Kontoor Brands Inc

NOTE 6 —SUPPLY CHAIN FINANCING

The Company facilitates voluntary Supply Chain Finance ("SCF") programs with its financial institutions that allow certain suppliers the option to sell or assign their rights to receivables due from the Company, enabling the suppliers to receive payment from the financial institutions sooner than our negotiated payment terms. At September 2024, December 2023 and September 2023, accounts payable included total outstanding balances of $34.1 million, $19.7 million and $21.9 million, respectively, due to suppliers that participate in the SCF programs.

Kontoor Brands, Inc. Q3 FY24 Form 10-Q 12

NOTE 7 —SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-term Borrowings

At September 2024, December 2023 and September 2023, the Company had $20.0 million, $24.1 million and $23.7 million, respectively, of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. There wereno outstanding balances under these arrangements at September 2024, December 2023 and September 2023.

Long-term Debt

The following table presents the components of "long-term debt" as recorded in the Company's balance sheets:

Credit Facilities

The Company is party to a senior secured Credit Agreement, as amended and restated on November 18, 2021 (the “Credit Agreement”), which provides for (i) afive-year $400.0 million term loan A facility (“Term Loan A”) and (ii) afive-year $500.0 million revolving credit facility (the “Revolving Credit Facility”), collectively referred to as “Credit Facilities,” with the lenders and agents party thereto.

Term Loan A requires quarterly repayments of $5.0 million through September 2026, and the remaining principal of $335.0 million is due at maturity in November 2026. During the nine months ended September 2024, the Company repaid a total of $40.0 million of the principal outstanding on Term Loan A, including $25.0 million of voluntary early repayments which reduced future required quarterly repayments. Term Loan A had an outstanding principal amount of $350.0 million, $390.0 million and $392.5 million at September 2024, December 2023 and September 2023, respectively, which is reported net of unamortized deferred financing costs. As of September 2024, interest expense on Term Loan A was being recorded at an effective annual interest rate of 6.0%, including the amortization of deferred financing costs and the impact of the Company's interest rate swap agreements.

The Revolving Credit Facility may be used to borrow funds in both U.S. dollar and certain non-U.S. dollar currencies, and has a $75.0 million letter of credit sublimit. As of September 2024, the Company hadno outstanding borrowings under the Revolving Credit Facility and $6.5 million of outstanding standby letters of credit issued on behalf of the Company, leaving $493.5 million available for borrowing against this facility.

The interest rate per annum applicable to borrowings under the Credit Facilities is an interest rate benchmark elected by the Company based on the currency and term of the borrowing plus an applicable margin, as defined therein.

The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type as well as customary events of default. In addition, the Credit Agreement contains financial covenants which require compliance with (i) a total leverage ratio not to exceed 4.50 to 1.00 as of the last day of any test period, with an allowance for up totwo elections to increase the limit to 5.00 to 1.00 in connection with certain material acquisitions, and (ii) a consolidated interest coverage ratio as of the last day of any test period to be no less than 3.00 to 1.00. As of September 2024, the Company was in compliance with all covenants and expects to maintain compliance with the applicable covenants for at least one year from the issuance of these financial statements.

13 Kontoor Brands, Inc. Q3 FY24 Form 10-Q

Senior Notes

On November 18, 2021, the Company entered into an indenture (the “Indenture”) by and among the Company and certain subsidiaries of the Company named as guarantors therein (the “Guarantors”), pursuant to which it issued $400.0 million of unsecured senior notes due November 2029 (the “Notes”) through a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act. The Notes bear interest at a fixed rate of 4.125% per annum, payable in cash in arrears on May 15 and November 15 of each year.

The Notes had an outstanding principal amount of $400.0 million at September 2024, December 2023 and September 2023, which is reported net of unamortized deferred financing costs. As of September 2024, interest expense on the Notes was being recorded at an effective annual interest rate of 4.3%, including the amortization of deferred financing costs.

The Notes are guaranteed on a senior unsecured basis by the Company’s existing and future domestic subsidiaries (other than certain excluded subsidiaries) that are borrowers under or guarantors of the Credit Facilities or certain other indebtedness. The Indenture governing the Notes contains customary negative covenants for financings of this type. The Indenture does not contain any financial covenants. As of September 2024, the Company was in compliance with the Indenture and expects to maintain compliance with the applicable non-financial covenants for at least one year from the issuance of these financial statements.

Refer to Note 11 in the Company's 2023 Annual Report on Form 10-K for additional information regarding the Company’s debt obligations.

Total cash paid for interest was $27.0 million and $23.5 million during the nine months ended September 2024 and September 2023, respectively.

NOTE 8 —FAIR VALUE MEASUREMENTS

Certain assets and liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. Categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.

•Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company's own data and judgments about assumptions that market participants would use in pricing the asset or liability.

Kontoor Brands, Inc. Q3 FY24 Form 10-Q 14

Recurring Fair Value Measurements

The following tables present financial assets and financial liabilities that are measured and recorded in the Company's financial statements at fair value on a recurring basis:

The Company's cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of foreign currency exchange contracts and interest rate swap agreements, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies and observable interest rate yield curves for interest rate swap agreements. Investment securities are held in the Company's deferred compensation plans as an economic hedge of the related deferred compensation liabilities and are comprised of mutual funds that are valued based on quoted prices in active markets (Level 1). Liabilities related to the Company's deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments (Level 2).

Additionally, at September 2024, the carrying value of the Company's long-term debt was $745.0 million compared to a fair value of $725.3 million. At December 2023, the carrying value of the Company's long-term debt was $783.9 million compared to a fair value of $747.1 million. The fair value of long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.

All other financial assets and financial liabilities are recorded in the Company's financial statements at cost. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At September 2024 and December 2023, their carrying values approximated fair value due to the short-term nature of these instruments.

15 Kontoor Brands, Inc. Q3 FY24 Form 10-Q

NOTE 9 —DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Summary of Derivative Financial Instruments

The Company enters into derivative contracts with external counterparties to hedge certain foreign currency transactions. The notional amount of all outstanding foreign currency exchange contracts was $317.0 million at September 2024, $348.8 million at December 2023 and $339.9 million at September 2023, consisting primarily of contracts hedging exposures to the euro, Mexican peso, Canadian dollar, British pound, Polish zloty and Swedish krona. Foreign currency exchange contracts have maturities up to 20 months.

The Company periodically enters into "floating to fixed" interest rate swap agreements to mitigate exposure to volatility in reference rates on the Company's future interest payments. Because these swap agreements meet the criteria for hedge accounting, all related gains and losses are deferred within accumulated other comprehensive loss ("AOCL") and are amortized through the swap maturity dates.

During 2019, the Company entered into "floating to fixed" interest rate swap agreements (the "2019 Swap Agreements") that matured on April 18, 2024. On September 9, 2024, the Company entered into new "floating to fixed" interest rate swap agreements (the "2024 Swap Agreements") that mature on August 18, 2029. The notional amount of the 2024 Swap Agreements was $150.0 million at September 2024. The notional amount of the 2019 Swap Agreements was $300.0 million at December 2023 and September 2023.

The Company's outstanding derivative financial instruments met the criteria for hedge accounting at the inception of the hedging relationship. At each reporting period, the Company assesses whether the hedging relationships continue to be highly effective in offsetting changes in cash flows of hedged items. If the Company determines that a specific hedging relationship has ceased to be highly effective, it discontinues hedge accounting. All designated hedging relationships were determined to be highly effective as of September 2024.

The following table presents the fair value of outstanding derivatives on an individual contract basis:

The Company records and presents the fair value of all derivative assets and liabilities in the Company's balance sheets on a gross basis, even though certain derivative contracts are subject to master netting agreements. If the Company were to offset and record the asset and liability balances of its derivative contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Company's balance sheets would be adjusted from the current gross presentation to the net amounts.

The following table presents a reconciliation of gross to net amounts for derivative asset and liability balances:

Kontoor Brands, Inc. Q3 FY24 Form 10-Q 16

The following table presents the location of derivatives in the Company's balance sheets, with current or noncurrent classification based on maturity dates:

Cash Flow Hedges

The following tables present the pre-tax effects of cash flow hedges included in the Company's statements of operations and statements of comprehensive income:

Other Derivative Information

Any contracts that are not designated as hedges are recorded at fair value in the Company's balance sheets. Changes in the fair values of derivative contracts not designated as hedges are recognized directly in earnings. There were no significant amounts recognized in earnings for changes in the fair values of derivative contracts not designated as hedges or the ineffective portion of any hedging relationships during the three and nine months ended September 2024 and September 2023.

At September 2024, AOCL included $5.8 million of pre-tax net deferred losses for foreign currency exchange contracts and interest rate swap agreements that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on rates in effect when outstanding derivative contracts are settled.

NOTE 10 —CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Common Stock

During the nine months ended September 2024, the Company repurchased 1.2 million shares of Common Stock for $85.0 million, including commissions, under its $300.0 million share repurchase program authorized by the Company's Board of Directors. All shares reacquired in connection with the repurchase program are treated as authorized and unissued shares upon repurchase.

17 Kontoor Brands, Inc. Q3 FY24 Form 10-Q

Accumulated Other Comprehensive Loss

The following table presents deferred components of AOCL in equity, net of related taxes:

The following tables present changes in AOCL, net of related tax impact:

Kontoor Brands, Inc. Q3 FY24 Form 10-Q 18

The following table presents reclassifications out of AOCL:

NOTE 11 —INCOME TAXES

The effective income tax rate for the nine months ended September 2024 was 19.5% compared to 21.4% in the 2023 period. The nine months ended September 2024 included a net discrete tax benefit primarily related to stock-based compensation which decreased the effective income tax rate by 0.7%. The nine months ended September 2023 included a net discrete tax expense primarily related to a remeasurement of deferred tax assets associated with a tax holiday granted from local income taxes in a foreign jurisdiction which increased the effective income tax rate by 2.4%. The effective tax rate without discrete items for the nine months ended September 2024 was 20.2% compared to 19.0% in the 2023 period. The increase was primarily due to changes in our jurisdictional mix of earnings.

During the nine months ended September 2024, the amount of net unrecognized tax benefits and associated interest increased by $0.9 million to $14.5 million. Management believes that it is reasonably possible that the amount of unrecognized tax benefits may decrease by $2.3 million within the next 12 fiscal months due to expiration of statutes of limitations, which would reduce income tax expense.

19 Kontoor Brands, Inc. Q3 FY24 Form 10-Q

NOTE 12 —EARNINGS PER SHARE

The calculations of basic and diluted earnings per share ("EPS") are based on net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares outstanding, respectively.

The following table presents the calculations of basic and diluted EPS:

For the three and nine months ended September 2024 and September 2023, animmaterial number of shares were excluded from the dilutive earnings per share calculations because the effect of their inclusion would have been anti-dilutive.

For the three and nine months ended September 2024, a total of 0.5 million and 0.6 million shares of performance-based restricted stock units ("PRSUs"), respectively, were excluded from the calculations of diluted earnings per share as the units were not considered to be contingent outstanding shares. For both the three and nine months ended September 2023, a total of 0.6 million shares of PRSUs were excluded from the calculations of diluted earnings per share as the units were not considered to be contingent outstanding shares.

NOTE 13 —LEASES

The Company enters into operating leases for retail stores, operational facilities, vehicles and certain equipment, with terms expiring at various dates through 2033. Most leases have fixed rentals, with many of the real estate leases requiring additional payments for real estate taxes and occupancy-related costs.

The following table presents supplemental cash flow and non-cash information related to operating leases:

NOTE 14 —RESTRUCTURING

During the three and nine months ended September 2024, the Company incurred restructuring charges related to actions to streamline and transfer select production within our internal manufacturing network and other business optimization activities.

Of the $2.1 million and $10.1 million of restructuring charges recognized during the three and nine months ended September 2024, respectively, $0.1 million and $1.8 million were reflected within "selling, general and administrative expenses" and $2.0 million and $8.3 million were reflected within "cost of goods sold," respectively. Of the $7.8 million of restructuring charges recognized during the nine months ended September 2023, $5.4 million were reflected within "selling, general and administrative expenses" and $2.4 million were reflected within "cost of goods sold."

Of the $2.0 million restructuring accrual reported in the Company's balance sheet at September 2024, $1.7 million is expected to be paid out within the next 12 months and was classified within "accrued and other current liabilities," and the remaining $0.3 million was classified within "other liabilities." All of the $0.8 million restructuring accrual reported in the Company's balance sheet at December 2023 was classified within "accrued and other current liabilities."

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The following table presents the components of restructuring charges:

The following table presents the restructuring costs by business segment:

The following table presents activity in the restructuring accrual for the nine-month period ended September 2024:

NOTE 15 —SUBSEQUENT EVENT

On October 24, 2024, the Board of Directors declared a regular quarterly cash dividend of $0.52 per share of the Company's Common Stock. The cash dividend will be payable on December 19, 2024, to shareholders of record at the close of business on December 9, 2024.

21 Kontoor Brands, Inc. Q3 FY24 Form 10-Q