1. It is April 2019. A US company needs to borrow $100,000,000 for three months starting five months from now. The current 3-month LIBOR is 2.5%. The company is afraid that rates may rise during those five months before it obtains the loan. Should the company buy or sell Eurodollar futures? And how many (ignoring the present value of the basis point change)?

Which month should the futures settle/expire?

Assume that the appropriate Eurodollar future is trading at 97.4. What interest does the company pay if the 3-month LIBOR rate finishes at 95 (factoring in the gain/loss of the Eurodollar futures contracts)? Or finishes at 98? Assume each month has 30 days.

Use this case study to answer the questions below.

CASE CHAPTER 1: INTRODUCTION TO RESEARCH THE LAROCHE CANDY COMPANY

In 1864 Henricus Laroche started making high-quality chocolate in his kitchen in Ooigem, Belgium. Henricus learned his trade at a famous chocolate shop in Paris, and he and his wife began to make chocolate in bars, wafers and other shapes soon after Henricus had returned to Belgium to start his own business. The Belgian people loved Laroche’s chocolate and the immediate success soon caused him to increase his production facilities. Henricus decided to build a chocolate factory in Kortrijk, a nearby city in the Flemish province West Flanders. With mass-production, the company was able to lower the per-unit costs and to make chocolate, once a luxury item, affordable to everybody. The Laroche Candy Company flourished, expanded its product lines and acquired related companies during the following decades. Within a century the company had become Belgium’s leading candy-manufacturer employing over 2,500 people. Today, The Laroche Candy Company is one of the biggest manufacturers of chocolate and non-chocolate confectionery products in Europe. Under the present leadership of Luc Laroche the company has become truly innovative. What’s more, the company has adopted a very proactive approach to marketing planning and is therefore a fierce competitor in an increasingly global marketplace. The number of products the company produces and markets has increased dramatically; at this moment there are more than 250 Laroche Candy items distributed internationally in bulk, bags, and boxes. Luc Laroche, born in 1946, is the fifth generation of his family to lead The Laroche Candy Company. He is the great-great-grandson of company founder Henricus Laroche and the current Chairman and CEO of the company. But Luc is nearing retirement. He has planned to stop working in two to three years. Whereas stepping back from power is a very difficult thing to do for a lot of people, it is an easy thing to do for Luc: He is looking forward to spending time with his grand-children and to driving his Harley Davidson across Europe. What’s more, he has never found the time to play golf, and he is planning to spend “three whole summers learning it” if necessary. And yet, even though ‘letting go’ is not a problem for Luc, he still has his worries about his imminent retirement. As in most family businesses, Luc’s two children spent their share of summers working for the company. Luc’s oldest son Davy has repeatedly worked for the accounting department whereas Davy’s younger brother Robert has infrequently worked in the field. However, they have never shown a serious interest in the business. Davy, who is 35, currently works as an associate professor of management accounting at a reputable university in Belgium. Robert, aged 32, lives in Paris and has been working as a photographer for the last ten years. About twelve years ago, Robert told his dad, "I know you'd like me to come in the business, but I've got my own path to travel." Luc recalls responding that he respects that and that he does not want Robert to feel constrained; “I just want you to be happy” is what he has told Robert on that particular occasion. Ever since this conversation with Robert, Luc has put his hopes on Davy. A few days ago, Luc has invited Davy to have dinner at the famous restaurant “In de Wulf” in Dranouter, Belgium to discuss the future of the Laroche Candy Company. He wants to talk about his retirement and a succession plan for the company with Davy, who has serious doubts about taking over the company. Davy knows that for his dad the company is his life and like his dad, he wants the company to be successful in the future; but he just does not know whether it is a good idea to take over from his father. In an effort to maintain a balanced perspective on the issue, Davy has done some research on it. Hence, he has become very familiar with statistics about the failure rate of family transitions. These statistics have triggered numerous concerns and fears about taking over the company from his father. Luc and Davy discuss the future of the company during a memorable dinner in Dranouter. Luc tells Davy that he wants his son to take over the company, but Davy explains that he has qualms. He brings up his doubts and fears and alternatives such as going public, selling to a strategic acquirer or investor, or selling to employees through an employee stock ownership plan. Luc hardly listens to Davy’s concerns and strikes a blow for family business. “History is full of examples of spectacular ascents of family business,” he said after the waiter has refilled his glass for the fourth time in just over an hour, “the Rothschilds, the Murdochs, the Waltons, and the Vanderbilts, to name only a few. The Rothschilds, for instance, not only accumulated the largest amount of private wealth the Western world has ever seen, they also changed the course of history by financing kings and monarchs. Did you know that they supported Wellington’s armies, which ultimately led to the defeat of Napoleon at Waterloo? I bet you didn’t.” Davy raised an eyebrow. “I didn’t. But what I do know”, he replied, “is that only fifty years after the death of Cornelius Vanderbilt, who created a fortune in railroads and shipping, several of his direct descendants were flat broke. Apparently the Vanderbilts had both a talent for acquiring and spending money in unmatched numbers.” Davy leaned in closer toward his father. “Seriously dad, I do believe that strong family values are very important but I also feel that they may place restraints on the development of the company. It is commonly known that familism in Southern Italy is one of the main reasons for the slower economic development of the south relative to the north.” Luc sighed and looked at his son. “So, what does this all mean?” “Well, I think that the key question is whether family firms evolve as an efficient response to the institutional and market environment, or whether they are an outcome of cultural norms that might be harmful for corporate decisions and economic outcomes”, Davy replied with a gentle smile. “Don’t you think so?” “I … um … I guess I do.” Luc smiled back at his son. “I am not sure that I understand what you mean, but it sounds great. Let’s throw some money at it and hire a consultant who knows something about this. I’ll call McKinsey first thing tomorrow morning. Cheers.” “Cheers dad”, Davy echoed lifting his glass. Two weeks later, Paul Thomas Anderson, a senior McKinsey consultant, put forward the following problem statement in a meeting with Luc Laroche: What are the implications of family control for the governance, financing, and overall performance of the Laroche Candy Company?

QUESTIONS

1. What is business research?

2. Why is the project that Paul Thomas Anderson is doing for The Laroche Candy Company a research project?

3. Which steps will Paul take now that he has clearly defined the problem that needs attention?

4. Luc Laroche has decided to hire an external consultant to investigate the problem. Do you think that this is a wise decision or would it have been better to ask his son Davy or an internal consultant to do the research project?

5. What can (or should) Luc do to assist Paul to yield valuable research results?

6. How can basic or fundamental research help Paul to solve the specific problem of The Laroche Candy Company?

7. Try to find relevant books, articles, research reports and this issue. Use, among others, electronic resources of your library and/or the internet.

Flint Inc. reports accounting income of $106,200 for 2020, its first year of operations. The following items cause taxable income to be different than income reported on the financial statements.

Assume that the company follows the taxes payable method of accounting for income taxes under ASPE. During the year, Flint Inc. made tax instalment payments of $46,910.

QUESTIONS:

A) Calculate the taxable income and income tax expense for the year ended December 31, 2020.

B) Prepare the journal entry to record income taxes at December 31, 2020.

C) Prepare the income statement for 2020, beginning with the line “Income before income tax.”

D) Provide the balance sheet presentation for any resulting income tax accounts at December 31, 2020.

the construction activity for the year-end 31 December 2020, are as follows:

Required:

1) Prepare a schedule by project, showing clearly the amount of gross profit (loss) of the project before deducting selling, general, and administrative expenses for the year ended 31 December 2020 using the percentage-of-completion method.(based on estimated costs.)

2)Based on the schedule, show the amount of gross profit ( or loss) before selling, general,and administrative expenses for the year ended 31 December 2020, which would be reported if the following method are used:

(I) the cost-recovery method.

(II) The percentage-of-completion method ( based on estimated costs)

3) Determine the construction in process balance that would appear in the statement of financial position of the company as at 31/12/2020 for the project AA, assuming that the precentage-of-completion method is used. show all the working.

General, Inc. leases equipment to different types of businesses. The company generally acquires the equipment and leases the equipment to its customers under long-term sales-type leases. General’s implicit interest in the lease arrangements is 10% annual rate.

General leased its machine that it purchased for $30,900 to a lessee, Oscar Company on January 1, 2018. The lease contract specified annual payments of $8,000 beginning January 1, 2018, the beginning of the lease, and each January 1 through 2020 (three-year lease term). Oscar Company has the option to purchase the machine at the end of the lease term, December 31, 2020, for $12,000 when it is expected to have a residual value of $16,000, considered a bargain purchase amount. The Company’s year-end is 12/31.

Required:

1. Show how General calculated the $8,000 annual lease payments for this sales-type lease.

2. Prepare an amortization schedule that describes the pattern of interest revenue for General, Inc. over the lease term.

3. Prepare the appropriate entries for General, Inc. from the beginning of the lease through the end of the lease term.

Power Corporation acquired 100 percent ownership of Scrub Company on February 12, 20X9. At the date of acquisition, Scrub Company reported assets and liabilities with book values of $430,000 and $184,000, respectively, common stock outstanding of $86,000, and retained earnings of $160,000. The book values and fair values of Scrub’s assets and liabilities were identical except for land, which had increased in value by $16,000, and inventories, which had decreased by $7,000.

Required:
a. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $271,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A.) Record the basic consolidation entry.

B.) Record the excess value (differential) reclassification entry.

b. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $242,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A.) Record the basic consolidation entry.

B.)Record the excess value (differential) reclassification entry.

It was February 2005, and Fred Gehring and Ludo Onnink—CEO and CFO, respectively, of Tommy Hilfiger Europe (the European subsidiary of Tommy Hilfiger)—had just left the conference room in Amsterdam after hearing Tommy Hilfiger’s quarterly results. For the fifth consecutive year, the results in the U.S. were disappointing; sales had declined by 11% on average over this period, dropping from $1.9 billion in 2000 to $1.1 billion in 2005. In Europe, however, the firm’s performance continued to be strong with sales growing at more than 40% a year, from $82 million in 2000 to $428 million in 2005 (see Exhibit 1). In an attempt to compensate for the decline in its core Tommy Hilfiger brand, the company had acquired the rights to the Karl Lagerfeld brand and was contemplating further brand acquisitions and expansions. Gehring and Onnink were concerned that Tommy Hilfiger’s steady decline in the U.S. would start spilling over to the European business, which thus far had been insulated and was growing at a healthy pace. Tommy Hilfiger, the second of nine children, had grown up in Elmira, New York. In 1969, while a senior in high school, Hilfiger began his fashion career with $150, just enough to purchase 20 pairs of bell-bottom jeans. He opened a shop called People’s Place which quickly grew to 10 stores, expanding to serve nearby college campuses, such as Cornell University. A big rock ‘n’ roll fan, Hilfiger was influenced by the British rock scene, and numerous young musicians—including a young Bruce Springsteen—visited his stores. Hilfiger’s goal was to bring London and New York City fashion to upstate New York. Over time, he gradually shifted from retailer to designer as he began to customize jeans and the other items he sold.  Larger sizes, more prominent logos, and brighter colors became a staple of Tommy Hilfiger designs in the late 1990s. Customers responded with enthusiasm, and Tommy Hilfiger’s sales exploded, crossing the $2 billion mark in 2000. Riding its rapidly growing sales and increasing popularity, the Tommy Hilfiger brand expanded aggressively via additional lines—such as boys’ clothing—and licensing abroad in markets such as Australia, India, Korea, Japan, and South America. However, by the early 2000s the company was beginning to lose steam in the U.S. market. Hiphop artists and their fans had moved on to more urban brands, such as Marc Ecko and FUBU, while the Tommy Hilfiger brand had already become tarnished in the eyes of preppy consumers.In response to this decline, the company began to cut prices, filling the clearance racks of Macy’s and Bloomingdale’s. In addition, the company tried to get away from core design themes to pick up sales by mimicking designs that were selling well in department stores and to expand the brand lineup in order to cater to more audiences. When Tommy Hilfiger filed for its IPO in 1992 it had only its one flagship Tommy Hilfiger brand. By 2005, the company had significantly expanded its brand portfolio. The U.S. Distribution Channel The early 2000s coincided with massive consolidation in the U.S. department store channel. One notable example was Federated’s 2005 acquisition of Marshall Field’s to create the nation's secondlargest department store chain, accounting for 35% of conventional and chain department store sales in the U.S. Within the all-important department store channel, there was an inherent pecking order. At the top of the pyramid were luxury stores such as Neiman Marcus and Saks. The next step down included bridge retailers like Bloomingdale’s and Nordstrom. Below that was the better category, with stores like Macy’s and Parisian. Moderate stores—such as Dillard’s and J. C. Penney—came in next, followed by budget stores, which included Kohl’s and Mervyns. In 2005, department stores accounted for 18% of U.S. clothing sales. The 24-and-under age group—a fashionable, trend-driven market—accounted for 36.5% of Tommy Hilfiger’s sales, but only 29.7% of Polo’s sales. Additionally, while Polo children’s wear accounted for only 8.2% of total sales, this segment made up more than 15% of Tommy Hilfiger’s sales. Tommy Hilfiger ranked highly in terms of awareness relative to Polo (90% vs. 86%). However, the brand fared worse in terms of other key factors deemed to be important for apparel purchasers, such as quality, style, and fit. Market research conducted by the company showed that retailers were offering Tommy Hilfiger merchandise at prices 30% below Polo for comparable items, although customers were willing to pay prices just one tier below Polo (7% to 10% lower). This disconnect in pricing depended primarily on the economics of the U.S. wholesale sector. Department stores requested discounts or markdown support from Tommy Hilfiger to drive higher volumes and traffic to their stores. In order to protect the margins generated from the department store channel, Tommy Hilfiger responded by pushing more and more product volume at lower prices into the channel, which in turn created pressure to discount the products in order to sell through the large volumes. In 2005, Tommy Hilfiger changed its segment reporting to separately report the U.S. and international (including Canada and Europe) wholesale results, which had previously been consolidated in a single wholesale figure. (The financial results by geographic region are reported in Exhibits 5 and 6.) This revealed that, from 2004 to 2005, gross margins in the U.S. wholesale channel declined from 33.5% to 26.2%, and the U.S. wholesale EBITDA dropped from $111 million in 2004 to $11 million in 2005. During the same period, retail’s contribution to sales in the U.S. was increasing. Sales for the U.S. retail business increased from $320 million in 2004 to $345 million in 2005, while the U.S. retail EBITDA went from $64 million in 2004 to $65 million in 2005. Retail gross margins in 2005 were strong at about 50.4%, vs. 26.2% in the wholesale channel. In contrast, the European wholesale distribution channel contributed $365 million in sales in 2004 and $459 million in 2005, with EBITDA of $63 million in 2004 and $98 million in 2005. Gross margins in European wholesale were at 55.4%, more than double the gross margin in the U.S. wholesale business. The European retail channel generated $47 million in sales in 2004 and $72 million in 2005. European retail EBITDA reached $9 million in 2004 and $5 million in 2005. Tommy Hilfiger had already attempted to move into the upscale apparel segment in the spring of 2004 with the launch of the H Hilfiger line, a brand that was intended to be more fashionable and formal. The line, backed by a $10 million marketing budget and Hilfiger’s personal involvement with a tour of six U.S. department stores, did well in Europe and the U.S. (in the company’s own retail stores) but was relatively unsuccessful in the U.S. wholesale channel. The Lagerfeld acquisition was an even larger departure from Tommy Hilfiger’s traditional audience. In early March 2005, Gehring and Onnink presented their fully worked-out plans, first to the CEO and later to the entire board. To their surprise, while the board recognized that there was merit in the plan, they did not embrace it. Gehring and Onnink engaged in several conversations with Hilfiger to express their concerns about the developments in the business and Gehring’s possible interest in acquiring the company. Gehring also had conversations with Joel Horowitz, then chairman of the board, to express Gehring’s concerns about the financial results of the U.S. wholesale operations and his interest in the acquisition. From these interactions, Gehring concluded he would need to secure financing to make his bid credible to Tommy Hilfiger’s board, and he called Silas Chou to discuss potential options. Chou committed his financial support, conditional on Gehring finding a private equity firm to support his bid. Gehring also secured some financing from a European bank, but again the financing was conditional on a private equity-led transaction. In March and April 2005, Gehring and Onnink met with several private equity firms and financial institutions to discuss their interest in acquiring Tommy Hilfiger. In May 2005, Gehring delivered a letter to the board of directors of Tommy Hilfiger, backed with equity financing from Apax Funds and debt financing from Citibank, expressing their joint interest in making a proposal to acquire Tommy Hilfiger for $14.50 in cash per share (representing a 33% premium over the most recent closing price of $10.91). The board rejected the offer but retained J.P. Morgan as a financial advisor to seek additional offers from potential buyers, whether strategic or financial. Gehring and Onnink were appointed the new CEO and CFO, respectively. Hilfiger and Horowitz were invited into the transaction as co-investors and board members. The Way Forward Gehring and Onnink were now in control of the business. They realized they needed to start executing their plan immediately. Could they turn the company’s performance around in the U.S.? And what changes, if any, should they make to support the global expansion of the company? What should their immediate next steps be? The Turnaround (2006–2010) Between signing the transaction documentation in December 2005 and completing the acquisition in May 2006, Gehring and Onnink worked with the Apax team to put together a detailed 100-day plan that included all initiatives the new management team was going to implement immediately after taking charge. Gehring relocated from Amsterdam to New York to take over and initiate a set of radical changes to the U.S. operations right after the closing in May 2006. Approximately 40% of wholesale and corporate staff positions in the U.S. were eliminated, and three distribution centers in the U.S. were consolidated into one site. In terms of the brand portfolio, Karl Lagerfeld and the Tommy Hilfiger brand extension “H” were closed in New York, which resulted in additional savings. The worldwide trademarks for Karl Lagerfeld, Lagerfeld Gallery, and KL Lagerfeld/Lagerfeld had been acquired by Tommy Hilfiger in January 2005. One of the core components of Gehring’s plan was the importance of changing the brand’s perception and positioning in the U.S. The objective was to move from the blurred positioning between low-tier urban street wear and the mid-tier “traditional” brand (competing with Nautica and Charter Club) to a best-in-class “neo-traditional” brand (competing with J. Crew and Polo Ralph Lauren). A turning point in the company’s wholesale strategy was an exclusive distribution deal with Macy’s. In a first-of-its-kind deal that was later adopted by several other brands, the company agreed to eliminate distribution through all other stores in exchange for “most favored nation” status with Macy’s. The collaboration between Gehring and Onnink on the one hand and Apax on the other was crucial to effect this transformation. In May 2010, Apax sold Tommy Hilfiger to Phillips-Van Heusen Corporation, now known as PVH Corp. (NYSE: PVH), for a total consideration of approximately €2.2 billion ($3.0 billion), including €1.9 billion ($2.6 billion) in cash and €276 million ($380 million) in PVH common stock. The price achieved by Apax at exit was almost twice what it paid for Tommy Hilfiger in 2006. This implied that Apax achieved a 5 times money multiple on its equity investment in the transaction. Tommy Hilfiger in 2014 The Tommy Hilfiger business progressed well after the transaction between Apax and PVH. European growth kept up its momentum even during the extremely turbulent European debt crisis and the related recessionary environment that was triggered by it. The pan-European penetration of the brand proved to be a significant strong point whereby a slowdown in business in the Southern European markets was offset by ongoing growth in the Northern markets. The Hilfiger brands generated significant revenue for PVH. In 2012, the Tommy Hilfiger North America segment generated earnings for interest and taxes (EBIT) of $183 million on total revenue of $1.4 billion. This represented significant growth over 2010, when EBIT for North America was $111 million. Meanwhile, the Tommy Hilfiger International segment generated EBIT of $243 million on $1.8 billion of total revenue. Similar to North America, the 2012 EBIT represented significant growth over the 2010 figure of $155 million. In November 2013 Gehring announced his plans to retire from his CEO position during the second half of 2014 and to hand over leadership of the company to long-time associate Daniel Grieder, a 52-year-old Swiss national who has been with the company in various roles since 1997, most recently as CEO of the European business. PVH reached an agreement with Gehring to continue with the company on an ongoing basis as chairman of Tommy Hilfiger and vice chairman of PVH Corp. Onnink also announced his planned resignation effective April 2014, when he would seek new entrepreneurial endeavors but remain involved with the company in an advisory capacity for another year.

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What is the case about?

What are the important events that occurred in the case?

What can we learn from reading the case?

What advice do you have for the leaders in the case and/or company in the case?

It was February 2005, and Fred Gehring and Ludo Onnink—CEO and CFO, respectively, of Tommy Hilfiger Europe (the European subsidiary of Tommy Hilfiger)—had just left the conference room in Amsterdam after hearing Tommy Hilfiger’s quarterly results. For the fifth consecutive year, the results in the U.S. were disappointing; sales had declined by 11% on average over this period, dropping from $1.9 billion in 2000 to $1.1 billion in 2005. In Europe, however, the firm’s performance continued to be strong with sales growing at more than 40% a year, from $82 million in 2000 to $428 million in 2005 (see Exhibit 1). In an attempt to compensate for the decline in its core Tommy Hilfiger brand, the company had acquired the rights to the Karl Lagerfeld brand and was contemplating further brand acquisitions and expansions. Gehring and Onnink were concerned that Tommy Hilfiger’s steady decline in the U.S. would start spilling over to the European business, which thus far had been insulated and was growing at a healthy pace. Tommy Hilfiger, the second of nine children, had grown up in Elmira, New York. In 1969, while a senior in high school, Hilfiger began his fashion career with $150, just enough to purchase 20 pairs of bell-bottom jeans. He opened a shop called People’s Place which quickly grew to 10 stores, expanding to serve nearby college campuses, such as Cornell University. A big rock ‘n’ roll fan, Hilfiger was influenced by the British rock scene, and numerous young musicians—including a young Bruce Springsteen—visited his stores. Hilfiger’s goal was to bring London and New York City fashion to upstate New York. Over time, he gradually shifted from retailer to designer as he began to customize jeans and the other items he sold.  Larger sizes, more prominent logos, and brighter colors became a staple of Tommy Hilfiger designs in the late 1990s. Customers responded with enthusiasm, and Tommy Hilfiger’s sales exploded, crossing the $2 billion mark in 2000. Riding its rapidly growing sales and increasing popularity, the Tommy Hilfiger brand expanded aggressively via additional lines—such as boys’ clothing—and licensing abroad in markets such as Australia, India, Korea, Japan, and South America. However, by the early 2000s the company was beginning to lose steam in the U.S. market. Hiphop artists and their fans had moved on to more urban brands, such as Marc Ecko and FUBU, while the Tommy Hilfiger brand had already become tarnished in the eyes of preppy consumers.In response to this decline, the company began to cut prices, filling the clearance racks of Macy’s and Bloomingdale’s. In addition, the company tried to get away from core design themes to pick up sales by mimicking designs that were selling well in department stores and to expand the brand lineup in order to cater to more audiences. When Tommy Hilfiger filed for its IPO in 1992 it had only its one flagship Tommy Hilfiger brand. By 2005, the company had significantly expanded its brand portfolio. The U.S. Distribution Channel The early 2000s coincided with massive consolidation in the U.S. department store channel. One notable example was Federated’s 2005 acquisition of Marshall Field’s to create the nation's secondlargest department store chain, accounting for 35% of conventional and chain department store sales in the U.S. Within the all-important department store channel, there was an inherent pecking order. At the top of the pyramid were luxury stores such as Neiman Marcus and Saks. The next step down included bridge retailers like Bloomingdale’s and Nordstrom. Below that was the better category, with stores like Macy’s and Parisian. Moderate stores—such as Dillard’s and J. C. Penney—came in next, followed by budget stores, which included Kohl’s and Mervyns. In 2005, department stores accounted for 18% of U.S. clothing sales. The 24-and-under age group—a fashionable, trend-driven market—accounted for 36.5% of Tommy Hilfiger’s sales, but only 29.7% of Polo’s sales. Additionally, while Polo children’s wear accounted for only 8.2% of total sales, this segment made up more than 15% of Tommy Hilfiger’s sales. Tommy Hilfiger ranked highly in terms of awareness relative to Polo (90% vs. 86%). However, the brand fared worse in terms of other key factors deemed to be important for apparel purchasers, such as quality, style, and fit. Market research conducted by the company showed that retailers were offering Tommy Hilfiger merchandise at prices 30% below Polo for comparable items, although customers were willing to pay prices just one tier below Polo (7% to 10% lower). This disconnect in pricing depended primarily on the economics of the U.S. wholesale sector. Department stores requested discounts or markdown support from Tommy Hilfiger to drive higher volumes and traffic to their stores. In order to protect the margins generated from the department store channel, Tommy Hilfiger responded by pushing more and more product volume at lower prices into the channel, which in turn created pressure to discount the products in order to sell through the large volumes. In 2005, Tommy Hilfiger changed its segment reporting to separately report the U.S. and international (including Canada and Europe) wholesale results, which had previously been consolidated in a single wholesale figure. (The financial results by geographic region are reported in Exhibits 5 and 6.) This revealed that, from 2004 to 2005, gross margins in the U.S. wholesale channel declined from 33.5% to 26.2%, and the U.S. wholesale EBITDA dropped from $111 million in 2004 to $11 million in 2005. During the same period, retail’s contribution to sales in the U.S. was increasing. Sales for the U.S. retail business increased from $320 million in 2004 to $345 million in 2005, while the U.S. retail EBITDA went from $64 million in 2004 to $65 million in 2005. Retail gross margins in 2005 were strong at about 50.4%, vs. 26.2% in the wholesale channel. In contrast, the European wholesale distribution channel contributed $365 million in sales in 2004 and $459 million in 2005, with EBITDA of $63 million in 2004 and $98 million in 2005. Gross margins in European wholesale were at 55.4%, more than double the gross margin in the U.S. wholesale business. The European retail channel generated $47 million in sales in 2004 and $72 million in 2005. European retail EBITDA reached $9 million in 2004 and $5 million in 2005. Tommy Hilfiger had already attempted to move into the upscale apparel segment in the spring of 2004 with the launch of the H Hilfiger line, a brand that was intended to be more fashionable and formal. The line, backed by a $10 million marketing budget and Hilfiger’s personal involvement with a tour of six U.S. department stores, did well in Europe and the U.S. (in the company’s own retail stores) but was relatively unsuccessful in the U.S. wholesale channel. The Lagerfeld acquisition was an even larger departure from Tommy Hilfiger’s traditional audience. In early March 2005, Gehring and Onnink presented their fully worked-out plans, first to the CEO and later to the entire board. To their surprise, while the board recognized that there was merit in the plan, they did not embrace it. Gehring and Onnink engaged in several conversations with Hilfiger to express their concerns about the developments in the business and Gehring’s possible interest in acquiring the company. Gehring also had conversations with Joel Horowitz, then chairman of the board, to express Gehring’s concerns about the financial results of the U.S. wholesale operations and his interest in the acquisition. From these interactions, Gehring concluded he would need to secure financing to make his bid credible to Tommy Hilfiger’s board, and he called Silas Chou to discuss potential options. Chou committed his financial support, conditional on Gehring finding a private equity firm to support his bid. Gehring also secured some financing from a European bank, but again the financing was conditional on a private equity-led transaction. In March and April 2005, Gehring and Onnink met with several private equity firms and financial institutions to discuss their interest in acquiring Tommy Hilfiger. In May 2005, Gehring delivered a letter to the board of directors of Tommy Hilfiger, backed with equity financing from Apax Funds and debt financing from Citibank, expressing their joint interest in making a proposal to acquire Tommy Hilfiger for $14.50 in cash per share (representing a 33% premium over the most recent closing price of $10.91). The board rejected the offer but retained J.P. Morgan as a financial advisor to seek additional offers from potential buyers, whether strategic or financial. Gehring and Onnink were appointed the new CEO and CFO, respectively. Hilfiger and Horowitz were invited into the transaction as co-investors and board members. The Way Forward Gehring and Onnink were now in control of the business. They realized they needed to start executing their plan immediately. Could they turn the company’s performance around in the U.S.? And what changes, if any, should they make to support the global expansion of the company? What should their immediate next steps be? The Turnaround (2006–2010) Between signing the transaction documentation in December 2005 and completing the acquisition in May 2006, Gehring and Onnink worked with the Apax team to put together a detailed 100-day plan that included all initiatives the new management team was going to implement immediately after taking charge. Gehring relocated from Amsterdam to New York to take over and initiate a set of radical changes to the U.S. operations right after the closing in May 2006. Approximately 40% of wholesale and corporate staff positions in the U.S. were eliminated, and three distribution centers in the U.S. were consolidated into one site. In terms of the brand portfolio, Karl Lagerfeld and the Tommy Hilfiger brand extension “H” were closed in New York, which resulted in additional savings. The worldwide trademarks for Karl Lagerfeld, Lagerfeld Gallery, and KL Lagerfeld/Lagerfeld had been acquired by Tommy Hilfiger in January 2005. One of the core components of Gehring’s plan was the importance of changing the brand’s perception and positioning in the U.S. The objective was to move from the blurred positioning between low-tier urban street wear and the mid-tier “traditional” brand (competing with Nautica and Charter Club) to a best-in-class “neo-traditional” brand (competing with J. Crew and Polo Ralph Lauren). A turning point in the company’s wholesale strategy was an exclusive distribution deal with Macy’s. In a first-of-its-kind deal that was later adopted by several other brands, the company agreed to eliminate distribution through all other stores in exchange for “most favored nation” status with Macy’s. The collaboration between Gehring and Onnink on the one hand and Apax on the other was crucial to effect this transformation. In May 2010, Apax sold Tommy Hilfiger to Phillips-Van Heusen Corporation, now known as PVH Corp. (NYSE: PVH), for a total consideration of approximately €2.2 billion ($3.0 billion), including €1.9 billion ($2.6 billion) in cash and €276 million ($380 million) in PVH common stock. The price achieved by Apax at exit was almost twice what it paid for Tommy Hilfiger in 2006. This implied that Apax achieved a 5 times money multiple on its equity investment in the transaction. Tommy Hilfiger in 2014 The Tommy Hilfiger business progressed well after the transaction between Apax and PVH. European growth kept up its momentum even during the extremely turbulent European debt crisis and the related recessionary environment that was triggered by it. The pan-European penetration of the brand proved to be a significant strong point whereby a slowdown in business in the Southern European markets was offset by ongoing growth in the Northern markets. The Hilfiger brands generated significant revenue for PVH. In 2012, the Tommy Hilfiger North America segment generated earnings for interest and taxes (EBIT) of $183 million on total revenue of $1.4 billion. This represented significant growth over 2010, when EBIT for North America was $111 million. Meanwhile, the Tommy Hilfiger International segment generated EBIT of $243 million on $1.8 billion of total revenue. Similar to North America, the 2012 EBIT represented significant growth over the 2010 figure of $155 million. In November 2013 Gehring announced his plans to retire from his CEO position during the second half of 2014 and to hand over leadership of the company to long-time associate Daniel Grieder, a 52-year-old Swiss national who has been with the company in various roles since 1997, most recently as CEO of the European business. PVH reached an agreement with Gehring to continue with the company on an ongoing basis as chairman of Tommy Hilfiger and vice chairman of PVH Corp. Onnink also announced his planned resignation effective April 2014, when he would seek new entrepreneurial endeavors but remain involved with the company in an advisory capacity for another year.

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Is Globalization in Decline or Not? What is the proper role for US based companies in their globalization efforts? Can US based companies afford to retreat from global markets? While competition in global markets has increased, and profitability has become difficult to maintain, can US based companies afford to retreat from their global footprint? Do you have any direct experience with this issue in your workplace that you could bring to the discussion?