SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 29, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-8501
HARTMARX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3217140
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Wacker Drive
Chicago, Illinois 60606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 312/372-6300
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- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark |X| whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
Indicate by check mark |X| whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No _____
At March 31, 2004 there were 35,446,576 shares of the Company's
common stock outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statement of Earnings
for the three months ended February 29, 2004
and February 28, 2003. 3
Unaudited Condensed Consolidated Balance Sheet
as of February 29, 2004, November 30, 2003 and
February 28, 2003. 4
Unaudited Condensed Consolidated Statement of Cash
Flows for the three months ended February 29, 2004
and February 28, 2003. 6
Notes to Unaudited Condensed Consolidated Financial
Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17
Item 4. Controls and Procedures 18
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted, except per share amounts)
Three Months Ended
-------------------------------------------
Feb. 29, 2004 Feb. 28, 2003
----------------- -----------------
Net sales $ 136,613 $ 131,837
Licensing and other income 569 448
----------------- -----------------
137,182 132,285
----------------- -----------------
Cost of goods sold 95,863 92,981
Selling, general and administrative expenses 36,206 34,834
----------------- -----------------
132,069 127,815
----------------- -----------------
Earnings before interest and taxes 5,113 4,470
Interest expense 1,543 1,910
Refinancing expense - 795
----------------- -----------------
Earnings before taxes 3,570 1,765
Tax provision 1,410 695
----------------- -----------------
Net earnings $ 2,160 $ 1,070
================= =================
Basic and diluted earnings per share $ .06 $ .03
================= =================
Dividends per common share $ - $ -
================= =================
Average shares outstanding:
Basic 34,586 34,350
================= =================
Diluted 35,603 34,441
================= =================
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's Omitted)
Feb. 29, Nov. 30, Feb. 28,
2004 2003 2003
-------------- ------------ --------------
CURRENT ASSETS
Cash and cash equivalents $ 1,447 $ 2,964 $ 1,623
Accounts receivable, less allowance
for doubtful accounts of $9,881
$10,604 and $9,107 135,006 117,778 133,305
Inventories 128,281 124,010 120,888
Prepaid expenses 6,225 5,249 6,519
Deferred income taxes 14,521 14,521 11,372
-------------- ------------- --------------
Total current assets 285,480 264,522 273,707
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GOODWILL 23,145 23,165 21,660
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DEFERRED INCOME TAXES 54,095 53,636 61,292
-------------- ------------- --------------
OTHER ASSETS 7,196 7,858 8,308
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PREPAID AND INTANGIBLE PENSION ASSET 59,104 60,871 63,004
-------------- ------------- --------------
PROPERTIES
Land 1,980 1,980 1,980
Buildings and building improvements 36,361 36,350 36,263
Furniture, fixtures and equipment 104,536 104,321 101,673
Leasehold improvements 25,306 25,273 24,755
-------------- ------------- --------------
168,183 167,924 164,671
Accumulated depreciation and amortization (139,740) (138,601) (133,356)
-------------- ------------- --------------
Net properties 28,443 29,323 31,315
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TOTAL ASSETS $ 457,463 $ 439,375 $ 459,286
============== ============= ==============
(See accompanying notes to unaudited ondensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's Omitted)
Feb. 29, Nov. 30, Feb. 28,
2004 2003 2003
-------------- ------------- -------------
CURRENT LIABILITIES
Current portion of long-term debt $ 15,638 $ 15,628 $ 20,592
Accounts payable and accrued expenses 59,113 65,200 58,023
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Total current liabilities 74,751 80,828 78,615
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NON-CURRENT LIABILITIES 12,621 13,142 12,586
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LONG-TERM DEBT 109,478 88,776 118,230
-------------- ------------- --------------
MINIMUM PENSION LIABILITY 64,178 64,178 69,473
-------------- ------------- --------------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued - - -
Common shares, $2.50 par value; 75,000,000
shares authorized; 36,194,814 shares issued
at February 29, 2004, 36,996,314 shares
issued at November 30, 2003 and 36,800,564
shares issued at February 28, 2003. 90,487 92,491 92,001
Capital surplus 64,478 65,642 67,177
Retained earnings 57,435 55,275 47,640
Unearned employee benefits (482) (1,303) (2,076)
Common shares in treasury, at cost,
808,716 at February 29, 2004,
1,916,681 at November 30, 2003 and
2,383,028 at February 28, 2003. (4,038) (8,454) (10,512)
Accumulated other comprehensive income (loss) (11,445) (11,200) (13,848)
-------------- ------------- --------------
Total shareholders' equity 196,435 192,451 180,382
-------------- ------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 457,463 $ 439,375 $ 459,286
============== ============= ==============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's Omitted)
Three Months Ended
----------------------------------------
Increase (Decrease) in Cash and Cash Equivalents Feb. 29, 2004 Feb. 28, 2003
-------------- ---------------
Cash Flows from operating activities:
Net earnings $ 2,160 $ 1,070
Reconciling items to adjust net earnings to
net cash used in operating activities:
Depreciation and amortization of fixed assets 1,414 1,561
Amortization of long lived assets, debt discount and
unearned employee benefits 1,349 883
Non-cash charge re: refinancing expense - 795
Changes in:
Receivables, inventories, prepaids and other assets (20,532) (11,199)
Accounts payable, accrued expenses and
non-current liabilities (5,238) (11,482)
Taxes and deferred taxes on earnings 898 258
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Net cash used in operating activities (19,949) (18,114)
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Cash Flows from investing activities:
Capital expenditures (577) (403)
Contingent payments re: acquisition (1,392) (1,664)
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Net cash used in investing activities (1,969) (2,067)
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Cash Flows from financing activities:
Increase in borrowings under Credit Facility 20,864 25,169
Payment of 12.5% Senior Unsecured Notes - (10,341)
Payment of other debt (152) (141)
Checks drawn in excess of bank balances (1,818) -
Other equity transactions 1,507 263
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Net cash provided by financing activities 20,401 14,950
-------------- ---------------
Net decrease in cash and cash equivalents (1,517) (5,231)
Cash and cash equivalents at beginning of period 2,964 6,854
-------------- ---------------
Cash and cash equivalents at end of period $ 1,447 $ 1,623
============== ===============
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 1,561 $ 2,408
Income taxes 399 437
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations,
financial position and cash flows for the applicable period presented. Results
of operations for any interim period are not necessarily indicative of results
for any other periods or for the full year. These unaudited interim financial
statements should be read in conjunction with the financial statements and
related notes contained in the Annual Report on Form 10-K for the year ended
November 30, 2003. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Note 2
The calculation of basic earnings per share for each period is based on the
weighted average number of common shares outstanding. The calculation of
diluted earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock using the treasury stock method. At February 29,
2004, the total of outstanding stock options included 361,142 shares at
exercise prices ranging from $5.25 to $8.09. These shares were not included in
the computation of diluted earnings per share utilizing the treasury stock
method, as the average price of the Company's stock was below the grant price
from these options. At February 28, 2003, options to purchase 2,942,998 shares
of the Company's common stock were outstanding at prices ranging from $2.50 to
$8.09. For 2003, these options were not included in the computation of diluted
earnings per share, as the average price per share of the Company's common
stock was below the grant price.
The Company accounts for its employee stock based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost related to stock options is reflected in net
earnings, as all options granted under those plans had an exercise price equal
to or greater than the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation (in millions, except per share amounts).
Three Months Ended
------------------------------------
Feb. 29, Feb. 28,
2004 2003
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Net earnings, as reported $ 2.2 $ 1.1
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (0.2) (0.2)
------------- -------------
Pro forma net earnings $ 2.0 $ 0.9
============= =============
Earnings per share:
Basic and diluted - as reported $ .06 $ .03
============= =============
Basic and diluted - pro forma $ .06 $ .03
============= =============
The fair value of each option granted in the respective period is estimated at
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. First quarter results included
$.6 million of incremental expense associated with the performance based
vesting on February 10, 2004 of 606,500 restricted stock awards resulting from
the closing price of common shares equaling or exceeding $4.25 for thirty
consecutive days.
Note 3
Long-term debt comprised the following (000's omitted):
Feb. 29, Nov. 30, Feb. 28,
2004 2003 2003
------------ ------------ ------------
Borrowings under Credit Facility $ 89,538 $ 68,674 $ 102,649
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 18,328 18,480 18,923
------------ ------------ ------------
125,116 104,404 138,822
Less - current 15,638 15,628 20,592
------------ ------------ ------------
Long-term debt $ 109,478 $ 88,776 $ 118,230
============ ============ ============
Effective August 31, 2002, the Company entered into a new $200 million senior
revolving credit facility ("Credit Facility"), replacing a $200 million
facility scheduled to mature in June 2003. The Credit Facility has a three and
one-half year term with an additional one year renewal at the Company's option
(i.e., until February 2007), and provides for a $50 million letter of credit
sub-facility. Interest rates under the new facility are based on a spread in
excess of either LIBOR or prime as the benchmark rate and on the level of
excess availability. The weighted average interest rate was approximately 3.6%
at February 29, 2004, based on LIBOR and prime rate loans. The facility
provides for an unused commitment fee of .375% per annum based on the $200
million maximum, less the outstanding borrowings and letters of credit issued.
Eligible receivables and inventories provide the principal collateral for the
borrowings, along with certain other tangible and intangible assets of the
Company.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2004 and
as of February 29, 2004, the Company was in compliance with all covenants
under the Credit Facility and its other borrowing agreements. At February 29,
2004, the Company had approximately $21 million of letters of credit
outstanding, relating to either contractual commitments for the purchase of
inventories from unrelated third parties or for such matters as workers'
compensation requirements in lieu of cash deposits. Such letters of credit are
issued pursuant to the Company's Credit Facility and are considered as usage
for purposes of determining the maximum available credit line and
availability. At February 29, 2004, additional borrowing availability under
the Credit Facility was approximately $59 million.
Mortgages and other debt includes the Company's ongoing guarantee of a $2.5
million industrial development bond retained by a former subsidiary, due
September 1, 2007, on which interest is paid semi-annually and there is no
collateral.
On January 21, 2003, the Company retired the remaining $10.3 million face
value of the then outstanding 12.5% senior unsecured notes. This early
retirement resulted in a fiscal 2003 pre-tax charge of $.8 million, related to
the write-off of the remaining unamortized debt discount and issue costs, and
reflected as refinancing expense in the accompanying Unaudited Consolidated
Statement of Earnings for the quarter ended February 28, 2003.
Note 4
Inventories at each date consisted of (000's omitted):
Feb. 29, Nov. 30, Feb. 28,
2004 2003 2003
------------ ------------- ------------
Raw materials $ 37,641 $ 38,455 $ 42,853
Work-in-process 7,263 7,168 8,435
Finished goods 83,377 78,387 69,600
------------ ------------- -------------
$ 128,281 $ 124,010 $ 120,888
============ ============= =============
Inventories are stated at the lower of cost or market. At February 29, 2004,
November 30, 2003 and February 28, 2003, approximately 47%, 48% and 45% of the
Company's total inventories, respectively, are valued using the last-in,
first-out (LIFO) method representing certain work-in-process and finished
goods. The first-in, first-out (FIFO) method is used for substantially all raw
materials and the remaining inventories.
Note 5
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The Company 's Men's Apparel
Group designs, manufactures and markets tailored clothing, slacks, sportswear
and dress furnishings. The Women's Apparel Group markets women's career
apparel, sportswear and accessories to both retailers and to individuals who
purchase women's apparel through a direct to consumer catalog and using the
internet.
Information on the Company's operations and total assets for the three months
ended and as of February 29, 2004 and February 28, 2003 is summarized as
follows (in millions):
Men's Women's
Apparel Apparel
Group Group Adj. Consol.
------------- ------------- -------------- -------------
2004
Net sales $ 119.2 $ 17.4 - $ 136.6
Earnings (loss) before taxes 7.5 1.4 (5.3) 3.6
Total assets 286.8 30.1 140.6 457.5
2003
Net sales $ 120.6 $ 11.2 $ - $ 131.8
Earnings (loss) before taxes 8.1 (0.2) (6.1) 1.8
Total assets 283.8 24.7 150.8 459.3
During the three months ended February 29, 2004 and February 28, 2003, there
were no intergroup sales and there was no change in the basis of measurement
of group earnings or loss.
Operating expenses incurred by the Company in generating sales are charged
against the respective group; indirect operating expenses are allocated to the
groups benefitted. Group results exclude any allocation of general corporate
expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings (loss) before taxes
consist principally of interest expense, refinancing expense in 2003, and
general corporate expenses. Adjustments of total assets are for cash,
recoverable and deferred income taxes, investments, other assets and corporate
properties, including the intangible pension asset. The Men's Apparel Group
total assets include goodwill related to acquisitions.
Note 6
Comprehensive income, which includes all changes in the Company's equity
during the period, except transactions with stockholders, was as follows
(000's omitted):
Three Months Ended
--------------------------------
Feb. 29, Feb. 28,
2004 2003
------------- --------------
Net earnings $ 2,160 $ 1,070
Other comprehensive income (loss):
Change in fair value of foreign exchange
contracts, net of tax (86) 73
Currency translation adjustment, net of tax (159) 193
------------- --------------
Comprehensive earnings $ 1,915 $ 1,336
============= ==============
The change in Accumulated Other Comprehensive Income (Loss) consists of the
following (000's omitted):
As of November 30, 2003 $ (11,200)
Current period change in:
Fair value of foreign exchange contracts,
net of tax (86)
Currency translation adjustment, net of tax (159)
------------
As of February 29, 2004 $ (11,445)
============
Note 7
On September 25, 2003, the Board of Directors adopted an amendment to the
Rights Agreement which provides that the Rights expire at the earliest of (i)
the close of business on January 31, 2006, (ii) the time at which the Rights
are redeemed in accordance with the terms of the Rights Agreement or (iii) the
close of business on the first Trading Day (as defined in the Rights
Agreement) after the closing price of the Company's common stock as reported
in the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
("NYSE") or comparable national securities exchange, if not listed on the
NYSE, exceed the Book Value per Share (as defined below) for 60 consecutive
calendar days. The term "Book Value per Share" means on any date the total
shareholders' equity of the Company as reported in the Company's most recent
periodic report filed with the SEC divided by the total number of shares of
the Company's common stock issued and outstanding stated in such report. At
February 29, 2004, book value per share was $5.55.
Note 8
As of December 1, 2003, the Company adopted the Financial Accounting Standards
Board FIN 46 "Consolidation of Variable Interest Entities, An Interpretation
of APB No. 51". FIN 46 provides guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities" or "VIE") and how to determine when and which
business enterprises should consolidate the VIE. This new model for
consolidation applies to entities (1) where the equity investors (if any) do
not have a controlling financial interest or (2) whose equity investment at
risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. FIN 46
applies immediately to VIEs created after January 31, 2003 and to VIEs in
which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to VIEs in
which an enterprise holds a variable interest that it acquired before February
1, 2003. In October 2003, the Board deferred the effective date of FIN 46 to
the first reporting period ending after December 15, 2003 for VIEs created
before February 1, 2003. As the Company does not have any VIEs, adoption of
this statement has had no effect on the Company's reported financial
condition, results of operations, cash flows or financial statement
disclosures.
In December 2003, the Financial Accounting Standards Board issued SFAS No. 132
(Revised 2003) - "Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS 132 (Revised) retains the disclosures required
by SFAS 132 and requires additional disclosures relating to types of plan
assets, investment strategy, measurement date(s), plan obligations, cash flows
and components of net periodic benefit cost recognized in interim periods of
defined benefit pension plans and other defined benefit postretirement plans.
The provisions of SFAS 132 (Revised) are effective for financial statements
issued for years ending after December 15, 2003 (the Company's fiscal year
beginning December 1, 2003) and for interim periods beginning after December
15, 2003 (the Company's second quarter beginning March 1, 2004), at which time
the additional disclosures will be included.
HARTMARX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company operates exclusively in the apparel business. Its operations are
comprised of the Men's Apparel Group ("MAG") and Women's Apparel Group. MAG
designs, manufactures and markets men's tailored clothing, slacks, sportswear
(including golfwear) and dress furnishings (shirts and ties). Products are
sold at luxury, premium and moderate price points under a broad variety of
apparel brands, both owned and under license, to an extensive range of retail
channels. The Women's Apparel Group markets women's career apparel, sportswear
and accessories to department and specialty stores under owned and licensed
brand names and through a direct to consumer operation offering a wide range
of apparel and accessories to business and professional women through catalogs
and its e-commerce website.
The Company's principal operational challenges have been to address the
following:
< The widespread casual dressing in the workplace, which was a major
contributor to the overall market decline for tailored clothing
products, especially for tailored suits, the Company's core product
offering.
< The need to diversify the Company's product offerings in non-tailored
product categories in light of the declining demand for tailored
clothing.
< The market share declines experienced by certain department store
retailers, an important distribution channel for the Company.
The Company has gradually expanded its non-tailored clothing product offerings
through internally developed programs, new licensing arrangements and
acquisitions, including the acquisition of the Consolidated Apparel Group
during 2001. This product diversification has also opened up or expanded
distribution channels for the Company's products, such as through resort and
"green grass" golf shops for the Company's golf lines, warehouse clubs for
moderate-priced sportswear and most recently, internet-based marketing for
certain womenswear products. Sales of non-tailored apparel (men's sportswear,
golfwear, slacks and womenswear) increased to 42% of total sales during the
first quarter of 2004 compared to 38% for the first quarter of 2003. For the
full year, non-tailored apparel sales represented 44% of total sales in 2003
compared to 42% in 2002. The increase in first quarter pre-tax earnings to
$3.6 million in 2004 from $1.8 million in 2003 reflected a 3.6% revenue
increase to $136.6 million from $131.8 million, improved operating margins and
lower financing related costs.
Liquidity and Capital Resources
November 30, 2003 to February 29, 2004
Since November 30, 2003, net accounts receivable increased $17.2 million or
14.6% to $135.0 million, principally attributable to the seasonal increase
from tailored clothing shipments in the Men's Apparel Group. This increase
represented the principal item comprising the $19.9 million net cash used in
operating activities in the accompanying Unaudited Condensed Consolidated
Statement of Cash Flows. Inventories of $128.3 million increased $4.3 million
or 3.4% reflecting certain sportswear product categories which have a later
revenue cycle compared to tailored clothing. Net properties decreased $.9
million to $28.4 million as depreciation expense exceeded capital additions.
Accounts payable and accrued expenses declined $6.1 million reflecting regular
seasonal payments. Total debt, including current maturities, increased $20.7
million to $125.1 million and represented the principal source of net cash
provided by financing activities in the accompanying Unaudited Condensed
Consolidated Statement of Cash Flows; this increase reflected regular seasonal
increases in working capital requirements. Total debt represented 39% of total
capitalization at February 29, 2004 compared to 35% at November 30, 2003.
Shareholders' equity increased $4.0 million from the earnings as well as from
the favorable impact of stock option exercises.
In addition to the information provided below relating to debt, credit
facilities, guarantees, future commitments, liquidity and risk factors, the
reader should also refer to the Company's Annual Report on Form 10-K for the
year ended November 30, 2003.
The Company's borrowing arrangements consist of a senior revolving credit
facility, mortgages and industrial development bonds. The current $200 million
Credit Facility has an initial three and one-half year term with an additional
one year renewal at the Company's option (i.e., until February 2007), and also
provides for a $50 million letter of credit sub-facility. Interest rates under
the Credit Facility are based on a spread in excess of either LIBOR or prime
as the benchmark rate and on the level of excess availability. The weighted
average interest rate was 3.6% at February 29, 2004, based on LIBOR and prime
rate loans. The facility provides for an unused commitment fee of .375% per
annum, based on the $200 million maximum, less the outstanding borrowings and
letters of credit issued. Eligible receivables and inventories provide the
principal collateral for the borrowings, along with certain other tangible and
intangible assets of the Company. The weighted average interest rate at
February 29, 2004 and February 28, 2003 on all borrowings was approximately
5.2% in 2004 compared to 5.3% in 2003.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2004 and
as of February 29, 2004, the Company was in compliance with all covenants
under the Credit Facility and its other borrowing agreements.
There are several factors which can affect the Company's ability to remain in
compliance with the financial covenants currently contained in its Credit
Facility, and to a lesser extent, in its other borrowing arrangements. The
following summarizes certain of the most significant risk factors:
o The apparel environment is cyclical, and the level of consumer spending
on apparel can decline during recessionary periods when disposable income
declines. The tailored clothing market relating to suits has experienced unit
declines over the past several years. If the tailored clothing market
continues to decline, sales and profitability would be adversely affected.
o Continuation of widespread casual dressing in the workplace could further
reduce the demand for tailored clothing products, especially for tailored
suits. While the Company markets several sportswear and casual product lines,
consumer receptiveness to these casual and sportswear product offerings may
not offset the declines in the tailored clothing unit sales.
o The Company's customers include major U.S. retailers (certain of which
are under common ownership and control), several of whom reported declines in
sales during various monthly periods of 2003 and 2002. The ten largest
customers represented approximately 56% of consolidated sales during fiscal
2003 with the largest customer representing approximately 26% of sales. A
decision by the controlling management of a group of stores or any other
significant customer, whether motivated by competitive conditions, financial
difficulties or otherwise, to decrease the amount of merchandise purchased
from the Company, or change their manner of doing business, could have a
material adverse effect on the Company's financial condition and results of
operations.
At February 29, 2004, the Company had approximately $21 million of letters of
credit outstanding, relating to either contractual commitments for the
purchase of inventories from unrelated third parties or for such matters as
workers' compensation requirements in lieu of cash deposits. Such letters of
credit are issued pursuant to the Credit Facility and are considered as usage
for purposes of determining borrowing availability. At February 29, 2004,
additional borrowing availability under the Credit Facility was approximately
$59 million. Availability levels on any date are impacted by the level of
outstanding borrowings under the Credit Facility, the level of eligible
receivables and inventory and outstanding letters of credit. Availability
levels generally decline towards the end of the first and third quarters and
increase during the second and fourth quarters. For the trailing twelve
months, additional availability levels have ranged from $26 million to $97
million. The Company has also entered into surety bond arrangements
aggregating approximately $11 million with unrelated parties, primarily for
the purposes of satisfying workers' compensation deposit requirements of
various states where the Company has operations. At February 29, 2004, there
were an aggregate of $1.9 million of outstanding foreign exchange contracts
primarily related to anticipated inventory purchases to be made in the next
nine months. Other than the Company's ongoing guarantee of a $2.5 million
industrial development bond included as a component of consolidated debt, the
Company has not committed to and has not provided any guarantees of other
lines of credit, repurchase obligations, etc., with respect to the obligations
for any unconsolidated entity or to any unrelated third party.
The Company's various borrowing arrangements are either fixed rate or variable
rate borrowing arrangements. None of the arrangements have rating agency
"triggers" which would impact either the borrowing rate or borrowing
commitment. The Company has not entered into off balance sheet financing
arrangements, other than operating leases, and has made no financial
commitments or guarantees with any unconsolidated subsidiaries or special
purpose entities. All of the Company's subsidiaries are wholly owned and
included in the accompanying consolidated financial statements. There have
been no related party transactions nor any other transactions which have not
been conducted on an arm's-length basis. The Company believes its liquidity
and expected cash flows are sufficient to finance its operations after due
consideration of its various borrowing arrangements, other contractual
obligations and earnings prospects.
February 28, 2003 to February 29, 2004
Net accounts receivable of $135.0 million increased $1.7 million or 1.3%
principally reflecting the higher sales. Inventories of $128.3 million
increased $7.4 million or 6.1%, attributable to the Men's Apparel Group in
anticipation of higher sales. Net properties of $28.4 million decreased $2.9
million, as capital additions were more than offset by higher depreciation
expense. At February 29, 2004, total debt of $125.1 million declined $13.7
million compared to the year earlier level. Debt levels have been favorably
impacted principally by the higher cash earnings. Total debt represented 39%
of total capitalization at February 29, 2004 compared to 43% at February 28,
2003.
Results of Operations
First Quarter 2004 Compared to First Quarter 2003
First quarter consolidated sales were $136.6 million compared to $131.8
million in 2003; the 3.6% increase was attributable to the Women's Apparel
Group. Men's Apparel Group revenues of $119.2 million declined $1.4 million or
1.2% with sportswear increases offset by tailored clothing declines. Women's
Apparel Group revenues, which represented approximately 13% of consolidated
sales in 2004 and 9% in 2003, increased approximately $6.2 million from new
brand introductions and higher web based sales. Aggregate sportswear and other
non-tailored clothing product categories represented approximately 42% of
total first quarter revenues in 2004 and 38% in 2003.
The consolidated gross margin percentage to sales was 29.8% compared to 29.5%
last year. The higher gross margin rate compared to last year reflected
changes in product mix, as women's and men's sportswear product categories
generated a higher gross margin rate compared to tailored clothing.
Consolidated selling, general and administrative expenses were $36.2 million
in 2004 compared to $34.8 million in 2003; the ratio to sales was 26.5% in
2004 compared to 26.4% in 2003. The current period included $.6 million of
incremental expense associated with the performance based vesting on February
10, 2004 of 606,500 restricted stock awards resulting from the closing price
of common shares equaling or exceeding $4.25 for thirty consecutive calendar
days. Vesting of additional restricted stock awards is expected to result in
approximately $.3 million of incremental expense during the Company's second
quarter ending May 31, 2004.
Earnings before interest and taxes ("EBIT") were $5.1 million in 2004 compared
to $4.5 million in 2003, as the $.6 million decline in the Men's Apparel Group
was more than offset by higher Women's Apparel Group earnings. EBIT
represented 3.7% of consolidated sales in 2004 and 3.4% of sales in 2003,
reflecting the improved gross margin ratio compared to the prior year.
Interest expense declined to $1.5 million in 2004 compared to $1.9 million in
2003, attributable to lower average borrowings and to a decrease in the
weighted average interest rate. The prior period also included $.8 million of
pre-tax refinancing expense related to the write off of unamortized debt
discount and issue costs from the January 2003 early retirement of the then
outstanding $10.3 million of 12.5% senior unsecured notes. Consolidated
pre-tax earnings were $3.6 million in 2004 compared to $1.8 million in 2003.
After reflecting the applicable tax provision, consolidated net earnings were
$2.2 million in 2004 compared to $1.1 million in 2003. The basic and diluted
earnings per share was $.06 in 2004 compared to $.03 per share in 2003.
Based on current conditions, the Company continues to anticipate a
consolidated sales increase for the year ending November 30, 2004 in the low
to mid single digit range. In the Men's Apparel Group, revenue increases are
expected in the men's sportswear product categories, including the Ted Baker
and Bobby Jones product lines, as well as from new dedicated brand programs
with several additional retailers similar to the Austin Reed sportswear
program initiated previously with Dillards. Men's tailored clothing revenues
in 2004 are anticipated to approximate the level attained during 2003. While a
full-year revenue increase is also anticipated in the Women's Apparel Group, a
significant portion of the higher first quarter revenues reflected newer
programs initiated in the Fall of 2003.
The improving economy and stock market recovery in recent months are
encouraging, although consumer spending for apparel in certain department
stores remains sluggish. The anticipated revenue increase for 2004 as noted
above, along with the administrative expense structure currently in place, are
expected to result in net earnings increasing in the 25% - 40% range over
2003's full-year net earnings of $8.7 million or $.25 per diluted share. Debt
reduction by fiscal year-end November 30, 2004 in the $15-$20 million range is
anticipated, assuming no acquisitions. The Company continues to pursue prudent
acquisitions which can produce positive cash flows, are accretive to earnings
in the near to mid-term, and which do not create excess debt leverage.
This quarterly report on Form 10-Q contains forward-looking statements made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The statements could be significantly impacted by such
factors as the level of consumer spending for men's and women's apparel, the
prevailing retail environment, the Company's relationships with its suppliers,
customers, lenders, licensors and licensees, actions of competitors that may
impact the Company's business and the impact of unforeseen economic changes,
such as interest rates, or in other external economic and political factors
over which the Company has no control. The reader is also directed to the
Company's 2003 Annual Report on Form 10-K for additional factors that may
impact the Company's results of operations and financial condition.
Forward-looking statements are not guarantees as actual results could differ
materially from those expressed or implied in forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
The Company does not hold financial instruments for trading purposes or engage
in currency speculation. The Company enters into foreign exchange forward
contracts from time to time to limit the currency risks primarily associated
with purchase obligations denominated in foreign currencies. Foreign exchange
contracts are generally for amounts not to exceed forecasted purchase
obligations or receipts and require the Company to exchange U.S. dollars for
foreign currencies at rates agreed to at the inception of the contracts. These
contracts are typically settled by actual delivery of goods or receipt of
funds. The effects of movements in currency exchange rates on these
instruments, which have not been significant, are recognized in earnings in
the period in which the purchase obligations are satisfied or funds are
received. As of February 29, 2004, the Company had entered into foreign
exchange contracts, aggregating approximately $1.9 million corresponding to
approximately 1.7 million Euros primarily related to inventory purchases in
the next nine months.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of the variable rate borrowings
under its Credit Facility. Rates may fluctuate over time based on economic
conditions, and the Company could be subject to increased interest payments if
market interest rates rise rapidly. A 1% change in the effective interest rate
on the Company's anticipated borrowings under its Credit Facility would impact
annual interest expense by approximately $.9 million. In the last three years,
the Company has not used derivative financial instruments to manage interest
rate risk.
The Company's customers include major U.S. retailers (certain of which are
under common ownership and control), several of whom reported declines in
sales during various monthly periods in 2003 and 2002. The ten largest
customers represented approximately 56% of consolidated sales during fiscal
2003 with the largest customer representing approximately 26% of sales. A
decision by the controlling management of a group of stores or any other
significant customer, whether motivated by competitive conditions, financial
difficulties or otherwise, to decrease the amount of merchandise purchased
from the Company, or change their manner of doing business, could have a
material adverse effect on the Company's financial conditions and results of
operations.
Item 4 - Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures. The Company's
management, under the supervision of and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Company's disclosure controls and procedures are
effective and are reasonably designed to ensure that all material information
relating to the Company required to be included in the Company's reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
(B) Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act
during the fiscal quarter to which this report relates that have materially
affected, or are reasonable likely to materially affect, the Company's
internal control over financial reporting.
Limitations on the Effectiveness of Controls. The Company's
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls or the Company's
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some person, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
31.1 Certification of President and Chief Executive Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Executive Vice President and Chief
Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of President and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(B) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTMARX CORPORATION
April 7, 2004 By /s/ GLENN R. MORGAN
------------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
April 7, 2004 By /s/ ANDREW A. ZAHR
-------------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)