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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 the quarterly period ended May 3, 2003
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 1-7340
KELLWOOD COMPANY
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2472410
- --------------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
600 KELLWOOD PARKWAY, P.O. BOX 14374, ST. LOUIS, MO 63178
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 576-3100
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 by Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Number of shares of common stock, par value $.01, outstanding at May 3, 2003
(only one class): 26,279,260.
----------
1
KELLWOOD COMPANY
----------------
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
May 3, 2003 May 4, 2002 February 1, 2003
------------ ------------ ----------------
ASSETS
- ------
Current assets:
Cash and time deposits $ 95,278 $ 152,076 $ 211,862
Receivables, net 390,158 331,217 326,025
Inventories 287,149 269,703 362,742
Prepaid taxes and expenses 42,117 32,261 41,502
------------ ------------ ------------
Total current assets 814,702 785,257 942,131
Property, plant and equipment, net 104,430 104,526 105,913
Intangible assets, net 130,356 35,468 58,512
Goodwill 150,196 78,159 102,224
Other assets 38,764 48,055 45,799
------------ ------------ ------------
Total assets $ 1,238,448 $ 1,051,465 $ 1,254,579
============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Current portion of long-term debt $ 26,986 $ 18,186 $ 26,996
Notes payable 2,044 8,413 636
Accounts payable 162,272 133,985 187,003
Accrued salaries and employee benefits 41,880 33,241 55,547
Accrued expenses 72,272 51,540 82,502
------------ ------------ ------------
Total current liabilities 305,454 245,365 352,684
Long-term debt 278,222 303,874 278,515
Deferred income taxes and other 61,744 38,607 64,261
Shareowners' equity:
Common stock 228,945 176,348 214,826
Retained earnings 472,847 434,643 456,226
Accumulated other comprehensive income (10,645) (12,072) (11,090)
Less treasury stock, at cost (98,119) (135,300) (110,843)
------------ ------------ ------------
Total shareowners' equity 593,028 463,619 559,119
------------ ------------ ------------
Total liabilities and shareowners' equity $ 1,238,448 $ 1,051,465 $ 1,254,579
============ ============ ============
See notes to condensed consolidated financial statements.
3
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
--------------------------------------------------------
(Amounts in thousands except per share data)
Three Months Ended
--------------------------
May 3, 2003 May 4, 2002
----------- -----------
Net sales $ 689,222 $ 570,680
Costs and expenses:
Cost of products sold 550,186 463,794
Selling, general and
administrative expenses 97,006 79,495
Provision for realignment 0 7,244
Amortization of intangible assets 2,845 725
Interest expense 6,452 6,839
Interest income and other, net 405 (564)
---------- ----------
Earnings before income taxes 32,328 13,147
Income taxes 11,500 4,600
---------- ----------
Net earnings $ 20,828 8,547
========== ==========
Weighted average shares outstanding:
Basic 26,174 22,953
========== ==========
Diluted 26,554 23,211
========== ==========
Earnings per share:
Basic $ .80 $ .37
========== ==========
Diluted $ .78 $ .37
========== ==========
Dividends paid per share $ .16 $ .16
========== ==========
See notes to condensed consolidated financial statements.
4
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
Three months ended
------------------
May 3, 2003 May 4, 2002
------------ -----------
OPERATING ACTIVITIES:
Net earnings $ 20,828 $ 8,547
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 9,451 6,664
Non-cash portion of restructuring charge (756) 8,060
Deferred income taxes and other 4,356 1,339
Changes in working capital components:
Receivables, net (40,614) (12,286)
Inventories 86,954 93,783
Prepaid taxes and expenses (615) (656)
Accounts payable and accrued expenses (62,187) (4,442)
----------- ----------
Net cash provided by operating activities 17,417 101,009
----------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,705) (2,959)
Acquisitions, net of cash acquired (132,517) -
Dispositions of Fixed Assets 1,629 341
Other Investment Activity - (10,000)
----------- ----------
Net cash (used) by investing activities (135,593) (12,618)
----------- ----------
FINANCING ACTIVITIES:
Net proceeds from notes payable 1,408 801
Reduction of long-term debt (303) (4,620)
Dividends paid (4,197) (3,671)
Stock transactions under incentive plans 4,684 1,936
----------- ----------
Net cash provided/(used) by financing activities 1,592 (5,554)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND TIME DEPOSITS (116,584) 82,837
Cash and time deposits, beginning of period 211,862 69,239
----------- ----------
Cash and time deposits, end of period $ 95,278 $ 152,076
=========== ==========
Supplemental Cash Flow Information:
Interest Paid 7,593 7,980
Income Taxes Paid 10,925 793
Significant non-cash investing and financing activities:
Issuance of stock for the acquisition of Briggs $ 11,891
===========
See notes to condensed consolidated financial statements.
5
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Amounts in thousands)
1. ACCOUNTING POLICIES. It is the opinion of management that all adjustments
necessary for a fair presentation of results for the interim periods have
been reflected in the statements presented. Such adjustments were normal and
recurring in nature. Accounting policies have been continued without change
and are described in the Summary of Significant Accounting Policies
contained in the Company's Annual Report to Shareowners for fiscal 2002 (the
year ended February 1, 2003). For additional information regarding the
Company's financial condition, refer to the footnotes accompanying the 2002
financial statements. Details in those notes have not changed significantly
except as indicated herein and as a result of normal transactions in the
interim.
RECLASSIFICATIONS. Certain amounts in the prior year condensed consolidated
financial statements have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS. On June 25, 2002 the Company completed the acquisition of
Gerber Childrenswear, Inc. On February 4, 2003 the Company completed the
acquisition of substantially all of the assets of Briggs New York Corp.
These acquisitions have been accounted for under the purchase method of
accounting, accordingly, the results of the acquired companies have been
included in the consolidated financial statements from their respective
acquisition dates. The Company's unaudited consolidated results of
operations for the first quarter of fiscal 2002 on a pro-forma basis,
assuming these acquisitions had occurred at the beginning of 2002 are: net
sales of $667,289, net income of $13,466, and diluted earnings per share of
$.52. These pro forma results are not necessarily indicative of the
operating results that would have occurred had these acquisitions been
consummated at the beginning of the year or of future operating results.
In connection with the purchase accounting for the Gerber and Briggs
acquisitions, Kellwood is in the process of evaluating the tangible and
intangible assets and liabilities acquired. At May 3, 2003, the Company is
completing its evaluation of all aspects of the Gerber operations including
production facilities, sourcing programs, and product distribution
processes. These evaluations may result in adjustments to the purchase
accounting including the recorded amount of goodwill. Also at May 3, 2003,
the Company has begun the process of appraising the tangible and intangible
assets of Briggs. The Company estimates that approximately $120,000 of the
purchase price will be allocated to intangible assets and goodwill.
Additional cash purchase consideration may be due if Briggs achieves certain
specified financial performance targets over the next four years; such
consideration, if earned, would be accounted for as additional goodwill.
3. INVENTORIES. Inventories consist of the following:
February 1,
May 3, 2003 May 4, 2002 2003
----------- ----------- -----------
Inventories:
Finished goods $ 208,499 $ 192,904 $ 278,060
Work in process 34,937 33,808 43,321
Raw materials 43,713 42,991 41,361
---------- ---------- ----------
Total Inventories $ 287,149 $ 269,703 $ 362,742
========== ========== ==========
Net of obsolescence reserves of $ 35,828 $ 27,053 $ 34,120
========== ========== ==========
4. DEBT. On April 30, 2002 the Company executed a $240,000 3-year committed,
unsecured bank credit facility (the "2002 Facility"). On January 31, 2003
this credit facility was increased to $280,000. The 2002 Facility can be
used for borrowings and/or letters of credit. Borrowings under the 2002
Facility bear interest at a spread of approximately 1.45% over LIBOR. At
May 3, 2003, there were no outstanding short-term loans. Letters of credit
outstanding under the agreement were $63,724.
6
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Amounts in thousands)
5. COMPREHENSIVE INCOME. Differences between net earnings and total
comprehensive income resulted from foreign currency translation and
unrecognized impacts of derivative instruments, as follows:
Three months ended
------------------
May 3, 2003 May 4, 2002
----------- -----------
Net earnings $ 20,828 $ 8,547
Other comprehensive income:
Currency translation adjustment (499) (160)
Unrecognized gain/(loss) on derivatives 55 (34)
--------- --------
Total comprehensive income $ 20,384 $ 8,353
========= ========
6. STOCK OPTION PLANS. On March 5, 2003 the Company granted nonqualified
stock options to certain officers and other key employees for 558,700 shares
of common stock at an exercise price of $25.05, which was equal to the
market value of the shares on the grant date.
The Company is considering adopting the fair value recognition provisions of
FAS 123, Accounting for Stock-Based Compensation in the future. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FAS 123.
Three months ended
------------------
May 3, 2003 May 4, 2002
----------- -----------
Net earnings as reported $ 20,828 $ 8,547
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax effect (665) (663)
--------- --------
Pro-forma net earnings $ 20,163 $ 7,884
--------- --------
Earnings per share:
Basic, as reported $ .80 $ .37
Basic, pro-forma $ .77 $ .34
Diluted, as reported $ .78 $ .37
Diluted, pro-forma $ .76 $ .34
7. NEW ACCOUNTING STANDARDS. FAS 143 The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations. This statement was adopted by
the Company in 2003 and did not have a material impact on consolidated
financial position, results of operations or cash flows.
FAS 146 The FASB issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. FAS 146
provides direction for accounting and disclosure regarding specific costs
related to an exit or disposal activity. This statement was adopted by the
Company in 2003 and did not have a material impact on consolidated financial
position, results of operations or cash flows.
FAS 148 The FASB issued Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosures. The
disclosure provisions of this statement have been adopted and are presented
in Note 6 above.
7
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Amounts in thousands)
8. FACILITIES REALIGNMENT COSTS. In 2002 the Company decided to implement
realignment actions, including the closing of certain domestic warehousing
and Latin American production facilities and the discontinuance of a
licensing agreement. The realignments included the closing of five warehouse
operations and six manufacturing facilities and will result in a reduction
of employment by approximately 1,900, primarily production and warehousing
personnel. These actions impacted earnings in the first quarter of 2002 by
$8,949 before tax ($5,800 after tax, or $.25 per share). These costs
included $1,705 recorded in cost of products sold and $7,244 recorded as a
provision for realignment.
Through May 3, 2003 the Company closed five warehouse operations and four
manufacturing facilities, resulting in a reduction of employment of
approximately 1,200. The costs related to these actions include employee
severance, vacant facilities costs, and other cash realignment costs
including minimum royalties and customer markdowns on a discontinued license
agreement. Detail for these costs through May 3, 2003 is as follows:
Amount Amount Accrual at
Provided Utilized May 3, 2003
--------- -------- -----------
Employee severance $ 3,170 $ 2,133 $ 1,037
Vacant facilities costs 3,838 1,598 2,240
Other cash realignment costs 1,915 1,853 62
--------- -------- --------
Total realignment, excluding non-cash 8,923 $ 5,584 $ 3,339
======== ========
Asset impairments 6,064
---------
Total realignment costs $ 14,987
=========
The Company expects the remaining realignment actions to be completed by the
second quarter of 2003.
In connection with an acquisition the Company made the decision to implement
certain realignment actions within the acquired operations. These
realignments include the closing of one warehouse operation and four
manufacturing facilities and will result in a reduction of employment by
approximately 1,350, primarily production and warehousing personnel. The
estimated costs of these actions were accrued in the opening balance sheet
and did not impact earnings. Through May 3, 2003, the Company closed a
manufacturing plant in Mexico and downsized two domestic manufacturing
facilities, resulting in a reduction of employment of approximately 490.
Costs incurred include employee severance and vacant facilities costs.
Detail for these costs, and the related accruals, through May 3, 2003 is as
follows:
Amount
Originally Amount Accrual at
Provided Utilized May 3, 2003
---------- -------- -----------
Employee severance $ 4,789 $ 1,218 $ 3,571
Vacant facilities costs 2,874 207 2,667
-------- -------- --------
Total realignment $ 7,663 $ 1,425 $ 6,238
======== ======== ========
The Company expects the remaining realignment actions to be completed by the
fourth quarter of 2003.
8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Amounts in thousands)
9. REPORTABLE SEGMENTS. The Company and its subsidiaries are principally
engaged in the apparel and related soft goods industry. The Company's
business units are aggregated into the following reportable segments:
Women's Sportswear, Men's Sportswear, and Other Soft Goods. Sales, segment
earnings, and net assets by segment for the first quarter as well as a
reconciliation of the segment earnings (defined as Net Sales less Cost of
Products Sold and Selling, General and Administrative expenses) of the
reported segments to total Kellwood earnings before income taxes are as
follows:
Three months ended
------------------
May 3, 2003 May 4, 2002
----------- -----------
Net Sales:
Women's Sportswear $ 415,824 $ 361,161
Men's Sportswear 126,708 89,102
Other Soft Goods 146,690 120,417
---------- ----------
Kellwood net sales $ 689,222 570,680
========== ==========
Segment earnings:
Women's Sportswear $ 35,963 $ 29,661*
Men's Sportswear 7,785 5,106*
Other Soft Goods 10,411 3,516*
---------- ----------
Total segments 54,159 38,283*
Amortization of Intangibles (2,845) (725)
Interest expense (6,452) (6,839)
Provision for realignment - (7,244)
General corporate and other (12,534) (10,328)
----------- ----------
Earnings before income taxes $ 32,328 $ 13,147
========== ==========
Net Assets at quarter-end:
Women's Sportswear $ 504,047 $ 387,813
Men's Sportswear 180,198 113,257
Other Soft Goods 188,785 151,377
Corporate and other 27,250 141,645
---------- ----------
Kellwood total $ 900,280 $ 794,092
========== ==========
* - Realignment costs included in segment earnings above:
Women's Sportswear $ 85
Men's Sportswear 319
Other Soft Goods 1,301
----------
Total segments 1,705
----------
The provision for realignment relates to the segments as follows: Women's
Sportswear ($4,055), Men's Sportswear ($1,779) and Other Soft Goods
($1,410).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
DOLLARS IN MILLIONS EXCEPT PER SHARE DATA
- -----------------------------------------
OPERATING RESULTS
- -----------------
Sales for the first quarter were $689, up $119, or 21%, from last year. The
increase in sales was due to 4% internal sales growth ($21) and $98 from the
acquisitions of Gerber Childrenswear on June 25, 2002, and Briggs on
February 4, 2003.
Net earnings were $20.8, or $.78 per share compared to $8.6, or $.37 per
share last year on a diluted basis. Included in net earnings for last year's
first quarter is $8.9 before-tax, or $5.8 after-tax ($.25 per share) in
facilities realignment costs. This represents the first quarter impact of
the $15 pretax facility realignment program implemented in 2002. Excluding
the first quarter facilities realignment costs, net earnings for the 2002
first quarter were $14.4, or $.62 per share.
ACQUISITIONS. On June 25, 2002 the Company completed the acquisition of
Gerber Childrenswear, Inc. On February 4, 2003 the Company completed the
acquisition of substantially all of the assets of Briggs New York Corp.
These acquisitions have been accounted for under the purchase method of
accounting, accordingly, the results of the acquired companies have been
included in the consolidated financial statements from their respective
acquisition dates.
SUMMARIZED FINANCIAL DATA for the quarters ended May 3, 2003 (fiscal 2003)
and May 4, 2002 (fiscal 2002), including facilities realignment costs in
fiscal 2002, are as follows (percentages are calculated based on actual
data, but columns may not add due to rounding):
First Quarter, fiscal, First Quarter, fiscal,
---------------------------------- ------------------------------------
2003 2002 Change 2003 2002 Change
-------- -------- ------ --------- --------- ------
Net Sales $ 689 $ 571 20.8% 100.0% 100.0% -
Cost of products sold(1) 550 464 18.6% 79.8% 81.3% -1.4%
-------- -------- --------- --------- --------- ---------
Gross Profit(1) 139 107 30.1% 20.2% 18.7% 1.4%
SG&A 97 79 22.0% 14.1% 13.9% .1%
-------- -------- --------- --------- --------- ---------
Gross profit less SG&A(1) 42 27 53.4% 6.1% 4.8% 1.3%
Provision for realignment(1) - 7 nmf - 1.3% 1.3%
Amortization of intangibles 3 1 nmf .4% .1% 0.3%
Interest expense 6 7 -5.7% .9% 1.2% -0.3%
Interest (income) & other, net - (1) nmf .1% -.1% 0.2%
-------- -------- --------- --------- --------- ---------
Earnings before income tax 32 13 146% 4.7% 2.3% 2.4%
Income taxes 12 5 150% 1.7% .8% .9%
-------- -------- --------- --------- --------- ---------
Net earnings $ 21 $ 9 144% 3.0% 1.5% 1.5%
======== ======== ========= ========= ========= =========
Effective tax rate 35.6% 35.0% .6%
Average diluted shares (million) 26.6 23.2 14.4%
-------- -------- ---------
Diluted Earnings per Share $ .78 .37 113%
-------- -------- ---------
(1) - Impact of facilities realignment costs included in three months ended May 4, 2002 data above:
Cost of products sold $ 1.7 .3%
Provision for realignment 7.2 1.3%
-------- ---------
Earnings before income tax 8.9 1.6%
Income taxes 3.1 .6%
-------- ---------
Net earnings $ 5.8 1.0%
-------- ---------
Diluted Earnings per Share $ .25
--------
SEASONALITY: Kellwood's businesses are seasonal. The Company generally sells
its products prior to the principal retail selling seasons: spring, summer,
fall, and holiday. Sales and earnings for the first quarter have
historically been higher than for the other quarters of the fiscal year.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions except per share data)
-------------------------------------------
SALES. Sales for the first quarter were $689 increasing $119 or 21% versus
last year. Acquisitions contributed $98 to the year-to-year increase in
sales along with internal growth of $21 or 4%. The internal growth resulted
from $37 of revenue from new brands and programs and $11 or 2% growth from
ongoing brands and programs in both years, partially offset by revenue
slippage from lost or discontinued programs.
GROSS PROFIT for the first quarter increased $30.4 to 20.2% of sales versus
19.0% of sales reported last year (excluding realignment). On a comparable
basis, excluding the acquisitions of Gerber Childrenswear and Briggs, gross
profit increased $12.1 to 20.4% of sales. The 1.4 percentage point
year-to-year improvement in Kellwood's gross margin rate on a comparable
basis resulted from cost reductions due to moving more contract production
from the Western to Eastern hemisphere and using Kellwood's newly
established trading company, in addition to having less surplus and obsolete
inventory to liquidate and/or reserve for, and the elimination of several
non-competitive manufacturing facilities in North America, Mexico, and the
Caribbean Basin.
SG&A EXPENSE for the quarter increased $17.5 and increased as a percentage
of sales to 14.1% from 13.9% in the prior year. Included in the $17.5
increase was $9.3 of SG&A expense from the recent acquisitions of Gerber
Childrenswear and Briggs. On a comparable basis, SG&A expense increased $8.0
or 10%. $2.5 of the increase in spending relates to new brands and marketing
programs which provided relatively little sales volume in the quarter but
will provide growth later in the year and next year.
AMORTIZATION of intangible assets was $2.8, up $2.1 from last year. This was
due to acquisitions.
WEIGHTED AVERAGE DILUTED SHARES outstanding increased 14.4% (3.3 million
shares) primarily as a result of the shares issued in connection with the
acquisitions of Gerber and Briggs.
SEGMENT RESULTS
- ---------------
The Company and its subsidiaries are principally engaged in the apparel and
related soft goods industry. Sales by segment for the quarter were as
follows:
First Quarter, fiscal,
---------------------------------
2003 2002 Change
-------- -------- --------
Women's Sportswear $ 416 $ 361 15.1%
Men's Sportswear 127 89 42.2%
Other Soft Goods 147 120 21.8%
-------- -------- --------
Total Net Sales $ 689 $ 571 20.8%
======== ======== ========
Earnings by segment for the quarter (excluding facilities realignment costs
in 2002) were as follows:
First Quarter, fiscal, as a percentage of net sales
--------------------------------- ----------------------------------
2003 2002 Change 2003 2002 Change
-------- -------- -------- -------- --------- --------
Women's Sportswear $ 36.0 $ 29.7 20.9% 8.6% 8.2% .4%
Men's Sportswear 7.8 5.4 43.5% 6.1% 6.1% .1%
Other Soft Goods 10.4 4.8 116.1% 7.1% 4.0% 3.1%
-------- -------- -------- -------- --------- --------
Segment Earnings $ 54.2 $ 40.0 35.4% 7.9% 7.0% .9%
======== ======== ======== ======== ========= ========
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions except per share data)
-------------------------------------------
Each of Kellwood's business segments contributed to the year-to-year
increase in sales. Sales of Women's Sportswear increased $55 or 15% due
principally to the acquisition of Briggs. Sales of Men's Sportswear were
exceptionally strong, increasing $38 or 42% with the acquisition of Auburn
Hosiery (part of Gerber Childrenswear) contributing $13 along with internal
growth of $25 or 28%. Sales of Other Soft Goods increased $26 or 22% due
entirely to the acquisition of Gerber Apparel, which contributed $36 of
revenue in the first quarter. Excluding the impact of the Gerber
acquisition, sales of Other Soft Goods (Intimate Apparel and Recreation
Products) were down $10 or 8% from last year.
WOMEN'S SPORTSWEAR sales represented 60% of total company sales in the first
quarter. Sales of Women's Sportswear in the first quarter increased $55 or
15% from last year to $416. $49 of the year-to-year growth came from the
acquisition of Briggs on February 4, 2003, with internal growth from the
rest of the Women's portfolio of 2%.
Our core brands (Sag Harbor, Koret, My Michelle and Dorby) which represent
57% of Kellwood's women's sportswear business, had good sell in during the
first quarter with sales up $18 or 8% versus last year. Sag Harbor
sportswear and My Michelle junior sportswear were exceptionally strong.
Operating earnings for the quarter were $36.0, up $6.3 from last year due
primarily to the acquisition of Briggs. Gross profit as a percent of sales
improved nearly one percentage point to 22.0% of sales versus 21.2% last
year due to improved sourcing and less surplus and obsolete inventory. The
improvement in gross profit was offset by higher SG&A spending largely
attendant with several new marketing initiatives. Some of the new brands and
programs generated only a nominal amount of revenue in the first quarter -
and others will not ship until the third or fourth quarter but nevertheless
required investment or start up spending in the first quarter.
MEN'S SPORTSWEAR. The Men's Sportswear segment represented 18% of Company
sales in the first quarter. The Men's Sportswear segment consists of three
distinct business units: Smart Shirts, Kellwood Menswear, and the recently
acquired Auburn Hosiery. Sales in the quarter were $127, up $38 or 42% from
last year. The acquisition of Gerber Hosiery contributed $13 of the
year-to-year increase in sales with internal sales growth of $25 or 28%.
Smart Shirts continues to grow in a very weak market. Most of the
year-to-year increase came from the growing number of brands licensed by
Smart Shirts including our newest addition, Claiborne dress shirts sold to
all of the major department stores. The growth in the branded business
contributed to the significant year-to-year increase in gross margin and
operating earnings.
Menswear sales for the quarter were $21, up $4 or 21% from last year. The
Menswear business consists of two parts: private label sportswear
(principally bottoms) and branded Slates tops and Northern Isles knitwear.
In the private label bottoms area, sales were bolstered by significant
increases in business with key customers. Sales in the branded business were
down from last year.
Operating earnings for the quarter were $7.8, up $2.4 from last year due to
increased earnings from businesses that were part of Kellwood in both 2003
and 2002.
THE OTHER SOFT GOODS SEGMENT represented 21% of Company sales in the first
quarter. The Other Soft Goods segment consists of three distinct business
units -- Intimate Apparel, Gerber Apparel and American Recreation Products.
Sales in the quarter increased $26 or 22% versus last year. The acquisition
of Gerber Apparel contributed a $36 increase in sales; sales of businesses
that were part of Kellwood in both years were down $10 or 8%. Sales from the
two ongoing divisions of Other Soft Goods, Intimate Apparel and Recreation
Products were down due to weak customer demand and softness in the camping
business.
In the face of a difficult environment, we planned for a challenging year in
2003 and took action to improve gross margins and lower SG&A spending as
well as improve working capital management and return on capital. As a
result of facility consolidations and moving essentially all of our sourcing
to contractors in the Far East, margins
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions except per share data)
-------------------------------------------
have improved 1.3 percentage points, and SG&A spending has been reduced.
FINANCIAL CONDITION
- -------------------
Cash flow from operations is the Company's primary source of liquidity.
Kellwood uses financial leverage to minimize the overall cost of capital and
maintain adequate operating and financial flexibility. Management monitors
leverage through its debt-to-capital ratio. Working capital management is
monitored primarily by analysis of the Company's investment in accounts
receivable and inventories and by the amount of accounts payable.
LEVERAGE
- --------
As of May 3, 2003, Kellwood's debt-to-capital ratio reached 34.1% down
1.3 percentage points from February 1, 2003. This is particularly notable
in light of the fact that during the first quarter the Company absorbed
the $140 acquisition of Briggs. The ratio of total debt-to-capital fell
7.5 percentage points from April of last year. The three primary drivers of
this improvement were free cash flow, working capital management, and the
$80 of new equity issued in conjunction with the Gerber and Briggs
acquisitions.
WORKING CAPITAL
- ---------------
The CURRENT RATIO decreased to 2.7 at May 3, 2003 compared to 3.2 at May 4,
2002.
CASH AND TIME DEPOSITS were $95 at May 3, 2003 compared to $152 last year.
During the past 12 months, approximately $146 of cash was used in
acquisitions. Cash flow and working capital management have covered
two-thirds of these investments. Working capital as a percentage of sales is
currently running at about 17% compared to 21% last year.
ACCOUNTS RECEIVABLE were $390, up $59 from last year. Excluding the
receivables of Briggs and Gerber at May 3, 2003, receivables were flat with
the prior year. Days sales outstanding were 52.4 days as of May 3, 2003
compared to 54.6 days last year.
INVENTORIES were up $17, or 6.5%, to $287 as of May 3, 2003. Days supply now
stands at an estimated 69 days. This represents a 3 day improvement from
last year. Excluding acquisitions, inventories are down $30, or 11%.
FINANCING AND INVESTING ACTIVITIES
- ----------------------------------
Capital expenditures were $4.7 for the first quarter compared to $3.0 in the
comparable period last year. Capital spending for 2003 is expected to be
about $26 - 28.
DEBT:
On April 30, 2002 the Company executed a $240 3-year committed, unsecured
bank credit facility. On January 31, 2003 this credit facility was increased
to $280. This facility can be used for borrowings and/or letters of credit.
Borrowings under this facility bear interest at a spread of approximately
1.45% over LIBOR. At May 3, 2003, there were no outstanding short-term
loans. Letters of credit outstanding under the agreement were $64.
ACQUISITIONS:
The Company continually evaluates possible acquisition candidates as a part
of its ongoing corporate development process. Various potential acquisition
candidates are in different stages of this process. Management believes that
the combined operating, cash and equity position and credit facilities of
the Company will continue to provide the capital flexibility necessary to
fund future opportunities and to meet existing obligations.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions except per share data)
-------------------------------------------
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
- -----------------------------------------------------------------
This Quarterly Report contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of
1995. These forward-looking statements represent the Company's expectations
or beliefs concerning future events and are based on various assumptions and
subject to a wide variety of risks and uncertainties. Although the Company
believes that its expectations reflected in the forward-looking statements
are reasonable, it cannot and does not give any assurance that such
expectations will prove to be correct.
The Company's forward-looking statements are based on certain assumptions,
and the Company's operations are subject to various risks and uncertainties.
Any one of these factors or any combination of these factors could
materially affect the results of the Company's operations and cause actual
results to differ materially from the Company's expectations. These factors
include but are not limited to:
o changes in the retail environment. With the growing trend towards
retail trade consolidation, the Company is increasingly dependent
upon key retailers whose bargaining strength and share of the
Company's business is growing. Accordingly, the Company faces
greater pressure from these customers to provide more favorable
trade terms. The Company can be negatively affected by changes in
the policies or negotiating positions of its customers. The
inability of the Company to develop satisfactory programs and
systems to satisfy these customers could adversely affect operating
results in any reporting period;
o changes in the relative performance of the Company's business units
that could have an adverse impact on the business units' forecasted
cash flows, resulting in goodwill impairment charges;
o changes in trends in the market segments in which the Company
competes;
o the performance of the Company's products within the prevailing retail
environment;
o customer acceptance of both new designs and newly introduced product
lines;
o actions of competitors that may impact the Company's business;
o financial or operational difficulties encountered by customers or
suppliers;
o the economic impact of uncontrollable factors, such as terrorism and
war;
o disruptions to transportation systems or shipping lanes used by the
Company or its suppliers;
o continued satisfactory relationships with licensees and licensors
of trademarks and brands;
o the impact of economic changes such as:
o the overall level of consumer spending for apparel,
o national and regional economic conditions,
o inflation or deflation,
o changes in oil prices, including their impact on fabric prices
and/or transportation costs;
o currency exchange fluctuations,
o changes in interest rates and other capital market conditions;
o stable governments and business conditions in the nations where the
Company's products are manufactured;
o health or other issues that could affect the free-flow of people
and goods between nations where the Company's products are
manufactured;
o the scope, nature or impact of acquisition activity; and
o changes in the Company's plans, strategies, objectives,
expectations and intentions which may happen at any time at the
discretion of the Company.
The reader is also directed to the Company's periodic filings with the
Securities and Exchange Commission for additional factors that may impact
the Company's results of operations and financial condition.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions except per share data)
-------------------------------------------
The words "believe", "expect", "will", "estimate", "project", "forecast",
"should", "anticipate" and similar expressions may identify forward-looking
statements. Additionally, all statements other than statements of historical
facts included in this Annual Report including without limitation, the
statements under "Financial Review" and "Outlook", are also forward-looking
statements.
Forward-looking statements are not guarantees, as actual results could
differ materially from those expressed or implied in forward-looking
statements. The Company specifically disclaims any obligation to publicly
update, modify, retract or revise any forward-looking statements, whether as
a result of new information, future events or otherwise. All forward-looking
statements contained herein, the entire contents of the Company's website,
and all subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf, are expressly qualified in
their entirety by this cautionary statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
At May 3, 2003, the Company's debt portfolio was composed of approximately
1% variable-rate debt and 99% fixed-rate debt. Kellwood's strategy regarding
management of its exposure to interest rate fluctuations did not change
significantly during the quarter. Management does not expect any significant
changes in its exposure to interest rate fluctuations or in how such
exposure is managed during fiscal 2003.
Based on quoted market prices obtained through independent pricing sources
for the same or similar types of borrowing arrangements, the Company
believes the major components of its fixed rate long-term debt have a market
value of approximately $342 at May 3, 2003 which compares to their book
value of $304. With respect to the Company's fixed-rate debt outstanding at
May 3, 2003, a 10% increase in interest rates would have resulted in
approximately a $12 decrease in the market value of Kellwood's fixed-rate
debt; a 10% decrease in interest rates would have resulted in approximately
a $13 increase in the market value of Kellwood's fixed-rate debt. With
respect to the Company's variable-rate debt, a 10% change in interest rates
would have had an immaterial impact on the Company's interest expense for
the quarter.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Hal J. Upbin, Kellwood's Chairman, President and Chief Executive Officer,
and W. Lee Capps, III, Kellwood's Senior Vice President Finance and Chief
Financial Officer, with the participation of the Company's management group
evaluated Kellwood's disclosure controls and procedures within 90 days of
the filing date of this Quarterly Report on Form 10-Q, and determined that
such controls and procedures were effective and sufficient to ensure
compliance with applicable laws and regulations regarding appropriate
disclosure in the Quarterly Report, and that there were no material
weaknesses in those disclosure controls and procedures. They have also
indicated that there were no significant changes in internal controls or
other factors that could significantly affect internal controls subsequent
to the date of their most recent evaluation of disclosure controls and
procedures, including any corrective actions with regard to significant
deficiencies and material weaknesses.
15
PART II. OTHER INFORMATION
--------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the May 29, 2003 Annual Meeting of Shareowners, four directors were
elected to serve for two-year terms. The tabulation was as follows:
Directors Shares Voted For Shares Withheld
Kitty G. Dickerson 22,318,082 929,373
Jerry M. Hunter 16,964,272 6,283,182
Larry R. Katzen 22,305,624 941,830
Janice E. Page 22,314,834 932,622
Other directors whose term of office continued after the meeting are:
Raymond F. Bentele, Martin Bloom, Leonard A. Genovese, Martin J. Granoff,
and Hal J. Upbin.
ITEM 5. OTHER INFORMATION.
- --------------------------
On May 29, 2003, the employment agreement between Hal J. Upbin and the
Company was amended to extend its term through January 31, 2006 under the
same terms and conditions as currently in effect. The extension was provided
in order to accommodate succession planning for the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) EXHIBITS:
S.E.C. Exhibit
Reference No. Description
------------- -----------
10.8* Amendment to Employment Agreement dated May 29, 2003
between Kellwood Company and Hal J. Upbin, filed
herewith.
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
* Denotes management contract or compensatory plan.
b) REPORTS ON FORM 8-K:
The following reports were filed on Form 8-K during the three
months ended May 3, 2003:
Current Report on Form 8-K dated February 4, 2003 reporting
under Items 5 and 7
Current Report on Form 8-K dated March 6, 2003 reporting under
Items 5 and 7
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.
KELLWOOD COMPANY
June 11, 2003 /s/ W. Lee Capps, III
---------------------
W. Lee Capps, III
Senior Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
June 11, 2003 /s/ Lawrence E. Hummel
----------------------
Lawrence E. Hummel
Vice President Finance (Principal Accounting Officer)
16
CERTIFICATIONS
I, Hal J. Upbin, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ended May 3, 2003, of Kellwood Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 11, 2003
/s/ HAL J. UPBIN
----------------
Hal J. Upbin
Chairman, President and Chief Executive Officer
17
I, W. Lee Capps, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ended May 3, 2003, of Kellwood Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 11, 2003
/s/ W. LEE CAPPS, III
---------------------
W. Lee Capps, III
Senior Vice President Finance and Chief Financial Officer
18