

 

 

 

 

Rental services

 

132,443

 

132,690

 

392,621

 

395,449

 

 

 

 

 

 

 

 

 

 

 

Alteration services

 

44,610

 

43,842

 

134,668

 

111,550

 

Retail dry cleaning services

 

8,460

 

8,183

 

25,356

 

24,035

 

Total alteration and other services

 

53,070

 

52,025

 

160,024

 

135,585

 

 

 

 

 

 

 

 

 

 

 

Corporate apparel clothing product

 

64,059

 

71,475

 

186,038

 

194,956

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

865,446

 

$

890,637

 

$

2,670,609

 

$

2,324,189

 

 

Operating (loss) income by reportable segment and the reconciliation to (loss) earnings before income taxes is as follows (in thousands):

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

Operating (loss) income:

 

October 31,
2015

 

November 1,
2014

 

October 31,
2015

 

November 1,
2014

 

Retail

 

$

(38,971

)

$

39,848

 

$

110,739

 

$

106,117

 

Corporate apparel

 

2,570

 

5,327

 

6,272

 

9,043

 

Operating (loss) income

 

(36,401

)

45,175

 

117,011

 

115,160

 

Interest income

 

50

 

125

 

140

 

305

 

Interest expense

 

(26,457

)

(25,131

)

(79,475

)

(39,459

)

Loss on extinguishment of debt

 

 

 

(12,675

)

(2,158

)

(Loss) earnings before income taxes

 

$

(62,808

)

$

20,169

 

$

25,001

 

$

73,848

 

 

18



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16.  Legal Matters

 

On July 30, 2013, Matthew B. Johnson, et al., on behalf of themselves and all Ohio residents similarly situated (the “Johnson Plaintiffs”), filed a putative class action Complaint against Jos. A. Bank in the U.S. District Court for the Southern District of Ohio, Eastern District (Case No. 2:13-cv-756).  The Complaint alleges, among other things, deceptive sales and marketing practices by Jos. A. Bank relating to its use of the words “free” and “regular price.”  The Complaint seeks, among other relief, certification of the complaint as a class action, compensatory damages, declaratory relief, injunctive relief and costs and disbursements (including attorneys’ fees).  On August 19, 2014, the Court dismissed the class claims and certain other breach of contract claims.  On June 9, 2015, the Court also dismissed the plaintiffs’ claim for injunctive relief.  Based on the two favorable court rulings, we do not believe that this case will have a material adverse effect on our financial position, results of operations or cash flows.

 

In December 2013, Jos. A. Bank received a subpoena from the Ohio Attorney General requiring the production of certain information relating to its advertising and marketing practices.  Jos. A. Bank produced information in response to the subpoena, cooperated with further information requests and had ongoing communications with the Ohio Attorney General’s office.  On October 9, 2015, the Attorney General’s office issued a letter advising the Company that it was taking no further action at this time. We consider the matter closed.

 

On July 9, 2014, David Lucas and Eric Salerno, on behalf of themselves and all California residents similarly situated, filed a putative class action Complaint against Jos. A. Bank in the U.S. District Court for Southern California (Case No. ‘14CV1631LAB JLB).  The Complaint alleges, among other things, that Jos. A. Bank violated the California Unfair Competition Law and the California Consumers Legal Remedies Act with its comparative price advertising, price discounts and free apparel promotions.  The Complaint seeks, among other relief, certification of the case as a class action, permanent injunction, actual and compensatory damages, restitution including disgorgement of profits and unjust enrichment, costs and attorney fees.  We intend to vigorously defend the case.  The range of loss, if any, is not reasonably estimable at this time.  We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

 

In addition, we are involved in various routine legal proceedings, including ongoing litigation, incidental to the conduct of our business.  Management does not believe that any of these matters will have a material adverse effect on our financial position, results of operations or cash flows.

 

17. Condensed Consolidating Information

 

As discussed in Note 4, The Men’s Wearhouse, Inc. (the “Issuer”) issued $600.0 million in aggregate principal amount of 7.00% Senior Notes.  The Senior Notes are guaranteed by certain of our U.S. subsidiaries (collectively, the “Guarantors”).  Our Canadian and U.K. subsidiaries (collectively, the “Non-Guarantors”) are not guarantors of the Senior Notes.  Each of the Guarantors is 100% owned and all guarantees are joint and several.  In addition, the guarantees are full and unconditional except for certain automatic release provisions related to the Guarantors.

 

These automatic release provisions are considered customary and include the sale or other disposition of all or substantially all of the assets or all of the capital stock of any subsidiary guarantor, the release or discharge of a guarantor’s guarantee of the obligations under the Term Loan other than a release or discharge through payment thereon, the designation in accordance with the Indenture of a guarantor as an unrestricted subsidiary or the satisfaction of the requirements for defeasance or discharge of the Senior Notes as provided for in the Indenture.

 

The tables in the following pages present the condensed consolidating financial information for the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated.  The consolidating financial information may not necessarily be indicative of the financial positions, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

 

19



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Men’s Wearhouse, Inc.

Condensed Consolidating Balance Sheet

October 31, 2015

(in thousands)

 

 

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

Wearhouse, Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

771

 

$

2,128

 

$

50,755

 

$

 

$

53,654

 

Accounts receivable, net

 

21,452

 

353,807

 

33,203

 

(341,560

)

66,902

 

Inventories

 

252,520

 

652,080

 

155,647

 

 

1,060,247

 

Other current assets

 

90,352

 

69,646

 

8,073

 

 

168,071

 

Total current assets

 

365,095

 

1,077,661

 

247,678

 

(341,560

)

1,348,874

 

Property and equipment, net

 

311,313

 

197,503

 

39,665

 

 

548,481

 

Rental product, net

 

121,983

 

7,150

 

18,211

 

 

147,344

 

Goodwill

 

6,159

 

837,532

 

47,300

 

 

890,991

 

Intangible assets, net

 

213

 

546,937

 

21,021

 

 

568,171

 

Investments in subsidiaries

 

2,418,994

 

 

 

(2,418,994

)

 

Other assets

 

40,961

 

858

 

8,831

 

(42,132

)

8,518

 

Total assets

 

$

3,264,718

 

$

2,667,641

 

$

382,706

 

$

(2,802,686

)

$

3,512,379

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

399,292

 

$

128,803

 

$

46,985

 

$

(341,560

)

$

233,520

 

Accrued expenses and other current liabilities

 

146,102

 

111,308

 

21,801

 

 

279,211

 

Current maturities of long-term debt

 

7,000

 

 

 

 

7,000

 

Total current liabilities

 

552,394

 

240,111

 

68,786

 

(341,560

)

519,731

 

Long-term debt, net

 

1,649,206

 

 

33,432

 

(33,432

)

1,649,206

 

Deferred taxes and other liabilities

 

77,735

 

277,783

 

11,241

 

(8,700

)

358,059

 

Shareholders’ equity

 

985,383

 

2,149,747

 

269,247

 

(2,418,994

)

985,383

 

Total liabilities and shareholders’ equity

 

$

3,264,718

 

$

2,667,641

 

$

382,706

 

$

(2,802,686

)

$

3,512,379

 

 

20



Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Men’s Wearhouse, Inc.

Condensed Consolidating Balance Sheet

November 1, 2014

(in thousands)

 

 

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

Wearhouse, Inc.

 

Subsidiaries

 

Subsidiaries