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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 November 1, 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 November 1,
2003 (only one class): 26,728,082.
1
KELLWOOD COMPANY
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INDEX
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Page No.
--------
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 6-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
November 1, November 2, February 1,
2003 2002 2003
----------- ----------- -----------
ASSETS
- ------
Current assets:
Cash and time deposits $ 124,187 $ 180,393 $ 210,323
Receivables, net 381,690 339,566 322,377
Inventories 266,806 333,283 351,101
Prepaid taxes and expenses 44,942 41,464 40,236
Current assets of discontinued operations 22,449 20,454 18,094
---------- ---------- ----------
Total current assets 840,074 915,160 942,131
Property, plant and equipment, net 94,445 95,311 99,354
Intangible assets, net 112,379 60,639 57,975
Goodwill 163,037 99,607 102,225
Other assets 32,198 45,782 44,518
Long-term assets of discontinued operations 3,572 13,967 8,376
---------- ---------- ----------
Total assets $1,245,705 $1,230,466 $1,254,579
========== ========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Notes payable and current
portion of long-term debt $ 26,565 $ 17,440 $ 27,232
Accounts payable 147,470 172,260 183,727
Accrued salaries and employee benefits 42,309 45,539 54,729
Accrued expenses 50,372 73,926 76,301
Current liabilities of discontinued operations 8,088 6,614 10,696
---------- ---------- ----------
Total current liabilities 274,804 315,779 352,685
Long-term debt 273,709 300,142 278,115
Deferred income taxes and other 61,219 57,790 61,975
Long-term liabilities of discontinued operations 2,432 2,275 2,685
Shareowners' equity:
Common stock 246,623 214,551 214,826
Retained earnings 501,289 451,865 456,225
Accumulated other comprehensive income (9,465) (11,195) (11,089)
Less treasury stock, at cost (104,906) (100,741) (100,843)
---------- ---------- ----------
Total shareowners' equity 633,541 554,480 559,119
---------- ---------- ----------
Total liabilities and shareowners' equity $1,245,705 $1,230,466 $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 Nine Months Ended
---------------------------- -----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $645,758 $622,627 $1,832,566 $1,645,920
Costs and expenses:
Cost of products sold 505,082 492,243 1,447,500 1,318,527
Selling, general and
administrative expenses 86,351 86,665 267,376 243,007
Provision for realignment - 3,115 - 10,359
Amortization of intangible assets 2,433 1,943 7,310 3,998
Interest expense 6,217 7,560 18,870 21,470
Interest (income) and other, net 234 (422) 1,744 (1,770)
-------- -------- ---------- ----------
Earnings before income taxes 45,441 31,523 89,766 50,329
Income taxes 15,011 11,059 30,742 17,631
-------- -------- ---------- ----------
Net earnings from continuing operations 30,430 20,464 59,024 32,698
Net earnings (loss)
from discontinued operations (180) 631 (1,260) 870
-------- -------- ---------- ----------
Net earnings $ 30,250 $ 21,095 $ 57,764 $ 33,568
======== ======== ========== ==========
Weighted average shares outstanding:
Basic 26,632 25,563 26,412 24,234
======== ======== ========== ==========
Diluted 27,321 25,761 26,947 24,546
======== ======== ========== ==========
Earnings (loss) per share:
Basic:
Continuing operations $ 1.14 $ .80 $ 2.24 $ 1.35
Discontinued operations - .03 (.05) .04
------- -------- ---------- ----------
Net earnings $ 1.14 $ .83 $ 2.19 $ 1.39
======== ======== ========== ==========
Diluted:
Continuing operations $ 1.11 $ .79 $ 2.19 $ 1.33
Discontinued operations - .03 (.05) .04
------- -------- ---------- ----------
Net earnings $ 1.11 $ .82 $ 2.14 $ 1.37
======= ======== ========== ==========
Dividends paid per share $ .16 $ .16 $ .48 $ .48
======= ======== ========== ==========
See notes to condensed consolidated financial statements.
4
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
Nine months ended
---------------------------------
November 1, November 2,
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net earnings $ 57,764 $ 33,568
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 27,186 24,656
Asset impairment portion of facilities realignment - 6,064
Deferred income taxes and other 15,793 6,354
Changes in working capital components:
Receivables, net (37,285) (4,157)
Inventories 96,681 70,848
Prepaid taxes and expenses (5,898) (4,900)
Accounts payable and accrued expenses (92,475) 37,379
--------- --------
Net cash from operating activities 61,766 169,812
--------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (15,048) (9,126)
Acquisitions, net of cash acquired (134,527) (18,075)
Subordinated note receivable 1,374 (11,000)
Dispositions of fixed assets 2,418 2,658
--------- --------
Net cash from investing activities (145,783) (35,543)
--------- --------
FINANCING ACTIVITIES:
Reduction of notes payable (636) (7,366)
Reduction of long-term debt (4,636) (10,143)
Dividends paid (12,692) (11,460)
Stock transactions under incentive plans 15,845 5,854
--------- --------
Net cash from financing activities (2,119) (23,115)
--------- --------
NET INCREASE (DECREASE) IN CASH AND TIME DEPOSITS (86,136) 111,154
Cash and time deposits, beginning of period 210,323 69,239
--------- --------
Cash and time deposits, end of period $ 124,187 $180,393
========= ========
Supplemental Cash Flow Information:
Interest Paid $ 14,596 $ 19,035
========= ========
Income Taxes Paid $ 40,743 $ 14,352
========= ========
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 UNAUDITED 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 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. We estimate the additional consideration for 2003 to be in
the range of $6,000 to 8,000.
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 Company's unaudited consolidated results of operations for the three
months ended November 2, 2002, on a pro-forma basis, assuming the Briggs
acquisition had occurred at the beginning of 2002 are: net sales of
$689,805, net earnings from continuing operations of $23,350 and diluted
earnings per share from continuing operations of $.89. The Company's
unaudited consolidated results of operations for the nine months ended
November 2, 2002, on a pro-forma basis, assuming the Gerber and Briggs
acquisitions had occurred at the beginning of 2002 are: net sales of
$1,861,910, net earnings from continuing operations of $41,590 and diluted
earnings per share from continuing operations of $1.59. 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
3. DISCONTINUED OPERATIONS. On October 30, 2003 the Company finalized an
agreement to sell their domestic and European hosiery (Hosiery) operations
for $7,500 plus reimbursement of $2,800 for certain costs incurred by the
Company in connection with the closure of certain facilities. As such, the
operations of the Hosiery business are accounted for as discontinued
operations, and accordingly, operating results and assets and liabilities of
the Hosiery operations are segregated in the accompanying condensed
consolidated statement of earnings and condensed consolidated balance sheet,
respectively. Prior to being classified as discontinued, the Hosiery
operations were included in the Men's Sportswear segment.
The Hosiery operations were acquired in June 2002 as part of the Company's
acquisition of Gerber Childrenswear. Operating results for the Hosiery
operations are as follows:
Three months ended Nine months ended
------------------------------- ----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $13,558 $10,768 $42,760 $21,500
======= ======= ======= =======
Earnings (loss) before income taxes $ (244) $ 972 $(1,916) $ 1,339
Income taxes (64) 341 (656) 469
------- ------- ------- -------
Net earnings (loss) $ (180) $ 631 $(1,260) $ 870
======= ======= ======= =======
Summarized assets and liabilities of the Hosiery operations are as follows:
November 1, November 2, February 1,
2003 2002 2003
----------- ----------- -----------
Receivables $ 8,613 $ 5,674 $ 3,648
Inventories 10,607 10,736 11,641
Other current assets 3,229 4,044 2,805
------- ------- -------
Current assets of
discontinued operations $22,449 $20,454 $18,094
======= ======= =======
Property, plant and equipment, net $ 3,047 $12,706 $ 6,559
Other assets 525 1,261 1,817
------- ------- -------
Long-term assets of
discontinued operations $ 3,572 $13,967 $ 8,376
======= ======= =======
Accounts payable $ 4,446 $ 2,897 $ 3,277
Accrued liabilities 3,242 3,317 7,019
Current portion of long-term debt 400 400 400
------- ------- -------
Current liabilities of
discontinued operations $ 8,088 $ 6,614 $10,696
======= ======= =======
Long-term debt $ 200 $ 600 $ 400
Other long-term liabilities 2,232 1,675 2,285
------- ------- -------
Long-term liabilities of
discontinued operations $ 2,432 $ 2,275 $ 2,685
======= ======= =======
The decrease in property, plant and equipment, net from November 2, 2002 is
due to adjustments to the preliminary purchase price allocation.
The sale of the Hosiery operations was closed on November 13, 2003. The
Company is currently evaluating the earnings impact of the sale transaction.
It is expected that the transaction will have a nominal impact on earnings.
This will be recorded in the fourth quarter as part of discontinued
operations.
7
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
4. INVENTORIES. Inventories consist of the following:
November 1, November 2, February 1,
2003 2002 2003
----------- ----------- -----------
Inventories:
Finished goods $208,142 $254,529 $273,858
Work in process 26,731 34,813 37,522
Raw materials 31,933 43,941 39,721
-------- -------- --------
Total Inventories $266,806 $333,283 $351,101
======== ======== ========
Net of obsolescence reserves of $ 30,449 $ 31,740 $ 31,153
======== ======== ========
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 1.00% over LIBOR. At November 1, 2003, there were
no outstanding short-term loans. Letters of credit outstanding under the
agreement were $56,812.
In addition, the Company maintains informal uncommitted lines of credit with
two banks, which totaled $20,000 at November 1, 2003. There were no
borrowings under these uncommitted lines at November 1, 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 Nine months ended
------------------------------ ----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings $30,250 $21,095 $57,764 $33,568
Other comprehensive income:
Currency translation adjustment (733) (630) 1,712 (712)
Unrecognized gain/(loss) on derivatives (67) 155 (88) 38
------- ------- ------- -------
Total comprehensive income $29,450 $20,620 $59,388 $32,894
======= ======= ======= =======
8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED 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 Nine months ended
------------------------------ -----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerators:
Net earnings from continuing operations $30,430 $20,464 $59,024 $32,698
Net earnings from discontinued operations (180) 631 (1,260) 870
------- ------- ------- -------
Net earnings $30,250 $21,095 $57,764 $33,568
======= ======= ======= =======
Denominators (000's):
Average shares outstanding - Basic 26,632 25,563 26,412 24,234
Impact of stock options 689 198 535 312
------- ------- ------- -------
Average shares outstanding - Diluted 27,321 25,761 26,947 24,546
======= ======= ======= =======
Continuing operations $ 1.14 $ .80 $ 2.24 $ 1.35
Discontinued operations - .03 (.05) .04
------- ------- ------- -------
Basic earnings per share $ 1.14 $ .83 $ 2.19 $ 1.39
======= ======= ======= =======
Continuing operations $ 1.11 $ .79 $ 2.19 $ 1.33
Discontinued operations - .03 (0.05) .04
------- ------- ------- -------
Diluted earnings per share $ 1.11 $ .82 $ 2.14 $ 1.37
======= ======= ======= =======
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 accounts for the stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The following table illustrates the
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123.
Three months ended Nine months ended
------------------------------- ------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings as reported $30,250 $21,095 $57,764 $33,568
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax effect (669) (663) (2,008) (1,990)
------- ------- ------- -------
Pro-forma net earnings $29,581 $20,432 $55,756 $31,578
======= ======= ======= =======
Earnings per share:
Basic, as reported $ 1.14 $ .83 $ 2.19 $ 1.39
Basic, pro-forma $ 1.11 $ .80 $ 2.11 $ 1.30
Diluted, as reported $ 1.11 $ .82 $ 2.14 $ 1.37
Diluted, pro-forma $ 1.08 $ .79 $ 2.07 $ 1.29
9
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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(R) for women's
sportswear, Izod(R) for women's sportswear, Def Jam(R), Liz Claiborne(R) for
women's suits and XOXO(R) 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.
10. 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 third quarter of 2002, the
Company recorded pretax realignment and related costs of $3,383, which
included $268 recorded in cost of products sold and $3,115 recorded as a
provision for realignment. For the first nine months of 2002, the Company
recorded pretax realignment and related costs of $13,000, which included
$2,641 recorded in cost of sales and $10,359 recorded as a provision for
realignment.
Through November 1, 2003 the Company closed five warehouse operations and
four manufacturing facilities, resulting in a reduction of employment of
approximately 1,200 and terminated a licensing agreement. 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
November 1, 2003 is as follows:
Amount Amount Accrual at
Provided Utilized November 1, 2003
-------- -------- ----------------
Employee severance $ 3,170 $2,896 $ 274
Vacant facilities costs 3,838 2,944 894
Other cash realignment costs 1,915 1,915 -
------- ------ ------
Total realignment, excluding non-cash 8,923 $7,755 $1,168
====== ======
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.
10
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED 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 November 1, 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 last of the four manufacturing facilities is one of the
two facilities in Ireland that make up the European Hosiery operations. This
facility will not be closed as part of the acquisition implementation but
instead is part of the discontinuance of the European Hosiery operations
discussed in Note 3. As a result of the changes in plans for the third and
fourth manufacturing facilities, the accruals of $3.3 million for severance
related to those closings have been reversed. Details for the Gerber
realignment costs, and the related accruals, through November 1, 2003 are as
follows:
Amount
Originally Amount Discontinued Accrual at
Provided Utilized Reversals Operations November 1, 2003
---------- -------- --------- ------------ ----------------
Employee severance $4,789 $1,314 $3,331 $ - $ 144
Vacant facilities costs 2,874 420 - 395 2,059
------ ------ ----- ----- ------
Total realignment $7,663 $1,734 $3,331 $ 395 $2,203
====== ====== ====== ===== ======
The majority of the remaining accrual at November 1, 2003 relates to a lease
payment on a vacant facility that will expire in 2008.
11
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
11. REPORTABLE SEGMENTS. The Company and its subsidiaries are principally
engaged in the apparel and related soft goods industry. The Company's
operations are managed in a number of business units that are organized
around individual product lines and brands. These business units are
aggregated into three major consumer market product groupings along with
General Corporate, which represent the Company's reportable segments. These
segments are:
o Women's Sportswear designs, merchandises and sells women's
sportswear sold through leading retailers in all channels of
distribution. The product line includes blazers, dresses, sweaters,
blouses, vests, other tops, skirts, pants, and skorts. The business
is primarily branded goods sold at the popular-to-moderate price
points, but the segment does include some better-to-bridge lines -
upper price point women's sportswear sold principally to small
specialty stores, regional department stores and catalog houses.
o Men's Sportswear designs, manufactures and sells men's woven and
knit shirts, pants, and jeans sold to leading department stores,
catalog houses and national chains. The business is primarily
private label but also includes a number of branded programs such
as Slates(R) business casual shirts, sweaters and tops, Nautica(R),
Claiborne(R) and Dockers(R) dress shirts.
o Other Soft Goods designs, merchandises and sells intimate apparel,
infant apparel, and recreation products (tents, sleeping bags,
backpacks, and related products).
o General Corporate includes the following expenses at the corporate
level that are not allocated to the above segments:
- Corporate general and administrative expenses,
- Pension plan termination gain, and
- Amortization of intangible assets
Management evaluates the performance of its operating segments separately to
individually monitor the different factors affecting financial performance.
Segment earnings for the three major consumer market product segments
includes substantially all of the segment's costs of production,
distribution and administration. Segment net assets includes the net working
capital, net fixed assets and other noncurrent assets and liabilities of
each segment. Goodwill and net intangibles are included in the three major
consumer market product segment's net assets, however the related
amortization expense is included in amortization of intangibles at the
corporate level and is not allocated to those segments. Certain corporate
assets, including capitalized software, and debt and cash balances are
accounted for at the corporate level and are not allocated to the three
major consumer market product segments. Capital expenditures exclude the
cost of long-lived assets included in acquisitions accounted for under
purchase accounting.
12
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Sales, segment earnings, and net assets by segment for the three and nine
month periods ended November 1, 2003 and November 2, 2002 are as follows:
Three months ended Nine months ended
------------------------------ ----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales:
Women's Sportswear $ 397,745 $ 393,975 $1,105,333 $1,022,191
Men's Sportswear 143,642 112,651 362,211 288,091
Other Soft Goods 104,371 116,001 365,022 335,638
--------- --------- ---------- ----------
Kellwood net sales $ 645,758 $ 622,627 $1,832,566 $1,645,920
========= ========= ========== ==========
Segment earnings(1):
Women's Sportswear $ 41,060 $ 40,395 $ 92,346 $ 84,476
Men's Sportswear 16,190 10,623 33,376 21,512
Other Soft Goods 5,708 4,683 22,354 10,948
General Corporate (8,633) (11,982) (30,386) (32,550)
--------- --------- ---------- ----------
Total segment earnings 54,325 43,719 117,690 84,386
Provision for realignment(2) - (3,115) - (10,359)
Amortization of intangibles (2,433) (1,943) (7,310) (3,998)
Interest expense (6,217) (7,560) (18,870) (21,470)
Interest income and other, net (234) 422 (1,744) 1,770
--------- --------- ---------- ----------
Earnings before income taxes $ 45,441 $ 31,523 $ 89,766 $ 50,329
========= ========= ========== ==========
Net assets at quarter-end:
Women's Sportswear $ 498,769 $ 387,851
Men's Sportswear 190,090 130,962
Other Soft Goods 188,873 186,441
General Corporate (228,975) (159,544)
--------- ---------
Continuing Operations 648,757 545,710
Discontinued Operations (15,216) 8,770
--------- ---------
Kellwood total $ 633,541 $ 554,480
========= =========
(1) Realignment costs included in segment earnings above for the three
months ended November 2, 2002 were $163 for Women's Sportswear, $(122) for
Men's Sportswear and $227 for Other Soft Goods, and for the nine months
ended November 2, 2002 were $565 for Women's Sportswear, $305 for Men's
Sportswear, and $1,771 for Other Soft Goods.
(2) For the three months ended November 2, 2002, the provision for
realignment relates to the segments as follows: $276 for Women's Sportswear,
$(196) for Men's Sportswear and $3,035 for Other Soft Goods. For the nine
months ended November 2, 2002 the provision for realignment relates to the
segments as follows: $4,331 for Women's Sportswear, $1,583 for Men's
Sportswear, and $4,445 for Other Soft Goods.
13
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
12. NEW ACCOUNTING STANDARDS.
The Financial Accounting Standards Board (FASB) issued SFAS 146, Accounting
for Costs Associated with Exit or Disposal Activities. SFAS 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 SFAS 148, Accounting for Stock-Based Compensation -
Transition and Disclosures. The Company applies APB 25 and related
interpretations in accounting for its stock option plans. The disclosure
provisions of SFAS 148 have been adopted and are presented in Note 8.
14
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 November 1, 2003 and November 2, 2002, and in the condensed
consolidated statement of earnings for the three-month and nine-month
periods ended November 1, 2003 and November 2, 2002. 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 third quarter were $645.8, up $23.1, or 3.7%, from last year.
Net earnings from continuing operations for the third quarter were $30.4, or
$1.11 per share compared to $20.5, or $.79 per share last year on a diluted
basis. Included in net earnings from continuing operations for last year's
third quarter is $3.4 before-tax, or $2.2 after-tax ($.08 per share) in
facilities realignment costs. This represents the 2002 third quarter impact
of the $15 pretax facility realignment program implemented in 2002.
Excluding the third quarter facilities realignment costs, net earnings from
continuing operations for the 2002 third quarter were $22.6, or $.88 per
diluted share.
Sales for the first nine months were $1,832.6, up $186.6, or 11.3% from the
prior year. Net earnings from continuing operations were $59.0, or $2.19 per
share compared to $32.7, or $1.33 per share last year on a diluted basis.
Included in net earnings from continuing operations for the first nine
months of 2002 is $13.0 before-tax, or $8.4 after-tax ($.35 per share) in
facilities realignment costs. Excluding the first nine months facilities
realignment costs, net earnings from continuing operations for the first
nine months of 2002 were $41.1, or $1.67 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, and 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 $4.0 if another buyer prevailed. This
amount was received on December 2, 2003 and will be recorded as income, net
of bid related expenses (currently estimated at $1.5), in the fourth
quarter.
15
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 nine month periods ended
November 1, 2003 and November 2, 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 Nine months ended
------------------------------------ ----------------------------------
November 1, November 2, November 1, November 2,
2003 2002 Change 2003 2002 Change
----------- ----------- ------ ----------- ----------- ------
Net sales $645.8 $622.6 3.7% $1,832.6 $1,645.9 11.3%
Cost of products sold(1) 505.1 492.2 2.6% 1,447.5 1,318.5 9.8%
------ ------ ----- -------- -------- -----
Gross profit(1) 140.7 130.4 7.9% 385.1 327.4 17.6%
SG&A 86.4 86.7 (0.4%) 267.4 243.0 10.0%
------ ------ ----- -------- -------- -----
Operating earnings before
amortization and
realignment costs(1)(2) 54.3 43.7 24.3% 117.7 84.4 39.5%
Provision for realignment(1) - 3.1 - 10.4
Amortization of intangibles 2.4 1.9 25.2% 7.3 4.0 82.8%
------ ------ ----- -------- -------- -----
Operating earnings 51.9 38.7 34.2% 110.4 70.0 57.6%
Interest expense 6.2 7.6 (17.8%) 18.9 21.5 (12.1%)
Interest (income) & other, net 0.2 (0.4) NM 1.7 (1.8) NM
------ ------ ----- -------- -------- -----
Earnings before taxes 45.4 31.5 44.2% 89.8 50.3 78.4%
Income taxes 15.0 11.1 35.9% 30.7 17.6 74.4%
------ ------ ----- -------- -------- -----
Net earnings from
continuing operations $ 30.4 $ 20.5 48.6% $ 59.0 $ 32.7 80.5%
====== ====== ===== ======== ======== =====
Effective tax rate 33.1% 35.1% 34.2% 35.0%
Average diluted shares 27.3 25.8 6.1% 26.9 24.5 9.8%
------ ------ ----- -------- -------- -----
Diluted earnings per share $ 1.11 $ .79 40.1% $ 2.19 $ 1.33 64.4%
------ ------ ----- -------- -------- -----
(1) The impact of facilities realignment costs included in data above for
the three months ended November 2, 2002 was $.3 included in cost of products
sold and $3.1 included in provision for realignment ($2.2 in net earnings
and $.08 in diluted earnings per share), and for the nine months ended
November 2, 2002 was $2.6 included in cost of products sold and $10.4
included in provision for realignment ($8.4 in net earnings and $.35 in
diluted earnings per share).
(2) Operating earnings before amortization and realignment costs differs
from operating earnings in that it excludes the provision for realignment
and amortization of intangibles. Operating earnings before amortization and
realignment costs should not be considered as an alternative to operating
earnings. Operating earnings before amortization and realignment costs is
the primary measure used to evaluate the Company's performance as well as
the performance of the Company's business units and segments. Management
believes the comparison of operating earnings before amortization and
realignment costs 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 operating earnings before
amortization and realignment costs may not be comparable to any similarly
titled measure used by another company.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
Three months ended Nine months ended
------------------------------------ -----------------------------------
November 1, November 2, November 1, November 2,
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 78.2% 79.1% (0.8%) 79.0% 80.1% (1.1%)
----- ----- ---- ----- ----- ----
Gross profit 21.8% 20.9% 0.8% 21.0% 19.9% 1.1%
SG&A 13.4% 13.9% (0.5%) 14.6% 14.8% (0.2%)
----- ----- ---- ----- ----- ----
Operating earnings before
amortization and
realignment costs 8.4% 7.0% 1.4% 6.4% 5.1% 1.3%
Provision for realignment 0.0% 0.5% (0.5%) 0.0% 0.6% (0.6%)
Amortization of intangibles 0.4% 0.3% 0.1% 0.4% 0.2% 0.2%
----- ----- ---- ----- ----- ----
Operating earnings 8.0% 6.2% 1.8% 6.0% 4.3% 1.8%
Interest expense 1.0% 1.2% (0.3%) 1.0% 1.3% (0.3%)
Interest (income) & other, net 0.0% (0.1%) 0.1% 0.1% (0.1%) 0.2%
----- ----- ---- ----- ----- ----
Earnings before taxes 7.0% 5.1% 2.0% 4.9% 3.1% 1.8%
Income taxes 2.3% 1.8% 0.6% 1.7% 1.1% 0.6%
----- ----- ---- ----- ----- ----
Net earnings from
continuing operations 4.7% 3.3% 1.4% 3.2% 2.0% 1.2%
===== ===== ==== ===== ===== ====
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 third quarter have
historically been higher than the other quarters of the fiscal year.
SALES for the third quarter were $645.8, increasing $23.1 or 3.7% versus
last year. The increase in sales was primarily driven by the acquisition of
Briggs (approximately $57.8) and increased sales at the Men's Sportswear
segment (approximately $31.0) partially offset by discontinued brands and
programs and sales declines to existing customers in the Women's and Other
Soft Goods segments. Sales for the nine months ended November 1, 2003, were
$1,832.6, increasing $186.6 or 11.3% versus last year. The increase in sales
was due to the acquisitions of Gerber and Briggs (approximately $206.0) and
increased sales in the Men's Sportswear segment (approximately $74.1)
partially offset by discontinued brands and programs and sales declines to
existing customers in the Women's and Other Soft Goods segments.
GROSS PROFIT for the third quarter of 2003 was $140.7 or 21.8% of sales.
This increased $10.3 or 0.8% of sales versus $130.4 or 20.9% of sales
reported last year. Included in gross profit for last year's third quarter
is $0.3 in facilities realignment costs. Excluding the 2002 third quarter
facilities realignment costs, gross profit for the third quarter of 2003
increased $10.0 or 0.8% of net sales.
Gross profit for the nine months ended November 1, 2003, was $385.1 or 21.0%
of sales. This increased $57.7 or 1.1% of sales versus $327.4 or 19.9% of
sales reported last year. Included in gross profit for the nine months ended
November 2, 2002 is $2.6 in facilities realignment costs. Excluding the
facilities realignment costs, gross profit for the nine months ended
November 1, 2003, increased $55.0 or 1.0% of net sales. The improvement in
the Company's gross margin rate for the three and nine months ended November
1, 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, having less surplus and obsolete inventory to
reserve for and liquidate, and the elimination of several non-competitive
manufacturing facilities in Mexico, Canada, El Salvador and Honduras.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
SG&A EXPENSE for the third quarter of 2003 decreased $0.3 and for the nine
months ended November 1, 2003 increased $24.4 compared to the corresponding
periods of the prior year. The increase for the nine months ended November
1, 2003 was primarily due to the acquisitions of Briggs and Gerber ($15.6)
and spending related to several new brands and marketing initiatives
($14.9). These initiatives provided relatively little sales volume during
the nine months ended November 1, 2003, but are expected to provide growth
in the fourth quarter of 2003 and in 2004. For the three and nine months
ended November 1, 2003, SG&A expense as a percent of sales decreased 0.5%
and 0.2%, respectively, compared to the corresponding periods of the prior
year.
PROVISION FOR REALIGNMENT represents the impact of the facility realignment
program implemented in 2002. See financial statement Note 10.
AMORTIZATION of intangible assets for the third quarter and for the nine
months ended November 1, 2003, increased $0.5 and $3.3, 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 $1.3 or 17.8% for the third quarter and $2.6 or
12.1% for the nine months ended November 1, 2003 compared to the
corresponding periods of the prior year. 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 third quarter and for the nine months
ended November 1, 2003 decreased $0.7 and $3.5, 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 tax rate for the first nine months of
2003 was reduced from 35.0% to 34.25% which resulted in a decrease of
approximately two percentage points in the third quarter versus last year.
This decrease was due to additional utilization of offshore earnings to
support growth and recently established Kellwood Trading Ltd. sourcing
operation.
DISCONTINUANCE OF HOSIERY OPERATIONS. On October 30, 2003 the Company
finalized an agreement to sell their Hosiery operations. As such, the
operations of the Hosiery business are accounted for as discontinued
operations, and accordingly, operating results and assets and liabilities of
the Hosiery operations are segregated in the accompanying condensed
consolidated statement of earnings and condensed consolidated balance sheet.
The sale of the entire Hosiery operations closed in November 2003. See
financial statement Note 3.
WEIGHTED AVERAGE DILUTED SHARES outstanding increased in both the three and
nine-month periods. This increase was due to the shares issued in connection
with the acquisitions of Briggs for the three-month period and Gerber and
Briggs for the nine-month period.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - (continued)
---------------------------------------
(Dollars in Millions, except per share data)
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 Nine months ended
------------------------------------ ----------------------------------
November 1, November 2, November 1, November 2,
2003 2002 Change 2003 2002 Change
----------- ----------- ------ ----------- ----------- ------
Women's Sportswear $397.7 $394.0 1.0% $1,105.3 $1,022.2 8.1%
Men's Sportswear 143.6 112.7 27.5% 362.2 288.1 25.7%
Other Soft Goods 104.4 116.0 (10.0%) 365.0 335.6 8.8%
------ ------ ----- -------- -------- ----
Total net sales $645.8 $622.6 3.7% $1,832.6 $1,645.9 11.3%
====== ====== ===== ======== ======== ====
Earnings by segment (excluding facilities realignment costs in the prior
year) were as follows:
Three months ended - amounts Three months ended - percentages
---------------------------------- -----------------------------------
November 1, November 2, November 1, November 2,
2003 2002 Change 2003 2002 Change
----------- ----------- ------ ----------- ----------- ------
Women's Sportswear $41.1 $ 40.6 1.2% 10.3% 10.3% 0.0%
Men's Sportswear 16.2 10.5 54.2% 11.3% 9.3% 2.0%
Other Soft Goods 5.7 4.9 16.3% 5.5% 4.2% 1.2%
General Corporate (8.6) (12.0) (28.0%) NM NM NM
------ ------- ----- ---- ---- ---
Segment earnings $54.3 $ 44.0 23.5% 8.4% 7.1% 1.3%
===== ====== ===== ==== ==== ===
Nine months ended - amounts Nine months ended - percentages
---------------------------------- -----------------------------------
November 1, November 2, November 1, November 2,
2003 2002 Change 2003 2002 Change
----------- ----------- ------ ----------- ----------- ------
Women's Sportswear $ 92.3 $ 85.0 8.6% 8.4% 8.3% 0.0%
Men's Sportswear 33.4 21.8 53.0% 9.2% 7.6% 1.6%
Other Soft Goods 22.4 12.7 75.8% 6.1% 3.8% 2.3%
General Corporate (30.4) (32.6) (6.6%) NM NM NM
------ ------ ---- --- --- ---
Segment earnings $117.7 $ 87.0 35.2% 6.4% 5.3% 1.1%
====== ====== ==== === === ===
19
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 third quarter of fiscal 2003 were $397.7,
increasing $3.8 or 1.0% versus last year. Sales for the nine months ended
November 1, 2003 were $1,105.3, increasing $83.1 or 8.1% versus last year.
The increase in sales for both periods was primarily due to the acquisition
of Briggs (which had sales of $57.8 for the third quarter and $151.8 for the
nine months ended November 1, 2003) and sales from new brands launched
earlier this year, partially offset by sales decreases in low margin private
label merchandise, core popular-to-moderately priced merchandise and better
to bridge brands sold to specialty stores.
Segment earnings for the third quarter of fiscal 2003 were $41.1, up $0.5
from last year and for the nine months ended November 1, 2003 were $92.3, up
$7.3 from last year. The primary reason for the increase in segment earnings
during both periods was the acquisition of Briggs, partially offset by
decreased earnings in the other women's business units. This decrease was
due to lower sales volume and increased costs for new brands and
initiatives.
MEN'S SPORTSWEAR. Sales for the third quarter of 2003 were $143.6,
increasing $31.0 or 27.5% versus last year. Sales for the nine months ended
November 1, 2003 were $362.2, increasing $74.1 or 25.7% versus last year.
The increase in sales for both periods was due to several new brands and
marketing initiatives and increased sales in private label bottoms business.
Segment earnings for the third quarter of fiscal 2003 were $16.2, up $5.7
from last year and for the nine months ended November 1, 2003 were $33.4, up
$11.6 from last year. The increase in earnings for both periods was due to
higher sales volume and gross margin improvement resulting from better
utilization of our manufacturing capacity and improved efficiency at our
plants.
OTHER SOFT GOODS. The Other Soft Goods segment contains three businesses:
Intimate Apparel, Gerber Apparel and American Recreation Products. Sales for
the third quarter of fiscal 2003 were $104.4, decreasing $11.6 or 10.0%
versus last year. Sales for the nine months ended November 1, 2003 were
$365.0, increasing $29.4 or 8.8% versus last year. The decrease in sales for
the three-month period ended November 1, 2003 was primarily due to decreased
sales at Intimate Apparel and American Recreations Products. Sales at these
two business units were down due to weak customer demand and softness in the
camping business. The increase in sales for the nine-month period ended
November 1, 2003 was primarily due to the Gerber acquisition (which had
sales increases of $54.2 compared to the prior year) partially offset by
sales declines at Intimate Apparel and American Recreation Products.
Segment earnings for the third quarter of fiscal 2003 were $5.7, up $0.8
from last year and for the nine months ended November 1, 2003 were $22.4, up
$9.6 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 expense for the third quarter of fiscal 2003 was $8.6,
down $3.3 from last year and for the nine months ended November 1, 2003 was
$30.4, down $2.2 from last year. The decreases in both periods are primarily
due to decreases in compensation expense and various other corporate expenses.
In addition, cost of sales was negatively impacted in 2002 related to a
purchase accounting write-up of inventory to fair value for the acquisition
of Gerber.
20
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 November 1, 2003, the Company's debt-to-capital ratio reached 32.2%
down 3.2 and 4.2 percentage points from February 1, 2003 and November 2,
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 primary drivers of this improvement were cash flow from
operations and working capital management.
WORKING CAPITAL
- ---------------
The CURRENT RATIO increased to 3.1 at November 1, 2003 compared to 2.7 at
February 1, 2003.
CASH AND TIME DEPOSITS decreased $86.1 to $124.2 at November 1, 2003 from
$210.3 at February 1, 2003. The primary reasons for the decrease in cash and
time deposits are the use of $134.5 for acquisitions and $15.0 for capital
expenditures partially offset by net cash flow from operating activities of
$61.8.
ACCOUNTS RECEIVABLE were $381.7, up $59.3 from February 1, 2003. Excluding
the receivables of Briggs at November 1, 2003, receivables were up $18.6
compared to the yearend. Days sales outstanding were 52 days as of November
1, 2003 compared to 51 days at February 1, 2003.
INVENTORIES were $266.8, down $84.3, or 24.0%, from February 1, 2003. Days
supply now stands at an estimated 58 days compared to 51 days at February 1,
2003. Excluding the acquisition of Briggs, inventories are down $91.8, or
26.1%. The decrease in inventory levels relates primarily to various
initiatives and company wide efforts surrounding inventory management.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES were $240.2, down $74.6, or 23.7%,
from February 1, 2003. Excluding Briggs ($19.7), accounts payable and
accrued expenses decreased $94.3. This decrease was a result of lower
inventory purchases and decreases in accrued compensation, accrued income
taxes and accrued facilities realignment.
FINANCING AND INVESTING ACTIVITIES
- ----------------------------------
Capital expenditures were $15.0 for the first nine months of 2003 compared
to $9.1 in the comparable period last year. Capital spending for 2003 is
expected to be about $21 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 1.00% over
LIBOR. At November 1, 2003, there were no outstanding short-term loans.
Letters of credit outstanding under the agreement were $57.
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.
21
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.
22
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 Form 10-Q are forward-looking.
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 November 1, 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 $321 at November 1, 2003 which compares to their book
value of $300. With respect to the Company's fixed-rate debt outstanding at
November 1, 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
- -------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by
this report, that the Company's disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
are effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms. There were no changes in the Company's internal control over
financial reporting during the quarter ended November 1, 2003 that have
materially affected, or are reasonably like to materially affect, the
Company's internal controls over financial reporting.
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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 November 1, 2003:
Current Report on Form 8-K dated August 28, 2003
reporting under items 12 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
December 4, 2003 /s/ W. Lee Capps, III
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W. Lee Capps, III
Executive Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
December 4, 2003 /s/ Lawrence E. Hummel
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Lawrence E. Hummel
Vice President Finance (Principal Accounting Officer)
24