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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 August 2, 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 August 2,
2003 (only one class): 26,527,626.
1
KELLWOOD COMPANY
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
August 2, 2003 August 3, 2002 February 1, 2003
-------------- -------------- ----------------
ASSETS
- ------
Current assets:
Cash and time deposits $ 112,078 $ 142,679 $ 211,862
Receivables, net 314,675 290,152 326,025
Inventories 355,572 403,901 362,742
Prepaid taxes and expenses 46,897 40,273 41,502
---------------- --------------- ---------------
Total current assets 829,222 877,005 942,131
Property, plant and equipment, net 102,918 128,718 105,913
Intangible assets, net 115,304 59,092 58,512
Goodwill 163,071 76,076 102,224
Other assets 34,674 50,563 45,799
---------------- --------------- ---------------
Total assets $ 1,245,189 $ 1,191,454 $ 1,254,579
================ =============== ===============
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Current portion of long-term debt $ 26,975 $ 18,219 $ 26,996
Notes payable - 659 636
Accounts payable 180,864 179,852 187,003
Accrued salaries and employee benefits 41,315 38,075 55,547
Accrued expenses 54,951 56,518 82,502
---------------- --------------- ---------------
Total current liabilities 304,105 293,323 352,684
Long-term debt 276,224 303,055 278,515
Deferred income taxes and other 63,246 58,579 64,261
Shareowners' equity:
Common stock 239,978 214,479 214,826
Retained earnings 475,304 437,180 456,226
Accumulated other comprehensive income (10,265) (14,387) (11,090)
Less treasury stock, at cost (103,403) (100,775) (100,843)
---------------- --------------- ---------------
Total shareowners' equity 601,614 536,497 559,119
---------------- --------------- ---------------
Total liabilities and shareowners' equity $ 1,245,189 $ 1,191,454 $ 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 Six Months Ended
-------------------------------- ---------------------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Net sales $ 526,789 $ 463,346 $ 1,216,011 $ 1,034,026
Costs and expenses:
Cost of products sold 418,787 372,221 968,973 836,015
Selling, general and
administrative expenses 88,280 77,420 185,286 156,915
Provision for realignment - - - 7,244
Amortization of intangible assets 2,087 1,330 4,932 2,055
Interest expense 6,206 7,072 12,658 13,911
Interest (income) and other, net 1,104 (724) 1,509 (1,287)
-------------- ------------- ------------- -------------
Earnings before income taxes 10,325 6,027 42,653 19,173
Income taxes 3,639 2,100 15,139 6,700
-------------- ------------- ------------- -------------
Net earnings $ 6,686 $ 3,927 $ 27,514 $ 12,473
============== ============= ============= =============
Weighted average shares outstanding:
Basic 26,432 24,200 26,302 23,573
============== ============= ============= =============
Diluted 26,970 24,682 26,761 23,942
============== ============= ============= =============
Earnings per share:
Basic $ .25 $ .16 $ 1.05 $ .53
============== ============= ============= =============
Diluted $ .25 $ .16 $ 1.03 $ .52
============== ============= ============= =============
Dividends paid per share $ .16 $ .16 $ .32 $ .32
============== ============= ============= =============
See notes to condensed consolidated financial statements.
4
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
Six months ended
----------------------------------
August 2, 2003 August 3, 2002
-------------- --------------
OPERATING ACTIVITIES:
Net earnings $ 27,514 $ 12,473
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 18,086 14,385
Provision for realignment - 7,244
Deferred income taxes and other 8,525 4,089
Changes in working capital components:
Receivables, net 38,343 50,949
Inventories 18,521 11,966
Prepaid taxes and expenses (5,287) (1,828)
Accounts payable and accrued expenses (62,974) 23,886
-------------- --------------
Net cash from operating activities 42,728 123,164
-------------- --------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,093) (6,103)
Acquisitions, net of cash acquired (134,150) (17,835)
Subordinated note receivable 688 (11,000)
Dispositions of fixed assets 1,923 993
-------------- --------------
Net cash from investing activities (141,632) (33,945)
-------------- --------------
FINANCING ACTIVITIES:
Net proceeds from notes payable - (6,953)
Reduction of long-term debt (2,948) (7,204)
Dividends paid (8,428) (7,371)
Stock transactions under incentive plans 10,496 5,749
-------------- --------------
Net cash from financing activities (880) (15,779)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND TIME DEPOSITS (99,784) 73,440
Cash and time deposits, beginning of period 211,862 69,239
-------------- --------------
Cash and time deposits, end of period $ 112,078 $ 142,679
============== ==============
Supplemental Cash Flow Information:
Interest Paid $ 14,596 $ 13,979
============== ==============
Income Taxes Paid $ 32,360 $ 13,540
============== ==============
Significant non-cash investing and financing activities:
Issuance of stock for acquisitions $ 11,891 $ 68,185
============== ==============
See notes to condensed consolidated financial statements.
5
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Dollars in thousands, except per share data)
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
significant 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. (Gerber). On February 4, 2003 the Company
completed the acquisition of substantially all of the assets of Briggs New
York Corp. (Briggs). 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 purchase price allocation for the Gerber acquisition was finalized
during the second quarter of 2003. The finalization of the purchase price
did not result in any significant change to the preliminary purchase price
allocation.
The original purchase price for Briggs was approximately $128,000 in cash
and .5 million shares of Kellwood common stock valued at approximately
$12,000 at the date of acquisition. During the second quarter an additional
purchase price payment of $3,700 was made as a result of higher working
capital at closing. The Company is in the process of evaluating the tangible
and intangible assets of Briggs. We expect the purchase price allocations
for the Briggs acquisition to be finalized in the first quarter of 2004.
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.
This additional cash purchase consideration is calculated based on a formula
applied to operating results. A minimum level of performance must be reached
in order for this additional consideration to be paid. At this minimum level
of performance, additional consideration of $2,000 would be paid for each of
the four years after the acquisition. The amount of consideration increases
with increased levels of earnings. There is no maximum amount of incremental
purchase price.
The amounts and lives assigned to each identifiable intangible asset as well
as the goodwill resulting from the finalized Gerber and preliminary Briggs
purchase price allocations are as follows:
Gerber (final) Briggs (preliminary)
---------------------------- --------------------------
Lives Amounts Lives Amounts
------------- -------------- ----------- -------------
Identifiable intangible assets:
Tradenames 15 $ 8,500 20 $ 32,000
Customer relationships 20 4,900 15 30,000
License rights 1.5 to 13.5 12,820 -
-------------- -------------
26,220 62,000
Goodwill 23,784 60,000
-------------- -------------
Total intangibles and goodwill $ 50,004 $ 122,000
============== =============
The estimated intangible amounts for Briggs decreased by $13,079 (with an
offsetting increase to goodwill) during the second quarter due to better
estimates being available. As a result, amortization decreased during the
quarter by approximately $700.
The Company's unaudited consolidated results of operations for the three and
six months ended August 3, 2002, on a pro-forma basis, assuming the Gerber
and Briggs acquisitions had occurred at the beginning of 2002 are: net sales
of $539.8 and $1,207.1, respectively, net income of $5.7 and $19.2,
respectively, and diluted earnings per share of $.22 and $.73, respectively.
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.
6
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
3. DISCONTINUED OPERATION. In August 2003 the Company decided to discontinue
the European component of Auburn Hosiery. All European manufacturing,
distribution and sales will cease. These operations are comprised of two
manufacturing and distribution facilities with 275 employees, all located in
Ireland. The closing of one of these facilities and the consolidation of
operations into the other was previously planned and accrued for in Gerber's
opening balance sheet as discussed in Note 11. Beginning in the third
quarter, the operating results for the European component of Auburn Hosiery,
along with the costs of discontinuance will be removed from continuing
operations for all periods presented and shown as a discontinued operation.
4. INVENTORIES. Inventories consist of the following:
August 2, August 3, February 1,
2003 2002 2003
------------- ------------- --------------
Inventories:
Finished goods $ 272,521 $ 305,904 $ 278,060
Work in process 39,215 39,408 43,321
Raw materials 43,836 58,589 41,361
------------- ------------- --------------
Total Inventories $ 355,572 $ 403,901 $ 362,742
============= ============= ==============
Net of obsolescence reserves of $ 34,091 $ 32,548 $ 34,120
============= ============= ==============
5. 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 approximately 1.45% over LIBOR. At August 2, 2003,
there were no outstanding short-term loans. Letters of credit outstanding
under the agreement were $62,060.
In addition, the Company maintains informal uncommitted lines of credit with
two banks, which totaled $20,000 at August 2, 2003. There were no borrowings
under these uncommitted lines at August 2, 2003.
6. 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 Six months ended
-------------------------------- -------------------------------
August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002
-------------- -------------- -------------- --------------
Net earnings $ 6,686 $ 3,927 $ 27,514 $ 12,473
Other comprehensive income:
Currency translation adjustment (480) 146 (979) (82)
Unrecognized gain/(loss) on derivatives 100 (152) 155 (117)
------------- -------------- -------------- --------------
Total comprehensive income $ 6,306 $ 3,921 $ 26,690 $ 12,274
============= ============== ============== ==============
7
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
7. EARNINGS PER SHARE. The following is a reconciliation between basic and
diluted earnings per share:
Three months ended Six months ended
-------------------------------- -------------------------------
August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002
-------------- -------------- -------------- --------------
Numerator: Net earnings $ 6,686 $ 3,927 $ 27,514 $ 12,473
============= ============== ============== ==============
Denominator (000's):
Average shares outstanding - Basic 26,432 24,200 26,302 23,573
Impact of stock options 538 482 459 369
------------- -------------- -------------- --------------
Average shares outstanding - Diluted 26,970 24,682 26,761 23,942
============= ============== ============== ==============
Basic Earnings Per Share $ .25 $ .16 $ 1.05 $ .53
============= ============== ============== ==============
Diluted Earnings Per Share $ .25 $ .16 $ 1.03 $ .52
============= ============== ============== ==============
8. 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 Six months ended
-------------------------------- -------------------------------
August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002
-------------- -------------- -------------- --------------
Net earnings as reported $ 6,686 $ 3,927 $ 27,514 $ 12,473
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax effect (669) (664) (1,339) (1,327)
------------- -------------- -------------- --------------
Pro-forma net earnings $ 6,017 $ 3,263 $ 26,175 $ 11,146
============= ============== ============== ==============
Earnings per share:
Basic, as reported $ .25 $ .16 $ 1.05 $ .53
Basic, pro-forma $ .23 $ .13 $ 1.00 $ .48
Diluted, as reported $ .25 $ .16 $ 1.03 $ .52
Diluted, pro-forma $ .23 $ .13 $ .98 $ .47
9. LICENSES. The Company has exclusive license agreements to market apparel
under trademarks owned by other parties. During 2003 new license agreements
were entered into for trademarks that included Calvin Klein for women's
sportswear, Izod for women's sportswear, Def Jam, Liz Claiborne for women's
suits and XOXO for juniors sportswear, intimate apparel and dresses. These
agreements contain provisions for minimum royalty and advertising payments
based on anticipated sales in future periods. The future minimum amounts for
these new agreements total approximately $80 million for periods through
2008.
8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
10. NEW ACCOUNTING STANDARDS. 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.
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.
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 8.
11. 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 2002 earnings by $14,987 before tax
($9,703 after tax, or $.39 per share). During the first quarter of 2002 the
Company record pretax realignment and related costs of $8,949, which
included $1,705 recorded in cost of sales and $7,244 recorded as a provision
for realignment. During the second quarter of 2002 the Company recorded
additional pretax realignment and related costs of $669 in cost of sales.
Through August 2, 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. The asset impairments related primarily to fixed assets that are
no longer being used and that have been reduced to estimated liquidating
value. Detail for these costs through August 2, 2003 is as follows:
Amount Amount Accrual at
Provided Utilized August 2, 2003
------------- -------------- --------------
Employee severance $ 3,170 $ 2,530 $ 640
Vacant facilities costs 3,838 2,500 1,338
Other cash realignment costs 1,915 1,901 14
------------- -------------- --------------
Total realignment, excluding non-cash 8,923 $ 6,931 $ 1,992
============== ==============
Asset impairments 6,064
-------------
Total realignment costs $ 14,987
=============
The Company expects the remaining realignment actions to be completed by the
fourth quarter of 2003.
9
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
In connection with the Gerber acquisition, the Company made the decision to
implement certain realignment actions within the acquired operations. These
realignments include the closing of one warehouse operation, the closing of
four manufacturing facilities and the downsizing of two domestic
manufacturing facilities and will result in a reduction of employment by
approximately 1,350, primarily production and warehouse personnel. The
estimated costs of these actions were accrued in the opening balance sheet.
Through August 2, 2003, the Company has closed the warehouse operation and
two of the four manufacturing plants and completed the downsizing of the two
domestic manufacturing facilities, resulting in a reduction of employment of
approximately 520. The Company has decided that it will not currently close
the third of the four manufacturing facilities that was originally planned
to be closed. The accrual of $42 relating to this facility has been
reversed, resulting in decreased goodwill. The Company will be proceeding
with the closing of the last of the four remaining manufacturing facilities
shortly. This is one of two facilities in Ireland that make up the European
Hosiery operations. See Note 3 regarding the discontinuance of those
operations. This will result in a reduction of employment of approximately
150. Details for the Gerber realignment costs, and the related accruals,
through August 2, 2003 are as follows:
Amount
Originally Amount Accrual at
Provided Utilized August 2, 2003
------------- --------------- ---------------------
Employee severance $ 4,789 $ 1,221 $ 3,568
Vacant facilities costs 2,874 252 2,622
------------- --------------- ---------------------
Total realignment $ 7,663 $ 1,473 $ 6,190
============= =============== =====================
The Company expects the remaining realignment actions to be completed by
yearend.
10
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
12. 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 three and six month periods
ended August 2, 2003 and August 3, 2002, 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 Six months ended
-------------------------------- ------------------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
------------- -------------- ------------- --------------
Net Sales:
Women's Sportswear $ 291,764 $ 267,056 $ 707,588 $ 628,216
Men's Sportswear 121,064 97,069 247,772 186,172
Other Soft Goods 113,961 99,220 260,651 219,638
------------- -------------- ------------- --------------
Kellwood net sales $ 526,789 $ 463,346 $ 1,216,011 $ 1,034,026
============= ============== ============= ==============
Segment earnings (1):
Women's Sportswear $ 15,324 $ 14,420 $ 51,287 $ 44,081
Men's Sportswear 7,788 6,212 15,573 11,318
Other Soft Goods 6,235 2,749 16,646 6,265
------------- -------------- ------------- --------------
Total segment earnings 29,347 23,381 83,506 61,664
Amortization of Intangibles (2,087) (1,330) (4,932) (2,055)
Interest expense (6,206) (7,072) (12,658) (13,911)
Provision for realignment (2) - - - (7,244)
General corporate and other (10,729) (8,952) (23,263) (19,281)
------------- -------------- ------------- --------------
Earnings before income taxes $ 10,325 $ 6,027 $ 42,653 $ 19,173
============= ============== ============= ==============
Net Assets at quarter-end:
Women's Sportswear $ 453,191 $ 375,780
Men's Sportswear 193,040 156,189
Other Soft Goods 178,970 183,430
Corporate and other 79,612 143,031
------------- --------------
Kellwood total $ 904,813 $ 858,430
============= ==============
(1) - Realignment costs included in segment earnings above for the three
months ended August 3, 2002 were $317 for Women's Sportswear, $109 for Men's
Sportswear and $243 for Other Soft Goods, and for the six months ended
August 3, 2002 were $402 for Women's Sportswear, $428 for Men's Sportswear,
and $1,544 for Other Soft Goods.
(2) - The provision for realignment for the six months ended August 3, 2002
relates to the segments as follows: $4,055 for Women's Sportswear, $1,779
for Men's Sportswear, and $1,410 for Other Soft Goods.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
(Dollars in millions, except per share data.)
The discussion below is focused on significant changes in financial
condition and results of operations in the condensed consolidated balance
sheet as of August 2, 2003 and August 3, 2002, and in the condensed
consolidated statement of earnings for the three-month and six-month periods
ended August 2, 2003 and August 3, 2002, respectively. We recommend that
this discussion be read in conjunction with the audited consolidated
financial statements and accompanying notes included in our 2002 Annual
Report to Shareowners.
The Company's internal reporting utilizes net earnings, earnings per share
and gross profit excluding the facilities realignment charge. Management
evaluates each of its business units using these measures in order to
isolate the results of ongoing operations by excluding the charge which is
infrequent and unusual. Therefore, throughout management's discussion and
analysis of financial condition and results of operations, there will be a
discussion of operating results both including and excluding the facilities
realignment costs. The amounts that exclude the facilities realignment
charge are non-GAAP measures and may not be comparable to measures used by
other entities.
OPERATING RESULTS
- -----------------
Sales for the second quarter were $526.8, up $63.4, or 13.7%, from last
year. The increase in sales was primarily due to the acquisitions of Gerber
on June 25, 2002, and Briggs on February 4, 2003 as well as new brands and
programs.
Net earnings for the second quarter were $6.7, or $.25 per share compared to
$3.9, or $.16 per share last year on a diluted basis. Included in net
earnings for last year's second quarter is $0.7 before-tax, or $0.4
after-tax ($.02 per share) in facilities realignment costs. This represents
the 2002 second quarter impact of the $15 pretax facility realignment
program implemented in 2002. Excluding the second quarter facilities
realignment costs, net earnings for the 2002 second quarter were $4.4, or
$.18 per diluted share.
Sales for the first six months were $1,216.0, up $182.0, or 17.6% from the
prior year. Net earnings were $27.5, or $1.03 per share compared to $12.5,
or $.52 per share last year on a diluted basis. Included in net earnings for
the first six months of 2002 is $9.6 before-tax, or $6.3 after-tax ($.26 per
share) in facilities realignment costs. Excluding the first half facilities
realignment costs, net earnings for the first six months of 2002 were $18.8,
or $.78 per diluted share.
ACQUISITIONS. On June 25, 2002 the Company completed the acquisition of
Gerber. On February 4, 2003 the Company completed the acquisition of
substantially all of the assets of Briggs. 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 was the original qualified bidder for the purchase of Kasper
A.S.L., Limited (Kasper) out of bankruptcy. A final auction was held on
August 7, 2003 during which the Company was outbid. The original contract
calls for the Company to receive $4,000 if another buyer prevails. This
amount will be recorded as income, net of bid related expenses (currently
estimated at $1,500), when the sale of Kasper closes. This is currently
anticipated to be in the fourth quarter of 2003.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
SUMMARIZED FINANCIAL DATA for the three and six month periods ended August
2, 2003 and August 3, 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):
Three months ended Six months ended
---------------------------------- ------------------------------------
August 2, August 3, August 2, August 3,
2003 2002 Change 2003 2002 Change
-------- -------- ------ --------- --------- ------
Net Sales $ 526.8 $ 463.3 13.7% $ 1,216.0 $ 1,034.0 17.6%
Cost of products sold (1) 418.8 372.2 12.5% 969.0 836.0 15.9%
-------- -------- ------ --------- --------- ------
Gross Profit (1) 108.0 91.1 18.5% 247.0 198.0 24.8%
SG&A 88.3 77.4 14.0% 185.3 156.9 18.1%
-------- -------- ------ --------- --------- ------
Gross Profit less SG&A (1) (2) 19.7 13.7 43.9% 61.8 41.1 50.3%
Provision for realignment (1) - - - 7.2
Amortization of intangibles 2.1 1.3 56.9% 4.9 2.1 140.0%
Interest expense 6.2 7.1 (12.2%) 12.7 13.9 (9.0%)
Interest (income) & other, net 1.1 (0.7) NM 1.5 (1.3) NM
-------- -------- ------ --------- --------- ------
Earnings before tax 10.3 6.0 71.3% 42.7 19.2 122.5%
Income taxes 3.6 2.1 73.3% 15.1 6.7 126.0%
-------- -------- ------ --------- --------- ------
Net earnings $ 6.7 $ 3.9 70.2% $ 27.5 $ 12.5 120.6%
======== ======== ====== ========= ========= ======
Effective tax rate 35.2% 34.8% 35.5% 34.9%
Average diluted shares 27.0 24.7 9.3% 26.8 23.9 11.8%
-------- -------- ------ --------- --------- ------
Diluted Earnings per Share $ .25 $ .16 55.8% $ 1.03 $ .52 97.4%
-------- -------- ------ --------- --------- ------
(1) - The impact of facilities realignment costs included in data above for
the three months ended August 3, 2002 was $.7 included in cost of products
sold ($.4 in net earnings and $.02 in diluted earnings per share), and for
the six months ended August 3, 2002 was $2.4 included in cost of products
sold and $7.2 included in provision for realignment ($6.3 in net earnings
and $.26 in diluted earnings per share).
(2) - Gross Profit less SG&A differs from Operating Income in that it
excludes the provision for realignment and amortization of intangibles.
Gross Profit less SG&A should not be considered as an alternative to
operating income, which for the three and six months ended August 2, 2003
was $17.6 and $56.9, respectively, and for the three and six months ended
August 3, 2002, was $12.4 and $31.8, respectively. Gross Profit less SG&A is
one of the primary measures used by management to evaluate the Company's
performance as well as the performance of the Company's business units and
segments. Management believes the comparison of Gross Profit less SG&A
between periods is useful in showing the interaction of changes in gross
profit and SG&A without inclusion of the facilities realignment charges and
amortization of intangibles, the changes in which are explained elsewhere.
The subtotal of Gross Profit less SG&A may not be comparable to any
similarly titled measure used by another company.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
Three months ended Six months ended
--------------------------------- ------------------------------------
August 2, August 3, August 2, August 3,
As a percentage of net sales: 2003 2002 Change 2003 2002 Change
- ----------------------------- -------- -------- ------ --------- --------- ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 79.5% 80.3% (0.8%) 79.7% 80.9% (1.2%)
-------- -------- ------ --------- --------- ------
Gross Profit 20.5% 19.7% 0.8% 20.3% 19.1% 1.2%
SG&A 16.8% 16.7% 0.0% 15.2% 15.2% 0.1%
-------- -------- ------ --------- --------- ------
Gross Profit less SG&A 3.7% 3.0% 0.8% 5.1% 4.0% 1.1%
Provision for realignment - - - 0.0% 0.7% (0.7%)
Amortization of intangibles 0.4% 0.3% 0.1% 0.4% 0.2% 0.2%
Interest expense 1.2% 1.5% (0.3%) 1.0% 1.3% (0.3%)
Interest (income) & other, net 0.2% (0.2%) 0.4% 0.1% (0.1%) 0.2%
-------- -------- ------ --------- --------- ------
Earnings before tax 2.0% 1.3% 0.7% 3.5% 1.9% 1.7%
Income taxes 0.7% 0.5% 0.2% 1.2% 0.6% 0.6%
-------- -------- ------ --------- --------- ------
Net earnings 1.3% 0.8% 0.4% 2.3% 1.2% 1.1%
======== ======== ====== ========= ========= ======
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 second quarter have
historically been lower than for the other quarters of the fiscal year. In
recent years, the second quarter's results have represented approximately
21% of the year's sales and 8% of net earnings before unusual items and
facilities realignment costs.
SALES for the second quarter were $526.8, increasing $63.4 or 13.7% versus
last year. The increase in sales was due to the acquisitions of Gerber and
Briggs (approximately $68). Sales from new brands and programs were offset
by discontinued brands and programs. Sales for the six months ended August
2, 2003, were $1,216.0, increasing $182.0 or 17.6% versus last year. The
increase in sales was due to the acquisitions of Gerber and Briggs
(approximately $166) and internal growth.
GROSS PROFIT for the second quarter of 2003 was $108.0 or 20.5% of sales.
This increased $16.9 or 0.8% of sales versus $91.1 or 19.7% of sales
reported last year. Included in gross profit for last year's second quarter
is $0.7 in facilities realignment costs. Excluding the 2002 second quarter
facilities realignment costs, gross profit for the second quarter of 2003
increased $16.2 or 0.7% of net sales.
Gross profit for the six months ended August 2, 2003, was $247.0 or 20.3% of
sales. This increased $49.0 or 1.2% of sales versus $198.0 or 19.1% of sales
reported last year. Included in gross profit for the six months ended August
3, 2002 is $2.4 in facilities realignment costs. Excluding the facilities
realignment costs, gross profit for the six months ended August 2, 2003,
increased $46.6 or 0.9% of net sales. The improvement in Kellwood's gross
margin rate for the three and six months ended August 2, 2003, 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 reserve for and
liquidate, and the elimination of several non-competitive manufacturing
facilities in North America, Mexico, and the Caribbean Basin.
SG&A EXPENSE for the second quarter and for the six months ended August 2,
2003, increased $10.9 and $28.4 respectively, compared to the corresponding
periods of the prior year. This increase is primarily due to the
acquisitions of Briggs and Gerber ($7.0 for the second quarter and $16.5 for
the six months ended August 2, 2003) and spending related to several new
brands and marketing initiatives ($6.5 for the second quarter and $9.9 for
the six months ended August 2, 2003). These initiatives provided relatively
little sales volume during the six months ended August 2, 2003, but are
expected to provide growth in late 2003 and in 2004. For the three and six
month periods ended August 2, 2003, SG&A expense as a percent of sales was
relatively constant compared to the corresponding periods of the prior year.
PROVISION FOR REALIGNMENT represents the impact of the facility realignment
program implemented in 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
AMORTIZATION of intangible assets for the second quarter and for the six
months ended August 2, 2003, increased $0.8 and $2.8, respectively, compared
to the corresponding periods of the prior year. The increase was due to the
amortizable intangible assets acquired in the Gerber and Briggs
acquisitions.
INTEREST EXPENSE decreased $0.9 or 12.2% for the second quarter and $1.2 or
9.0% for the six months ended August 2, 2003 compared to the corresponding
periods of the prior year. As a percentage of net sales, interest expense
decreased to 1.2% from 1.5% for second quarter and to 1.0% from 1.3% for the
six months ended August 2, 2003. The decrease in interest expense is due to
a combination of lower average debt balances and lower rates.
INTEREST INCOME AND OTHER, net for the second quarter and for the six months
ended August 2, 2003 decreased $1.8 and $2.8, respectively, compared to the
corresponding periods of the prior year. The decrease in interest income and
other, net is primarily due to lower earnings related to a 50 percent owned
joint venture accounted for using the equity method and less interest
income.
INCOME TAXES. The Company's effective income tax rate of 35.5% is the rate
expected to be applicable for the full fiscal year. The overall rate is
slightly higher than the corresponding period of last year due to a higher
percentage of U.S. earnings in the current year, which are taxed at a higher
rate and a higher state tax rate as a result of the Briggs acquisition.
WEIGHTED AVERAGE DILUTED SHARES outstanding increased in both the three and
six month periods 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 were as follows (amounts are
presented based on actual data, therefore columns may not add due to
rounding):
Three months ended Six months ended
---------------------------------- ----------------------------------
August 2, August 3, August 2, August 3,
2003 2002 Change 2003 2002 Change
-------- -------- ------ -------- --------- ------
Women's Sportswear $ 291.8 $ 267.1 9.3% $ 707.6 $ 628.2 12.6%
Men's Sportswear 121.1 97.1 24.7% 247.8 186.2 33.1%
Other Soft Goods 114.0 99.2 14.9% 260.7 219.6 18.7%
-------- -------- ------ -------- --------- ------
Total Net Sales $ 526.8 $ 463.3 13.7% $1,216.0 $ 1,034.0 17.6%
======== ======== ====== ======== ========= ======
Earnings by segment (excluding facilities realignment costs in the prior
year) were as follows:
Three months ended - amounts Three months ended - percentages
---------------------------------- ------------------------------------
August 2, August 3, August 2, August 3,
2003 2002 Change 2003 2002 Change
-------- -------- ------ -------- -------- ------
Women's Sportswear $ 15.3 $ 14.7 4.0% 5.3% 5.5% (0.3%)
Men's Sportswear 7.8 6.3 23.2% 6.4% 6.5% (0.1%)
Other Soft Goods 6.2 3.0 108.4% 5.5% 3.0% 2.5%
-------- -------- ------ -------- -------- ------
Segment Earnings $ 29.3 $ 24.1 22.0% 5.6% 5.2% 0.4%
======== ======== ====== ======== ======== ======
Six months ended - amounts Six months ended - percentages
---------------------------------- ------------------------------------
August 2, August 3, August 2, August 3,
2003 2002 Change 2003 2002 Change
-------- -------- ------ -------- -------- ------
Women's Sportswear $ 51.3 $ 44.5 15.3% 7.2% 7.1% 0.2%
Men's Sportswear 15.6 11.7 32.6% 6.3% 6.3% (0.0%)
Other Soft Goods 16.6 7.8 113.2% 6.4% 3.6% 2.8%
-------- -------- ------ -------- -------- ------
Segment Earnings $ 83.5 $ 64.0 30.4% 6.9% 6.2% 0.7%
======== ======== ====== ======== ======== ======
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
WOMEN'S SPORTSWEAR. Sales for the second quarter of fiscal 2003 were $291.8,
increasing $24.7 or 9.3% versus last year. Sales for the six months ended
August 2, 2003 were $707.6, increasing $79.4 or 12.6% versus last year. The
increase in sales for both periods was primarily due to the acquisition of
Briggs (which had sales of $45.2 for the second quarter and $93.9 for the
six months ended August 2, 2003), partially offset by declining sales in
most of our other women's business units. This decline is primarily
attributable to sales decreases of private label merchandise and dresses and
decreased sales to specialty stores.
Segment earnings for the second quarter of fiscal 2003 were $15.3, up $0.6
from last year and for the six months ended August 2, 2003 were $51.3, up
$6.8 from last year. The primary reason for the increase in segment earnings
during both periods was an improvement in the gross margin percentage due to
product sourcing, partially offset by increased SG&A spending related to new
marketing initiatives.
MEN'S SPORTSWEAR. Sales for the second quarter of 2003 were $121.1,
increasing $24.0 or 24.7% versus last year. Sales for the six months ended
August 2, 2003 were $247.8, increasing $61.6 or 33.1% versus last year. The
acquisition of Gerber resulted in added sales of $5.5 in the second quarter
and $18.5 for the six months ended August 2, 2003. Sales growth in
businesses that were part of the Company in both 2003 and 2002 was across
every major product category and included increases in branded and private
label businesses.
Segment earnings for the second quarter of fiscal 2003 were $7.8, up $1.5
from last year and for the six months ended August 2, 2003 were $15.6, up
$3.9 from last year. The increase in segment earnings for both periods was
primarily due to increased earnings from businesses that were part of the
Company in both 2003 and 2002.
OTHER SOFT GOODS. The Other Soft Goods segment contains three businesses:
Intimate Apparel, Gerber Apparel and American Recreation Products. Sales for
the second quarter of fiscal 2003 were $114.0, increasing $14.8 or 14.9%
versus last year. Sales for the six months ended August 2, 2003 were $260.7,
increasing $41.1 or 18.7% versus last year. The increase in sales for both
periods was primarily due to the Gerber acquisition (which had sales
increases of $17.7 for the second quarter and $53.9 for the six months ended
August 2, 2003) partially offset by sales declines at the two business units
that were part of Kellwood in both years. Sales at these two business units
(Intimate Apparel and Recreation Products) were down due to weak customer
demand and softness in the camping business.
Segment earnings for the second quarter of fiscal 2003 were $6.2, up $3.2
from last year and for the six months ended August 2, 2003 were $16.6, up
$8.8 from last year. The Company 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 the majority of sourcing to contractors
in the Far East, margins have improved, SG&A spending has been reduced, and
segment earnings have increased.
GENERAL CORPORATE AND OTHER EXPENSE for the second quarter of fiscal 2003
was $10.7, up $1.8 from last year and for the six months ended August 2,
2003 was $23.3, up $4.0 from last year. The increases in both periods are
primarily due to increases in various corporate expenses, lower earnings
related to a joint venture accounted for using the equity method and less
interest income.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
FINANCIAL CONDITION
- -------------------
Cash flow from operations is the Company's primary source of liquidity. The
Company 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 August 2, 2003, the Company's debt-to-capital ratio reached 33.5% down
1.9 and 4.0 percentage points from February 1, 2003 and August 3, 2002,
respectively. This is particularly notable in light of the fact that during
the first quarter the Company absorbed the $140 acquisition of Briggs. The
three primary drivers of this improvement were free cash flow, working
capital management, and $12 of new equity issued in conjunction with the
Briggs acquisition.
WORKING CAPITAL
- ---------------
The CURRENT RATIO decreased to 2.7 at August 2, 2003 compared to 3.0 at
August 3, 2002.
CASH AND TIME DEPOSITS were $112.1 at August 2, 2003 compared to $142.7 at
August 3, 2002. During the past 12 months, approximately $128 of cash was
used in acquisitions. Cash flow and working capital management have covered
almost all of the cash used for acquisitions. Working capital as a
percentage of sales is currently running at about 17.0%, which compares
favorably to the 18.1% average in 2002.
ACCOUNTS RECEIVABLE were $314.7, up $24.5 from last year. Excluding the
receivables of Briggs at August 2, 2003, receivables were down $10.5
compared to the prior year. Days sales outstanding were 48 days as of August
2, 2003 compared to 49 days last year.
INVENTORIES were $355.6, down $48.3, or 12.0%, from August 3, 2002. Days
supply now stands at an estimated 63 days. This represents a 7-day
improvement from last year. Excluding the acquisition of Briggs, inventories
are down $56.5, or 14.0%.
FINANCING AND INVESTING ACTIVITIES
- ----------------------------------
Capital expenditures were $10.1 for the first six months of 2003 compared to
$6.1 in the comparable period last year. Capital spending for 2003 is
expected to be about $22 to 24.
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 approximately 1.45% over
LIBOR. At August 2, 2003, there were no outstanding short-term loans.
Letters of credit outstanding under the agreement were $62.1.
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.
17
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.
18
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 August 2, 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 $309 at August 2, 2003 which compares to their book
value of $302. With respect to the Company's fixed-rate debt outstanding at
August 2, 2003, a 10% increase in interest rates would have resulted in
approximately a $13 decrease in the market value of Kellwood's fixed-rate
debt; a 10% decrease in interest rates would have resulted in approximately
a $14 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 as of August 2,
2003, 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.
19
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a) EXHIBITS:
S.E.C. Exhibit
Reference No. Description
------------- -----------
31 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith.
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
b) REPORTS ON FORM 8-K:
The following reports were filed on Form 8-K during the three
months ended August 2, 2003:
Current Report on Form 8-K dated May 30, 2003 reporting
under items 7 and 9
Current Report on Form 8-K dated June 13, 2003 reporting
under items 5 and 7
Current Report on Form 8-K dated June 19, 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
September 4, 2003 /s/ W. Lee Capps, III
-----------------------------------
W. Lee Capps, III
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
September 4, 2003 /s/ Lawrence E. Hummel
-----------------------------------
Lawrence E. Hummel
Vice President Finance (Principal
Accounting Officer)
20