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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 July 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
Commission File Number 1-7340
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 July 31,
2004 (only one class): 27,656,488.
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 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
July 31, August 2, January 31,
2004 2003 2004
---------- ---------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 262,508 $ 111,201 $ 179,155
Receivables, net 341,820 303,781 321,455
Inventories 346,761 343,187 315,935
Prepaid taxes and expenses 69,772 65,397 66,328
Current assets of discontinued operations - 24,471 -
---------- ---------- ----------
Total current assets 1,020,861 848,037 882,873
Property, plant and equipment, net 98,603 96,423 96,798
Intangible assets, net 223,833 114,821 116,102
Goodwill 185,508 163,071 165,518
Other assets 34,199 33,587 30,783
Long-term assets of discontinued operations - 8,065 -
---------- ---------- ----------
Total assets $1,563,004 $1,264,004 $1,292,074
========== ========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Notes payable and current
portion of long-term debt $ 252 $ 26,576 $ 2,743
Accounts payable 207,334 174,394 179,024
Accrued salaries and employee benefits 40,931 40,123 50,790
Accrued expenses 71,933 58,409 70,196
Current liabilities of discontinued operations 1,813 15,225 2,333
---------- ---------- ----------
Total current liabilities 322,263 314,727 305,086
Long-term debt 469,653 276,024 271,877
Deferred income taxes and other 77,315 69,214 71,729
Long-term liabilities of discontinued operations - 2,426 -
Shareowners' equity:
Common stock 269,776 236,363 247,684
Retained earnings 536,831 475,302 510,329
Accumulated other comprehensive income (12,147) (10,265) (11,621)
Less treasury stock, at cost (100,687) (99,787) (103,010)
---------- ---------- ----------
Total shareowners' equity 693,773 601,613 643,382
---------- ---------- ----------
Total liabilities and shareowners' equity $1,563,004 $1,264,004 $1,292,074
========== ========== ==========
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
---------------------- --------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- ---------- ----------
Net sales $560,467 $508,861 $1,246,570 $1,181,206
Costs and expenses:
Cost of products sold 436,074 403,493 967,612 939,536
Selling, general and
administrative expenses 99,326 84,621 206,234 178,700
Amortization of intangible assets 3,465 2,059 6,931 4,877
Interest expense, net 6,752 5,911 13,039 12,354
Other (income) and expense, net (694) 655 (873) 831
-------- -------- ---------- ----------
Earnings before income taxes 15,544 12,122 53,627 44,908
Income taxes 5,324 4,272 18,367 15,935
-------- -------- ---------- ----------
Net earnings from continuing operations 10,220 7,850 35,260 28,973
Net loss from discontinued
operations, net of tax - (1,164) - (1,459)
-------- -------- ---------- ----------
Net earnings $ 10,220 $ 6,686 $ 35,260 $ 27,514
======== ======== ========== ==========
Weighted average shares outstanding:
Basic 27,585 26,432 27,336 26,303
======== ======== ========== ==========
Diluted 28,150 26,970 27,990 26,762
======== ======== ========== ==========
Earnings (loss) per share:
Basic:
Continuing operations $ .37 $ .30 $ 1.29 $ 1.10
Discontinued operations - (.05) - (.05)
-------- -------- ---------- ----------
Net earnings $ .37 $ .25 $ 1.29 $ 1.05
======== ======== ========== ==========
Diluted:
Continuing operations $ .36 $ .29 $ 1.26 $ 1.08
Discontinued operations - (.04) - (.05)
-------- -------- ---------- ----------
Net earnings $ .36 $ .25 $ 1.26 $ 1.03
======== ======== ========== ==========
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
-------------------------
July 31, August 2,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net earnings $ 35,260 $ 27,514
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 20,528 18,086
Deferred income taxes and other 5,324 17,381
Changes in working capital components:
Receivables, net (18,439) 38,343
Inventories (30,104) 18,521
Prepaid taxes and expenses (3,389) (24,104)
Accounts payable and accrued expenses 29,797 (49,963)
--------- ---------
Net cash from operating activities 38,977 45,778
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (12,952) (10,093)
Acquisitions, net of cash acquired (143,337) (134,150)
Subordinated note receivable 1,375 688
Dispositions of fixed assets 202 1,923
--------- ---------
Net cash from investing activities (154,712) (141,632)
--------- ----------
FINANCING ACTIVITIES:
Borrowings of long-term debt, net of financing costs 195,390 -
Repayments of long-term debt (4,448) (2,948)
Dividends paid (8,758) (8,428)
Stock transactions under incentive plans 16,904 8,108
--------- ---------
Net cash from financing activities 199,088 (3,268)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 83,353 (99,122)
Cash and cash equivalents, beginning of period 179,155 210,323
--------- ---------
Cash and cash equivalents, end of period $ 262,508 $ 111,201
========= =========
Supplemental cash flow information:
Interest paid $ 12,403 $ 14,596
========= =========
Income taxes paid, net $ 7,927 $ 32,364
========= =========
Significant non-cash investing and financing activities:
Issuance of stock for acquisitions $ - $ 11,891
========= =========
See notes to condensed consolidated financial statements.
5
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 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 condensed consolidated financial
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 2003 (the fiscal year ended
January 31, 2004). For additional information regarding the Company's
financial condition, refer to the footnotes accompanying the 2003 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.
NOTE 2. BUSINESS COMBINATIONS. On February 3, 2004 the Company completed the
acquisition of all of the membership interests of Phat Fashions, LLC and
Phat Licensing, LLC (together referred to as Phat). Phat is a licensor of
apparel for men, women and children, athletic shoes and accessories through
the Phat Farm and Baby Phat brands. The Company believes Phat will add
important labels to Kellwood's portfolio of brands. The total purchase price
for Phat was $140,000 in cash. Included in this amount was the exercise
price for Phat's option to buyout the license from the menswear licensee for
$25,000, which the Company exercised in February 2004. Additional cash
purchase consideration will be due if Phat achieves certain specified
financial performance targets for 2004 through 2010. Such consideration, if
earned, would be accounted for as additional goodwill. This additional cash
purchase consideration is calculated based on a formula applied to annual
royalty revenue through 2010. A minimum level of royalty revenue must be
earned in order for this additional consideration to be paid. There is no
maximum amount of incremental purchase price.
In connection with the Phat acquisition, the Company is in the process of
determining the fair value of the tangible and intangible assets and
liabilities acquired. During the second quarter, there were no significant
changes to the preliminary purchase price allocation. The following table
summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition.
Cash $ 5,437
Other current assets 2,722
Property, plant & equipment 2,874
Intangible assets 114,662
Goodwill 21,154
--------
Total assets acquired 146,849
========
Current liabilities 6,302
--------
Net assets acquired $140,547
========
Intangible assets, which represent trademarks and customer relationships,
are being amortized over useful lives of 20 years.
On February 4, 2003 the Company completed the acquisition of substantially
all of the assets of Briggs New York Corp. (Briggs). The purchase price for
Briggs was $133,823 in cash and 0.5 million shares of Kellwood common stock
valued at $11,891. Additional cash purchase consideration will be due if
Briggs achieves certain specified annual financial performance targets
through 2006. Such consideration, if earned, will be accounted for as
additional goodwill. This additional cash purchase consideration is
calculated based on a formula applied to annual 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 year through 2006. The amount
of consideration increases with increased levels of earnings. There is no
maximum amount of incremental purchase price. The additional consideration
paid to Briggs based on their 2003 performance was approximately $8,200.
This amount was accrued at January 31, 2004 and paid out during the first
quarter of 2004.
6
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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. Briggs is part of the Women's Sportswear segment, and
Phat is part of the Men's Sportswear segment.
NOTE 3. DISCONTINUED OPERATIONS. During the fourth quarter of 2003, the
Company decided to discontinue their True Beauty by Emme(R) (True Beauty)
operations. This included the termination of the related license agreement.
The agreement was originally entered into during the second quarter of 2002.
As such, the operations of True Beauty ceased in the fourth quarter of 2003
and have been accounted for as discontinued operations. Accordingly,
operating results and assets and liabilities of True Beauty are segregated
in the accompanying condensed consolidated statement of earnings and
condensed consolidated balance sheet, respectively. Prior to being
classified as discontinued, True Beauty was included in the Women's
Sportswear segment. In connection with the termination of the license
agreement, there were certain costs incurred including future minimum
royalties and other shutdown costs totaling approximately $2,800. The future
minimum royalties will be paid over the life of the license, which extends
through 2006. The other shutdown costs were paid in the fourth quarter of
2003.
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, Inc.
For the three and six months ended July 31, 2004, there was no operating
activity for the discontinued operations, and the only remaining item on the
balance sheet is an accrued liability, which totaled $1,813 as of July 31,
2004. This accrual relates to the future minimum royalties that will be paid
over the life of the terminated True Beauty license agreement. For the three
and six months ended August 2, 2003, the operating results for the True
Beauty and Hosiery operations are as follows:
Three months ended Six months ended
August 2, 2003 August 2, 2003
------------------------------- -------------------------------
Hosiery True Beauty Total Hosiery True Beauty Total
------- ----------- ------- ------- ----------- -------
Net sales $16,224 $ 1,704 $17,928 $29,203 $5,602 $34,805
======= ======= ======= ======= ====== =======
Loss before income taxes (753) (1,045) (1,798) (1,672) (583) (2,255)
Income taxes (266) (368) (634) (592) (204) (796)
------- ------- ------- ------- ------ -------
Net loss $ (487) $ (677) $(1,164) $(1,080) $ (379) $(1,459)
======= ======= ======= ======= ====== =======
7
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Summarized assets and liabilities of the True Beauty and Hosiery operations
at August 2, 2003 are as follows:
August 2, 2003
--------------------------------
Hosiery True Beauty Total
------- ----------- -------
Receivables, net $ 9,599 $1,295 $10,894
Inventories 11,246 1,139 12,385
Other current assets 1,192 - 1,192
------- ------ -------
Current assets of discontinued operations $22,037 $2,434 $24,471
======= ====== =======
Property, plant and equipment, net $ 6,495 $ - $ 6,495
Other assets 1,570 - 1,570
------- ------ -------
Long-term assets of discontinued operations $ 8,065 $ - $ 8,065
======= ====== =======
Accounts payable $ 3,717 $2,753 $ 6,470
Accrued liabilities 8,355 - 8,355
Current portion of long-term debt 400 - 400
------- ------ -------
Current liabilities of discontinued operations $12,472 $2,753 $15,225
======= ====== =======
Long-term debt $ 200 $ - $ 200
Other long-term liabilities 2,226 - 2,226
------- ------ -------
Long-term liabilities of discontinued operations $ 2,426 $ - $ 2,426
======= ====== =======
NOTE 4. INVENTORIES. Inventories consist of the following:
July 31, August 2, January 31,
2004 2003 2004
-------- --------- -----------
Inventories:
Finished goods $264,386 $264,302 $240,856
Work in process 36,046 36,230 36,407
Raw materials 46,329 42,655 38,672
-------- -------- --------
Total Inventories $346,761 $343,187 $315,935
======== ======== ========
Net of obsolescence reserves of $ 31,467 $ 33,827 $ 29,949
======== ======== ========
NOTE 5. FACILITIES REALIGNMENT COSTS. 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
were anticipated to 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 July 31,
2004, 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 decided that it would not 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 made up the European Hosiery operations. This facility was
not 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 $3,331 for severance related to those closings
were reversed to the opening balance sheet in fiscal 2003. During the second
quarter of fiscal 2004, the Company completed all realignment activities
associated with the Gerber acquisition with the unutilized remaining
reserves being reversed to goodwill. Detail for the Gerber realignment
costs, and the related accruals, through July 31, 2004 are as follows:
Amount
Originally Amount Discontinued Accrual at
Provided Utilized Reversals Operations July 31, 2004
---------- -------- --------- ------------ -------------
Employee severance $4,789 $1,422 $3,367 $ - $ -
Vacant facilities costs 2,874 1,602 877 395 -
------ ------ ------ ---- ----
Total realignment $7,663 $3,024 $4,244 $395 $ -
====== ====== ====== ==== ====
8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill and intangible assets since the beginning of 2004 are as
follows:
Goodwill Intangibles
-------- -----------
Balance as of January 31, 2004 $165,518 $116,102
Changes:
Acquisition of Phat 21,154 114,662
Contingent purchase price - Briggs (211) -
Gerber realignment reserves (953) -
Amortization expense - (6,931)
-------- --------
Balance as of July 31, 2004 $185,508 $223,833
======== ========
NOTE 7. 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 July 31,
2004, there were no borrowings outstanding under this facility. Letters of
credit outstanding under the agreement were $86,306. In addition to this
facility, the Company has $5,114 in outstanding letters of credit used by
its foreign subsidiaries.
The Company also maintains informal uncommitted lines of credit with two
banks, which totaled $20,000 at July 31, 2004. There were no borrowings
under these uncommitted lines at July 31, 2004.
During the second quarter of 2004, the Company privately placed $200,000 of
3.50% Convertible Senior Debentures due 2034. The debentures are convertible
into shares of Kellwood's common stock at an initial conversion rate of
18.7434 shares per one thousand dollars original principal amount of
debentures (which is equivalent to an initial conversion price of
approximately $53.35 per share) during any fiscal quarter commencing after
July 31, 2004 if the last reported sale price of the common stock is greater
than or equal to $70.05 per share for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the
preceding fiscal quarter. The holders may also convert the debentures into
shares of Kellwood common stock prior to the stated maturity if the Company
calls the debentures for redemption and under certain other circumstances.
In July 2004, the Company irrevocably elected to satisfy in cash 100% of the
accreted principal amount of debentures converted. The Company may still
satisfy the remainder of its conversion obligation to the extent it exceeds
the accreted principal amount in cash or common stock or a combination of
cash and common stock.
The debentures accrue interest at an annual rate of 3.50%, payable
semi-annually until June 15, 2011. After June 15, 2011 interest will not be
paid, but instead the recorded value of the bonds will increase until
maturity. At maturity, the holder will receive the accreted principal amount
which will be equal to the original principal amount of one thousand dollars
per debenture plus the accreted interest.
The debentures will mature on June 15, 2034, unless earlier converted,
redeemed or repurchased by the Company. The Company may redeem some or all
of the debentures for cash, at any time and from time to time, on or after
June 20, 2011 at a redemption price equal to 100% of the accreted principal
amount of the debentures to be redeemed, plus accrued and unpaid interest
to, but excluding the redemption date. Holders have the right to require the
Company to repurchase some or all of the debentures for cash at a repurchase
price equal to 100% of the accreted principal amount of the debentures to be
repurchased, plus accrued and unpaid interest to, but excluding, the
repurchase date, on June 15, 2011, June 15, 2014, June 15, 2019, June 15,
2024 and June 15, 2029, or if the Company undergoes a fundamental change as
defined in the debentures agreement. The Company intends to use the net
proceeds from the offering for general corporate purposes, which may include
future acquisitions.
9
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 8. 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
--------------------- -----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- -------- ---------
Net earnings $10,220 $6,686 $35,260 $27,514
Other comprehensive income:
Currency translation adjustment (413) (480) (747) (979)
Unrecognized gain/(loss) on derivatives (153) 100 220 155
------- ------ ------- -------
Total comprehensive income $ 9,654 $6,306 $34,733 $26,690
======= ====== ======= =======
NOTE 9. RETIREMENT BENEFITS. The net periodic benefit cost related to the
Company's defined benefit pension plans for the three months ended July 31,
2004 and August 2, 2003 were $260 and $216, respectively, and for the six
months ended July 31, 2004 and August 2, 2003 the net periodic benefit cost
were $523 and $431, respectively. As of July 31, 2004, $582 of contributions
have been made. The Company presently anticipates contributing an additional
$621 to fund its pension plans in 2004 for a total of $1,203.
NOTE 10. STOCK OPTION PLANS. On March 4, 2004 the Company granted stock
options to certain officers and other key employees for 593,800 shares of
common stock at an exercise price of $42.37, which was equal to the market
value of the shares on the grant date. The increase in common stock to
$269,776 at July 31, 2004 from $247,684 at January 31, 2004 was primarily a
result of exercised stock options and employee stock compensation.
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 No. 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 No. 123.
Three months ended Six months ended
----------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- -------- ---------
Net earnings from continuing operations as reported $10,220 $7,850 $35,260 $28,973
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax effect (851) (669) (1,702) (1,339)
------- ------ ------- -------
Pro-forma net earnings from continuing operations $ 9,369 $7,181 $33,558 $27,634
======= ====== ======= =======
Earnings per share from continuing operations:
Basic, as reported $ .37 $ .30 $ 1.29 $ 1.10
Basic, pro-forma $ .34 $ .27 $ 1.23 $ 1.05
Diluted, as reported $ .36 $ .29 $ 1.26 $ 1.08
Diluted, pro-forma $ .33 $ .27 $ 1.20 $ 1.03
10
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 11. EARNINGS PER SHARE. The following is a reconciliation between basic
and diluted earnings per share:
Three months ended Six months ended
--------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- -------- ---------
Numerators:
Net earnings from continuing operations $10,220 $ 7,850 $35,260 $28,973
Net earnings from discontinued operations - (1,164) - (1,459)
------- ------- ------- -------
Net earnings $10,220 $ 6,686 $35,260 $27,514
======= ======= ======= =======
Denominators (000's):
Average shares outstanding - Basic 27,585 26,432 27,336 26,303
Impact of stock options 565 538 654 459
------- ------- ------- -------
Average shares outstanding - Diluted 28,150 26,970 27,990 26,762
======= ======= ======= =======
Continuing operations $ .37 $ .30 $ 1.29 $ 1.10
Discontinued operations - (.05) - (.05)
------- ------- ------- -------
Basic earnings per share $ .37 $ .25 $ 1.29 $ 1.05
======= ======= ======= =======
Continuing operations $ .36 $ .29 $ 1.26 $ 1.08
Discontinued operations - (.04) - (.05)
------- ------- ------- -------
Diluted earnings per share $ .36 $ .25 $ 1.26 $ 1.03
======= ======= ======= =======
NOTE 12. REPORTABLE SEGMENTS. The Company and its subsidiaries are
principally engaged in the apparel and related soft goods industries. 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. A
partial list of such brands are Sag Harbor(R), Koret(R), Jax(R),
David Dart(R), Dorby(TM), My Michelle(R), Briggs New York(R),
Northern Isles(R) and David Brooks(R). Calvin Klein(R), XOXO(R),
IZOD(R), Liz Claiborne(R) David Meister(TM), and Bill Burns(R) are
produced under licensing agreements.
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 and Phat(R), Def Jam
University(TM) and Run Athletics(TM) sportswear.
o OTHER SOFT GOODS designs, merchandises and sells intimate apparel,
infant apparel, and recreation products (tents, sleeping bags,
backpacks and related products). The business is primarily branded
goods including Kelty(R) and Sierra Design(R) for recreation
products, Gerber(R) for infant apparel and Oscar de la Renta(R) for
intimate apparel.
o GENERAL CORPORATE includes general and administrative expenses at
the corporate level that are not allocated to the above segments.
11
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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 measures net working capital, net fixed assets and other
noncurrent assets and liabilities of each segment. Goodwill, net intangibles
and certain corporate assets, including capitalized software and debt and
cash balances are accounted for at the corporate level and as a result are
included in the General Corporate segment net assets. Amortization of
intangibles is accounted for at the corporate level and is not allocated to
the segments.
Sales, segment earnings, and net assets by segment for the three and six
month periods ended July 31, 2004 and August 2, 2003 are as follows:
Three months ended Six months ended
---------------------- -----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- ---------- ----------
Net sales:
Women's Sportswear $319,555 $290,060 $ 757,531 $ 701,986
Men's Sportswear 139,613 108,204 267,770 225,418
Other Soft Goods 101,299 110,597 221,269 253,802
-------- -------- ---------- ----------
Total net sales $560,467 $508,861 $1,246,570 $1,181,206
======== ======== ========== ==========
Segment earnings:
Women's Sportswear $ 18,541 $ 16,369 $ 60,792 $ 51,870
Men's Sportswear 14,472 8,560 25,153 17,044
Other Soft Goods 3,274 6,176 10,555 16,787
General Corporate (11,220) (10,358) (23,776) (22,731)
-------- -------- ---------- ----------
Total segment earnings 25,067 20,747 72,724 62,970
Amortization of intangible assets 3,465 2,059 6,931 4,877
Interest expense, net 6,752 5,911 13,039 12,354
Other (income) and expense, net (694) 655 (873) 831
-------- -------- ---------- ----------
Earnings before income taxes $ 15,544 $ 12,122 $ 53,627 $ 44,908
======== ======== ========== ==========
Net assets at quarter-end:
Women's Sportswear $253,892 $262,326
Men's Sportswear 207,830 171,611
Other Soft Goods 87,016 100,802
General Corporate 146,848 51,989
-------- --------
Continuing Operations 695,586 586,728
Discontinued Operations (1,813) 14,885
-------- --------
Total net assets $693,773 $601,613
======== ========
General Corporate net assets increased from last year primarily due to the
acquisition of Phat.
NOTE 13. NEW ACCOUNTING STANDARDS. In December 2003 the Financial Accounting
Standards Board (FASB) issued SFAS No. 132 (revised 2003), Employer's
Disclosures about Pensions and Other Postretirement Benefits, an amendment
of FASB Statements No. 87, 88 and 106. This statement requires additional
disclosures related to pension plans and other postretirement benefit plans.
This statement was adopted by the Company in 2003. The required interim
disclosures are included in Note 9.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
----------------------
(Dollars in Millions, except per share data)
The following discussion is focused on significant changes in financial
condition and results of operations in the condensed consolidated balance
sheet as of July 31, 2004 and August 2, 2003, and in the condensed
consolidated statement of earnings for the three- and six-month periods
ended July 31, 2004 and August 2, 2003. The amounts and disclosures included
in management's discussion and analysis of financial condition and results
of operations, unless otherwise indicated, are presented on a continuing
operations basis. This discussion should be read in conjunction with the
audited consolidated financial statements and accompanying notes included in
the 2003 Annual Report to Shareowners.
OPERATING RESULTS
- -----------------
The apparel industry has experienced deflation for many years. As a result,
the Company's sales growth has come from acquisitions and investment in new
brands and initiatives. Earnings growth has come from increased sales and
control over costs.
Sales for the second quarter were $560.5, up $51.6, or 10.1%, from $508.9
for the second quarter of 2003. Sales for the six months ended July 31, 2004
were $1,246.6, up $65.4 or 5.5% versus last year. Sales increases were
primarily due to the acquisition of Phat Fashions, LLC and Phat Licensing,
LLC (together referred to as Phat) on February 3, 2004 of $17.4 for the
second quarter ($26.8 for the six months ended July 31, 2004) and growth in
the base business of $34.2 for the second quarter ($38.6 for the six months
ended July 31, 2004) as a result of key new marketing initiatives put in
place during the last nine months of 2003, which included the following new
brands:
o Calvin Klein(R) for women's sportswear
o IZOD(R) for women's sportswear
o XOXO(R) for junior's sportswear and dresses
o Lucy Pereda(TM) sportswear
o Liz Claiborne(R) for women's dresses and suits
o Def Jam University(TM) for women's and men's sportswear
The favorable impact on sales during the second quarter of 2004 and the six
months ended July 31, 2004 from the above brands was partially offset by the
planned elimination of certain brands and programs from the Company's broad
and diversified portfolio due to volume levels, pricing and/or margins that
are no longer acceptable.
The Company's gross margin percentage increased to 22.2% in the second
quarter of 2004 from 20.7% in the second quarter of 2003 (22.4% from 20.5%
for the six months ended July 31, 2004 and August 2, 2003, respectively)
primarily due to the acquisition of Phat, sourcing and other operating
efficiency improvements and higher margin branded business replacing lower
margin business.
The Company invested $7.6 during the second quarter of 2004 ($19.3 for the
six months ended July 31, 2004) in additional SG&A spending over 2003 on key
new marketing initiatives, which included the new brands listed above. SG&A
as a percent of sales increased in the second quarter of 2004 to 17.7% from
16.6% in the second quarter of 2003 (16.5% from 15.1% for the six months
ended July 31, 2004 and August 2, 2003, respectively) due principally to the
acquisition of Phat and the key new marketing initiatives.
Many of the Company's new brands were obtained through licensing agreements,
which commit the Company to minimum guaranteed royalties during the term of
the license. Sales for all significant licensing agreements are projected to
be at or above minimum guarantee levels for fiscal 2004. The investments
made in these key new marketing initiatives are expected to more favorably
impact sales and net earnings in the second half of 2004 as they move
through the product development cycle.
13
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 July 31,
2004 and August 2, 2003, are as follows (percentages are calculated based on
actual data, but columns may not add due to rounding):
Three months ended Six months ended
--------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 Change 2004 2003 Change
-------- -------- ------ -------- -------- ------
Net sales $ 560.5 $508.9 10.1% $1,246.6 $1,181.2 5.5%
Cost of products sold 436.1 403.5 8.1% 967.6 939.5 3.0%
------- ------ ----- -------- -------- -----
Gross profit 124.4 105.4 18.1% 279.0 241.7 15.4%
SG&A 99.3 84.6 17.4% 206.2 178.7 15.4%
------- ------ ----- -------- -------- -----
Operating earnings before
amortization (1) 25.1 20.7 20.8% 72.7 63.0 15.5%
Amortization of intangibles 3.5 2.1 68.3% 6.9 4.9 42.1%
------- ------ ----- -------- -------- -----
Operating earnings 21.6 18.7 15.6% 65.8 58.1 13.3%
Interest expense, net 6.8 5.9 14.2% 13.0 12.4 5.5%
Other (income) and
expense, net (0.7) 0.7 NM (0.9) 0.8 NM
------- ------ ----- ------- -------- -----
Earnings before taxes 15.5 12.1 28.2% 53.6 44.9 19.4%
Income taxes 5.3 4.3 24.6% 18.4 15.9 15.3%
------- ------ ----- -------- -------- -----
Net earnings from
continuing operations $ 10.2 $ 7.9 30.2% $ 35.3 $ 29.0 21.7%
======= ====== ===== ======== ======== =====
Effective tax rate 34.25% 35.2% 34.25% 35.5%
Average diluted shares 28.2 27.0 4.4% 28.0 26.8 4.6%
------- ------ ----- -------- -------- -----
Diluted earnings per share $ .36 $ .29 24.7% $ 1.26 $ 1.08 16.4%
------- ------ ----- -------- -------- -----
NM - Not meaningful
Three months ended Six months ended
--------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 Change 2004 2003 Change
-------- --------- ------ -------- --------- ------
As a percentage of net sales:
- -----------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 77.8% 79.3% (1.5%) 77.6% 79.5% (1.9%)
------- ------ ----- -------- -------- -----
Gross profit 22.2% 20.7% 1.5% 22.4% 20.5% 1.9%
SG&A 17.7% 16.6% 1.1% 16.5% 15.1% 1.4%
------- ------ ----- -------- -------- -----
Operating earnings before
amortization (1) 4.5% 4.1% 0.4% 5.8% 5.3% 0.5%
Amortization of intangibles 0.6% 0.4% 0.2% 0.6% 0.4% 0.1%
------- ------ ----- -------- -------- -----
Operating earnings 3.9% 3.7% 0.2% 5.3% 4.9% 0.4%
Interest expense, net 1.2% 1.2% 0.0% 1.0% 1.0% 0.0%
Other (income) and
expense, net (0.1%) 0.1% (0.3%) (0.1%) 0.1% (0.1%)
------- ------ ----- -------- -------- -----
Earnings before taxes 2.8% 2.4% 0.4% 4.3% 3.8% 0.5%
Income taxes 0.9% 0.8% 0.1% 1.5% 1.3% 0.1%
------- ------ ----- -------- -------- -----
Net earnings from
continuing operations 1.8% 1.5% 0.3% 2.8% 2.5% 0.4%
======= ====== ===== ======== ======== =====
NM - Not meaningful
(1) Operating earnings before amortization differs from operating earnings
in that it excludes the amortization of intangibles. Operating earnings
before amortization should not be considered as an alternative to operating
earnings. Operating earnings before amortization is the primary measure 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 operating earnings before amortization between
periods is useful in showing the interaction of changes in gross profit and
SG&A without inclusion of the amortization of intangibles, the change in
which is explained elsewhere. The subtotal of operating earnings before
amortization may not be comparable to any similarly titled measure used by
another company.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
(Dollars in Millions, except per share data)
SEASONALITY: Kellwood's businesses are seasonal. The Company generally sells
its products prior to the principal retail selling seasons: spring, summer,
fall, and holiday. Sales and earnings for the first and third quarter have
historically been higher than the second and fourth quarters of the fiscal
year.
SALES for the second quarter of 2004 were $560.5, increasing $51.6 or 10.1%
versus last year. Sales for the six months ended July 31, 2004 were
$1,246.6, increasing $65.4 or 5.5% versus last year. The increase in sales
for both periods was primarily due to the acquisition of Phat (approximately
$17.4 for the second quarter and $26.8 for the six months ended July 31,
2004) and several key new marketing initiatives 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 second quarter of 2004 was $124.4 or 22.2% of sales,
increasing $19.0 or 1.5% of sales versus $105.4 or 20.7% of sales reported
for the second quarter of 2003. For the six months ended July 31, 2004,
gross profit was $279.0 or 22.4% of sales, increasing $37.3 or 1.9% of sales
versus $241.7 or 20.5% of sales compared to the corresponding period of the
prior year.
The improvement in the Company's gross margin rate for the three and six
months ended July 31, 2004, resulted from the acquisition of Phat, sourcing
and other operating efficiency improvements and higher priced branded
business replacing lower margin business.
SG&A EXPENSE for the second quarter of 2004 increased $14.7 or 17.4% as a
percent of sales and for the six months ended July 31, 2004 increased $27.5
or 15.4% compared to the corresponding periods of the prior year. The
increase for both periods was primarily due to additional spending related
to key new marketing initiatives ($7.6 and $19.3 for the three and six
months ended July 31, 2004, respectively) and the acquisition of Phat ($6.4
and $12.8 for the three and six months ended July 31, 2004, respectively)
partially offset by decreases in SG&A related to the base business.
AMORTIZATION of intangible assets for the second quarter and six months
ended July 31, 2004, increased $1.4 and $2.0, respectively, compared to the
corresponding periods of the prior year. The increase in both periods was
due to the amortizable intangible assets acquired in the Phat acquisition.
INCOME TAXES. The Company's effective tax rate for the six months ended July
31, 2004 decreased to 34.25% from 35.5% for the six months ended August 2,
2003. This rate is consistent with the full-year 2003 effective tax rate and
the planned effective tax rate for 2004. During the third quarter of fiscal
2003, the effective tax rate was recorded at 33.0% in order to arrive at a
year-to-date effective tax rate of 34.25%.
WEIGHTED AVERAGE DILUTED SHARES outstanding increased in both the three and
six month periods due to the increased price of Kellwood common stock, which
drove higher option exercises and increased the dilutive effect of
unexercised options.
DISCONTINUED 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. Prior to being
classified as discontinued, the Hosiery operations were included in the
Men's Sportswear segment. See financial statement Note 3.
During the fourth quarter of 2003, the Company decided to discontinue their
True Beauty by Emme(R) (True Beauty) operations. This included the
termination of the related license agreement. As such, the operations of
True Beauty ceased in the fourth quarter of 2003 and have been accounted for
as discontinued operations. Accordingly, operating results and assets and
liabilities of True Beauty are segregated in the accompanying condensed
consolidated statement of earnings and condensed consolidated balance sheet,
respectively. Prior to being classified as discontinued, True Beauty was
included in the Women's Sportswear segment. See financial statement Note 3.
15
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. The Company's business units are aggregated
into the following reportable segments:
o Women's Sportswear,
o Men's Sportswear,
o Other Soft Goods, and
o General Corporate.
Sales and segment earnings 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
------------------------------- -------------------------------
July 31, August 2, July 31, August 2,
Net sales 2004 2003 Change 2004 2003 Change
- --------- -------- --------- ------ -------- --------- ------
Women's Sportswear $319.6 $290.1 10.2% $ 757.5 $ 702.0 7.9%
Men's Sportswear 139.6 108.2 29.0% 267.8 225.4 18.8%
Other Soft Goods 101.3 110.6 (8.4%) 221.3 253.8 (12.8%)
------ ------ ------ -------- -------- ------
Total net sales $560.5 $508.9 10.1% $1,246.6 $1,181.2 5.5%
====== ====== ====== ======== ======== ======
Three months ended - amounts Three months ended - percentages
------------------------------- --------------------------------
July 31, August 2, July 31, August 2,
Segment earnings 2004 2003 Change 2004 2003 Change
- ---------------- -------- --------- ------ -------- --------- ------
Women's Sportswear $ 18.5 $ 16.4 13.3% 5.8% 5.6% 0.2%
Men's Sportswear 14.5 8.6 69.1% 10.4% 7.9% 2.5%
Other Soft Goods 3.3 6.2 (47.0%) 3.2% 5.6% (2.4%)
General Corporate (11.2) (10.4) 8.3% NM NM NM
------ ------ ------ -------- -------- ------
Segment earnings $ 25.1 $ 20.7 20.8% 4.5% 4.1% 0.4%
====== ====== ====== ======== ======== ======
Six months ended - amounts Six months ended - percentages
-------------------------------- -------------------------------
July 31, August 2, July 31, August 2,
Segment earnings 2004 2003 Change 2004 2003 Change
- ---------------- -------- --------- ------ -------- --------- ------
Women's Sportswear $ 60.8 $ 51.9 17.2% 8.0% 7.4% 0.6%
Men's Sportswear 25.2 17.0 47.6% 9.4% 7.6% 1.8%
Other Soft Goods 10.6 16.8 (37.1%) 4.8% 6.6% (1.8%)
General Corporate (23.8) (22.7) 4.6% NM NM NM
----- ------ ------ -------- -------- ------
Segment earnings $ 72.7 $ 63.0 15.5% 5.8% 5.3% 0.5%
====== ====== ====== ======== ======== ======
NM - Not meaningful
WOMEN'S SPORTSWEAR. Sales for the second quarter of 2004 were $319.6
increasing $29.5 or 10.2% versus last year. Sales for the six months ended
July 31, 2004 were $757.5, increasing $55.5 or 7.9% versus last year. The
increase in sales for both periods was primarily due to sales of $38.5 for
the second quarter of 2004 ($93.7 for the six months ended July 31, 2004)
from key new marketing initiatives launched in 2003 including Calvin
Klein(R), IZOD(R), XOXO(R) and Lucy Pereda(TM) sportswear and Liz
Claiborne(R) dresses and suits, partially offset by the planned elimination
of certain low margin business.
Segment earnings for the second quarter of 2004 were $18.5, up $2.1 from
last year and for the six months ended July 31, 2004 were $60.8, up $8.9
from last year. The primary reasons for the increases in both periods in
segment earnings were gross margin improvements (0.3% percentage points for
the second quarter and 1.1% percentage points for the six months), increased
earnings related to key new marketing initiatives and improved sourcing
partially offset by a $6.6 increase in SG&A expense for the second quarter
($16.8 increase for the six months ended July 31, 2004) as a result of
spending on key new marketing initiatives.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
(Dollars in Millions, except per share data)
MEN'S SPORTSWEAR. Sales for the second quarter of 2004 were $139.6,
increasing $31.4 or 29.0% versus last year. Sales for the six months ended
July 31, 2004 were $267.8, increasing $42.4 or 18.8% versus last year. The
acquisition of Phat provided $17.4 of sales for the second quarter ($26.8
for the six months ended July 31, 2004), and increases in both the branded
and private label base business sales, including sales from the key new
marketing initiatives, were $14.0 for the second quarter ($15.6 for the six
months ended July 31, 2004).
Segment earnings for the second quarter of 2003 were $14.5, up $5.9 from
last year and for the first six months ended July 31, 2004 were $25.2, up
$8.2 from last year. The increase in earnings was due to the acquisition of
Phat ($3.8 and $5.7 for the three and six months ended July 31, 2004,
respectively) and gross margin improvement resulting from sourcing and
operating efficiency and an increased mix of higher margin branded business
partially offset by increased costs incurred from the launching of certain
new brands.
OTHER SOFT GOODS. The Other Soft Goods segment is composed of three product
categories: Intimate Apparel, Gerber Apparel and American Recreation
Products. Sales for the second quarter of 2004 were $101.3, decreasing $9.3
or 8.4% versus the second quarter of 2003. Sales for the six months ended
July 31, 2004 were $221.3, decreasing $32.5 or 12.8% versus last year. The
decrease in sales for both periods was primarily due to a decrease in
Intimate Apparel sales resulting from sourcing and logistical execution
difficulties and our customers doing more direct sourcing. Sales of Gerber
Apparel and American Recreation Products were also down due to competitive
and market conditions.
Segment earnings for the second quarter of 2004 were $3.3, down $2.9 from
last year, and for the six months ended July 31, 2004 were $10.6, down $6.2
from last year. The decrease in both periods was primarily due to the
difficulties at Intimate Apparel as described above.
GENERAL CORPORATE expense for the second quarter of 2004 was $11.2, up $0.8
from last year and for the six months ended July 31, 2004 was $23.8, up $1.1
from last year. The increases in both periods were primarily due to
increases in compensation expense and various other corporate expenses.
FINANCIAL CONDITION
- -------------------
Cash flow from operations continues to be the Company's primary source of
funds to finance operating needs, capital expenditures, debt service and
acquisitions. 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 (defined as
total debt divided by the sum of total debt and total shareholders' equity,
or total capital). As of July 31, 2004, the Company's debt-to-capital ratio
was 40.4% up 6.9% and 10.5% from August 2, 2003 and January 31, 2004,
respectively primarily due to the privately placed convertible debt
discussed below.
NET CASH PROVIDED BY OPERATING ACTIVITIES was $39.0 for the six months ended
July 31, 2004 compared to $45.8 for the six months ended August 2, 2003.
This $6.8 decrease was primarily due to the change in deferred income taxes
and working capital partially offset by higher net earnings.
Working Capital
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 and accrued expenses. The Company's working
capital is significantly influenced by sales patterns, which are highly
seasonal. Inventories, accounts payable and accrued expenses are highly
dependent upon sales levels and order lead times. Receivable levels are
dependent upon recent months' sales and customer payment experience. The
working capital fluctuations from January 31, 2004 to July 31, 2004 are
primarily a result of the seasonality in the Company's businesses.
In addition to seasonality fluctuations in working capital discussed above,
the year-to-year changes in the major components of working capital are
discussed below:
o Accounts receivable increased $38.0 to $341.8 at July 31, 2004
from $303.8 at August 2, 2003 due to the acquisition of Phat
($11.2) and increased sales.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
(Dollars in Millions, except per share data)
o Inventories increased $3.6 to $346.8 at July 31, 2004 from $343.2
at August 2, 2003. Days supply now stands at 57.0 days compared to
62.0 days at August 2, 2003. The increase in inventory levels
relates primarily to the acquisition of Phat partially offset by
various initiatives and company wide efforts surrounding inventory
management.
o Accounts payable and accrued expenses increased $47.3 to $320.2 at
July 31, 2004 from $272.9 at August 2, 2003 as a result of timing
of inventory receipts and related payments.
NET CASH USED IN INVESTING ACTIVITIES increased to $154.7 for the six months
ended July 31, 2004 from $141.6 for the six months ended August 2, 2003. The
net cash used in investing activities primarily relates to acquisitions as
discussed below.
On February 3, 2004 the Company completed the acquisition of all of the
membership interests of Phat. 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, and accordingly, the results of the acquired companies
have been included in the consolidated financial statements from their
respective acquisition dates (see financial statement Note 2).
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 combination of cash balances, cash generated from operations and
availability under credit facilities will continue to provide the capital
flexibility necessary to fund future opportunities and to meet existing
obligations.
NET CASH PROVIDED BY FINANCING ACTIVITIES increased to $199.1 for the six
months ended July 31, 2004 from ($3.3) for the six months ended August 2,
2003. The $202.4 increase was primarily due to proceeds from long-term debt
(see financial statement Note 7).
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 July 31, 2004, there were no outstanding short-term loans. Letters
of credit outstanding under the agreement were $86.3. In addition to this
facility, the Company has $5.1 in outstanding letters of credit used by its
foreign subsidiaries.
The current credit facility is set to expire in May 2005. The Company has
begun the process of replacing the existing facility.
As a result of the above, the Company's cash and cash equivalents increased
$151.3 to $262.5 at July 31, 2004 from $111.2 at August 2, 2003. This
increase was primarily due to the proceeds from the convertible debt and
positive cash flow from operations partially offset by the acquisition of
Phat on February 3, 2004.
18
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 the economic effects of the uncertainty through 2004 and early 2005
caused by the elimination of quota and the uncertainty as to the
effect of safeguards, if any, put in place on Chinese imports into
the U.S.;
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 ability to generate sufficient sales and profitability related to
licensing agreements that contain significant minimum royalty
payments;
o the impact of economic changes such as:
- the overall level of consumer spending for apparel,
- national and regional economic conditions,
- inflation or deflation,
- changes in oil prices, including their impact on fabric prices
and/or transportation costs;
- currency exchange fluctuations,
- 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 the
ability to effectively integrate acquired operations; 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
(Dollars in Millions, except per share data)
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.
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 July 31, 2004, 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 2004.
Based on quoted market prices obtained through independent pricing sources
for the same or similar types of borrowing arrangements, the Company's
long-term debt has a market value that approximates its book value at July
31, 2004. With respect to the Company's fixed-rate debt outstanding at July
31, 2004, a 10% increase in interest rates would have resulted in
approximately a $24.0 decrease in the market value of Kellwood's fixed-rate
debt; a 10% decrease in interest rates would have resulted in approximately
a $25.9 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.
In addition, the Company does not believe that foreign currency risk,
commodity price or inflation risk are material to the Company's business or
its consolidated financial position, results of operations or cash flows.
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 July 31, 2004 that have
materially affected, or are reasonably like to materially affect, the
Company's internal controls over financial reporting.
20
PART II. OTHER INFORMATION
- ---------------------------
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -------------------------------------------------------------------
In September 2000 the Board of Directors authorized the Company to
repurchase up to an additional ten percent of the outstanding shares of its
Common Stock (up to approximately 2.27 million shares) in the open market or
through privately negotiated transactions at management's discretion and
depending on market conditions. No purchases have been made pursuant to this
authorization.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a) EXHIBITS:
S.E.C. Exhibit
Reference No. Description
------------- -----------
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith.
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith.
32 Certification of Chief Executive Officer and
Chief Financial Officer 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 July 31, 2004:
Current Report on Form 8-K dated July 2, 2004 reporting
under item 5
Current Report on Form 8-K dated June 17, 2004 reporting under
items 5 and 7
Current Report on Form 8-K dated June 15, 2004 reporting under
items 5, 7 and 9
21
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 3, 2004 /s/ W. Lee Capps, III
------------------------------------
W. Lee Capps, III
Executive Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
September 3, 2004 /s/ Lawrence E. Hummel
------------------------------------
Lawrence E. Hummel
Vice President Finance (Principal
Accounting Officer)
22