Back to GetFilings.com
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 October 30, 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 October 30,
2004 (only one class): 27,676,625.
1
KELLWOOD COMPANY
----------------
INDEX
-----
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 6-12
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 21
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
----------------------
October 30, November 1, January 31,
2004 2003 2004
---------------- ----------------- ----------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 208,913 $ 124,187 $ 179,155
Receivables, net 443,790 381,682 321,455
Inventories 302,012 266,791 315,935
Prepaid taxes and expenses 66,806 63,758 66,328
Current assets of discontinued operations - 22,472 -
---------------- --------------- ----------------
Total current assets 1,021,521 858,890 882,873
Property, plant and equipment, net 97,548 94,445 96,798
Intangible assets, net 195,376 112,379 116,102
Goodwill 212,412 163,037 165,518
Other assets 34,897 32,197 30,783
Long-term assets of discontinued operations - 3,572 -
---------------- --------------- ----------------
Total assets $ 1,561,754 $ 1,264,520 $ 1,292,074
================ =============== ================
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Notes payable and current
portion of long-term debt $ 169 $ 26,565 $ 2,743
Accounts payable 185,368 146,463 179,024
Accrued salaries and employee benefits 39,971 42,306 50,790
Accrued expenses 70,360 60,996 70,196
Current liabilities of discontinued operations 1,457 9,096 2,333
---------------- --------------- ----------------
Total current liabilities 297,325 285,426 305,086
Long-term debt 469,658 273,709 271,877
Deferred income taxes and other 76,458 69,412 71,729
Long-term liabilities of discontinued operations - 2,432 -
Shareowners' equity:
Common stock 270,123 243,008 247,684
Retained earnings 560,757 501,289 510,329
Accumulated other comprehensive income (11,704) (9,465) (11,621)
Less treasury stock, at cost (100,863) (101,291) (103,010)
---------------- --------------- ----------------
Total shareowners' equity 718,313 633,541 643,382
---------------- --------------- ----------------
Total liabilities and shareowners' equity $ 1,561,754 $ 1,264,520 $ 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 Nine Months Ended
-------------------------------- --------------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
-------------- ------------- ------------- ---------------
Net sales $ 716,794 $ 644,131 $ 1,963,365 $ 1,825,337
Costs and expenses:
Cost of products sold 567,362 504,752 1,534,974 1,444,288
Selling, general and
administrative expenses 97,785 84,477 304,019 263,176
Amortization of intangible assets 3,134 2,433 10,065 7,310
Interest expense, net 6,429 6,451 19,469 18,805
Other (income) and expense, net (1,039) (88) (1,912) 744
-------------- ------------- ------------- -------------
Earnings before income taxes 43,123 46,106 96,750 91,014
Income taxes 14,770 15,237 33,137 31,172
-------------- ------------- ------------- -------------
Net earnings from continuing operations 28,353 30,869 63,613 59,842
Net loss from discontinued
operations, net of tax - (619) - (2,078)
-------------- ------------- ------------- -------------
Net earnings $ 28,353 $ 30,250 $ 63,613 $ 57,764
============== ============= ============= =============
Weighted average shares outstanding:
Basic 27,669 26,632 27,446 26,412
============== ============= ============= =============
Diluted 28,134 27,321 28,038 26,947
============== ============= ============= =============
Earnings (loss) per share:
Basic:
Continuing operations $ 1.02 $ 1.16 $ 2.32 $ 2.27
Discontinued operations - (.02) - (.08)
-------------- ------------- ------------- -------------
Net earnings $ 1.02 $ 1.14 $ 2.32 $ 2.19
============== ============= ============= =============
Diluted:
Continuing operations $ 1.01 $ 1.13 $ 2.27 $ 2.22
Discontinued operations - (.02) - (.08)
-------------- ------------- ------------- -------------
Net earnings $ 1.01 $ 1.11 $ 2.27 $ 2.14
============== ============= ============= =============
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
------------------------------------
October 30, November 1,
2004 2003
--------------- --------------
OPERATING ACTIVITIES:
Net earnings $ 63,613 $ 57,764
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 30,751 27,186
Deferred income taxes and other 4,407 23,986
Changes in working capital components:
Receivables, net (119,715) (37,285)
Inventories 14,346 96,681
Prepaid taxes and expenses (215) (24,715)
Accounts payable and accrued expenses 4,832 (80,005)
-------------- -------------
Net cash from operating activities (1,981) 63,612
-------------- -------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (19,903) (15,048)
Acquisitions, net of cash acquired (144,722) (134,527)
Subordinated note receivable 1,375 1,374
Dispositions of fixed assets 226 2,418
-------------- -------------
Net cash from investing activities (163,024) (145,783)
-------------- -------------
FINANCING ACTIVITIES:
Borrowings of long-term debt, net of financing costs 195,131 -
Repayments of long-term debt (4,448) (5,272)
Dividends paid (13,185) (12,692)
Stock transactions under incentive plans 17,265 13,999
-------------- -------------
Net cash from financing activities 194,763 (3,965)
-------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 29,758 (86,136)
Cash and cash equivalents, beginning of period 179,155 210,323
-------------- -------------
Cash and cash equivalents, end of period $ 208,913 $ 124,187
============== =============
Supplemental cash flow information:
Interest paid $ 18,285 $ 20,871
============== =============
Income taxes paid, net $ 9,018 $ 40,746
============== =============
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 purchase price
(including acquisition costs) for Phat was $141,932 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, and an additional purchase price payment of $1,369 that was
made in the third quarter as a result of higher working capital at close.
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. The Company
estimates the additional consideration to be paid with respect to 2004 will
be in the range of $2,000 to $4,000.
During the third quarter, the Company finalized the valuations of the
intangible assets acquired in connection with the Phat acquisition. As a
result, the estimated intangible assets decreased $25,323 (with an
offsetting increase to goodwill), and amortization expense was adjusted to
reflect this change retroactive to the acquisition date. Such adjustment was
immaterial to the Company's results of operations. There were no other
significant changes to the preliminary purchase price allocations. 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 3,332
Property, plant & equipment 2,940
Intangible assets 89,339
Goodwill 48,058
-----------
Total assets acquired 149,106
===========
Current liabilities 7,174
-----------
Net assets acquired $ 141,932
===========
Intangible assets, which represent trademarks and customer relationships,
are being amortized over useful lives of 20 and 15 years, respectively.
On February 4, 2003 the Company completed the acquisition of substantially
all of the assets of Briggs New York Corp. (Briggs). The purchase price
(including acquisition costs) 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. The Company estimates the additional
consideration to be paid with respect to 2004 will be in the range of $6,000
to $8,000.
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 nine months ended October 30, 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 $1,457 as of October
30, 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 nine months ended November 1, 2003, the operating results for the
True Beauty and Hosiery operations are as follows:
Three months ended Nine months ended
November 1, 2003 November 1, 2003
------------------------------------ ---------------------------------------
Hosiery True Beauty Total Hosiery True Beauty Total
------- ---------- ----- ------- ----------- -----
Net sales $ 13,558 $ 1,627 $ 15,185 $ 42,760 $ 7,229 $ 49,989
========== ========== ========== ========== =========== ==========
Loss before income taxes (244) (665) (909) (1,916) (1,248) (3,164)
Income taxes (78) (212) (290) (671) (415) (1,086)
---------- ---------- ---------- ---------- ----------- ----------
Net loss $ (166) $ (453) $ (619) $ (1,245) $ (833) $ (2,078)
========== ========== ========== ========== =========== ==========
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 November 1, 2003 are as follows:
November 1, 2003
-------------------------------------
Hosiery True Beauty Total
------- ----------- -----
Receivables, net $ 8,613 $ 8 $ 8,621
Inventories 10,607 15 10,622
Other current assets 3,229 - 3,229
---------- ---------- ----------
Current assets of discontinued operations $ 22,449 $ 23 $ 22,472
========== ========== ==========
Property, plant and equipment, net $ 3,047 $ - $ 3,047
Other assets 525 - 525
---------- ---------- ----------
Long-term assets of discontinued operations $ 3,572 $ - $ 3,572
========== ========== ==========
Accounts payable $ 4,446 $ 1,007 $ 5,453
Accrued liabilities 3,243 - 3,243
Current portion of long-term debt 400 - 400
---------- ---------- ----------
Current liabilities of discontinued operations $ 8,089 $ 1,007 $ 9,096
========== ========== ==========
Long-term debt $ 200 $ - $ 200
Other long-term liabilities 2,232 - 2,232
---------- ---------- ----------
Long-term liabilities of discontinued operations $ 2,432 $ - $ 2,432
========== ========== ==========
NOTE 4. INVENTORIES. Inventories consist of the following:
October 30, November 1, January 31,
2004 2003 2004
------------- ------------- ------------
Inventories:
Finished goods $ 227,104 $ 208,068 $ 240,856
Work in process 32,579 26,819 36,407
Raw materials 42,329 31,904 38,672
------------- ------------- ------------
Total inventories $ 302,012 $ 266,791 $ 315,935
============= ============= ============
Net of obsolescence reserves of $ 35,784 $ 30,944 $ 29,949
============= ============= ============
NOTE 5. 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 48,058 89,339
Contingent purchase price - Briggs (211) -
Gerber realignment reserves (953) -
Amortization expense - (10,065)
----------- -----------
Balance as of October 30, 2004 $ 212,412 $ 195,376
=========== ===========
8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 6. DEBT. On October 20, 2004, the Company executed a $400,000 five-year
unsecured, syndicated credit facility (the New Credit Agreement). The New
Credit Agreement can be used for borrowings and/or letters of credit.
Borrowings under the New Credit Agreement bear interest at LIBOR plus a
spread ranging from .60% to 1.25% with such spread depending on the
Company's leverage ratio. The New Credit Agreement replaces the Company's
previous agreement, dated April 30, 2002, that was set to expire in May
2005.
At October 30, 2004, there were no borrowings outstanding under this
facility. Letters of credit outstanding under the agreement were $60,962. In
addition to this facility, the Company has $4,902 in outstanding letters of
credit used by its foreign subsidiaries.
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 (in lieu of
issuance of stock) 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.
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 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 7. 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
----------------------------- ----------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
------------- ------------ ------------ -----------
Net earnings $ 28,353 $ 30,250 $ 63,613 $ 57,764
Other comprehensive income:
Currency translation adjustment 631 734 (115) 1,713
Unrecognized gain/(loss) on derivatives (188) 67 32 (88)
------------- ------------ ------------ -----------
Total comprehensive income $ 28,796 $ 31,051 $ 63,530 $ 59,389
============= ============ ============ ===========
NOTE 8. RETIREMENT BENEFITS. The net periodic benefit cost related to the
Company's defined benefit pension plans for the three months ended October
30, 2004 and November 1, 2003 were $260 and $216, respectively, and for the
nine months ended October 30, 2004 and November 1, 2003 were $783 and $647,
respectively. As of October 30, 2004, $1,030 of contributions have been
made. The Company presently anticipates contributing an additional $160 to
fund its pension plans in fiscal 2004 for a total of $1,190.
NOTE 9. 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
$270,123 at October 30, 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 earnings from continuing operations and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123.
Three months ended Nine months ended
--------------------------- -------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net earnings from continuing operations as reported $ 28,353 $ 30,869 $ 63,613 $ 59,842
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax (873) (685) (2,619) (2,055)
----------- ----------- ----------- -----------
Pro-forma net earnings from continuing operations $ 27,480 $ 30,184 $ 60,994 $ 57,787
=========== =========== =========== ===========
Earnings per share from continuing operations:
Basic, as reported $ 1.02 $ 1.16 $ 2.32 $ 2.27
Basic, pro-forma $ 0.99 $ 1.13 $ 2.22 $ 2.19
Diluted, as reported $ 1.01 $ 1.13 $ 2.27 $ 2.22
Diluted, pro-forma $ 0.98 $ 1.10 $ 2.18 $ 2.14
10
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 10. EARNINGS PER SHARE. The following is a reconciliation between basic
and diluted earnings per share:
Three months ended Nine months ended
---------------------------- ---------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerators:
Net earnings from continuing operations $ 28,353 $ 30,869 $ 63,613 $ 59,842
Net earnings from discontinued operations - (619) - (2,078)
----------- ----------- ----------- -----------
Net earnings $ 28,353 $ 30,250 $ 63,613 $ 57,764
=========== =========== =========== ===========
Denominators (000's):
Average shares outstanding - Basic 27,669 26,632 27,446 26,412
Impact of stock options 465 689 592 535
----------- ----------- ----------- -----------
Average shares outstanding - Diluted 28,134 27,321 28,038 26,947
=========== =========== =========== ===========
Continuing operations $ 1.02 $ 1.16 $ 2.32 $ 2.27
Discontinued operations - (.02) - (.08)
----------- ----------- ----------- -----------
Basic earnings per share $ 1.02 $ 1.14 $ 2.32 $ 2.19
=========== =========== =========== ===========
Continuing operations $ 1.01 $ 1.13 $ 2.27 $ 2.22
Discontinued operations - (.02) - (.08)
----------- ----------- ----------- -----------
Diluted earnings per share $ 1.01 $ 1.11 $ 2.27 $ 2.14
=========== =========== =========== ===========
NOTE 11. 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 nine
month periods ended October 30, 2004 and November 1, 2003 are as follows:
Three months ended Nine months ended
--------------------------- -------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales:
Women's Sportswear $ 413,522 $ 396,118 $ 1,171,054 $ 1,098,104
Men's Sportswear 205,978 153,884 473,748 379,302
Other Soft Goods 97,294 94,129 318,563 347,931
----------- ----------- ----------- -----------
Total net sales $ 716,794 $ 644,131 $ 1,963,365 $ 1,825,337
=========== =========== =========== ===========
Segment earnings:
Women's Sportswear $ 32,553 $ 41,725 $ 93,345 $ 93,594
Men's Sportswear 22,304 17,191 47,457 34,235
Other Soft Goods 6,292 4,708 16,847 21,495
General Corporate (9,502) (8,722) (33,277) (31,451)
----------- ----------- ----------- -----------
Total segment earnings 51,647 54,902 124,372 117,873
Amortization of intangible assets 3,134 2,433 10,065 7,310
Interest expense, net 6,429 6,451 19,469 18,805
Other (income) and expense, net (1,039) (88) (1,912) 744
----------- ----------- ----------- -----------
Earnings before income taxes $ 43,123 $ 46,106 $ 96,750 $ 91,014
=========== =========== =========== ===========
Net assets at quarter-end:
Women's Sportswear $ 304,920 $ 306,027
Men's Sportswear 224,208 181,494
Other Soft Goods 92,641 79,120
General Corporate 98,001 52,384
----------- -----------
Continuing Operations 719,770 619,025
Discontinued Operations (1,457) 14,516
----------- -----------
Total net assets $ 718,313 $ 633,541
=========== ===========
Men's Sportswear and Other Soft Goods net assets increased from last year
primarily due to increases in working capital. General Corporate net assets
increased from last year primarily due to the acquisition of Phat.
NOTE 12. 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 8.
In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed
into law. The Act contains a provision that permits the repatriation of cash
invested outside the U.S. at a tax rate of 5.25% after a defined base level
of cash is returned to the U.S. at the 35% statutory rate. The Company is
evaluating this provision of the Act and awaiting clarification of certain
technical aspects of this legislation. Until these items are clarified and
the Company develops a defined plan for the use of the funds, it is not
possible to determine the amount of cash to be returned to the U.S. or the
impact on income taxes or the Company's effective tax rate.
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 October 30, 2004 and November 1, 2003, and in the condensed
consolidated statement of earnings for the three- and nine-month periods
ended October 30, 2004 and November 1, 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 third quarter were $716.8, up $72.7 or 11.3%, from $644.1 for
the third quarter of 2003. Sales for the nine months ended October 30, 2004
were $1,963.4, up $138.1 or 7.6% 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 $28.6 for the
third quarter ($55.4 for the nine months ended October 30, 2004) and growth
in the base business of $44.1 for the third quarter ($82.7 for the nine
months ended October 30, 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 third quarter of 2004 and the nine
months ended October 30, 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 decreased to 20.8% in the third
quarter of 2004 from 21.6% in the third quarter of 2003 primarily due to a
combination of weak consumer demand for apparel and some of the Company's
brands not being fully on target in terms of fashion look and appeal
resulting in markdown pressure at retail and wholesale levels. The gross
margin percentage increased to 21.8% for the nine months ended October 30,
2004 from 20.9% for the nine months ended November 1, 2003 primarily due to
the acquisition of Phat.
The Company had $6.8 in additional SG&A spending during the third quarter of
2004 ($26.1 for the nine months ended October 31, 2004) over 2003 on key new
marketing initiatives, which included the new brands listed above. SG&A as a
percent of sales increased in the third quarter of 2004 to 13.6% from 13.1%
in the third quarter of 2003 (15.5% from 14.4% for the nine months ended
October 30, 2004 and November 1, 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 net earnings in the second half of 2005 as the economy improves and
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 nine month periods ended October
30, 2004 and November 1, 2003, are as follows (percentages are calculated
based on actual data, but columns may not add due to rounding):
Three months ended Nine months ended
------------------------------------- -----------------------------------
October 30, November 1, October 30, November 1,
2004 2003 Change 2004 2003 Change
----------- ----------- ------- ----------- ----------- ------
Net sales $ 716.8 $ 644.1 11.3% $ 1,963.4 $ 1,825.3 7.6%
Cost of products sold 567.4 504.8 12.4% 1,535.0 1,444.3 6.3%
----------- ----------- ------- ----------- ----------- ------
Gross profit 149.4 139.4 7.2% 428.4 381.0 12.4%
SG&A 97.8 84.5 15.8% 304.0 263.2 15.5%
----------- ----------- ------- ----------- ----------- ------
Operating earnings before
amortization (1) 51.6 54.9 (5.9%) 124.4 117.9 5.5%
Amortization of intangibles 3.1 2.4 28.8% 10.1 7.3 37.7%
----------- ----------- ------- ----------- ----------- ------
Operating earnings 48.5 52.5 (7.5%) 114.3 110.6 3.4%
Interest expense, net 6.4 6.5 (0.3%) 19.5 18.8 3.5%
Other (income) and
expense, net (1.0) (0.1) NM (1.9) 0.7 NM
----------- ----------- ------- ----------- ----------- ------
Earnings before taxes 43.1 46.1 (6.5%) 96.7 91.0 6.3%
Income taxes 14.8 15.2 (3.1%) 33.1 31.2 6.3%
----------- ----------- ------- ----------- ----------- ------
Net earnings from
continuing operations $ 28.4 $ 30.9 (8.2%) $ 63.6 $ 59.8 6.3%
=========== =========== ======= =========== =========== ======
Effective tax rate 34.25% 33.0% 34.25% 34.25%
Average diluted shares 28.1 27.3 3.0% 28.0 26.9 4.0%
----------- ----------- ------- ----------- ----------- ------
Diluted earnings per share $ 1.01 $ 1.13 (10.8%) $ 2.27 $ 2.22 2.2%
----------- ----------- ------- ----------- ----------- ------
NM - Not meaningful
Three months ended Nine months ended
------------------------------------- -----------------------------------
October 30, November 1, October 30, November 1,
As a percentage of net sales: 2004 2003 Change 2004 2003 Change
- ----------------------------- ------------ ---------- ------ ---------- ----------- ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 79.2% 78.4% 0.8% 78.2% 79.1% (0.9%)
------------ ---------- ------ ---------- ----------- ------
Gross profit 20.8% 21.6% (0.8%) 21.8% 20.9% 0.9%
SG&A 13.6% 13.1% 0.5% 15.5% 14.4% 1.1%
------------ ---------- ------ ---------- ----------- ------
Operating earnings before
amortization (1) 7.2% 8.5% (1.3%) 6.3% 6.5% (0.1%)
Amortization of intangibles 0.4% 0.4% 0.1% 0.5% 0.4% 0.1%
------------ ---------- ------ ---------- ----------- ------
Operating earnings 6.8% 8.1% (1.4%) 5.8% 6.1% (0.2%)
Interest expense, net 0.9% 1.0% (0.1%) 1.0% 1.0% (0.0%)
Other (income) and
expense, net (0.1%) (0.0%) (0.1%) (0.1%) 0.0% (0.1%)
----------- --------- ------ ---------- ----------- ------
Earnings before taxes 6.0% 7.2% (1.1%) 4.9% 5.0% (0.1%)
Income taxes 2.1% 2.4% (0.3%) 1.7% 1.7% (0.0%)
------------ ---------- ------ ---------- ----------- ------
Net earnings from
continuing operations 4.0% 4.8% (0.8%) 3.2% 3.3% (0.0%)
============ ========== ====== ========== =========== ======
(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 third quarter of 2004 were $716.8, increasing $72.7 or 11.3%
versus last year. Sales for the nine months ended October 30, 2004 were
$1,963.4, increasing $138.1 or 7.6% versus last year. The increase in sales
for both periods was primarily due to the acquisition of Phat (approximately
$28.6 for the third quarter and $55.4 for the nine months ended October 30,
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 third quarter of 2004 was $149.4 increasing $10.0
versus $139.4 reported for the third quarter of 2003. Gross profit as a
percent of sales for the third quarter of 2004 was 20.8% versus 21.6%
reported for the third quarter of 2003 primarily due to a combination of
weak consumer demand for moderately priced apparel and some of the Company's
brands not being fully on target in terms of fashion look and appeal
resulting in markdown pressure at retail and wholesale levels.
For the nine months ended October 30, 2004, gross profit was $428.4 or 21.8%
of sales, increasing $47.4 or 0.9% of sales versus $381.0 or 20.9% of sales
compared to the corresponding period of the prior year. The improvement in
the Company's gross margin rate for the nine months ended October 30, 2004,
resulted from the acquisition of Phat.
SG&A EXPENSE for the third quarter of 2004 increased $13.3 or 0.5% as a
percent of sales and for the nine months ended October 30, 2004 increased
$40.8 or 1.1% 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 ($6.8 and $26.1 for the three and nine
months ended October 30, 2004, respectively) and the acquisition of Phat
($8.9 and $21.7 for the three and nine months ended October 30, 2004,
respectively) partially offset by decreases in SG&A related to the base
business.
AMORTIZATION of intangible assets for the third quarter and nine months
ended October 30, 2004, increased $0.7 and $2.8, 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 three and nine months
ended October 30, 2004 was 34.25%. 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%. Income taxes paid through the first three quarters of 2004 were
lower than 2003 due to refunds received in the current year as a result of
overpayments made in the prior year.
WEIGHTED AVERAGE DILUTED SHARES outstanding increased in both the three and
nine 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 Nine months ended
------------------------------------ ------------------------------------
October 30, November 1, October 30, November 1,
Net sales 2004 2003 Change 2004 2003 Change
- --------- ----------- ----------- ------ ----------- ----------- ------
Women's Sportswear $ 413.5 $ 396.1 4.4% $ 1,171.1 $ 1,098.1 6.6%
Men's Sportswear 206.0 153.9 33.9% 473.7 379.3 24.9%
Other Soft Goods 97.3 94.1 3.4% 318.6 347.9 (8.4%)
----------- ----------- ------ ----------- ----------- ------
Total net sales $ 716.8 $ 644.1 11.3% $ 1,963.4 $ 1,825.3 7.6%
=========== =========== ====== =========== =========== ======
Three months ended - amounts Three months ended - percentages
------------------------------------- -------------------------------------
October 30, November 1, October 30, November 1,
Segment earnings 2004 2003 Change 2004 2003 Change
- ---------------- ----------- ----------- ------ ----------- ----------- ------
Women's Sportswear $ 32.6 $ 41.7 (22.0%) 7.9% 10.5% (2.7%)
Men's Sportswear 22.3 17.2 29.7% 10.8% 11.2% (0.3%)
Other Soft Goods 6.3 4.7 33.6% 6.5% 5.0% 1.5%
General Corporate (9.5) (8.7) 9.0% NM NM NM
----------- ----------- ------ ----------- ----------- ------
Segment earnings $ 51.6 $ 54.9 (5.9%) 7.2% 8.5% (1.3%)
=========== =========== ====== =========== =========== ======
Nine months ended - amounts Nine months ended - percentages
------------------------------------- ------------------------------------
October 30, November 1, October 30, November 1,
Segment earnings 2004 2003 Change 2004 2003 Change
- ---------------- ------------ ------------ ------ ----------- ----------- ------
Women's Sportswear $ 93.3 $ 93.6 (0.3%) 8.0% 8.5% (0.6%)
Men's Sportswear 47.5 34.2 38.6% 10.0% 9.0% 1.0%
Other Soft Goods 16.8 21.5 (21.6%) 5.3% 6.2% (0.9%)
General Corporate (33.3) (31.5) 5.8% NM NM NM
----------- ------------ ------ ----------- ----------- ------
Segment earnings $ 124.4 $ 117.9 5.5% 6.3% 6.5% (0.1%)
=========== ============ ====== =========== =========== ======
NM - Not meaningful
WOMEN'S SPORTSWEAR. Sales for the third quarter of 2004 were $413.5,
increasing $17.4 or 4.4% versus last year. Sales for the nine months ended
October 30, 2004 were $1,171.1, increasing $73.0 or 6.6% versus last year.
The increase in sales for both periods was primarily due to sales of $43.0
for the third quarter of 2004 ($136.8 for the nine months ended October 30,
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. This increase was partially offset by the
planned elimination of certain low margin business and a decline in the base
business (primarily the dress category).
Segment earnings for the third quarter of 2004 were $32.6, down $9.1 from
last year and for the nine months ended October 30, 2004 were $93.3, down
$0.3 from last year. The primary reason for the decrease in segment earnings
in the third quarter was increased markdowns and a $6.9 increase in SG&A
expense 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 third quarter of 2004 were $206.0,
increasing $52.1 or 33.9% versus last year. Sales for the nine months ended
October 30, 2004 were $473.7, increasing $94.4 or 24.9% versus last year.
The acquisition of Phat provided $28.6 of sales for the third quarter ($55.4
for the nine months ended October 30, 2004), and increases in both the
branded and private label base business sales, including sales from the key
new marketing initiatives, were $23.5 for the third quarter ($39.0 for the
nine months ended October 30, 2004).
Segment earnings for the third quarter of 2003 were $22.3, up $5.1 from last
year and for the first nine months ended October 30, 2004 were $47.5, up
$13.3 from last year. The increase in earnings was due to higher sales and
the acquisition of Phat ($2.4 and $8.0 for the three and nine months ended
October 30, 2004, respectively) partially offset by increased SG&A spending
attendant with the growth in the base business.
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 third quarter of 2004 were $97.3, increasing $3.2 or
3.4% versus the third quarter of 2003 primarily due to increased seasonal
and base sales at Gerber Apparel. Sales for the nine months ended October
30, 2004 were $318.6, decreasing $29.3 or 8.4% versus last year. The
decrease in sales for the nine months was primarily due to a decrease in
Intimate Apparel sales resulting from sourcing and logistical execution
difficulties and our customers doing more direct sourcing and decreased
sales of American Recreation Products due to competitive and market
conditions.
Segment earnings for the third quarter of 2004 were $6.3, up $1.6 from last
year, primarily due to higher sales, an increase in gross margin percentage
resulting from fixed cost absorption and the closing of one distribution
center at Gerber Apparel and improvement in bad debt expense partially
offset by decreased earnings at Intimate Apparel. For the nine months ended
October 30, 2004, segment earnings were $16.8, down $4.7 from last year. The
decrease for the nine months was primarily due to the difficulties at
Intimate Apparel as described above.
GENERAL CORPORATE expense for the third quarter of 2004 was $9.5, up $0.8
from last year and for the nine months ended October 30, 2004 was $33.3, up
$1.8 from last year. The increase for the third quarter was due to increases
in various corporate expenses. The increase for the nine months was
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 shareowners' equity,
or total capital). As of October 30, 2004, the Company's debt-to-capital
ratio was 39.5% up 7.3% and 9.6% from November 1, 2003 and January 31, 2004,
respectively due to the privately placed convertible debt discussed below.
NET CASH PROVIDED BY OPERATING ACTIVITIES was ($2.7) for the nine months
ended October 30, 2004 compared to $63.6 for the nine months ended November
1, 2003. This $66.3 decrease was primarily due to the change in working
capital and deferred income taxes 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 October 30, 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 $62.1 to $443.8 at October 30, 2004
from $381.7 at November 1, 2003 due to the acquisition of Phat
($19.1) 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 $35.2 to $302.0 at October 30, 2004 from
$266.8 at November 1, 2003. Days supply now stands at 67.3 days
compared to 68.4 days at November 1, 2003. The increase in
inventory levels relates primarily to the acquisition of Phat and
the forecasted increase in sales for the fourth quarter.
o Accounts payable and accrued expenses increased $45.9 to $295.7 at
October 30, 2004 from $249.8 at November 1, 2003 as a result of
timing of inventory receipts and related payments.
NET CASH USED IN INVESTING ACTIVITIES increased to $162.3 for the nine
months ended October 30, 2004 from $145.8 for the nine months ended November
1, 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, including the proceeds from the
convertible debentures, 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 $194.8 for the nine
months ended October 30, 2004 from ($4.0) for the nine months ended November
1, 2003. The $198.8 increase was primarily due to proceeds from the
Company's issuance of $200 in convertible debentures (see financial
statement Note 6).
On October 20, 2004, the Company executed a $400 five-year unsecured,
syndicated credit facility (the New Credit Agreement). The New Credit
Agreement can be used for borrowings and/or letters of credit. Borrowings
under the New Credit Agreement bear interest at LIBOR plus a spread ranging
from .60% to 1.25% with such spread depending on the Company's leverage
ratio. The New Credit Agreement replaces the Company's previous agreement,
dated April 30, 2002, that was set to expire in May 2005.
At October 30, 2004, there were no borrowings outstanding under this
facility. Letters of credit outstanding under the agreement were $61.0. In
addition to this facility, the Company has $4.9 in outstanding letters of
credit used by its foreign subsidiaries.
As a result of the above, the Company's cash and cash equivalents increased
to $208.9 at October 30, 2004. This increase was 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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
With the issuance of the convertible debentures, the amount of long-term
debt that would be included in the "2009 and after" column as disclosed in
the Form 10-K for the year ended January 31, 2004, increases by $200 to
$470. In addition, the interest payments related to all the Company's
long-term debt will be as follows: 2004 - $25; 2005-2006 - $56; 2007-2008 -
$56; 2009 and thereafter - $271.
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 October 30, 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
October 30, 2004. With respect to the Company's fixed-rate debt outstanding
at October 30, 2004, a 10% increase in interest rates would have resulted in
approximately a $22.8 decrease in the market value of Kellwood's fixed-rate
debt; a 10% decrease in interest rates would have resulted in approximately
a $24.4 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 October 30, 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
- ----------------
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.
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
December 8, 2004 /s/ W. Lee Capps, III
-----------------------------------------------
W. Lee Capps, III
Executive Vice President Finance and Chief
Financial Officer (Principal Financial Officer)
December 8, 2004 /s/ Lawrence E. Hummel
-----------------------------------------------
Lawrence E. Hummel
Vice President Finance (Principal Accounting
Officer)
22