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UNITED STATES
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 August 31, 2004
OR
[X] 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
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3217140
---------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
--------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 312/372-6300
------------
--------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report
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 x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes x No
--- ---
At September 30, 2004 there were 35,884,283 shares of the Company's
common stock outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Consolidated Statement of Earnings
for the three months and nine months ended
August 31, 2004 and August 31, 2003. 3
Unaudited Condensed Consolidated Balance Sheet
as of August 31, 2004, November 30, 2003 and
August 31, 2003. 4
Unaudited Condensed Consolidated Statement of Cash Flows
for the nine months ended August 31, 2004
and August 31, 2003. 6
Notes to Unaudited Condensed Consolidated Financial Statements. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
ITEM 4. Controls and Procedures 26
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000'S OMITTED)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------- -------------
Net sales $ 155,783 $ 151,559 $ 434,779 $ 410,373
Licensing and other income 934 560 1,837 1,532
------------ ------------- ------------- -------------
156,717 152,119 436,616 411,905
------------ ------------- ------------- -------------
Cost of goods sold 108,200 108,505 301,909 289,218
Selling, general and administrative expenses 38,750 35,736 113,358 106,822
------------ ------------- ------------- -------------
146,950 144,241 415,267 396,040
------------ ------------- ------------- -------------
Operating earnings 9,767 7,878 21,349 15,865
Interest expense 1,512 1,773 4,634 5,540
Refinancing expense - - - 795
------------ ------------- ------------- -------------
Earnings before taxes 8,255 6,105 16,715 9,530
Tax provision (3,265) (2,565) (6,605) (3,915)
------------ ------------- ------------- -------------
Net earnings $ 4,990 $ 3,540 $ 10,110 $ 5,615
============ ============= ============= =============
Earnings per share:
Basic $ .14 $ .11 $ .29 $ .17
============ ============= ============= =============
Diluted $ .14 $ .10 $ .28 $ .16
============ ============= ============= =============
Dividends per common share $ - $ - $ - $ -
============ ============= ============= =============
Average shares outstanding:
Basic 35,285 33,351 34,708 33,195
Diluted 36,459 34,688 36,142 34,246
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000'S OMITTED)
AUG. 31, NOV. 30, AUG. 31,
2004 2003 2003
------------- -------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,752 $ 2,964 $ 6,027
Accounts receivable, less allowance
for doubtful accounts of $8,956,
$10,604 and $10,202 135,579 117,778 146,652
Inventories 133,069 124,010 137,577
Prepaid expenses 6,982 5,249 6,840
Deferred income taxes 14,521 14,521 11,372
------------- -------------- -------------
Total current assets 292,903 264,522 308,468
------------- -------------- -------------
GOODWILL 23,264 23,165 22,548
------------- -------------- -------------
INTANGIBLE ASSETS 36,247 622 810
------------- -------------- -------------
DEFERRED INCOME TAXES 49,875 53,636 58,551
------------- -------------- -------------
OTHER ASSETS 7,115 7,236 6,132
------------- -------------- -------------
PREPAID AND INTANGIBLE PENSION ASSET 64,016 60,871 58,708
------------- -------------- -------------
PROPERTIES
Land 1,980 1,980 1,980
Buildings and building improvements 36,452 36,350 36,286
Furniture, fixtures and equipment 105,280 104,321 103,849
Leasehold improvements 25,933 25,273 24,650
------------- -------------- -------------
169,645 167,924 166,765
Accumulated depreciation and amortization (141,433) (138,601) (137,319)
------------- -------------- -------------
Net properties 28,212 29,323 29,446
------------- -------------- -------------
TOTAL ASSETS $ 501,632 $ 439,375 $ 484,663
============= ============== =============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000'S OMITTED)
AUG. 31, NOV. 30, AUG. 31,
2004 2003 2003
------------- -------------- -------------
CURRENT LIABILITIES
Current portion of long-term debt $ 15,658 $ 15,628 $ 20,611
Accounts payable and accrued expenses 76,408 65,200 59,163
------------- ------------- -------------
Total current liabilities 92,066 80,828 79,774
------------- ------------- -------------
NON-CURRENT LIABILITIES 21,408 13,142 13,604
------------- ------------- -------------
LONG-TERM DEBT 116,839 88,776 135,472
------------- ------------- -------------
MINIMUM PENSION LIABILITY 65,428 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;
35,855,814 shares issued at August 31, 2004, 36,996,314
shares issued at November 30, 2003 and August 31, 2003 89,640 92,491 92,491
Capital surplus 63,826 65,642 66,187
Retained earnings 65,385 55,275 52,185
Unearned employee benefits (1,439) (1,303) (1,766)
Common shares in treasury, at cost,
35,109 at August 31, 2004,
1,916,681 at November 30, 2003 and
2,077,492 at August 31, 2003. (249) (8,454) (9,164)
Accumulated other comprehensive income (loss) (11,272) (11,200) (13,593)
------------- ------------- -------------
Total shareholders' equity 205,891 192,451 186,340
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 501,632 $ 439,375 $ 484,663
============= ============= =============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000'S OMITTED)
NINE MONTHS ENDED AUGUST 31,
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2004 2003
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 10,110 $ 5,615
Reconciling items to adjust net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 4,188 4,761
Amortization of long lived assets, debt discount and
unearned employee benefits 3,671 2,354
Non-cash charge re: refinancing expense acquisition: - 795
Changes in assets and liabilities, net of effect of
Receivables, inventories, prepaids and other assets (24,734) (37,549)
Accounts payable, accrued expenses and
non-current liabilities 5,539 (9,329)
Taxes and deferred taxes on earnings 6,060 2,832
-------------- ---------------
Net cash provided by (used in) operating activities 4,834 (30,521)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments made re: acquisitions (33,517) (1,664)
Capital expenditures (3,243) (1,744)
Cash proceeds from sale of assets - 185
-------------- ---------------
Net cash used in investing activities (36,760) (3,223)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Credit Facility 28,561 42,724
Payment of 12.5% Senior Unsecured Notes - (10,341)
Payment of other debt (468) (435)
Change in checks drawn in excess of bank balances 300 -
Proceeds from exercise of stock options 2,257 32
Other equity transactions 1,064 937
-------------- ---------------
Net cash provided by financing activities 31,714 32,917
-------------- ---------------
Net decrease in cash and cash equivalents (212) (827)
Cash and cash equivalents at beginning of period 2,964 6,854
-------------- ---------------
Cash and cash equivalents at end of period $ 2,752 $ 6,027
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid (received)
during the period for:
Interest $ 4,513 $ 5,788
Income taxes (235) 1,203
(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. The number of shares used in
computing basic and diluted shares were as follows (000's omitted):
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Basic 35,285 33,351 34,708 33,195
Dilutive effect of:
Stock options and awards 867 324 829 110
Restricted stock awards 307 1,013 605 941
----------- ----------- ----------- ------------
Diluted 36,459 34,688 36,142 34,246
=========== =========== =========== ============
For the three months and nine months ended August 31, 2004 and 2003, the
following number of options and restricted stock awards 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 or award price for the
respective period:
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------------------------- --------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
Anti-dilutive:
Options 59,135 981,052 74,550 1,423,204
Restricted stock awards 201,500 - 201,500 201,000
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 NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------ ----------- ------------
Net earnings, as reported $ 5.0 $ 3.5 $ 10.1 $ 5.6
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related
tax effects (0.1) (0.1) (0.4) (0.4)
----------- ------------ ----------- ------------
Pro forma net earnings $ 4.9 $ 3.4 $ 9.7 $ 5.2
=========== ============ =========== ============
Earnings per share:
Basic - as reported $ .14 $ .11 $ .29 $ .17
=========== ============ =========== ============
- pro forma $ .14 $ .10 $ .28 $ .16
=========== ============ =========== ============
Diluted - as reported $ .14 $ .10 $ .28 $ .16
=========== ============ =========== ============
- pro forma $ .13 $ .10 $ .27 $ .15
=========== ============ =========== ============
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 Black-Sholes model does not necessarily provide a reliable single
measure of the fair value of its stock options. As previously reported, the
Company's second quarter results included $.4 million of incremental expense
associated with the performance based vesting on March 25, 2004 of 201,000
restricted stock awards resulting from the closing price of common shares
equaling or exceeding $5.25 for thirty consecutive days and 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. There was a $.1 million favorable impact in
the third quarter of 2004 related to this accelerated vesting.
In the calculation of earnings per share, restricted stock awards are excluded
from the computation of basic earnings per share and included in the
calculation of diluted earnings per share using the treasury stock method.
During 2003, the Company had included restricted stock awards in the
computation of basic and diluted earnings per share. The impact of this change
for 2003 compared to the previously reported amounts was to increase basic
earnings per share by $.01 to $.11 and $.17 for the three months and nine
months ended August 31, respectively.
NOTE 3
Long-term debt comprised the following (000's omitted):
AUG. 31, NOV. 30, AUG. 31,
2004 2003 2003
------------ ------------ ------------
Borrowings under Credit Facility $ 97,234 $ 68,674 $ 120,204
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 18,013 18,480 18,629
------------ ------------ ------------
132,497 104,404 156,083
Less - current 15,658 15,628 20,611
------------ ------------ ------------
Long-term debt $ 116,839 $ 88,776 $ 135,472
============ ============ ============
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 4.1%
at August 31, 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 August 31, 2004, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements. At August 31, 2004, the
Company had approximately $27 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
August 31, 2004, additional borrowing availability under the Credit Facility
was approximately $42 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 the annual interest rate of 8.5% 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 first quarter 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 nine months ended August 31, 2003.
Checks drawn in excess of bank balances are included as a component of accounts
payable.
NOTE 4
Components of net periodic pension expense for the Company's defined benefit
and non-qualified supplemental pension plans for the three months and nine
months ended August 31, 2004 and 2003 were as follows (000's omitted):
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
Service cost $ 1,225 $ 991 $ 3,655 $ 3,434
Interest cost 3,640 3,174 11,252 11,094
Expected return on plan assets (4,005) (3,035) (12,401) (10,614)
Recognized net actuarial (gain) loss (83) 118 (18) 411
Net amortization 847 847 2,540 2,540
-------------- ------------- ------------- -------------
Net periodic pension expense $ 1,624 $ 2,095 $ 5,028 $ 6,865
============== ============= ============= =============
During fiscal 2004 to date, $8.3 million of contributions have been made,
including $2.7 million during the third fiscal quarter. The Company is
currently considering additional optional contributions in the range of $1
million to $3 million during the fourth quarter of fiscal 2004.
NOTE 5
Inventories at each date consisted of (000's omitted):
AUG. 31, NOV. 30, AUG. 31,
2004 2003 2003
------------- -------------- --------------
Raw materials $ 35,904 $ 38,455 $ 37,402
Work-in-process 6,634 7,168 8,134
Finished goods 90,531 78,387 92,041
------------- -------------- --------------
$ 133,069 $ 124,010 $ 137,577
============= ============== ==============
Inventories are stated at the lower of cost or market. At August 31, 2004,
November 30, 2003 and August 31, 2003, approximately 45%, 48% and 50% 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 6
On July 20, 2004, the Company acquired certain assets, properties and
operations of Exclusively Misook, Inc. ("Misook"), a designer and marketer of
upscale women's knit products sold through leading specialty and department
stores. The acquisition of Misook is expected to provide for strategic growth
opportunities in womenswear and further diversification of product categories.
The purchase price for Misook as of the acquisition date was approximately
$32.6 million, of which $32.1 million was paid in cash as of August 31, 2004.
Additional cash purchase consideration will be due if Misook achieves certain
specified financial performance targets over a five-year period commencing
August 1, 2004. This additional contingent cash purchase consideration is
calculated based on a formula applied to operating results. A minimum level of
performance, as defined in the purchase agreement, must be achieved during any
of the periods in order for additional consideration to be paid. At the minimum
level of performance (annualized operating earnings, as defined, of at least
$12 million), additional annual consideration of $3.6 million would be paid
over the five year period following the acquisition. The amount of
consideration increases with increased levels of earnings and there is no
maximum amount of incremental purchase price. The additional consideration
applicable to the four months ending November 30, 2004 is estimated currently
at approximately $1.5 million.
If the Misook business is sold within five years of the acquisition date ("Sale
Transaction"), the purchase agreement provides, at the option of the seller,
for a lump sum payment covering the remaining earnout period based on the
average annual contingent consideration earned prior to the date of the Sale
Transaction.
The Misook acquisition is being accounted for under the purchase method of
accounting. Accordingly, the results of Misook are included in the consolidated
financial statements from the acquisition date. Misook's results of operations
and assets are included in the Women's Apparel Group segment.
The Company has allocated the purchase price to the Misook assets acquired and
liabilities assumed at estimated fair values, considering a number of factors,
including the use of an independent appraisal. The excess of fair value of the
net assets acquired compared to the amount paid as of the acquisition date has
been reflected as "estimated amount due seller", in accordance with SFAS No.
141 ("Business Combinations"). Any contingent consideration payable in the
future will be first applied to reduce the amount recorded as "estimated amount
due seller", and thereafter to goodwill. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. This allocation has not yet been finalized and is subject
to revision; subsequent revisions, if any, are not expected to be material
(000's omitted):
Cash consideration ($32,125 paid at closing;
$491 to be paid in October) $ 32,616
Estimated direct acquisition costs 200
----------------
Total purchase price $ 32,816
================
Allocation of purchase price:
Accounts receivable $ 6,715
Inventories 1,155
Other current assets 392
Intangible assets 36,150
Deferred taxes 525
Property, plant and equipment 58
Other assets 48
Current liabilities (428)
Estimated amount due seller (10,549)
Minimum pension liability (1,250)
----------------
Total purchase price $ 32,816
================
Of the $10,549 estimated amount due seller, $1,500 is included in accounts
payable and accrued expenses and the remainder is included in non-current
liabilities.
The components of the Intangible Assets listed in the above table are based on
an independent third party appraisal and are as follows (000's omitted):
AMOUNT LIFE
-------------- ---------------
Tradename $ 28,400 Indefinite
Customer relationships 3,000 10 years
Supply agreement 4,400 5 years
Covenant not to compete 350 5 years
The tradename was deemed to have an indefinite life and, accordingly, will not
be amortized as of the acquisition date, but will be subject to periodic
impairment testing at future periods in accordance with SFAS No. 142 ("Goodwill
and Other Intangible Assets"). The customer relationships and covenant not to
compete will be amortized based on estimated weighted cash flows over their
life. The supply agreement will be amortized on a straight line basis over the
life of the agreement.
The Misook acquisition was financed utilizing borrowing availability under the
Company's Credit Facility.
The pro forma financial information presented below gives effect to the
Misook acquisition as if it had occurred as of the beginning of the Company's
fiscal year 2004 and fiscal year 2003. The information presented below is for
illustrative purposes only and is not indicative of results that would have
been achieved if the acquisition had occurred as of the beginning of the
Company's 2004 and 2003 fiscal years or of future operating performance.
Amounts in millions, except per share:
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $163.0 $161.1 $460.5 $440.2
Net earnings 6.9 5.3 14.9 10.7
Net earnings per share:
Basic $ .19 $ .16 $ .43 $ .32
Diluted $ .19 $ .15 $ .41 $ .31
NOTE 7
The additional contingent payments to the former owners of Consolidated Apparel
Group are based on earnings achievement for the periods involved. Based on the
aggregate amount of contingent payments made to date, additional contingent
payments are expected to aggregate within a range of $3 million to $4 million
over the remaining earnout periods through 2006, as defined in the purchase
agreement; $.3 million has been accrued through August 31, 2004 for anticipated
contingent amounts applicable to 2004 results which would be paid during fiscal
2005. The amount accrued for additional contingent payments for the year ended
November 30, 2003 was paid in January 2004.
As discussed in Note 6, a minimum level of performance, as defined in the
purchase agreement, must be achieved during any of the periods in order for
additional consideration to be paid to the former owner of Misook.
NOTE 8
Amounts billed to customers for shipping and handling are included in sales.
The cost of goods sold caption includes, where applicable, the following
components: product cost, including inbound freight, duties, internal
inspection costs, internal transfer costs and certain other costs of the
distribution network. The warehousing, picking and packing of finished products
totaled $14.2 million in the first nine months of fiscal 2004 and $14.4 million
in the first nine months of fiscal 2003 and $4.6 million for the third quarter
of 2004 and $4.7 million for the third quarter of 2003 and are included as a
component of Selling, General and Administrative Expenses.
NOTE 9
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 and nine
months ended and as of August 31, 2004 and August 31, 2003 is summarized as
follows (in millions):
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
---------------- -------------- ----------- ------------
THREE MONTHS ENDED AUGUST 31, 2004
Sales $136.9 $18.9 $ - $155.8
Earnings (loss) before taxes 12.4 1.2 (5.3) 8.3
2003
Sales $136.0 $15.6 $ - $151.6
Earnings (loss) before taxes 9.6 1.3 (4.8) 6.1
NINE MONTHS ENDED AUGUST 31,
2004
Sales $377.7 $57.1 $ - $434.8
Earnings (loss) before taxes 27.8 5.0 (16.1) 16.7
Total assets 291.3 67.9 142.4 501.6
2003
Sales $371.8 $38.6 $ - $410.4
Earnings (loss) before taxes 24.9 0.8 (16.2) 9.5
Total assets 311.2 29.0 144.5 484.7
During the three and nine months ended August 31, 2004, there was $.3 million
of sales from the Men's Apparel Group to the Women's Apparel Group. These sales
have been eliminated from Men's Apparel Group sales. During the three months
and nine months ended August 31, 2003, there were no intergroup sales. During
all the periods, 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 $23.3 million of goodwill related to acquisitions and the
Women's Apparel Group total assets include intangible assets of $35.9 million
related to acquisitions.
Revenues and long-lived assets by geographic region are as follows (in
millions):
REVENUES LONG-LIVED ASSETS
---------------------------------------------------------------- ------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
----------------------------- ----------------------------- ------------------------
2004 2003 2004 2003 2004 2003
------------ ----------- ------------ ----------- ---------- ----------
USA $150.9 $147.6 $420.5 $395.8 $155.3 $114.5
Canada 4.3 3.7 13.3 13.4 2.6 2.2
All Other 0.6 0.3 1.0 1.2 0.9 0.9
------------ ----------- ------------ ----------- ---------- ----------
$155.8 $151.6 $434.8 $410.4 $158.8 $117.6
============ =========== ============ =========== ========== ==========
Sales by Canadian subsidiaries to customers in the United States are included
in USA sales. Sales to customers in countries other than USA or Canada are
included in All Other.
Long-lived assets includes prepaid and intangible pension asset, net
properties, goodwill, intangible assets and other assets.
NOTE 10
On September 25, 2003, the Board of Directors adopted an amendment to the
Rights Agreement which provided that the Rights expired at the earliest of (i)
the close of business on January 31, 2006, (ii) the time at which the Rights
were 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, exceeded
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 Securities and Exchange Commission divided by the total number
of shares of the Company's common stock issued and outstanding stated in such
report. Effective as of the close of business on June 15, 2004, all Rights
issued to Company stockholders expired as a result of the reported closing
price of the Company's common stock exceeding the Book Value per Share, as
defined, for 60 consecutive days.
NOTE 11
Following is an analysis of the changes in common stock and treasury stock for
the nine months ended August 31, 2004 (amount in thousands):
COMMON STOCK TREASURY STOCK
-------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- -------------- --------------- ------------
Balance November 30, 2003 36,996,314 $ 92,491 1,916,681 $ (8,454)
Shares issued for:
Stock options and awards - - (801,485) 3,805
Sales to employee benefit plans - - (212,552) 999
Vesting of restricted stock awards, net (1,330,500) (3,326) (867,535) 3,401
Long term incentive plan awards,
net of forfeitures 190,000 475 - -
--------------- -------------- --------------- ------------
Balance August 31, 2004 35,855,814 $ 89,640 35,109 $ (249)
=============== ============== =============== ============
NOTE 12
Comprehensive income, which includes all changes in the Company's equity during
the period, except transactions with stockholders, was as follows (000's
omitted):
NINE MONTHS ENDED
---------------------------------
AUG. 31, 2004 AUG. 31, 2003
-------------- --------------
Net earnings $ 10,110 $ 5,615
Other comprehensive income (loss):
Change in fair value of foreign
exchange contracts, net of tax (147) 65
Foreign currency translation adjustment 75 456
-------------- --------------
Comprehensive earnings $ 10,038 $ 6,136
============== ==============
The change in Accumulated Other Comprehensive Income (Loss) was as follows (000's omitted):
FAIR VALUE OF FOREIGN ACCUMU-LATED
MINIMUM FOREIGN CURRENCY OTHER
PENSION EXCHANGE TRANSLATION COMPREHENSIVE
LIABILITY CONTRACTS ADJUSTMENT INCOME (LOSS)
---------------- --------------- ---------------- ----------------
FISCAL 2004
- -------------------------
Balance Nov. 30, 2003 $ (11,735) $ 249 $ 286 $ (11,200)
Change in fiscal 2004 - (147) 75 (72)
---------------- --------------- ---------------- ----------------
Balance August 31, 2004 $ (11,735) $ 102 $ 361 $ (11,272)
================ =============== ================ ================
FISCAL 2003
- -------------------------
Balance Nov. 30, 2002 $ (14,015) $ (22) $ (77) $ (14,114)
Change in fiscal 2003 - 65 456 521
---------------- --------------- ---------------- ----------------
Balance August 31, 2003 $ (14,015) $ 43 $ 379 $ (13,593)
================ =============== ================ ================
The pre-tax amounts, the related income tax (provision) benefit and after-tax
amounts allocated to each component of the change in other comprehensive income
(loss) was as follows (000's omitted):
NINE MONTHS ENDED AUGUST 31, 2004 PRE-TAX TAX AFTER-TAX
- ----------------------------------------- --------------- --------------- ----------------
Minimum pension liability $ - $ - $ -
Fair value of foreign exchange contracts (247) 100 (147)
Foreign currency translation adjustment (110) 185 75
--------------- --------------- ----------------
$ (357) $ 285 $ (72)
=============== =============== ================
NINE MONTHS ENDED AUGUST 31, 2003
- -----------------------------------------
Minimum pension liability $ - $ - $ -
Fair value of foreign exchange contracts 107 (42) 65
Foreign currency translation adjustment 753 (297) 456
--------------- --------------- ----------------
$ 860 $ (339) $ 521
=============== =============== ================
NOTE 13
As of December 1, 2003, the Company adopted 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 an interest in 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.
As of March 1, 2004, the Company adopted the disclosure requirements of
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).
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 knitwear, 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. On July 20, 2004, the Company acquired certain assets, properties
and operations of Misook, a designer and marketer of upscale women's knit
products sold through leading specialty and department stores. The purchase
price for Misook at the acquisition date was approximately $32.6 million, of
which $32.1 million was paid in cash as of August 31, 2004. As further
described in Part I, Item 1, Note 6, additional contingent consideration will
be due if Misook achieves certain specified financial performance targets. The
acquisition of Misook is expected to provide for strategic growth opportunities
in womenswear and further diversification of product categories.
These product diversification actions have 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 internet-based marketing for certain womenswear products. Sales
of non-tailored apparel (men's sportswear, golfwear, slacks and womenswear)
increased to 45% of total sales during the first nine months of 2004 compared
to 43% for the first nine months of 2003. Non-tailored apparel sales
represented 44% of total sales for the fiscal year ended November 30, 2003
compared to 42% in fiscal 2002.
The increase in year to date pre-tax earnings to $16.7 million in 2004 from
$9.5 million in 2003 reflected a 6% revenue increase to $434.8 million from
$410.4 million, improved operating margins and lower financing related costs.
LIQUIDITY AND CAPITAL RESOURCES
NOVEMBER 30, 2003 TO AUGUST 31, 2004
For the nine months ended August 31, 2004, net cash provided by
operating activities as reflected in the accompanying Unaudited Condensed
Consolidated Statement of Cash Flows was $4.8 million compared to a net use of
cash of $30.5 million for the nine months ended August 31, 2003. The
improvement compared to the prior year net use of cash of $30.5 million
reflected the increased earnings this year and higher working capital
requirements during the prior year period. Since November 30, 2003, net
accounts receivable increased $17.8 million or 15% to $135.6 million,
reflecting the normal seasonal change from tailored clothing shipments in the
Men's Apparel Group and the inclusion of $4.4 million of net receivables
related to Misook. Inventories of $133.1 million increased $8.1 million or 6%,
excluding Misook, and were about offset by accounts payable and accrued
expenses increasing $7.6 million, excluding Misook. The increase in Intangible
Assets to $36.2 million from $.6 million related to the fair value of
intangible assets acquired in the Misook transaction, including the Misook
tradename. Net properties decreased $1.1 million to $28.2 million as
depreciation expense exceeded capital additions. Total debt, including current
maturities, increased $28.1 million and along with the $3.3 million of stock
option proceeds and other stock sales were the principal components of net cash
provided by financing activities in the accompanying Unaudited Condensed
Consolidated Statement of Cash Flows. The debt increase to $132.5 million,
which was attributable to the $32.1 million payment for the Misook business,
was the principal component of cash used in investing activities. Total debt
represented 39% of total capitalization at August 31, 2004 compared to 35% at
November 30, 2003. Shareholders' equity increased $13.4 million, principally
from earnings and from the 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 4.1% at August 31, 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 August
31, 2004 and August 31, 2003 on all borrowings was approximately 5.0% in 2004
compared to 4.5% 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 August 31, 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), who have reported modest sales
increases so far in 2004 following 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 August 31, 2004, the Company had approximately $27 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. Additional borrowing 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. At August 31, 2004, additional borrowing
availability under the Credit Facility was approximately $42 million, which
reflected both eligible assets and the $32.1 million paid for the Misook
acquisition. For the trailing twelve months, additional availability levels
have ranged from $35 million to $101 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 August 31,
2004, there was an aggregate of $4.0 million of outstanding foreign exchange
contracts primarily related to inventory purchases to be made in the next three
months, anticipated U.S. dollar collections by the Company's Canadian business
in the next nine months, and anticipated licensing revenues to be received in
the next six 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.
AUGUST 31, 2003 TO AUGUST 31, 2004
Net accounts receivable of $135.6 million decreased $11.1 million or 8%, as the
inclusion of $4.4 million related to Misook and the higher sales were more than
offset by improved collections. Inventories of $133.1 million declined $4.5
million or 3%, attributable to the Men's Apparel Group, as the prior year
included earlier production and receipts of finished products and higher
in-stock inventory levels. The current year included $.7 million attributable
to Misook. The increase in Intangible Assets to $36.2 million from $.8 million
in the year earlier period was attributable to the fair value of intangible
assets acquired in the Misook transaction, including the Misook tradename. Net
properties of $28.2 million decreased $1.2 million, as capital additions were
more than offset by higher depreciation expense. At August 31, 2004, total debt
of $132.5 million declined $23.6 million compared to the year earlier level;
the debt decline was after reflecting the $32.1 million paid for the Misook
business in July 2004. Debt levels have been favorably impacted by the higher
cash earnings and lower working capital requirements. Total debt represented
39% of total capitalization at August 31, 2004 compared to 46% at August 31,
2003.
RESULTS OF OPERATIONS
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003
Third quarter consolidated sales were $155.8 million, including $4.3 million
attributable to Misook, compared to $151.6 million in 2003. Men's Apparel Group
revenues were $136.9 million compared to $136.0 million in the year earlier
period. Within the Men's Apparel Group, wholesale selling prices for comparable
products were approximately even in 2004 compared to 2003. Overall, tailored
clothing average wholesale selling prices increased slightly from 2003,
reflecting a shift in product mix in 2004 from the prior year. Unit sales of
tailored clothing product categories changed from the prior year's third
quarter as follows: suits increased approximately 3% and sport coats decreased
approximately 10%. Slack product categories decreased approximately 3%. While
unit sales of sportswear products decreased approximately 28%, average
wholesale selling prices were 28% higher than 2003, reflecting product mix
changes to higher priced products. Women's Apparel Group revenues, which
represented approximately 12% of consolidated sales in 2004 and 10% in 2003,
increased $3.3 million, attributable to Misook. Excluding Misook and the effect
of a one year private label program which commenced last fall and was
substantially completed in the second quarter of 2004, unit sales of women's
apparel decreased 18% and average selling prices increased 15%, primarily
attributable to a change in product mix. Aggregate sportswear and other
non-tailored clothing product categories, including women's, represented
approximately 43% of total third quarter revenues in each period.
The consolidated gross margin percentage to sales was 30.5% compared to 28.4%
last year. The higher gross margin rate compared to last year principally
reflected changes in product mix towards higher margin women's and men's
sportswear products; tailored clothing margins also improved from reduced sales
of lower margin products. Approximately $4.6 million in 2004 and $4.7 million
in 2003 of costs related to warehousing, picking and packing of finished
products are included as a component in Selling, General and Administrative
Expenses; accordingly, gross margin may not be comparable to those other
entities that include all of the costs related to their distribution network in
arriving at gross margin. Consolidated selling, general and administrative
expenses increased to $38.7 million in the current period compared to $35.7
million in 2003; the ratio to sales increased to 24.9% in 2004 compared to
23.6% in 2003. The current period included $1.1 million of expenses related to
Misook as well as incremental professional fees related to the documentation
and testing of internal controls as required by the Sarbanes-Oxley Act,
partially offset by a real estate tax refund relating to the Company's
corporate office.
Operating earnings increased to $9.8 million in 2004 compared to $7.9 million
last year and represented 6.3% of net sales in 2004 and 5.2% of net sales in
2003, with the improvement principally attributable to the higher gross margin
ratio compared to the prior year. Men's Apparel Group operating earnings were
$12.4 million in 2004 compared to $9.6 million in 2003, attributable to the
higher sales and improved gross margins; tailored clothing products represented
the most significant contributor to earnings and cash flow in each year.
Women's Apparel Group operating earnings were $1.2 million in 2004 compared to
$1.3 million in 2003, as the incremental earnings attributable to Misook since
the July 20th acquisition were offset by margin declines in other lines,
including the impact of the private label program which commenced in the third
quarter of 2003 and was substantially completed in the second quarter of 2004.
Interest expense decreased to $1.5 million this period compared to $1.8 million
last year. The decline from last year's third quarter was primarily
attributable to the lower average outstanding borrowings. Consolidated pre-tax
earnings were $8.3 million compared to $6.1 million last year. After reflecting
the applicable tax provision, consolidated net earnings were $5.0 million this
period compared to $3.5 million last year. Diluted earnings per share were $.14
compared to $.10 per share in 2003.
NINE MONTHS 2004 COMPARED TO NINE MONTHS 2003
Consolidated sales were $434.8 million, including $4.3 million attributable to
Misook, compared to $410.4 million in 2003. In the Men's Apparel Group,
revenues increased $5.9 million to $377.7 million, as tailored clothing product
revenues represented the principal component of the improvement. In general,
wholesale selling prices for comparable products were approximately even in
2004 compared to 2003. Overall, tailored clothing average wholesale selling
prices decreased slightly from 2003, reflecting a shift in product mix in 2004
compared to the prior year. Year-to-date unit sales of tailored clothing
product categories changed from the prior year as follows: suits increased
approximately 7%; sport coats decreased approximately 2%. Slack product
categories increased approximately 10%. While unit sales of sportswear products
decreased 15%, average wholesale prices were approximately 15% higher than 2003
reflecting product mix changes to higher priced products. Women's Apparel Group
revenues, which represented approximately 13% of consolidated sales in 2004 and
9% in 2003, increased approximately $18.5 million, attributable principally to
the effect of a one year private label program which commenced last fall and
was substantially completed during the second fiscal quarter of 2004, and the
inclusion of Misook sales of $4.3 million. This private label program
aggregated $12.9 million in 2004 compared to $2.4 million in 2003. Excluding
this program and Misook, unit sales of women's apparel increased 22% and
average selling prices decreased 10%, primarily attributable to changes in
product mix. Aggregate sportswear and other non-tailored clothing product
categories, including women's, represented 45% of nine month sales versus 43% a
year ago.
The consolidated gross margin percentage to sales was 30.6% compared to 29.5%
last year, reflecting the changes in product mix towards higher margin women's
and men's sportswear products; tailored clothing margins also improved from
fewer sales of lower margin products. Approximately $14.2 million in 2004 and
$14.4 million in 2003 of costs related to warehousing, picking and packing of
finished products are included as a component in Selling, General and
Administrative Expenses; accordingly, gross margins may not be comparable to
those other entities that include all of the costs related to their
distribution network in arriving at gross margin. Consolidated selling, general
and administrative expenses increased to $113.4 million in the current period
compared to $106.8 million in 2003 on the higher 2004 sales; the ratio to sales
was 26.1% of sales in 2004 compared to 26.0% of sales in 2003. The current year
included $1.1 million of incremental expenses related to Misook as well as
incremental professional fees related to the documentation and testing of
internal controls as required by the Sarbanes-Oxley Act, partially offset by a
real estate tax refund relating to the Company's corporate office.
Operating earnings increased to $21.3 million in 2004 compared to $15.9 million
in 2003 and represented 4.9% of sales in 2004 compared to 3.9% of sales in
2003. Men's Apparel Group operating earnings were $27.8 million in 2004
compared to $24.9 million in 2003 with tailored clothing products representing
the most significant contributor to earnings and cash flow in each year.
Women's Apparel Group operating earnings increased to $5.0 million in 2004
compared to $.8 million in 2003 attributable to its higher sales and related
favorable operating expense leverage.
Interest expense decreased to $4.6 million from $5.5 million last year; the
decline was principally attributable to the lower average borrowings. The prior
period also included $.8 million 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 $16.7 million this year
compared to $9.5 million last year. After reflecting the applicable tax
provision, consolidated net earnings were $10.1 million or $.28 per diluted
share this year compared to $5.6 million or $.16 per diluted share last year.
Based on current conditions, the Company anticipates a consolidated sales
percentage increase for the year ending November 30, 2004 in the mid single
digit range. In the Men's Apparel Group, full year revenue increases are
expected both in the tailored and men's sportswear product categories. A
full-year revenue increase is also anticipated in the Women's Apparel Group
although the fourth quarter incremental revenues related to the Misook
acquisition will be largely offset by the unfavorable effect of the one year
private label program initiated in the Fall of 2003 that was substantially
completed during the second quarter of 2004.
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 55% - 60% range over 2003's full-year net
earnings of $8.7 million or $.25 per diluted share. This expected increase
reflects Misook's contribution of $.01 per diluted share to third quarter
results and the anticipation of an additional $.02 to $.03 to fourth quarter
earnings per diluted share. The Misook acquisition was financed utilizing
availability under the Company's senior credit facility; as a result of
trailing year cash earnings and reduced working capital requirements, the
Company does not anticipate any significant increase in year over year debt
levels. The Company expects to pursue additional acquisitions which can
contribute to business growth, produce positive cash flows, are accretive to
earnings in the near to mid-term, and do not create excessive 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 August 31, 2004, the Company had entered into foreign exchange contracts
aggregating approximately $4.0 million corresponding to approximately .3
million Euros related to inventory purchases in the next three months,
approximately $3.7 million Canadian dollars related to anticipated U.S. dollar
collections by the Company's Canadian business in the next nine months, and
approximately 109 million Japanese Yen primarily related to anticipated
licensing revenues to be received in the next six 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 $1.0 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), who have reported modest sales increases
so far in 2004 following 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 reasonably likely to materially affect, the Company's internal control
over financial reporting.
The Company is currently in the process of documenting, evaluating, and testing
its internal controls over financial reporting as required by the
Sarbanes-Oxley Act of 2002. As a result of this process, enhancements to the
Company's internal controls over financial reporting are being implemented and
may be implemented in the future as management addresses deficiencies that have
been or may be identified. However, there can be no assurance that all such
deficiencies will be fully remediated and successfully tested before the end of
the Company's fiscal year, or that any remaining deficiencies that have not
been fully remediated and successfully tested at that time will not be
material.
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:
2.1 Purchase Agreement dated as of June 25, 2004, by and among EM
Acquisition Crop., Hartmarx Corporation, Exclusively Misook,
Misook Doolittle and Harry Doolittle (incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K filed by
Hartmarx Corporation with the Commission on July 23, 2004).
31.1 Certification of Chairman, 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 Chairman, 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:
Reports on Form 8-K filed during the third quarter ended August
31, 2004. The Forms 8-K listed below that were furnished to the
SEC shall not be deemed filed for any purpose.
A current report on Form 8-K dated June 16, 2004 was filed with
the SEC to report the expiration of the Amended and Restated
Rights Agreement, dated April 13, 2000.
A current report on Form 8-K dated June 28, 2004 was filed with
the SEC to report the agreement to acquire the business of
Exclusively Misook, Inc.
A current report on Form 8-K, dated July 1, 2004, was filed with
the SEC to report the Company's issuance of a press release on
the Company's financial results for the second quarter ended May
31, 2004.
A current report on Form 8-K dated July 23, 2004 was filed with
the SEC to report the completion of the acquisition of
Exclusively Misook, Inc.
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
October 8, 2004 By /s/ GLENN R. MORGAN
--------------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
October 8, 2004 By /s/ ANDREW A. ZAHR
--------------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)