Company Quick10K Filing
Quick10K
Neiman Marcus
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$13.50 6 $78
10-Q 2019-01-26 Quarter: 2019-01-26
10-Q 2018-10-27 Quarter: 2018-10-27
10-K 2018-07-28 Annual: 2018-07-28
10-Q 2018-04-28 Quarter: 2018-04-28
10-Q 2018-01-27 Quarter: 2018-01-27
10-Q 2017-10-28 Quarter: 2017-10-28
10-K 2017-07-29 Annual: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-Q 2017-01-28 Quarter: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-K 2016-07-30 Annual: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-30 Quarter: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-K 2015-08-01 Annual: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-K 2014-08-02 Annual: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-Q 2014-02-01 Quarter: 2014-02-01
8-K 2019-04-19 Enter Agreement, Regulation FD
8-K 2019-04-10 Enter Agreement, Regulation FD
8-K 2019-04-02 Regulation FD
8-K 2019-03-25 Enter Agreement, Regulation FD, Exhibits
8-K 2019-03-12 Earnings, Exhibits
8-K 2019-01-25 Officers
8-K 2019-01-25 Officers
8-K 2018-12-06 Earnings, Exhibits
8-K 2018-11-30 Earnings, Regulation FD, Exhibits
8-K 2018-11-20 Officers
8-K 2018-10-08 Officers
8-K 2018-09-18 Earnings, Officers, Exhibits
8-K 2018-06-06 Earnings, Exhibits
8-K 2018-05-22 Officers
8-K 2018-03-28 Officers, Exhibits
8-K 2018-02-15 Officers
8-K 2018-01-04 Officers, Exhibits
CAL Caleres 1,160
RDUS Radius Health 1,040
LBC Luther Burbank 610
WINS Wins Finance Holdings 444
LPG Doriang 431
CRHM CRH Medical 207
EKSO Ekso Bionics 157
EWST E-Waste 0
DMCI Diamond Cartel 0
BBII Brisset Beer 0
NMS 2019-01-26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit101-q2fy19.htm
EX-31.1 exhibit311-q2fy19.htm
EX-31.2 exhibit312-q2fy19.htm
EX-32.1 exhibit321-q2fy19.htm

Neiman Marcus Earnings 2019-01-26

NMS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q2fy19201912610q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 26, 2019
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to            
 
Commission file no. 333-133184-12
 
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter) 
Delaware
20-3509435
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
75201
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý
 
 
 
 
 



NEIMAN MARCUS GROUP LTD LLC
 
INDEX
 
 
 
 
Page
Part I.
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except units)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
41,338

 
$
38,510

 
$
35,788

Credit card receivables
 
36,462

 
33,689

 
42,258

Merchandise inventories
 
999,337

 
1,115,839

 
1,137,178

Other current assets
 
247,996

 
123,822

 
143,452

Total current assets
 
1,325,133

 
1,311,860

 
1,358,676

 
 
 
 
 
 
 
Property and equipment, net
 
1,539,277

 
1,569,904

 
1,557,112

Intangible assets, net
 
2,615,798

 
2,735,303

 
2,786,041

Goodwill
 
1,753,245

 
1,883,869

 
1,887,729

Other long-term assets
 
32,856

 
44,967

 
37,377

Total assets
 
$
7,266,309

 
$
7,545,903

 
$
7,626,935

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
252,945

 
$
318,969

 
$
283,805

Accrued liabilities
 
527,872

 
511,289

 
532,081

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
810,243

 
859,684

 
845,312

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
4,732,782

 
4,623,152

 
4,572,262

Deferred income taxes
 
688,764

 
707,554

 
762,840

Other long-term liabilities
 
621,615

 
596,332

 
607,507

Total long-term liabilities
 
6,043,161

 
5,927,038

 
5,942,609

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at January 26, 2019, July 28, 2018 and January 27, 2018)
 

 

 

Member capital
 
1,325,116

 
1,587,350

 
1,588,081

Accumulated other comprehensive loss
 
(44,607
)
 
(22,297
)
 
(38,379
)
Accumulated deficit
 
(867,604
)
 
(805,872
)
 
(710,688
)
Total member equity
 
412,905

 
759,181

 
839,014

Total liabilities and member equity
 
$
7,266,309

 
$
7,545,903

 
$
7,626,935

 
See Notes to Condensed Consolidated Financial Statements.


1


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,380,323

 
$
1,480,046

 
$
2,473,107

 
$
2,575,728

Other revenues, net
 
13,797

 
14,065

 
25,404

 
25,929

Total revenues
 
1,394,120

 
1,494,111

 
2,498,511

 
2,601,657

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
958,547

 
1,021,984

 
1,658,783

 
1,720,254

Selling, general and administrative expenses (excluding depreciation)
 
309,223

 
321,897

 
585,984

 
616,714

Depreciation expense
 
47,809

 
53,428

 
98,503

 
108,656

Amortization of intangible assets
 
10,536

 
11,500

 
21,878

 
23,664

Amortization of favorable lease commitments
 
12,620

 
12,784

 
25,062

 
25,569

Other expenses
 
11,895

 
12,614

 
21,324

 
15,454

 
 
 
 
 
 
 
 
 
Operating earnings
 
43,490

 
59,904

 
86,977

 
91,346

 
 
 
 
 
 
 
 
 
Benefit plan expense, net
 
872

 
462

 
1,745

 
925

Interest expense, net
 
81,434

 
76,549

 
161,983

 
152,647

 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(38,816
)
 
(17,107
)
 
(76,751
)
 
(62,226
)
 
 
 
 
 
 
 
 
 
Income tax benefit
 
(9,810
)
 
(389,639
)
 
(19,574
)
 
(408,541
)
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(29,006
)
 
$
372,532

 
$
(57,177
)
 
$
346,315



See Notes to Condensed Consolidated Financial Statements.




2


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(29,006
)
 
$
372,532

 
$
(57,177
)
 
$
346,315

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (loss):
 
 

 
 

 
 

 
 
Foreign currency translation adjustments, before tax
 

 
4,549

 
(1,835
)
 
13,156

Change in unrealized gain (loss) on financial instruments, before tax
 
(6,848
)
 
13,761

 
(6,070
)
 
18,910

Reclassification of realized loss (gain) on financial instruments to earnings (loss), before tax
 
(2,633
)
 
1,033

 
(4,555
)
 
2,272

Change in unrealized gain (loss) on unfunded benefit obligations, before tax
 
(358
)
 
(10
)
 
(18,889
)
 
582

Tax effect related to items of other comprehensive earnings (loss)
 
2,549

 
(4,678
)
 
7,978

 
(9,868
)
Total other comprehensive earnings (loss)
 
(7,290
)
 
14,655

 
(23,371
)
 
25,052

 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
 
$
(36,296
)
 
$
387,187

 
$
(80,548
)
 
$
371,367

 
See Notes to Condensed Consolidated Financial Statements.


3


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

Net earnings (loss)
 
$
(57,177
)
 
$
346,315

Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

Depreciation and amortization expense
 
157,685

 
170,127

Deferred income taxes
 
(1,771
)
 
(402,981
)
Payment-in-kind interest
 

 
29,289

Other
 
2,421

 
(806
)
 
 
101,158

 
141,944

Changes in operating assets and liabilities:
 
 

 
 

Merchandise inventories
 
(22,269
)
 
21,624

Other current assets
 
(67,216
)
 
(6,127
)
Accounts payable and accrued liabilities
 
(35,817
)
 
35,674

Deferred real estate credits
 
10,097

 
11,729

Funding of defined benefit pension plan
 
(11,200
)
 
(9,300
)
Net cash provided by (used for) operating activities
 
(25,247
)
 
195,544

 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(84,066
)
 
(65,796
)
Net cash used for investing activities
 
(84,066
)
 
(65,796
)
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

Borrowings under revolving credit facilities
 
962,970

 
450,163

Repayment of borrowings under revolving credit facilities
 
(832,223
)
 
(578,569
)
Repayment of borrowings under senior secured term loan facility
 
(14,713
)
 
(14,713
)
Distribution to Parent
 
(2,181
)
 

Repurchase of stock
 
(1,401
)
 
(266
)
Shares withheld for remittance of employee taxes
 
(303
)
 
(332
)
Net cash provided by (used for) financing activities
 
112,149

 
(143,717
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(8
)
 
518

 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

Increase (decrease) during the period
 
2,828

 
(13,451
)
Beginning balance
 
38,510

 
49,239

Ending balance
 
$
41,338

 
$
35,788

 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

Cash paid (received) during the period for:
 
 

 
 

Interest
 
$
152,845

 
$
115,137

Income taxes
 
$
(6,882
)
 
$
(2,650
)
Non-cash - investing and financing activities:
 
 

 
 

Distribution to Parent
 
$
271,345

 
$

Property and equipment acquired through developer financing obligations
 
$

 
$
4,277

Issuance of PIK Toggle Notes
 
$

 
$
28,500

See Notes to Condensed Consolidated Financial Statements.

4


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER EQUITY
(UNAUDITED)
(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at October 27, 2018
 
$
1,324,666

 
$
(37,317
)
 
$
(838,598
)
 
$
448,751

Stock option exercises and other
 
450

 

 

 
450

Comprehensive loss:
 
 
 
 
 
 
 
 
Net loss
 

 

 
(29,006
)
 
(29,006
)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($1,774)
 

 
(5,074
)
 

 
(5,074
)
Reclassification to earnings, net of tax of ($682)
 

 
(1,951
)
 

 
(1,951
)
Change in unfunded benefit obligations, net of tax of ($93)
 

 
(265
)
 

 
(265
)
Total comprehensive loss
 
 
 
 
 
 
 
(36,296
)
Balance at January 26, 2019
 
$
1,325,116

 
$
(44,607
)
 
$
(867,604
)
 
$
412,905


(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at October 28, 2017
 
$
1,587,813

 
$
(53,034
)
 
$
(1,083,220
)
 
$
451,559

Stock option exercises and other
 
268

 

 

 
268

Comprehensive earnings:
 
 
 
 
 
 
 
 
Net earnings
 

 

 
372,532

 
372,532

Foreign currency translation adjustments, net of tax of ($18)
 

 
4,567

 

 
4,567

Adjustments for fluctuations in fair market value of financial instruments, net of tax of $4,313
 

 
9,448

 

 
9,448

Reclassification to earnings, net of tax of $387
 

 
646

 

 
646

Change in unfunded benefit obligations, net of tax of ($4)
 

 
(6
)
 

 
(6
)
Total comprehensive earnings
 
 
 
 
 
 
 
387,187

Balance at January 27, 2018
 
$
1,588,081

 
$
(38,379
)
 
$
(710,688
)
 
$
839,014


5


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER EQUITY
(UNAUDITED)
(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at July 28, 2018
 
$
1,587,350

 
$
(22,297
)
 
$
(805,872
)
 
$
759,181

Cumulative accounting transition adjustments
 

 
(7,597
)
 
14,724

 
7,127

Distribution to Parent

 
(262,905
)
 
8,658

 
(19,279
)
 
(273,526
)
Stock option exercises and other
 
671

 

 

 
671

Comprehensive loss:
 


 


 


 


Net loss
 

 

 
(57,177
)
 
(57,177
)
Foreign currency translation adjustments, net of tax of ($333)
 

 
(1,502
)
 

 
(1,502
)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($1,572)
 

 
(4,498
)
 

 
(4,498
)
Reclassification to earnings, net of tax of ($1,180)
 

 
(3,375
)
 

 
(3,375
)
Change in unfunded benefit obligations, net of tax of ($4,893)
 

 
(13,996
)
 

 
(13,996
)
Total comprehensive loss
 


 


 


 
(80,548
)
Balance at January 26, 2019
 
$
1,325,116

 
$
(44,607
)
 
$
(867,604
)
 
$
412,905


(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at July 29, 2017
 
$
1,587,086

 
$
(63,431
)
 
$
(1,057,003
)
 
$
466,652

Stock option exercises and other
 
995

 

 

 
995

Comprehensive earnings:
 


 


 


 


Net earnings
 

 

 
346,315

 
346,315

Foreign currency translation adjustments, net of tax of $2,435
 

 
10,721

 

 
10,721

Adjustments for fluctuations in fair market value of financial instruments, net of tax of $6,332
 

 
12,578

 

 
12,578

Reclassification to earnings, net of tax of $873
 

 
1,399

 

 
1,399

Change in unfunded benefit obligations, net of tax of $228
 

 
354

 

 
354

Total comprehensive earnings
 


 


 


 
371,367

Balance at January 27, 2018
 
$
1,588,081

 
$
(38,379
)
 
$
(710,688
)
 
$
839,014



6


NEIMAN MARCUS GROUP LTD LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 
1. Basis of Presentation
 
Neiman Marcus Group LTD LLC (the "Company") is a luxury omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman and Last Call brand names. References to "we," "our" and "us" are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context.

The Company is a subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a subsidiary of Neiman Marcus Group, Inc., a Delaware corporation ("Parent"). Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. The Sponsors acquired the Company on October 25, 2013 (the "Acquisition"). The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. The operations of MyTheresa are conducted primarily through the mytheresa.com website. In September 2018, substantially all of the holdings of NMG International LLC were distributed to NMG, to the Company, to Holdings and, ultimately, to Parent (the "Distribution"). These holdings consisted principally of the entities through which we had conducted the operations of MyTheresa. As a result of the Distribution, MyTheresa is no longer a subsidiary of the Company but rather a subsidiary of our Parent. Subsequent to the Distribution, the assets, liabilities and operating results of MyTheresa are excluded from our Condensed Consolidated Financial Statements. The assets and liabilities of MyTheresa are excluded from the Condensed Consolidated Balance Sheet presented as of January 26, 2019 and included in the Condensed Consolidated Balance Sheets presented as of July 28, 2018 and January 27, 2018. Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.

The accompanying Condensed Consolidated Financial Statements set forth financial information of the Company and its subsidiaries on a consolidated basis.  All significant intercompany accounts and transactions have been eliminated.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) the second quarter of fiscal year 2019 relate to the thirteen weeks ended January 26, 2019 (ii) the second quarter of fiscal year 2018 relate to the thirteen weeks ended January 27, 2018, (iii) year-to-date fiscal 2019 relate to the twenty-six weeks ended January 26, 2019 and (iv) year-to-date fiscal 2018 relate to the twenty-six weeks ended January 27, 2018.
 
We have prepared the accompanying Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended.  Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2018. In our opinion, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.
 
The luxury retail industry is seasonal in nature, with higher sales typically generated in the fall and holiday selling seasons. Due to seasonal and other factors, the results of operations for the second quarter of fiscal year 2019 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

Certain prior period income statement amounts have been reclassified for comparability with the current year presentation related to the inclusion of income from our credit card program within revenues and the correction of our previous income statement classification of certain reserves for sales returns and promotional programs. The reclassifications have no net impact on the presentation of net earnings (loss) in the Condensed Consolidated Financial Statements.
 
A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.


7


Use of Estimates.  We are required to make estimates and assumptions about future events in preparing our financial statements in conformity with GAAP. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.
 
While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. We make adjustments to our estimates and assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates and assumptions used in preparing the accompanying Condensed Consolidated Financial Statements.

We believe the following critical accounting policies, among others, encompass the more significant estimates, assumptions and judgments used in the preparation of the accompanying Condensed Consolidated Financial Statements:

recognition of revenues;
valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and merchandise allowances, estimation of inventory shrinkage and determination of cost of goods sold;
determination of impairment of intangible and long-lived assets;
measurement of liabilities related to our loyalty program;
recognition of income taxes; and
measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.

Segments. We conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.
 
Revenue Recognition. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("Revenue Standard"), to clarify the principles for revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and supersedes previous revenue recognition guidance. We adopted the revenue recognition requirements of this guidance in the first quarter of fiscal year 2019 using the modified retrospective adoption method and applied the ASU only to contracts not completed as of July 29, 2018. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements, but impacted the presentation of certain revenue transactions. These changes include (i) the gross balance sheet presentation of estimates for sales returns and related recoverable inventories within other current assets and (ii) the inclusion of income from our credit card program within revenues. Prior to the adoption of this guidance, our estimates of recoverable inventories were netted with our reserves for estimated sales returns within accrued liabilities. In addition, the adoption of this guidance accelerated the recognition of (i) online sales to the time of shipment rather than delivery (to coincide with the transfer of control to the customer) and (ii) direct response advertising costs to incurrence. Upon adoption, we recorded a net cumulative effect adjustment to reduce beginning accumulated deficit of $7.1 million.

In addition, we have determined that our previous income statement classification of certain reserves for sales returns and promotional programs resulted in the overstatement of previously reported revenues and cost of goods sold by $2.1 million in the second quarter of fiscal year 2018 and $26.7 million in year-to-date fiscal 2018. We evaluated the effects of these overstatements on prior periods' consolidated financial statements, individually and in the aggregate, and concluded that no prior period is materially misstated. However, we have revised our consolidated financial statements for the periods presented herein. The corrections had no impact on net earnings (loss).

We recognize revenues at the point-of-sale or upon shipment of goods to the customer. Shipping and handling costs are expensed as a fulfillment activity at shipping point. Revenues are reduced when our customers return goods previously purchased. We maintain reserves for anticipated sales returns based primarily on our historical trends and our expectations of future returns. Revenues exclude sales taxes collected from our customers.

Other Newly Adopted Accounting Pronouncements. In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit

8


Cost, which requires employers to disaggregate and present the service cost component in the same line of the income statement as other compensation costs and present the other components of net benefit costs, primarily interest costs and investment earnings, separately from the service cost component, outside a subtotal of operating earnings. We adopted this guidance in the first quarter of fiscal year 2019 using the retrospective adoption method and reclassified other components of net benefit costs from selling, general and administrative expenses to benefit plan expense, net. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive loss to retained earnings for certain stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Reform"), which was signed into law on December 22, 2017. The new guidance may be applied either in the period of adoption or retrospectively to each period in which the effect of the Tax Reform is recognized. We adopted this guidance in the first quarter of fiscal year 2019 and reclassified $7.6 million of stranded tax benefits from accumulated other comprehensive loss to reduce accumulated deficit.

Recent Accounting Pronouncements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. Previous GAAP did not require lease assets and liabilities to be recognized for operating leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. In July 2018, the FASB amended the new leases standard to provide entities with an additional and optional transition method and to provide entities with a practical expedient, whereby entities may elect not to separate lease and non-lease components when certain conditions are met. We are in the process of identifying our population of leases, reviewing current accounting policies and changes to business processes and controls to support the adoption of the new standard and evaluating the impact of adoption on our Consolidated Financial Statements. We do not expect the recognition, measurement and presentation of expenses and cash flows arising from our operating leases to significantly change under this new guidance. However, we expect this adoption to lead to a material increase in the assets and liabilities recorded on our Consolidated Balance Sheets. This new guidance is effective for us as of the first quarter of fiscal year 2020.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to simplify how hedge accounting arrangements are accounted for and presented in the financial statements, including the assessment of hedge effectiveness. Under the new standard, all changes in the fair value of cash flow hedges included in the assessment of effectiveness will be recorded in other comprehensive earnings (loss) and reclassified to earnings in the same income statement line item when the hedged item affects earnings. This new guidance is effective for us as of the first quarter of fiscal year 2020. We are currently evaluating the impact of adopting this new accounting guidance on our Consolidated Financial Statements.

In June 2018, the FASB issued ASU No. 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting, to align accounting for non-employee share-based payment transactions with the guidance for share-based payments to employees. Under the new standard, the measurement of equity-classified non-employee awards will be fixed at the grant date. This new guidance is effective for us as of the first quarter of fiscal year 2020. Early adoption is permitted. We do not believe this new accounting guidance will have an impact on our Consolidated Financial Statements. We intend to early adopt this guidance in the third quarter of fiscal year 2019.


2. Distribution to Parent

In September 2018, substantially all of the holdings of NMG International LLC were distributed to NMG, to the Company, to Holdings and, ultimately, to Parent. These holdings consisted principally of the entities through which we conducted the operations of MyTheresa.

As a result of the Distribution, the MyTheresa entities are no longer subsidiaries of the Company but rather subsidiaries of our Parent. The MyTheresa entities are no longer included in the Company's Condensed Consolidated Financial Statements subsequent to September 2018.


9


Summarized financial information related to the balances and results of operations of the distributed holdings prior to the Distribution is as follows:
(in thousands)
At Distribution
 
July 28,
2018
 
January 27, 2018
 
 
 
 
 
 
Total assets (1)
$
356,520

 
$
351,982

 
$
349,307

Net assets (1)
273,526

 
266,784

 
266,606

 
(1)
Assets at the Distribution include $2.2 million of cash and cash equivalents on hand.

 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
January 26, 2019
 
January 27, 2018
 
January 26, 2019
 
January 27, 2018
 
 
 
 
 
 
 
 
Revenues (1)
$

 
$
88,707

 
$
60,063

 
$
162,801

Net earnings (loss) (1)

 
5,368

 
(637
)
 
7,378

 
(1)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.


3. Revenues

In the first quarter of fiscal year 2019, we adopted the Revenue Standard using the modified retrospective adoption method and applied the ASU only to contracts not completed as of July 29, 2018. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements, but impacted the presentation of certain revenue transactions.

Disaggregation of Revenues. The components of disaggregated revenues are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
 
January 26, 2019
 
January 27, 2018
(in thousands, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from U.S. store operations (1)
 
$
946,965

 
68.6
%
 
$
975,689

 
70.1
%
 
$
1,673,732

 
69.4
%
 
$
1,714,496

 
71.1
%
Net sales from U.S. online operations (1)
 
433,358

 
31.4
%
 
415,650

 
29.9
%
 
739,312

 
30.6
%
 
698,431

 
28.9
%
Net sales from U.S. operations (2)
 
1,380,323

 
99.0
%
 
1,391,339

 
93.1
%
 
2,413,044

 
96.6
%
 
2,412,927

 
92.7
%
Net sales from MyTheresa operations (2) (3)
 

 
%
 
88,707

 
5.9
%
 
60,063

 
2.4
%
 
162,801

 
6.3
%
Total net sales (2)
 
1,380,323

 
99.0
%
 
1,480,046

 
99.1
%
 
2,473,107

 
99.0
%
 
2,575,728

 
99.0
%
Other revenues, net (2)
 
13,797

 
1.0
%
 
14,065

 
0.9
%
 
25,404

 
1.0
%
 
25,929

 
1.0
%
Total revenues (2)
 
$
1,394,120

 
100.0
%
 
$
1,494,111

 
100.0
%
 
$
2,498,511

 
100.0
%
 
$
2,601,657

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from total online operations (2)
 
$
433,358

 
31.1
%
 
$
504,357

 
33.8
%
 
$
799,375

 
32.0
%
 
$
861,232

 
33.1
%
 
(1)
Presented on the basis of net sales from U.S. operations.
(2)
Presented on the basis of total revenues.
(3)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.

10


Other revenues, net is principally composed of payments we receive related to our proprietary credit card program pursuant to an agreement (the "Program Agreement") with a third-party credit provider. We have credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names. We receive payments based on sales transacted on our proprietary credit cards. These payments are based on the profitability of the credit card portfolio as determined under the Program Agreement and are impacted by a number of factors including credit losses incurred and our allocable share of the profits generated by the credit card portfolio, which in turn may be impacted by credit ratings as determined by various rating agencies. In addition, we receive payments for marketing and servicing activities we provide, which are immaterial to the Condensed Consolidated Financial Statements. We recognize income from our credit card program when earned. The Program Agreement expires July 2020, subject to early termination provisions.

Contract Liabilities. Under the new Revenue Standard, contract liabilities relate to the transfer of goods or services to customers, consisting principally of unearned revenue, gift cards, loyalty points and other credits outstanding, and are included within accrued liabilities. Contract liabilities aggregated $250.0 million at January 26, 2019 and $218.8 million at July 28, 2018.

Revenues recognized from our beginning contract liabilities were $64.4 million during the second quarter of fiscal year 2019 and $106.3 million in year-to-date fiscal 2019.


4. Fair Value Measurements
 
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.
Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.
Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.

The following table shows the Company’s financial asset and liability that are required to be measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets:
(in thousands)
 
Fair Value
Hierarchy
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset:
 
 
 
 
 
 
 
 
Interest rate swaps (included in other long-term assets)
 
Level 2
 
$
24,753

 
$
35,649

 
$
25,996

 
 
 
 
 
 
 
 
 
Liability:
 
 
 
 
 
 
 
 
Stock-based award liability (included in other long-term liabilities)
 
Level 3
 
6,871

 
8,807

 
5,643

 
The fair value of the interest rate swaps is estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.

Because Parent is privately held and there is no public market for its common stock, the fair market value of Parent's common stock is determined by the Board of Directors of Parent (the "Parent Board") or the Compensation Committee, as applicable.  In determining the fair market value of Parent's common stock, the Parent Board or the Compensation Committee, as applicable, considers such factors as any recent transactions involving Parent's common stock, the Company’s actual and projected financial results, the principal amount of the Company’s indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process. Significant inputs to the common stock valuation model are updated as applicable and the carrying value of the obligation is adjusted to its estimated fair value at each reporting date.


11


The carrying values of cash and cash equivalents, credit card receivables and accounts payable approximate fair value due to their short-term nature.  We determine the fair value of our long-term debt on a non-recurring basis, which results are summarized as follows:
 
 
 
 
January 26, 2019
 
July 28, 2018
 
January 27, 2018
(in thousands)
 
Fair Value
Hierarchy
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Asset-Based Revolving Credit Facility
 
Level 2
 
$
272,000

 
$
272,000

 
$
159,000

 
$
159,000

 
$
132,000

 
$
132,000

mytheresa.com Credit Facilities
 
Level 2
 

 

 

 

 
2,593

 
2,593

Senior Secured Term Loan Facility
 
Level 2
 
2,795,494

 
2,461,796

 
2,810,207

 
2,492,316

 
2,824,920

 
2,395,899

Cash Pay Notes
 
Level 2
 
960,000

 
396,672

 
960,000

 
609,302

 
960,000

 
613,565

PIK Toggle Notes
 
Level 2
 
658,354

 
282,881

 
658,354

 
420,997

 
628,500

 
373,958

2028 Debentures
 
Level 2
 
122,997

 
88,058

 
122,890

 
103,570

 
122,783

 
90,831


We estimated the fair value of long-term debt using (i) prevailing market rates for debt of similar remaining maturities and credit risk for the senior secured asset-based revolving credit facility (as amended, the "Asset-Based Revolving Credit Facility") and the senior secured term loan facility (as amended, the "Senior Secured Term Loan Facility" and, together with the Asset-Based Revolving Credit Facility, the "Senior Secured Credit Facilities") and (ii) quoted market prices of the same or similar issues for the $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021 (the "Cash Pay Notes"), the $658.4 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021 (the "PIK Toggle Notes") and the $125.0 million aggregate principal amount of 7.125% Debentures due 2028 (the "2028 Debentures" and, together with the Cash Pay Notes and the PIK Toggle Notes, the "Notes").
 
In connection with purchase accounting, we adjusted the carrying values of our long-lived and intangible assets to their estimated fair values at the acquisition date. The fair value estimates were based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value). Subsequent to the Acquisition, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets.


5. Intangible Assets, Net and Goodwill
 
(in thousands)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
854,032

 
$
879,434

 
$
905,016

Other definite-lived intangible assets, net (1)
 
329,689

 
354,542

 
377,652

Tradenames (1)
 
1,432,077

 
1,501,327

 
1,503,373

Intangible assets, net
 
$
2,615,798

 
$
2,735,303

 
$
2,786,041

 
 
 
 
 
 
 
Goodwill (1)
 
$
1,753,245

 
$
1,883,869

 
$
1,887,729

 
(1)
In connection with the Distribution in September 2018, goodwill, tradenames and other definite-lived intangible assets, net related to MyTheresa were distributed to Parent. The assets and liabilities of MyTheresa are excluded from the Condensed Consolidated Balance Sheet presented as of January 26, 2019 and included in the Condensed Consolidated Balance Sheets presented as of July 28, 2018 and January 27, 2018.

Intangible Assets Subject to Amortization. Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from five to 55 years (weighted average life of 30 years) from the Acquisition date. Our definite-lived intangible assets, which primarily consist of customer lists, are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset, currently estimated at ten to 16 years (weighted average life of 14 years) from the Acquisition date. 


12


Total amortization of all intangible assets recorded in connection with acquisitions for the current and next five fiscal years is currently estimated as follows (in thousands):
January 27, 2019 through August 3, 2019
$
46,219

2020
85,778

2021
81,312

2022
81,539

2023
80,385

2024
64,469


At January 26, 2019, accumulated amortization was $273.4 million for favorable lease commitments and $353.9 million for other definite-lived intangible assets.

Indefinite-lived Intangible Assets and Goodwill.  Indefinite-lived intangible assets, such as our Neiman Marcus and Bergdorf Goodman tradenames and goodwill, are not subject to amortization.  Rather, we assess the recoverability of indefinite-lived intangible assets and goodwill annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. These impairment assessments are performed for two of our reporting units — Neiman Marcus and Bergdorf Goodman.


6. Long-term Debt
 
The significant components of our long-term debt are as follows:
(in thousands)
 
Interest
Rate
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
272,000

 
$
159,000

 
$
132,000

mytheresa.com Credit Facilities (1)
 
variable
 

 

 
2,593

Senior Secured Term Loan Facility
 
variable
 
2,795,494

 
2,810,207

 
2,824,920

Cash Pay Notes
 
8.00%
 
960,000

 
960,000

 
960,000

PIK Toggle Notes
 
8.75%/9.50%
 
658,354

 
658,354

 
628,500

2028 Debentures
 
7.125%
 
122,997

 
122,890

 
122,783

Total debt
 
 
 
4,808,845

 
4,710,451

 
4,670,796

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Less: unamortized debt issuance costs
 
 
 
(46,637
)
 
(57,873
)
 
(69,108
)
Long-term debt, net of debt issuance costs
 
 
 
$
4,732,782

 
$
4,623,152

 
$
4,572,262

 
(1)
Credit facilities of MyTheresa are excluded subsequent to the Distribution in September 2018.

Asset-Based Revolving Credit Facility.  At January 26, 2019, we have an Asset-Based Revolving Credit Facility with a maximum committed borrowing capacity of $900.0 million.  The Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later). At January 26, 2019, we had outstanding borrowings of $272.0 million under this facility, outstanding letters of credit of $1.3 million and unused commitments of $626.8 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to certain restrictions as more fully described below.
 
Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account.  To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million, we will be required to maintain a minimum fixed charge coverage ratio. Additional restrictions will apply if this condition is not met for five consecutive business days, including increased reporting requirements and additional administrative agent control rights over certain of our accounts. These restrictions will continue until the condition is satisfied and their imposition may limit our operational flexibility.

13


The Asset-Based Revolving Credit Facility permits us to increase commitments under the Asset-Based Revolving Credit Facility or add one or more incremental term loans to the Asset-Based Revolving Credit Facility by an amount not to exceed $200.0 million. However, the lenders are under no obligation to provide any such additional commitments or loans, and any increase in commitments or incremental term loans will be subject to customary conditions precedent.  If we were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the size of the Asset-Based Revolving Credit Facility could be increased to $1,100.0 million, but our ability to borrow would still be limited by the amount of the borrowing base.  The cash proceeds of any incremental term loans may be used for working capital and general corporate purposes.

At January 26, 2019, borrowings under the Asset-Based Revolving Credit Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Deutsche Bank AG New York Branch (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00% or (b) LIBOR, subject to certain adjustments, in each case plus an applicable margin of 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings at January 26, 2019. The applicable margin is based on the average historical excess availability under the Asset-Based Revolving Credit Facility, and is up to 1.00% with respect to base rate borrowings and up to 2.00% with respect to LIBOR borrowings, in each case with one 0.25% step down based on achievement and maintenance of a certain senior secured first lien net leverage ratio (as defined in the credit agreement governing the Asset-Based Revolving Credit Facility). The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 4.57% at January 26, 2019. In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of up to 0.375% per annum. We must also pay customary letter of credit fees and agency fees.

If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the aggregate revolving commitments and (b) the borrowing base, we will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  If the excess availability under the Asset-Based Revolving Credit Facility is less than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million for a period of five or more consecutive business days, funds held in a collection account maintained with the agent would be applied to repay the loans and other obligations and cash collateralize letters of credit. We would then be required to make daily deposits in the collection account maintained with the agent under the Asset-Based Revolving Credit Facility.

We may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary breakage costs with respect to LIBOR loans. There is no scheduled amortization under the Asset-Based Revolving Credit Facility. The principal amount of the revolving loans outstanding thereunder will be due and payable in full on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).
 
The Asset-Based Revolving Credit Facility is guaranteed by Holdings and each of our current and future direct and indirect wholly owned subsidiaries (subsidiary guarantors) other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At January 26, 2019, the assets of non-guarantor subsidiaries, primarily Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $88.6 million, or 1.2% of consolidated total assets. All obligations under the Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.

The Asset-Based Revolving Credit Facility contains covenants limiting, among other things, dividends and other restricted payments, investments, loans, advances and acquisitions, and prepayments or redemptions of other indebtedness. These covenants permit such restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that we must have (x) pro forma excess availability under the Asset-Based Revolving Credit Facility for each day of the 30-day period prior to such actions, which exceeds the greater of $90.0 million or 15% of the lesser of (a) the revolving commitments under the Asset-Based Revolving Credit Facility and (b) the borrowing base and (y) a pro forma fixed charge coverage ratio of at least 1.0 to 1.0, unless pro forma excess availability for each day of the 30-day period prior to such actions under the Asset-Based Revolving Credit Facility would exceed the greater of (1) $200.0 million and (2) 25% of the lesser of (i) the aggregate revolving commitments under the Asset-Based Revolving Credit Facility and (ii) the borrowing base. The Asset-Based Revolving Credit Facility also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.

14


For a more detailed description of the Asset-Based Revolving Credit Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Senior Secured Term Loan Facility.  We have a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At January 26, 2019, the outstanding balance under the Senior Secured Term Loan Facility was $2,795.5 million. The principal amount of the loans outstanding is due and payable in full on October 25, 2020.

The Senior Secured Term Loan Facility permits us to increase the term loans or add a separate tranche of term loans by an amount not to exceed $650.0 million plus an unlimited amount that would result (a) in the case of any incremental term loan facility to be secured equally and ratably with the term loans, a senior secured first lien net leverage ratio equal to or less than 4.25 to 1.00, and (b) in the case of any incremental term loan facility to be secured on a junior basis to the term loans, to be subordinated in right of payment to the term loans or unsecured and pari passu in right of payment with the term loans, a total net leverage ratio equal to or less than the total net leverage ratio as of October 25, 2013.

At January 26, 2019, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00%, or (b) an adjusted LIBOR (for a period equal to the relevant interest period, and in any event, never less than 1.00%), subject to certain adjustments, in each case plus an applicable margin. The applicable margin is up to 2.25% with respect to base rate borrowings and up to 3.25% with respect to LIBOR borrowings. The applicable margin is subject to adjustment based on our senior secured first lien net leverage ratio. The applicable margin with respect to outstanding LIBOR borrowings was 3.25% at January 26, 2019.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 5.76% at January 26, 2019.

Subject to certain exceptions and reinvestment rights, the Senior Secured Term Loan Facility requires that 100% of the net cash proceeds from certain asset sales and debt issuances and 50% (which percentage will be reduced to 25% if our senior secured first lien net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, is equal to or less than 4.0 to 1.0 but greater than 3.5 to 1.0 and will be reduced to 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0) from excess cash flow, as defined in the credit agreement governing the Senior Secured Term Loan Facility, for each of our fiscal years (commencing with the period ended July 26, 2015) must be used to prepay outstanding term loans under the Senior Secured Term Loan Facility at 100% of the principal amount to be prepaid, plus accrued and unpaid interest. We were not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements for fiscal year 2018.
 
We may repay all or any portion of the Senior Secured Term Loan Facility at any time, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than the last day of the relevant interest period. The Senior Secured Term Loan Facility amortizes in equal quarterly installments of $7.4 million, less certain voluntary and mandatory prepayments, with the remaining balance due at final maturity.
 
The Senior Secured Term Loan Facility is guaranteed by Holdings and each of our current and future subsidiary guarantors other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At January 26, 2019, the assets of non-guarantor subsidiaries, primarily Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $88.6 million, or 1.2% of consolidated total assets. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.

The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants and covenants related to the security arrangements for the Senior Secured Term Loan Facility. The credit agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.

For a more detailed description of the Senior Secured Term Loan Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Cash Pay Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, incurred indebtedness in the form of $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021.  Interest on the Cash Pay Notes is payable semi-

15


annually in arrears on each April 15 and October 15.  The Cash Pay Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings.  The Cash Pay Notes are unsecured and the guarantees are full and unconditional.  At January 26, 2019, the redemption price at which we may redeem the Cash Pay Notes, in whole or in part, as set forth in the indenture governing the Cash Pay Notes, was 102.000%. The Cash Pay Notes mature on October 15, 2021.

For a more detailed description of the Cash Pay Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

PIK Toggle Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, incurred indebtedness in the form of $600.0 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021. At January 26, 2019, the outstanding balance under the PIK Toggle Notes was $658.4 million. The PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings. The PIK Toggle Notes are unsecured and the guarantees are full and unconditional. At January 26, 2019, the redemption price at which we may redeem the PIK Toggle Notes, in whole or in part, as set forth in the indenture governing the PIK Toggle Notes, was 102.188%. The PIK Toggle Notes mature on October 15, 2021.

Interest on the PIK Toggle Notes is payable semi-annually in arrears on each April 15 and October 15. Prior to October 2018, interest on the PIK Toggle Notes, subject to certain restrictions, was payable (i) entirely in cash ("Cash Interest"), (ii) entirely by increasing the principal amount of the PIK Toggle Notes by the relevant interest payment amount ("PIK Interest"), or (iii) 50% in Cash Interest and 50% in PIK Interest. Cash Interest on the PIK Toggle Notes accrues at a rate of 8.75% per annum.  PIK Interest on the PIK Toggle Notes accrued at a rate of 9.50% per annum. Interest on the PIK Toggle Notes was paid entirely in cash for the first seven interest payments. We elected to pay the October 2017 and April 2018 interest payments in the form of PIK Interest, which resulted in the issuance of additional PIK Toggle Notes of $28.5 million in October 2017 and $29.9 million in April 2018. We did not elect to pay interest in the form of PIK Interest or partial PIK Interest with respect to the interest payment in October 2018. All future interest payments are required to be paid in Cash Interest.

For a more detailed description of the PIK Toggle Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

2028 Debentures.  NMG has outstanding $125.0 million aggregate principal amount of our 7.125% Senior Debentures due 2028.  The 2028 Debentures are secured by a first lien security interest on certain collateral subject to liens granted under the Senior Secured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company.  The guarantee is full and unconditional.  The 2028 Debentures are not guaranteed by any of NMG's subsidiaries. At January 26, 2019, NMG's subsidiaries consisted principally of (i) Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman brand, (ii) NM Nevada Trust, which holds legal title to certain real property and intangible assets used by us in conducting our operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations.  The 2028 Debentures include certain restrictive covenants and a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15.0 million.  The 2028 Debentures mature on June 1, 2028.

For a more detailed description of the 2028 Debentures, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Maturities of Long-term Debt.  At January 26, 2019, annual maturities of long-term debt during the current and next five fiscal years and thereafter are as follows (in millions):
January 27, 2019 through August 3, 2019
$
14.7

2020
29.4

2021
3,023.4

2022
1,618.4

2023

2024

Thereafter
123.0



The previous table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

16


Interest Expense, net.  The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
3,009

 
$
1,483

 
$
5,634

 
$
3,796

Senior Secured Term Loan Facility
 
37,067

 
33,814

 
73,378

 
67,232

Cash Pay Notes
 
19,200

 
19,200

 
38,400

 
38,400

PIK Toggle Notes
 
14,402

 
14,927

 
28,803

 
29,289

2028 Debentures
 
2,226

 
2,226

 
4,453

 
4,453

Amortization of debt issue costs
 
6,121

 
6,121

 
12,242

 
12,238

Capitalized interest
 
(1,136
)
 
(1,841
)
 
(2,096
)
 
(3,564
)
Other, net
 
545

 
619

 
1,169

 
803

Interest expense, net
 
$
81,434

 
$
76,549

 
$
161,983

 
$
152,647



7. Derivative Financial Instruments
 
Interest Rate Swaps. At January 26, 2019, we had outstanding floating rate debt obligations of $3,067.5 million. In April and June of 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,400.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments related to our Senior Secured Term Loan Facility from December 2016 to October 2020. As a result of the April 2016 swap agreements, our effective interest rate as to $700.0 million of floating rate indebtedness will be fixed at 4.9120% from December 2016 through October 2020. As a result of the June 2016 swap agreements, our effective interest rate as to an additional $700.0 million of floating rate indebtedness will be fixed at 4.7395% from December 2016 to October 2020. The fair value of our interest rate swap agreements was a gain of $24.8 million at January 26, 2019, $35.6 million at July 28, 2018 and $26.0 million at January 27, 2018, which amounts were included in other long-term assets. The interest rate swap agreements expire in October 2020.

We designated the interest rate swaps as cash flow hedges. As cash flow hedges, unrealized gains on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities. Our interest rate swap agreements are highly, but not perfectly, correlated to the changes in interest rates to which we are exposed. As a result, unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of such gains or losses will be recorded as a component of other comprehensive earnings (loss) while the ineffective portion of such gains or losses will be recorded as a component of interest expense.

In addition, we realize a gain or loss on our interest rate swap agreements in connection with each required interest payment on our floating rate indebtedness. The realized gains or losses effectively adjust the contractual interest requirements pursuant to the terms of our floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swap agreements. These realized gains or losses are reclassified to interest expense from accumulated other comprehensive loss.

A summary of the recorded amounts related to our interest rate swaps reflected in our Condensed Consolidated Statements of Operations is as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Realized hedging (gain) loss related to interest rate swaps – included in net interest expense
 
$
(2,633
)
 
$
1,033

 
$
(4,555
)
 
$
2,272


The amount of net gains recorded in other comprehensive earnings at January 26, 2019 that is expected to be reclassified into net interest expense in the next 12 months, if interest rates remain unchanged, is approximately $13.1 million.



17


8. Income Taxes
 
Our effective income tax rates are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 

 

 

 

Effective income tax rate excluding impact of Tax Reform
 
25.3
%
 
10.9
%
 
25.5
%
 
33.3
%
Impact of Tax Reform
 
%
 
2,266.8
%
 
%
 
623.2
%
Effective income tax rate
 
25.3
%
 
2,277.7
%
 
25.5
%
 
656.5
%

Our effective income tax rate of 25.3% on the loss for the second quarter of fiscal year 2019 and 25.5% on the loss for year-to-date fiscal 2019 exceeded the federal statutory rate of 21% due primarily to state income taxes.

Included in the income tax benefit recognized in the second quarter of fiscal year 2018 is the impact of the Tax Cuts and Jobs Act ("Tax Reform"), which was signed into law on December 22, 2017. Among numerous provisions included in the Tax Reform was the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As the effective date of the Tax Reform fell five months into our fiscal year, we were subject to a blended federal statutory rate of 26.9% in fiscal year 2018. In connection with our application of the new federal statutory rate in fiscal year 2018, we measured our long-term deferred income taxes at the new lower rate and recorded non-cash benefits aggregating $391.6 million, of which amount $387.8 million was recorded in the second quarter of fiscal year 2018. Excluding the impact of the Tax Reform, our effective income tax rate of 10.9% on the loss for the second quarter of fiscal year 2018 was below the blended federal statutory rate of 26.9% due primarily to the impact of the transition to the lower annualized federal statutory rate. Our effective income tax rate of 33.3% on the loss for year-to-date fiscal 2018 exceeded the blended federal statutory rate of 26.9% due primarily to state and foreign income taxes.

At January 26, 2019, the gross amount of unrecognized tax benefits was $1.3 million ($1.0 million of which would impact our effective tax rate, if recognized).  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $0.4 million at January 26, 2019, $0.3 million at July 28, 2018 and $0.3 million at January 27, 2018.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Internal Revenue Service ("IRS") is conducting an audit of our short-year 2014 (subsequent to the Acquisition) and fiscal years 2015 through 2017 federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2013. We believe our recorded tax liabilities as of January 26, 2019 are sufficient to cover any potential assessments made by the IRS or other taxing authorities and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances. We believe it is reasonably possible that adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations. At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.
 
Subsequent to the Acquisition, Parent and its subsidiaries, including the Company, file U.S. federal income taxes as a consolidated group. The Company has elected to be treated as a corporation for U.S. federal income tax purposes and all operations of Parent are conducted through its subsidiaries, including the Company. Income taxes incurred by Parent with respect to the Company's operations are reflected in the Condensed Consolidated Financial Statements of the Company. The Company’s financial statements recognize the current and deferred income tax consequences that result from the Company’s activities during the current and preceding periods as if the Company were a separate taxpayer rather than a member of the Parent company’s consolidated income tax return group.


9. Employee Benefits
 
Description of Retirement Benefit Plans.  We currently maintain defined contribution plans consisting of a retirement savings plan ("RSP") and a defined contribution supplemental executive retirement plan ("Defined Contribution SERP Plan"). In addition, we sponsor a defined benefit pension plan ("Pension Plan") and an unfunded supplemental executive retirement plan ("SERP Plan") that provides certain employees additional pension benefits. As of the third quarter of fiscal year 2010, benefits offered to all

18


participants in our Pension Plan and SERP Plan were frozen. Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits ("Postretirement Plan") if they meet certain service and minimum age requirements. We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits.

Our obligations for employee benefit plans, included in other long-term liabilities, are as follows:
(in thousands)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
Pension Plan
 
$
208,215

 
$
202,820

 
$
230,606

SERP Plan
 
100,186

 
98,814

 
111,093

Postretirement Plan
 
2,975

 
2,935

 
6,388

 
 
311,376

 
304,569

 
348,087

Less: current portion
 
(6,550
)
 
(6,441
)
 
(6,679
)
Long-term portion of benefit obligations
 
$
304,826

 
$
298,128

 
$
341,408

 
Funding Policy and Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law. As of January 26, 2019, we believe we will be required to contribute $27.6 million to the Pension Plan in fiscal year 2019, of which $11.2 million has been funded as of January 26, 2019. In fiscal year 2018, we were required to contribute $25.2 million to the Pension Plan.

Cost of Benefits. The components of the expenses we incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Pension Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
5,753

 
$
4,973

 
$
11,506

 
$
9,946

Expected return on plan assets
 
(5,488
)
 
(5,396
)
 
(10,976
)
 
(10,792
)
Net amortization of losses
 
199

 
170

 
398

 
340

Pension Plan expense (income)
 
$
464

 
$
(253
)
 
$
928

 
$
(506
)
 
 
 
 
 
 
 
 
 
SERP Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
940

 
$
844

 
$
1,880

 
$
1,688

SERP Plan expense
 
$
940

 
$
844

 
$
1,880

 
$
1,688

 
 
 
 
 
 
 
 
 
Postretirement Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
25

 
$
51

 
$
50

 
$
102

Net amortization of gains
 
(556
)
 
(180
)
 
(1,113
)
 
(360
)
Postretirement Plan income
 
$
(531
)
 
$
(129
)
 
$
(1,063
)
 
$
(258
)

Employee Vacation Benefit Liability.  We enacted changes to our vacation policy effective in fiscal year 2019. Pursuant to the provisions of our new vacation policy, vacation hours earned during each fiscal year must be taken during that fiscal year. Any accrued but unused vacation is forfeited at the end of the fiscal year subject to statutory requirements in certain states precluding such forfeitures. In fiscal year 2018, we recorded a non-cash gain of $19.5 million, of which amount $7.8 million was recorded in the second quarter and $9.0 million was recorded in year-to-date fiscal 2018, within selling, general and administrative expenses, in connection with the reduction of our liability for unused vacation prior to the effective date of our new vacation policy.


10. Commitments and Contingencies
 
Employment, Benefits, and Consumer Class Actions Litigation.  In August 2015, the National Labor Relations Board ("NLRB") affirmed an administrative law judge's recommended decision and order finding that the Company's Arbitration Agreement and class action waiver violated the National Labor Relations Act ("NLRA"). We filed our petition for review of the NLRB's order with the U.S. Court of Appeals for the Fifth Circuit. This case has been stayed while another similar case has been pending before the U.S. Supreme Court, which was decided on May 21, 2018 and held that class action waivers in arbitration agreements are lawful

19


under the NLRA and must be enforced under the Federal Arbitration Act. On June 1, 2018, the NLRB filed a motion to remove this case from abeyance, grant our petition for review regarding the class action waiver issue consistent with the U.S. Supreme Court’s decision, and remand the remainder of the case to the NLRB. On June 11, 2018, the U.S. Court of Appeals for the Fifth Circuit granted the NLRB’s motion, and the remanded portion of the case is pending before the NLRB.

The Company has several wage and hour putative class action matters pending in California. The earliest, filed in December 2015 and amended in February 2016, was filed against The Neiman Marcus Group, Inc. by Holly Attia and seven other named plaintiffs, seeking to certify a class of non-exempt employees for alleged violations for failure to pay overtime wages, failure to provide meal and rest breaks, failure to reimburse business expenses, failure to timely pay wages due at termination and failure to provide accurate itemized wage statements. Plaintiffs also allege derivative claims for restitution under California unfair competition law and a representative claim for penalties under the California Labor Code Private Attorneys General Act ("PAGA"), and all related damages for alleged violations (restitution, statutory penalties under PAGA, and attorneys' fees, interest and costs of suit). The case was removed to the U.S. District Court for the Central District of California in March 2016, and the Company filed a motion to compel arbitration and requested to stay the PAGA claim. In June 2016, the court granted the motion and compelled arbitration of the individual claims. The court retained jurisdiction of the PAGA claim and stayed that claim pending the outcome of arbitration. In October 2016, the court granted the plaintiffs' motion for reconsideration of the arbitration decision based on a recent decision by the Ninth Circuit Court of Appeals in Morris v. Ernst & Young, LLP, and reversed its order compelling arbitration. The Company appealed. The parties reached an agreement in principle to settle this case, subject to court approval. The motion for preliminary approval of the settlement was filed with the court on July 24, 2018. On September 5, 2018, the district court preliminarily approved the settlement. On February 25, 2019, the court issued an order granting final approval of the settlement and entered final judgment. The associated appeal has been administratively closed due to the pending settlement of the underlying action. A PAGA representative action filed by Xuan Hien Nguyen asserting the same factual allegations as the plaintiff in Attia was resolved in connection with the Attia settlement, as Nguyen and her claims were amended into Attia. On March 4, 2019, the Nguyen case was dismissed with prejudice. A PAGA representative action filed by Milca Connolly asserting substantially identical claims and a putative class and representative action filed by Ondrea Roces and Sophia Ahmed seeking to certify a class of current and former sales associates for alleged failure to pay wages for all hours worked, recordkeeping and wage statement violations, and failure to timely pay wages due at termination have been stayed pending the settlement approval process in Attia.

On October 27, 2017, a putative class action complaint was filed against Neiman Marcus Group, Inc., The Neiman Marcus Group LLC, and Bergdorf Goodman, Inc. in the U.S. District Court for the Southern District of New York by Victor Lopez, an allegedly visually-impaired and legally blind individual, in connection with his visits to Bergdorf Goodman, Inc.’s website. Mr. Lopez alleges, on behalf of himself and those similarly situated, that Bergdorf Goodman, Inc.’s website is not fully and equally accessible to legally blind individuals, resulting in denial of access to the equal enjoyment of goods and services, in violation of the Americans with Disabilities Act and the New York State and City Human Rights Laws. The defendant Companies filed a joint answer denying the claims. The parties have reached a settlement among all parties.
    
On August 7, 2014, a putative class action complaint was filed against The Neiman Marcus Group LLC in Los Angeles County Superior Court by a customer, Linda Rubenstein, in connection with the Company's Last Call stores in California. Ms. Rubenstein alleges that the Company has violated various California consumer protection statutes by implementing a marketing and pricing strategy that suggests that clothing sold at Last Call stores in California was originally offered for sale at full-line Neiman Marcus stores when allegedly, it was not, and that the Company lacks adequate information to support its comparative pricing labels. In September 2014, we removed the case to the U.S. District Court for the Central District of California. After dismissing Ms. Rubenstein’s original and first amended complaint, the court dismissed her second amended complaint in its entirety in May 2015, without leave to amend, and Ms. Rubenstein appealed. In April 2017, the Court of Appeal reversed, holding that Ms. Rubenstein’s allegations were sufficient to proceed past the pleadings stage of litigation. The case was transferred back to the district court. On September 7, 2017, the district court issued an order permitting Ms. Rubenstein to file a proposed Third Amended Complaint, which modifies the putative class period. Additionally, Ms. Rubenstein filed a motion for class certification, which was fully briefed by both parties. The parties reached an agreement in principle to settle the case, subject to court approval. A notice of settlement was filed, and the hearing on Ms. Rubenstein’s motion for class certification was vacated. On October 1, 2018, the court granted final approval of the settlement and entered judgment accordingly. The deadline to appeal the judgment expired with no appeals and the final settlement was remitted in November 2018.
    
In addition, we are currently involved in various other legal actions and proceedings that arose in the ordinary course of business. With respect to the matters described above as well as all other current outstanding litigation involving us, we believe that any liability arising as a result of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.


20


Cyber-Attack Class Actions Litigation. In January 2014, three class actions relating to a cyber-attack on our computer systems in 2013 (the "Cyber-Attack") were filed and later voluntarily dismissed by the plaintiffs between February and April 2014. The plaintiffs had alleged negligence and other claims in connection with their purchases by payment cards and sought monetary and injunctive relief. Three additional putative class actions relating to the Cyber-Attack were filed in March and April 2014, also alleging negligence and other claims in connection with plaintiffs’ purchases by payment cards. Two of the cases were voluntarily dismissed. The third case, Hilary Remijas v. The Neiman Marcus Group, LLC, was filed on March 12, 2014 in the U.S. District Court for the Northern District of Illinois. On June 2, 2014, an amended complaint in the Remijas case was filed, which added three plaintiffs (Debbie Farnoush and Joanne Kao, California residents; and Melissa Frank, a New York resident) and asserted claims for negligence, implied contract, unjust enrichment, violation of various consumer protection statutes, invasion of privacy and violation of state data breach laws. The Company moved to dismiss the Remijas amended complaint, and the court granted the Company's motion on the grounds that the plaintiffs lacked standing due to their failure to demonstrate an actionable injury. Plaintiffs appealed the district court's order dismissing the case to the Seventh Circuit Court of Appeals, and the Seventh Circuit Court of Appeals reversed the district court's ruling, remanding the case back to the district court. The Company filed a petition for rehearing en banc, which the Seventh Circuit Court of Appeals denied. The Company filed a motion for dismissal on other grounds, which the court denied. The parties jointly requested, and the court granted, an extension of time for filing a responsive pleading, which was due on December 28, 2016. On February 9, 2017, the court denied the parties' request for another extension of time, dismissed the case without prejudice, and stated that plaintiffs could file a motion to reinstate. On March 8, 2017, plaintiffs filed a motion to reinstate, which the court granted on March 16, 2017. On March 17, 2017, plaintiffs filed a motion seeking preliminary approval of a class action settlement resolving this action, which the court granted on June 21, 2017. On August 21, 2017, plaintiffs moved for final approval of the proposed settlement. In September 2017, purported settlement class members filed two objections to the settlement, and plaintiffs and the Company filed responses to the objections on October 19, 2017. At the fairness hearing on October 26, 2017, the Court ordered supplemental briefing on the objections. Objectors filed a supplemental brief in support of their objections on November 9, 2017, and plaintiffs and the Company filed their supplemental responses to the objections on November 21, 2017. On January 16, 2018, an order was issued by the District Court reassigning the case to Judge Sharon Johnson Coleman due to the prior judge’s retirement. On September 17, 2018, Judge Coleman denied final approval of the proposed settlement and decertified the settlement class. Judge Coleman has set a status conference for this matter for April 12, 2019. At this point, we are unable to predict the developments in, outcome of or other consequences related to this matter.

In addition to class actions litigation, payment card companies and associations may require us to reimburse them for unauthorized card charges and costs to replace cards and may also impose fines or penalties in connection with the security incident, and enforcement authorities may also impose fines or seek other remedies against us. We have also incurred other costs associated with this security incident, including legal fees, investigative fees, costs of communications with customers and credit monitoring services provided to our customers. We expect to continue to incur costs associated with maintaining appropriate security measures and otherwise complying with our obligations. We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

Distribution Litigation. On December 10, 2018, Marble Ridge Capital LP and Marble Ridge Master Fund LP (collectively, “Marble Ridge”) filed a lawsuit against Parent, Holdings, the Company, NMG, and NMG International LLC in the District Court for the 116th Judicial District, Dallas County, Texas (the “Marble Ridge Litigation”).  Marble Ridge alleges that the Distribution was a fraudulent transfer.  Marble Ridge seeks to undo the Distribution and return the entities through which the operations of MyTheresa are conducted from Parent to NMG International LLC under fraudulent transfer law and appoint a receiver under Texas state law. On December 14, 2018, the Company and the other defendants filed an answer denying Marble Ridge’s allegations, counterclaimed against Marble Ridge for prior defamatory statements, and filed a plea to the jurisdiction to dismiss Marble Ridge’s lawsuit.  On January 2, 2019, Marble Ridge moved to dismiss the counterclaims brought by the Company and the other defendants.  A hearing on the Company’s plea to the jurisdiction to dismiss Marble Ridge’s claims was held on March 7, 2019 and the matter was taken under submission.  A hearing on Marble Ridge’s motion to dismiss the Company’s counterclaims is currently scheduled for March 21, 2019.  We believe that the Marble Ridge Litigation is without merit and we intend to continue to vigorously contest it.  However, we are currently unable to predict the developments in, outcome of, and economic and other consequences of the Marble Ridge Litigation.  We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

Other.  We had $1.3 million of irrevocable letters of credit and $3.5 million in surety bonds outstanding at January 26, 2019, relating primarily to merchandise imports and state sales tax and utility requirements.



21


11. Accumulated Other Comprehensive Loss
 
The following table summarizes the changes in accumulated other comprehensive loss by component (amounts are recorded net of related income taxes):
(in thousands)
 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gains
on
Financial
Instruments
 
Unfunded
Benefit
Obligations
 
Total
 
 
 
 
 

 
 

 
 

Balance, July 28, 2018
 
$
(7,156
)
 
$
22,253

 
$
(37,394
)
 
$
(22,297
)
Other comprehensive (loss) earnings
 
(1,502
)
 
576

 
(13,731
)
 
(14,657
)
Amounts reclassified to earnings, net
 

 
(1,424
)
 

 
(1,424
)
Distribution to Parent
 
8,658

 

 

 
8,658

Reclassification of stranded tax effects
 

 
2,885

 
(10,482
)
 
(7,597
)
Balance, October 27, 2018
 
$

 
$
24,290

 
$
(61,607
)
 
$
(37,317
)
Other comprehensive loss
 

 
(5,074
)
 
(265
)
 
(5,339
)
Amounts reclassified to earnings, net
 

 
(1,951
)
 

 
(1,951
)
Balance, January 26, 2019
 
$

 
$
17,265

 
$
(61,872
)
 
$
(44,607
)
 
The amounts reclassified from accumulated other comprehensive loss to earnings, net are recorded within interest expense on the Condensed Consolidated Statements of Operations.


12. Stock-Based Awards
 
Incentive Plans.  Parent established various incentive plans pursuant to which eligible employees, consultants and non-employee directors are eligible to receive stock-based awards.  Under the incentive plans, Parent is authorized to grant stock options, restricted stock and other types of awards that are valued in whole or in part by reference to, or are payable or otherwise based on, the shares of common stock of Parent. Charges with respect to options issued by Parent pursuant to the incentive plans are reflected by the Company in the preparation of our Condensed Consolidated Financial Statements.

Co-Invest Options.  In connection with the Acquisition, certain executive officers of the Company rolled over a portion of the amounts otherwise payable in settlement of their pre-Acquisition stock options into stock options of Parent representing options to purchase a total of 56,979 shares of common stock of Parent (the "Co-Invest Options").

Non-Qualified Stock Options.  Pursuant to the terms