Kontoor Brands, Inc. (KTB) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide readers of our financial statements with a narrative from management's perspective on our financial condition, results of operations and liquidity as well as certain other factors that may affect our future results. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part IV of this Annual Report on Form 10-K. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended December 30, 2023, for discussion of the results of operations for the year ended December 30, 2023, compared to the year ended December 31, 2022.

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Special Note On Forward-Looking Statements” included in Part I of this Annual Report on Form 10-K and in Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K.

Description of Business

Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company headquartered in the United States ("U.S."). The Company designs, manufactures, procures, sells and licenses apparel, footwear and accessories, primarily under the brand names Wrangler® and Lee®. The Company's products are sold in the U.S. through mass merchants, specialty stores, department stores, company-operated stores and online, including digital marketplaces. The Company’s products are also sold internationally, primarily in the Europe, Middle East and Africa ("EMEA"), Asia-Pacific (“APAC”) and Non-U.S. Americas regions, through department stores, specialty stores, company-operated stores, concession retail stores, independently-operated partnership stores and online, including digital marketplaces.

Fiscal Year and Basis of Presentation

The Company operates and reports using a 52/53-week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended December 2024, December 2023 and December 2022 correspond to the 52-week fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022, respectively.

References to fiscal 2024 foreign currency amounts herein reflect the impact of changes in foreign exchange rates from fiscal 2023 and the corresponding impact on translating foreign currencies into U.S. dollars and on foreign currency-denominated transactions. The Company's most significant foreign currency translation exposure is typically driven by business conducted in euro-based countries, the Chinese yuan and the Mexican peso. However, the Company conducts business in other developed and emerging markets around the world with exposure to other foreign currencies.

Amounts herein may not recalculate due to the use of unrounded numbers.

Macroeconomic Environment and Other Recent Developments

Global macroeconomic conditions that continued to impact the Company during 2024 included ongoing elevated interest rates, moderating inflation, fluctuating foreign currency exchange rates, supply chain issues and inconsistent consumer demand. These factors continued to contribute to uncertain global economic conditions and consumer spending patterns, which impacted retailers' and the Company's operations. Additionally, the U.S. government has recently enacted and proposed tariff increases on imports. These actions may result in reciprocal tariffs or other restrictive trade measures by foreign jurisdictions. These conditions are causing greater uncertainty in the global economy.

The macroeconomic factors discussed above, primarily interest rates and inflation, contributed to ongoing retailer actions to conservatively manage inventory levels, which impacted our results during 2024.

Our global supply chain was affected by ongoing disruptions to key trade routes such as the Red Sea and Panama Canal, political unrest in Bangladesh and port strikes on the East and Gulf Coasts of the U.S. These disruptions did not have a significant impact on results.

The Company has responded to ongoing macroeconomic conditions by controlling expenses, adjusting pricing and proactively managing our global supply chain. While we anticipate continued uncertainty related to the macroeconomic environment during 2025, including the potential impact of tariff increases on product costs, we believe we are appropriately positioned to successfully manage through operational challenges that may arise. We continue to closely monitor macroeconomic conditions, including consumer behavior and the impact of these factors on consumer demand.

As discussed in Note 23 to the Company's financial statements in this Form 10-K, on February 18, 2025, the Company entered into a definitive agreement to acquire the global outdoor and workwear brand Helly Hansen, a wholly-owned subsidiary of Canadian Tire Corporation, Limited, for $1.276 billion Canadian dollars ("CAD") or approximately $900 million as of the agreement date, subject to working capital and other closing adjustments. On February 19, 2025, the Company entered into foreign currency exchange contracts

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totaling $1.275 billion CAD to mitigate any impact of foreign currency fluctuations prior to the closing date. The transaction is expected to close in the second fiscal quarter of 2025, upon receipt of required regulatory approval and completion of customary closing conditions.

Business Overview

We continue to execute on our strategic vision which focuses on four growth vectors: (i) expansion of our core U.S. Wholesale business, (ii) category extensions such as outdoor, workwear and tops, (iii) geographic expansion of our Wrangler® and Lee® brands and (iv) channel expansion focused on the digital platforms in our U.S. Wholesale and Direct-to-Consumer channels. We are focused on driving brand growth and delivering long-term value to our stakeholders including our consumers, customers, shareholders, suppliers and communities around the world.

In addition, our capital allocation strategy allows us the option to (i) invest in our business, (ii) pay down debt, (iii) provide for a superior dividend payout, (iv) effectively manage our share repurchase authorization and (v) act on strategic acquisition opportunities that may arise.

During 2024, the Company incurred total restructuring and transformation charges of $38.3 million, of which $13.1 million related to continued charges to streamline and transfer select production within our internal manufacturing network and $25.2 million related to Project Jeanius. Of the $38.3 million of restructuring and transformation charges recognized during 2024, $22.9 million were reflected within "selling, general and administrative expenses" and $15.4 million were reflected within "cost of goods sold."

During 2024, we moved into the execution phase of Project Jeanius, a comprehensive end-to-end business model transformation with the goal of creating significant investment capacity through gross and operating margin expansion. We anticipate continued transformation costs as we execute on this multi-year initiative, which are expected to drive benefits in cost of goods sold and selling, general and administrative expenses.

During 2023, the Company incurred total restructuring charges of $14.3 million to drive efficiencies in our operations, which included reducing our global workforce, streamlining and transferring select production within our internal manufacturing network and optimizing and globalizing our operating model. Of the $14.3 million of restructuring charges recognized during 2023, $8.5 million were reflected within "selling, general and administrative expenses" and $5.8 million were reflected within "cost of goods sold".

Refer to Note 22 to the Company's financial statements in this Form 10-K for additional information related to restructuring charges.

Out-of-Period Duty Expense Recorded in 2023

During 2023, management identified inaccuracies in processing certain transactions with U.S. Customs and Border Protection ("U.S. Customs") arising from the implementation of the Company's enterprise resource planning system, which resulted in an underpayment of duties owed to U.S. Customs for the 2021 to 2023 periods. Accordingly, the Company recorded an out-of-period adjustment in 2023 to accrue for the underpayment of duty expense related to the 2022 and 2021 periods. The $14.5 million out-of-period expense, recorded within "cost of goods sold" in 2023, results in a lack of comparability between periods in the statements of operations.

HIGHLIGHTS OF THE YEAR ENDED DECEMBER 2024

•Net revenues of $2.6 billion were flat compared to the year ended December 2023.

•U.S. Wholesale revenues increased 1% compared to the year ended December 2023, and represented 73% of total revenues in the current year.

•Non-U.S. Wholesale revenues decreased 7% compared to the year ended December 2023, and represented 15% of total revenues in the current year.

•Direct-to-Consumer revenues increased 4% compared to the year ended December 2023, and represented 12% of total revenues in the current year.

•Gross margin increased 280 basis points to 44.5% compared to the year ended December 2023.

•Selling, general and administrative expenses as a percentage of revenues increased to 31.4% compared to 29.5% for the year ended December 2023.

•Operating income increased 7% to $342.3 million compared to the year ended December 2023.

•Net income increased 6% to $245.8 million compared to the year ended December 2023.

•Diluted earnings per share was $4.36 in 2024, compared to $4.06 in 2023.

•Cash provided by operating activities was $368.2 million as compared to $356.5 million in the prior year period.

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ANALYSIS OF RESULTS OF OPERATIONS

Consolidated Statements of Operations

The following table presents components of the Company's statements of operations:

Additionally, the following table presents a summary of the changes in net revenues for the year ended December 2024 as compared to December 2023:

2024 Compared to 2023

Net revenues were flat, with growth in the U.S. Wholesale and Direct-to-Consumer channels offset by a decline in the Non-U.S. Wholesale channel. U.S. Wholesale revenues increased 1% primarily attributable to growth in our digital wholesale business and strength in our Outdoor and Western businesses, partially offset by retailer actions to conservatively manage inventory levels and a decrease in revenue from seasonal product. Direct-to-Consumer revenues increased 4% with growth in e-commerce sales partially offset by declines in retail store sales. The increases in U.S. Wholesale and Direct-to-Consumer were offset by a 7% decrease in Non-U.S. Wholesale revenues, driven by reduced wholesale shipments in all regions.

Additional details on changes in net revenues for the year ended December 2024 as compared to December 2023 are provided in the section titled “Information by Business Segment.”

Gross margin increased 280 basis points, primarily related to 360 basis points of favorability from product costs, channel mix and product mix and 60 basis points due to the out-of-period duty expense recorded in 2023. These benefits to gross margin were partially offset by 90 basis points from lower pricing and proactive inventory management actions and 40 basis points from restructuring and transformation charges.

Selling, general and administrative expenses increased $50.7 million, from 29.5% to 31.4% of net revenues, driven by a $24.7 million increase in incentive compensation expense, a $14.4 million increase in restructuring and transformation charges and $14.4 million of higher investments in our direct-to-consumer business, demand creation and information technology. These increases were partially offset by a $4.2 million reduction in distribution and freight costs.

The effective income tax rate for the year ended December 2024 was 18.5% compared to 15.0% for the year ended December 2023. The 2024 effective income tax rate included a net discrete tax benefit primarily related to a decrease in unrecognized tax benefits and interest as well as benefits from stock-based compensation. The net discrete tax benefit for the year ended December 2024 decreased the effective income tax rate by 1.5%. The year ended December 2023 included a net discrete tax benefit primarily related to changes in deferred tax valuation allowances, a decrease in unrecognized tax benefits and interest as well as benefits from stock-based compensation. These net discrete tax benefits for the year ended December 2023 decreased the effective income tax rate by 4.1%.

The effective tax rate without discrete items for the year ended December 2024 was 20.0% compared to 19.1% for the year ended December 2023. The increase was primarily due to changes in our jurisdictional mix of earnings. Our effective income tax rate for foreign operations was 8.2% and 9.2% for the years ended December 2024 and December 2023, respectively.

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Information by Business Segment

The Company's two reportable segments are Wrangler® and Lee®. Refer to Note 3 to the Company's financial statements in this Form 10-K for additional information.

The following tables present a summary of the changes in segment revenues and segment profit for the years ended December 2024 and December 2023:

Segment Revenues:

Segment Profit:

The following sections discuss the changes in segment revenues and segment profit.

Wrangler

2024 Compared to 2023

Global revenues for the Wrangler® brand increased 3%, due to growth in the U.S. Wholesale and Direct-to-Consumer channels, partially offset by a decline in the Non-U.S. Wholesale channel.

•Revenues in the Americas region increased 3%, primarily due to growth in our wholesale and direct-to-consumer businesses. Growth in wholesale was driven by an increase in our U.S. digital wholesale business and category growth. Growth in our direct-to-consumer business was attributable to higher e-commerce and retail store sales.

•Revenues in the EMEA region decreased 4%, due to a decline in our wholesale business, partially offset by growth in our direct-to-consumer business and a 2% favorable impact from foreign currency.

•Revenues in the APAC region increased slightly.

Operating margin increased to 20.3%, compared to 17.5% for 2023, primarily attributable to favorability from lower product costs, the out-of-period duty expense recorded in 2023, downtime in our manufacturing plants taken in 2023, product mix and a reduction in distribution and freight costs. These improvements were partially offset by higher investments in our direct-to-consumer business, demand creation and information technology, as well as an increase in restructuring and transformation charges, lower pricing and higher incentive compensation expense.

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Lee

2024 Compared to 2023

Global revenues for the Lee® brand decreased 6%, due to declines in all regions and channels.

•Revenues in the Americas region decreased 6%, driven by declines in our wholesale and direct-to-consumer businesses. The decrease in wholesale revenues was due to a decline in the U.S. Wholesale channel, as well as our Non-U.S. Americas wholesale business, primarily due to lower sales in Mexico. The decline in the U.S. Wholesale channel was primarily due to retailer actions to conservatively manage inventory levels and a decrease in seasonal product sales, partially offset by growth in digital wholesale. The decline in our direct-to-consumer business was due to lower retail store sales, partially offset by higher e-commerce sales.

•Revenues in the APAC region decreased 6%, primarily resulting from declines in wholesale revenue and retail store sales in China, partially offset by higher e-commerce sales.

•Revenues in the EMEA region decreased 6%, attributable to a decline in our wholesale business, partially offset by higher e-commerce sales.

Operating margin decreased to 11.3%, compared to 11.6% for 2023. Benefits from lower product costs, the out-of-period duty expense recorded in 2023 and a reduction in distribution and freight costs were more than offset by lower pricing, unfavorable product mix, higher incentive compensation expense, higher investments in our direct-to-consumer business and demand creation and deleverage of fixed expenses on lower revenues.

Other

In addition, we report an "Other" category to reconcile segment revenues and segment profit to the Company's operating results, but the Other category does not meet the criteria to be considered a reportable segment. Other includes sales and licensing of Chic®, Rock & Republic®, other company-owned brands and private label apparel, and the associated costs.

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Reconciliation of Segment Profit to Income Before Income Taxes

The costs below are necessary to reconcile total reportable segment profit to income before taxes. Corporate and other expenses, including certain restructuring and transformation costs, and interest income and expense are not controlled by segment management and therefore are excluded from the measurement of segment profit.

2024 Compared to 2023

Corporate and other expenses increased $27.2 million, primarily due to increases in incentive compensation expense and higher restructuring and transformation charges compared to the prior period.

Interest expense increased $0.4 million, primarily due to the maturity of the 2019 Swap Agreements (as defined in Note 15 to the Company's financial statements in this Form 10-K) in April 2024, partially offset by the effect of lower average debt outstanding during the twelve months ended December 2024 compared to the twelve months ended December 2023. In addition, the twelve months ended December 2023 included interest attributable to the out-of-period duty expense recorded in 2023.

ANALYSIS OF FINANCIAL CONDITION

Liquidity and Capital Resources

The Company's ability to fund our operating needs is dependent upon our ability to generate positive long-term cash flows from operations and maintain our debt financing on acceptable terms. The Company has historically generated strong positive cash flows from operations and continues to take proactive measures to manage working capital. We believe cash flows from operations will support our short-term liquidity needs as well as any future liquidity and capital requirements, in combination with available cash balances and borrowing capacity from our revolving credit facility.

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) a five-year $400.0 million term loan A facility (“Term Loan A”) and (ii) a five-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, with the remaining principal of $335.0 million due at maturity in November 2026. During the year ended December 2024, the Company repaid a total of $45.0 million of the principal outstanding on Term Loan A, including a $25.0 million voluntary early repayment which eliminated future required quarterly repayments until June 2026. Additionally, the Company has outstanding $400.0 million of unsecured 4.125% senior notes due 2029. The Company has "floating to fixed" interest rate swap agreements to mitigate exposure to volatility in reference rates on the Company's future interest payments. These debt obligations could restrict our future business strategies and could adversely impact our future results of operations, financial conditions or cash flows.

Refer to Note 11 to the Company's financial statements in this Form 10-K for additional information regarding the Company's debt obligations, and refer to Note 15 to the Company's financial statements in this Form 10-K for additional information regarding the Company's interest rate swap agreements.

As of December 2024, the Company was in compliance with all applicable covenants under the Credit Agreement and expects to maintain compliance with the applicable covenants for at least one year from the issuance of these financial statements. If economic conditions significantly deteriorate for a prolonged period, this could impact the Company's operating results and cash flows and thus our ability to maintain compliance with the applicable covenants. As a result, the Company could be required to seek new amendments to the Credit Agreement or secure other sources of liquidity, such as refinancing of existing borrowings, the issuance of debt or equity securities, or sales of assets. However, there can be no assurance that the Company would be able to obtain such additional financing on commercially reasonable terms or at all.

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 maximum borrowing capacity of $500.0 million with a $75.0 million letter of credit sublimit. There were no outstanding borrowings under the Revolving Credit Facility as of December 2024.

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The following table presents outstanding borrowings and available borrowing capacity under the Revolving Credit Facility and our cash and cash equivalents balances as of December 2024:

(1) Available borrowing capacity under the Revolving Credit Facility is net of $6.5 million of outstanding standby letters of credit issued on behalf of the Company under this facility.

At December 2024 and December 2023, the Company had $19.2 million and $24.1 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 were no outstanding balances under these arrangements at December 2024 and December 2023.

On August 5, 2021, the Company's Board of Directors approved a share repurchase program (the "2021 Repurchase Program") which authorized the repurchase of up to $200.0 million of the Company's outstanding Common Stock through open market or privately negotiated transactions. During the year ended December 2023, the Company repurchased 0.6 million shares of Common Stock for $30.0 million, including commissions, under the 2021 Repurchase Program.

On December 11, 2023, the Company announced that its Board of Directors approved a new share repurchase program (the "2023 Repurchase Program") which authorizes the repurchase of up to $300.0 million of the Company's outstanding Common Stock through open market or privately negotiated transactions. The 2023 Repurchase Program replaced all remaining shares under the 2021 Repurchase Program and does not have an expiration date but may be suspended, modified or terminated at any time without prior notice. During the year ended December 2024, the Company repurchased 1.2 million shares of Common Stock for $85.0 million, including commissions, under the 2023 Repurchase Program. As of December 2024, $215.0 million remained available for repurchase under the program.

The timing and amount of repurchases are determined by the Company's management based on its evaluation of market conditions, continued compliance with its debt covenants and other factors. All shares reacquired in connection with the Company's repurchase programs are treated as authorized and unissued shares upon repurchase.

During 2024, the Company paid $112.1 million of dividends to its shareholders. On February 13, 2025, 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 March 20, 2025, to shareholders of record at the close of business on March 10, 2025.

The Company intends to continue to pay cash dividends in future periods. The declaration and amount of any future dividends will be dependent upon multiple factors including our financial condition, earnings, cash flows, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors or considerations that our Board of Directors deems relevant.

We anticipate that we will have sufficient cash flows from operations, along with existing borrowing capacity, to support continued investments in our brands, infrastructure, talent and capabilities, dividend payments to shareholders, repayment of our debt obligations when due and repurchases of Common Stock. In addition, we would use current liquidity as well as access to capital markets to fund any strategic acquisition opportunities that may arise.

We currently expect capital expenditures to be approximately $35.0 million in 2025, primarily to support manufacturing, distribution, facility improvement, information technology and owned retail store investments.

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The following table presents our cash flows during the periods:

Operating Activities

During 2024, cash provided by operating activities was $368.2 million as compared to $356.5 million in the prior year period. The increase was primarily due to favorable changes in income tax and accounts payable and higher net income, partially offset by unfavorable changes in accounts receivable.

Investing Activities

During 2024, cash used by investing activities was $22.3 million as compared to $39.1 million in the prior year period, primarily due to decreases in property, plant and equipment and capitalized computer software expenditures in the current year period.

Financing Activities

During 2024, cash used by financing activities was $240.4 million as compared to $155.7 million in the prior year period. This increase was primarily due to a $55.6 million increase in Common Stock repurchases and a $35.0 million increase in repayments of Term Loan A in the current year period.

Contractual Obligations

The Company believes it has sufficient liquidity to fund its operations and meet its short-term and long-term obligations. The Company's estimated contractual obligations and other commercial commitments at December 2024 and the future periods in which such obligations are expected to be settled in cash are described below.

Contractual commitments on the Company's balance sheets include obligations to make principal payments on $745.0 million of long-term debt based on the defined terms of our debt agreements. Refer to Note 11 to the Company's financial statements in this Form 10-K for additional information. These debt agreements also require periodic interest payments on floating and fixed rate terms. Future estimated interest payments under these agreements, based on interest rates in effect as of December 2024 and the remaining terms of the debt arrangements, are $37.3 million, $34.8 million, $16.5 million, $16.5 million and $16.5 million for 2025 through 2029, respectively, with no remaining payments thereafter.

The Company has future payments related to "other liabilities" recorded in the balance sheets, which primarily represent long-term liabilities for deferred compensation and other employee-related benefits. Refer to Note 12 and Note 13 to the Company's financial statements in this Form 10-K for additional information.

The Company is committed under noncancelable operating leases. Refer to Note 20 to the Company's financial statements in this Form 10-K for additional information related to future lease payments.

The Company has unrecorded commitments consisting of inventory obligations, minimum royalty payments and other obligations. Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending and (iii) advertising. Refer to Note 21 to the Company's financial statements in this Form 10-K for additional information.

Off-Balance Sheet Arrangements

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

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Critical Accounting Policies and Estimates

We have chosen accounting policies that management believes are appropriate to accurately and fairly report our operating results and financial position in conformity with Generally Accepted Accounting Principles. We apply these accounting policies in a consistent manner. Significant accounting policies are summarized in Note 1 to the Company's financial statements included in Part IV of this Annual Report on Form 10-K.

The application of these accounting policies requires that we make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, net revenues, expenses, contingent assets and liabilities and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. Management evaluates these estimates and assumptions on an ongoing basis. Because our business cycle is relatively short (i.e., from the date that inventory is received until that inventory is sold and the trade accounts receivable is collected), actual results related to most estimates are known within a few months after any balance sheet date. In addition, we may retain outside specialists to assist in impairment testing of long-lived assets. Several of the estimates and assumptions we are required to make relate to future events and are therefore inherently uncertain, especially as it relates to events outside of our control. If actual results ultimately differ from previous estimates, the revisions are included in results of operations when the actual amounts become known.

We believe the following accounting policies involve the most significant management estimates, assumptions and judgments used in preparation of the financial statements or are the most sensitive to change from outside factors. The selection and application of the Company’s critical accounting policies and estimates are periodically discussed with the Audit Committee of the Board of Directors.

Impairment Testing of Long-Lived Assets

Long Lived Assets — Property, Plant and Equipment and Operating Lease Assets

Description

Our policy is to review property, plant and equipment and operating lease assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. In addition, the Company's policy is to perform impairment testing at least annually for retail store assets, including the related operating lease assets. We test for potential impairment at the asset or asset group level, which is the lowest level for which there are identifiable cash flows that are largely independent, by comparing the carrying value to the estimated undiscounted cash flows expected to be generated by the asset. If the forecasted undiscounted cash flows to be generated by the asset are not expected to be adequate to recover the asset’s carrying value, a fair value analysis must be performed, and an impairment charge is recorded if there is an excess of the asset’s carrying value over its estimated fair value.

Judgments and Uncertainties

When testing property, plant and equipment or operating lease assets for potential impairment, management uses the income-based discounted cash flow method using the estimated cash flows of the respective asset or asset group. We include assumptions about sales growth and operating margins, which are compared to our budgets, business plans and economic projections. Assumptions are also made for varying terminal growth rates for years beyond the forecast period. Generally, we utilize operating margin assumptions based on future expectations, operating margins historically realized in the reporting units’ industries and industry marketplace valuation multiples.

Initially, the estimated undiscounted cash flows of the asset or asset group through the end of its useful life are compared to its carrying value. If the undiscounted cash flows of the asset or asset group exceed its carrying value, there is no impairment charge. If the undiscounted cash flows of the asset or asset group are less than its carrying value, then the estimated fair value of the asset or asset group is calculated based on discounted cash flows using an applicable discount rate or weighted average cost of capital (“WACC”). An impairment charge is recognized for the difference, if any, between the estimated fair value of the asset or asset group and its carrying value.

Effect if Actual Results Differ From Assumptions

We have not made any material changes in the methodology used to evaluate the impairment of property, plant and equipment and operating lease assets during 2024. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments, useful lives of property, plant and equipment or term length of leases. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to potentially material impairments.

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Goodwill

Description

Our policy is to evaluate goodwill for possible impairment as of the beginning of the fourth quarter of each year, or whenever events or changes in circumstances indicate that the fair value of goodwill may be below its carrying amount. As part of our annual impairment testing, we may elect to assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If the Company elects to perform a qualitative analysis and determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing is required. Otherwise, the asset must be quantitatively tested for possible impairment. Alternatively, the Company may elect to bypass a qualitative analysis and perform a quantitative analysis.

Judgments and Uncertainties

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

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

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

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

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

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

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

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

Effect if Actual Results Differ From Assumptions

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

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Income Taxes

Description

As a global company, Kontoor is subject to taxation and files income tax returns in over 50 U.S. and foreign jurisdictions each year. The determination of our provision for income taxes, as it relates to estimates for deferred income taxes and liabilities for unrecognized tax benefits, requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws.

Judgments and Uncertainties

Deferred income tax assets and liabilities reflect the net future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has $65.5 million of gross deferred income tax assets related to income tax credit carryforwards and $33.3 million of gross deferred income tax assets related to operating loss carryforwards. We periodically assess the realizability of deferred tax assets, which often requires significant judgment. If management believes that the Company will not be able to generate sufficient taxable income to offset losses during the carryforward periods, the Company records valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. Based on the Company's assessment, it has recorded valuation allowances of $61.1 million related to income tax credit carryforwards and $17.4 million related to operating loss carryforwards based on the weight of available evidence and the conclusion that it is more-likely-than-not (likelihood of more than 50%) that some portion, or all, of these deferred tax assets will not be realized.

The calculation of liabilities for unrecognized tax benefits involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and significant management judgment. The Company’s income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. The Company has evaluated these potential issues under the “more-likely-than-not” standard of the accounting literature. A tax benefit is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized.

Effect if Actual Results Differ From Assumptions

Realization of deferred tax assets related to income tax credit and operating loss carryforwards is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws. If management determines in a future period that the amount of deferred tax assets to be realized differs from the net recorded amount, the Company would record an adjustment to the valuation allowance and income tax expense in that future period.

Judgments and estimates in the calculation of the liability for unrecognized tax benefits may change based on audit settlements, court cases, proposed tax regulations and interpretation of tax laws and regulations. Income tax expense could be materially affected to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits has been established, or to the extent the Company is required to pay amounts greater than the established liability for unrecognized tax benefits.

The Company does not currently anticipate any material impact on earnings from the ultimate resolution of these income tax estimates.

Recently Issued and Adopted Accounting Standards

Refer to Note 1 to the Company's financial statements included elsewhere in this Annual Report on Form 10-K for discussion of recently issued and adopted accounting standards.