10-Q 1 cal20160430.htm 10-Q Document


 
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 April 30, 2016
 
 
[  ]
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: 1-2191 
 
CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
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  þ     No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes  þ   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨     No þ 
 
As of May 27, 2016, 43,396,318 common shares were outstanding.

1



PART I
FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CALERES, INC.
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
(Unaudited)
 
 

($ thousands)
April 30, 2016

 
May 2, 2015

 
January 30, 2016

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
149,534

 
$
66,330

 
$
118,151

Receivables, net
116,961

 
126,512

 
153,664

Inventories, net
487,876

 
498,513

 
546,745

Prepaid expenses and other current assets
39,809

 
41,003

 
56,505

Total current assets
794,180

 
732,358

 
875,065

 
 
 
 
 
 
Other assets
116,347

 
141,969

 
118,349

Goodwill
13,954

 
13,954

 
13,954

Intangible assets, net
116,025

 
119,703

 
116,945

Property and equipment
484,280

 
442,273

 
475,750

Allowance for depreciation
(298,694
)
 
(288,923
)
 
(296,740
)
Net property and equipment
185,586

 
153,350

 
179,010

Total assets
$
1,226,092

 
$
1,161,334

 
$
1,303,323

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Trade accounts payable
$
189,154

 
$
172,116

 
$
237,802

Other accrued expenses
125,405

 
137,732

 
152,497

Total current liabilities
314,559

 
309,848

 
390,299

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
196,659

 
196,904

 
196,544

Deferred rent
46,728

 
41,441

 
46,506

Other liabilities
60,169

 
58,821

 
67,502

Total other liabilities
303,556

 
297,166

 
310,552

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
434

 
437

 
437

Additional paid-in capital
127,755

 
134,373

 
138,881

Accumulated other comprehensive (loss) income
(4,054
)
 
3,672

 
(5,864
)
Retained earnings
482,744

 
414,992

 
468,030

Total Caleres, Inc. shareholders’ equity
606,879

 
553,474

 
601,484

Noncontrolling interests
1,098

 
846

 
988

Total equity
607,977

 
554,320

 
602,472

Total liabilities and equity
$
1,226,092

 
$
1,161,334

 
$
1,303,323

See notes to condensed consolidated financial statements.

2



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
April 30, 2016

May 2, 2015

Net sales
$
584,733

$
602,283

Cost of goods sold
336,940

353,757

Gross profit
247,793

248,526

Selling and administrative expenses
219,050

218,190

Operating earnings
28,743

30,336

Interest expense
(3,610
)
(4,463
)
Interest income
247

304

Earnings before income taxes
25,380

26,177

Income tax provision
(7,502
)
(6,786
)
Net earnings
17,878

19,391

Net earnings attributable to noncontrolling interests
96

130

Net earnings attributable to Caleres, Inc.
$
17,782

$
19,261

 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.44


 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.44

 
 
 
Dividends per common share
$
0.07

$
0.07

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
April 30, 2016

May 2, 2015

Net earnings
$
17,878

$
19,391

Other comprehensive income (loss), net of tax:
 

 

Foreign currency translation adjustment
2,310

1,392

Pension and other postretirement benefits adjustments
(288
)
(215
)
Derivative financial instruments
(212
)
(217
)
Other comprehensive income, net of tax
1,810

960

Comprehensive income
19,688

20,351

Comprehensive income attributable to noncontrolling interests
110

134

Comprehensive income attributable to Caleres, Inc.
$
19,578

$
20,217

See notes to condensed consolidated financial statements.

4



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
April 30, 2016

May 2, 2015

Operating Activities
 
 

Net earnings
$
17,878

$
19,391

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 

Depreciation
9,019

8,558

Amortization of capitalized software
3,161

3,094

Amortization of intangible assets
920

930

Amortization of debt issuance costs and debt discount
432

301

Share-based compensation expense
1,987

1,687

Tax benefit related to share-based plans
(3,163
)
(2,401
)
Loss on disposal of property and equipment
79

213

Impairment charges for property and equipment
465

374

Deferred rent
222

1,699

Provision for doubtful accounts
182

(88
)
Changes in operating assets and liabilities:
 

 

Receivables
36,522

10,224

Inventories
60,532

45,312

Prepaid expenses and other current and noncurrent assets
16,438

(2,365
)
Trade accounts payable
(48,648
)
(43,918
)
Accrued expenses and other liabilities
(31,631
)
(21,468
)
Other, net
765

371

Net cash provided by operating activities
65,160

21,914

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(16,367
)
(12,905
)
Capitalized software
(1,820
)
(955
)
Net cash used for investing activities
(18,187
)
(13,860
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
103,000

86,000

Repayments under revolving credit agreement
(103,000
)
(86,000
)
Dividends paid
(3,068
)
(3,073
)
Acquisition of treasury stock
(12,130
)
(4,921
)
Issuance of common stock under share-based plans, net
(4,149
)
(3,751
)
Tax benefit related to share-based plans
3,163

2,401

Net cash used for financing activities
(16,184
)
(9,344
)
Effect of exchange rate changes on cash and cash equivalents
594

217

Increase (decrease) in cash and cash equivalents
31,383

(1,073
)
Cash and cash equivalents at beginning of period
118,151

67,403

Cash and cash equivalents at end of period
$
149,534

$
66,330

See notes to condensed consolidated financial statements.

5



CALERES, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1
Basis of Presentation
 
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Caleres, Inc. (the "Company"). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. 
 
The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. 
 
Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Caleres, Inc. 
 
For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 30, 2016.

Note 2
Impact of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued ASU 2015-14 to defer the effective date and ASUs 2016-08 and 2016-10 to clarify the implementation guidance in ASU 2014-09 Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.   The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted beginning after December 15, 2016.  The Company is currently evaluating the impact of the adoption of these ASUs on its condensed consolidated financial statements.
 
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure inventory at "the lower of cost and net realizable value", simplifying the current guidance under which entities must measure inventory at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The ASU also eliminates the real estate-specific provisions in the current standard. For lessors, ASU 2016-02 modifies the classification criteria and the accounting for sales-type and direct financing leases. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its condensed consolidated financial statements upon adoption in the first quarter of 2019 will be significant. However, the adoption of the ASU is not expected to trigger non-compliance with any covenant or other restriction under the provisions of any of the Company’s debt obligations. 


6



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies accounting for certain aspects of share-based payments to employees, including income taxes, forfeitures and statutory income tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

Note 3
Earnings Per Share
 
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the periods ended April 30, 2016 and May 2, 2015:
 
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
April 30, 2016

May 2, 2015

NUMERATOR
 

 

Net earnings
$
17,878

$
19,391

Net earnings attributable to noncontrolling interests
(96
)
(130
)
Net earnings allocated to participating securities
(486
)
(654
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
17,296

$
18,607

 
 
 
DENOMINATOR
 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
42,433

42,313

Dilutive effect of share-based awards
163

145

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,596

42,458


 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.44


 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.44

 
Options to purchase 66,165 and 62,997 shares of common stock for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively, were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be antidilutive.

Note 4
Long-term and Short-term Financing Arrangements

Credit Agreement 
On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement, which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC (as so amended, the “Credit Agreement”). After giving effect to the amendment, the Company is the lead borrower, and Sidney Rich Associates, Inc. and BG Retail, LLC are each co-borrowers and guarantors under the Credit Agreement. The Credit Agreement matures on December 18, 2019 and provides for a revolving credit facility in an aggregate amount of up to $600.0 million, subject to the calculated borrowing base restrictions, and provides for an increase at the Company’s option by up to $150.0 million from time to time during the term of the Credit Agreement, subject to satisfaction of certain conditions and the consent of existing or new lenders to assume the increase.

Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card

7



receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread.  The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement.  There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
 
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets.  In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements.  Furthermore, if excess availability falls below 12.5% of the Loan Cap for three consecutive business days or an event of default occurs, the lenders may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any twelve-month period.
 
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect, and a change of control event.  In addition, if the excess availability falls below the greater of (i) 10.0% of the lesser of the Loan Cap and (ii) $50.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of April 30, 2016

At April 30, 2016, the Company had no borrowings outstanding and $6.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $485.5 million at April 30, 2016.   

$200 Million Senior Notes Due 2019 
On May 11, 2011, the Company closed on an offering of $200.0 million aggregate principal amount of 7.125% Senior Notes due 2019 (the “2019 Senior Notes”).  The 2019 Senior Notes were guaranteed on a senior unsecured basis by each of its subsidiaries that was an obligor under the Credit Agreement, prior to the July 20, 2015 amendment. Interest on the 2019 Senior Notes was payable on May 15 and November 15 of each year. The 2019 Senior Notes were scheduled to mature on May 15, 2019 but were callable at specified redemption prices, plus accrued and unpaid interest.
 
On July 20, 2015, the Company commenced a cash tender offer (the "Tender Offer") to purchase any and all of the outstanding aggregate principal amount of its 2019 Senior Notes. Upon expiration of the Tender Offer on July 24, 2015, $160.7 million aggregate principal amount of the 2019 Senior Notes were validly tendered at the redemption price of 103.950%, representing the specified redemption price and a tender premium. On August 26, 2015, the remaining outstanding $39.3 million aggregate principal amount of outstanding 2019 Senior Notes were redeemed at the redemption price of 103.563%.

$200 Million Senior Notes Due 2023
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of 6.25% Senior Notes due 2023 (the "2023 Senior Notes") in a private placement. On October 22, 2015, the Company commenced an offer to exchange its 2023 Senior Notes outstanding for substantially identical debt securities registered under the Securities Act of 1933. The exchange offer was completed on November 23, 2015 and did not affect the amount of the Company's indebtedness outstanding. The net proceeds from the issuance of the 2023 Senior Notes were approximately $196.3 million after deducting fees and expenses associated with the offering. The Company used the net proceeds, together with cash on hand, to redeem the outstanding 2019 Senior Notes.

The 2023 Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the 2023 Senior Notes is payable on February 15 and August 15 of each year, beginning on February 15, 2016. The 2023 Senior Notes will mature on August 15, 2023.  Prior to August 15, 2018, the Company may redeem some or all of the 2023 Senior Notes at a redemption price equal to 100% of the principal amount of the 2023 Senior Notes plus a "make-whole" premium (as defined in the 2023 Senior Notes indenture) and accrued and unpaid interest to the redemption date.  After August 15, 2018, the Company may redeem all or a part of the 2023 Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest (as defined in the 2023 Senior Notes indenture), if redeemed during the 12-month period beginning on August 15 of the years indicated below:

8



Year
Percentage

2018
104.688
%
2019
103.125
%
2020
101.563
%
2021 and thereafter
100.000
%
 
If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the 2023 Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase.

The 2023 Senior Notes also contain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of April 30, 2016, the Company was in compliance with all covenants and restrictions relating to the 2023 Senior Notes.

Note 5
Business Segment Information

Following is a summary of certain key financial measures for the Company’s business segments for the thirteen weeks ended April 30, 2016 and May 2, 2015.  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended April 30, 2016
External sales
$
364,596

$
220,137

$

$
584,733

Intersegment sales

15,563


15,563

Operating earnings (loss)
25,753

9,623

(6,633
)
28,743

Segment assets
540,914

428,077

257,101

1,226,092

 
 
 
 
 
Thirteen Weeks Ended May 2, 2015
External sales
$
360,020

$
242,263

$

$
602,283

Intersegment sales

17,326


17,326

Operating earnings (loss)
27,960

11,060

(8,684
)
30,336

Segment assets
486,585

450,600

224,149

1,161,334

 
The Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments.  

Following is a reconciliation of operating earnings to earnings before income taxes:   
 
Thirteen Weeks Ended
($ thousands)
April 30, 2016

May 2, 2015

Operating earnings
$
28,743

$
30,336

Interest expense
(3,610
)
(4,463
)
Interest income
247

304

Earnings before income taxes
$
25,380

$
26,177



9



Note 6
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
April 30, 2016

May 2, 2015

January 30, 2016

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
183,068

183,068

183,068

Total intangible assets
185,868

185,868

185,868

Accumulated amortization
(69,843
)
(66,165
)
(68,923
)
Total intangible assets, net
116,025

119,703

116,945

Goodwill
 

 

 

Brand Portfolio
13,954

13,954

13,954

Total goodwill
13,954

13,954

13,954

Goodwill and intangible assets, net
$
129,979

$
133,657

$
130,899

 
Intangible assets consist primarily of owned and licensed trademarks, of which $20.8 million as of April 30, 2016, May 2, 2015 and January 30, 2016, are not subject to amortization. The remaining intangible assets are subject to amortization and have useful lives ranging from 15 to 40 years as of April 30, 2016. Amortization expense related to intangible assets was $0.9 million for the thirteen weeks ended April 30, 2016 and May 2, 2015
 
Note 7
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 30, 2016
$
601,484

$
988

$
602,472

Net earnings
17,782

96

17,878

Other comprehensive income
1,810

14

1,824

Dividends paid
(3,068
)

(3,068
)
Acquisition of treasury stock
(12,130
)

(12,130
)
Issuance of common stock under share-based plans, net
(4,149
)

(4,149
)
Tax benefit related to share-based plans
3,163


3,163

Share-based compensation expense
1,987


1,987

Equity at April 30, 2016
$
606,879

$
1,098

$
607,977

 

10



($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 31, 2015
$
540,910

$
712

$
541,622

Net earnings
19,261

130

19,391

Other comprehensive income
960

4

964

Dividends paid
(3,073
)

(3,073
)
Acquisition of treasury stock
(4,921
)

(4,921
)
Issuance of common stock under share-based plans, net
(3,751
)

(3,751
)
Tax benefit related to share-based plans
2,401


2,401

Share-based compensation expense
1,687


1,687

Equity at May 2, 2015
$
553,474

$
846

$
554,320


Accumulated Other Comprehensive (Loss) Income
The following table sets forth the changes in accumulated other comprehensive (loss) income by component for the thirteen weeks ended April 30, 2016 and May 2, 2015:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance January 30, 2016
$
(900
)
$
(5,356
)
$
392

$
(5,864
)
Other comprehensive income (loss) before reclassifications
2,310


(288
)
2,022

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive (loss) income

(477
)
123

(354
)
Tax provision (benefit)

189

(47
)
142

Net reclassifications

(288
)
76

(212
)
Other comprehensive income (loss)
2,310

(288
)
(212
)
1,810

Balance April 30, 2016
$
1,410

$
(5,644
)
$
180

$
(4,054
)
 
 
 
 
 
Balance January 31, 2015
$
(745
)
$
3,233

$
224

$
2,712

Other comprehensive income (loss) before reclassifications
1,392


(260
)
1,132

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive (loss) income

(357
)
71

(286
)
Tax provision (benefit)

142

(28
)
114

Net reclassifications

(215
)
43

(172
)
Other comprehensive income (loss)
1,392

(215
)
(217
)
960

Balance May 2, 2015
$
647

$
3,018

$
7

$
3,672

(1)
Amounts reclassified are included in selling and administrative expenses. See Note 9 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.

(2)
Amounts reclassified are included in net sales, costs of goods sold and selling and administrative expenses. See Notes 10 and 11 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 8
Share-Based Compensation
 
The Company recognized share-based compensation expense of $2.0 million and $1.7 million during the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively. In addition to share-based compensation expense, the Company recognized cash-

11



based expense related to performance share units and cash awards granted under the performance share plans of $0.8 million and $1.7 million during the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively.
 
The Company issued 387,605 and 344,679 shares of common stock during thirteen weeks ended April 30, 2016 and May 2, 2015, respectively, for stock-based awards, stock options exercised and directors' fees.
 
The following table summarizes restricted stock activity for the thirteen weeks ended April 30, 2016 and May 2, 2015:
 
Thirteen Weeks Ended April 30, 2016
 
 
Thirteen Weeks Ended May 2, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
January 30, 2016
1,262,449

 
$
19.55

 
January 31, 2015
1,562,470

 
$
15.61

Granted
336,800

 
26.64

 
Granted
285,421

 
30.06

Forfeited
(29,250
)
 
20.53

 
Forfeited
(34,850
)
 
21.01

Vested
(419,250
)
 
9.18

 
Vested
(350,625
)
 
14.58

April 30, 2016
1,150,749

 
$
25.38

 
May 2, 2015
1,462,416

 
$
18.57


Of the 336,800 restricted shares granted during the thirteen weeks ended April 30, 2016, all of the shares will vest in four years. Of the 285,421 restricted shares granted during the thirteen weeks ended May 2, 2015, 272,921 will vest in four years and the remaining 12,500 restricted shares will vest in five years. Share-based compensation expense is recognized on a straight-line basis over the respective vesting periods.

During the thirteen weeks ended April 30, 2016 and May 2, 2015, the Company granted performance share awards for a targeted 159,000 and 177,921 shares, respectively, with a weighted-average grant date fair value of $26.64 and $30.12, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded in accordance with the vesting schedule of the units over the three-year service period. The performance share units are settled in cash and their fair value is based on the unadjusted quoted market price for the Company’s common stock on each measurement date.

The following table summarizes stock option activity for the thirteen weeks ended April 30, 2016 and May 2, 2015:
 
Thirteen Weeks Ended April 30, 2016
 
 
Thirteen Weeks Ended May 2, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
January 30, 2016
301,295

 
$
8.95

 
January 31, 2015
416,803

 
$
8.42

Granted

 

 
Granted
16,667

 
12.81

Exercised
(50,066
)
 
7.17

 
Exercised
(58,633
)
 
6.98

Forfeited
(7,499
)
 
15.94

 
Forfeited
(1,500
)
 
15.94

Expired
(14,625
)
 
10.75

 
Expired
(36,451
)
 
6.95

April 30, 2016
229,105

 
$
8.99

 
May 2, 2015
336,886

 
$
9.01


Of the 16,667 stock options granted during the thirteen weeks ended May 2, 20158,333 will vest in four years and 8,334 will vest in five years.

The Company also granted 853 and 704 restricted stock units to non-employee directors during the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively, with weighted-average grant date fair values of $28.09 and $32.30, respectively. All restricted stock units for dividend equivalents vested immediately and compensation expense was fully recognized during the thirteen weeks ended April 30, 2016 and May 2, 2015.


12



Note 9
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
April 30, 2016

May 2, 2015

April 30, 2016

May 2, 2015

Service cost
$
2,263

$
3,329

$

$

Interest cost
3,861

3,586

15

15

Expected return on assets
(7,223
)
(7,655
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
38

166

(55
)
(48
)
Prior service income
(460
)
(475
)


Total net periodic benefit income
$
(1,521
)
$
(1,049
)
$
(40
)
$
(33
)

Note 10
Risk Management and Derivatives
 
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions. 
 
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major international financial institutions and have varying maturities through April 2017. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses foreign currency forward contracts as cash flow hedging instruments, which are recorded in the Company's condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive (loss) income and reclassified to earnings in the period that the hedged transaction is recognized in earnings.

Hedge ineffectiveness is evaluated using the hypothetical derivative method. The amount of hedge ineffectiveness for the thirteen weeks ended April 30, 2016 and May 2, 2015 was not material. 
 
As of April 30, 2016, May 2, 2015 and January 30, 2016, the Company had forward contracts maturing at various dates through April 2017,  April 2016 and January 2017, respectively. The contract notional amount represents the net amount of all purchase and sale contracts of a foreign currency. 

13



 
Contract Notional Amount
(U.S. $ equivalent in thousands)
April 30, 2016

May 2, 2015

January 30, 2016

Financial Instruments
 
 
 
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
$
15,767

$
17,635

$
14,118

Euro
15,182

16,449

15,499

Chinese yuan
14,066

10,978

14,623

Japanese yen
1,152

1,483

1,159

United Arab Emirates dirham
900

932

930

New Taiwanese dollars
514

528

570

Other currencies
170


219

Total financial instruments
$
47,751

$
48,005

$
47,118

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of April 30, 2016, May 2, 2015 and January 30, 2016 are as follows:

 
Asset Derivatives
 
Liability Derivatives
($ thousands)
Balance Sheet Location
Fair Value

 
Balance Sheet Location
Fair Value

 
 
 
 
 
 
Foreign exchange forward contracts:
 

 
 
 

 
 
 
 
 
 
April 30, 2016
Prepaid expenses and other current assets
$
615

 
Other accrued expenses
$
962

May 2, 2015
Prepaid expenses and other current assets
973

 
Other accrued expenses
1,032

January 30, 2016
Prepaid expenses and other current assets
1,000

 
Other accrued expenses
846

 
For the thirteen weeks ended April 30, 2016 and May 2, 2015, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
April 30, 2016
May 2, 2015
 
 
 
 
 
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCI on Derivatives

(Loss) Gain Reclassified from Accumulated OCI into Earnings

Gain (Loss) Recognized in OCI on Derivatives

Gain (Loss) Reclassified from Accumulated OCI into Earnings

 
 
 
 
 
Net sales
$
(164
)
$
(36
)
$
25

$
54

Cost of goods sold
(113
)
83

(201
)
(129
)
Selling and administrative expenses
51

(170
)
(88
)
4

Interest expense
(38
)

(22
)


All gains and losses currently included within accumulated other comprehensive (loss) income associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 11 to the condensed consolidated financial statements. 
 

14



Note 11
Fair Value Measurements
 
Fair Value Hierarchy 
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows: 

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 

Measurement of Fair Value 
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value. 
 
Money Market Funds 
The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan Assets and Liabilities 
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan for Non-Employee Directors  
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs that is equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s condensed consolidated statement of earnings. The fair value of each PSU is based on an unadjusted quoted

15



market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 
 
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to restricted stock units for non-employee directors is disclosed in Note 8 to the condensed consolidated financial statements.
 
Performance Share Units
Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three-year service period. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to performance share units is disclosed in Note 8 to the condensed consolidated financial statements.
 
Derivative Financial Instruments 
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed within Note 10 to the condensed consolidated financial statements. 

Secured Convertible Note
The Company received a $7.5 million face value secured convertible note as partial consideration for the December 2014 disposition of Shoes.com. The convertible note requires installments over four years with the first payment of $1.25 million due on July 1, 2017 and quarterly installments of $0.6 million thereafter, plus accrued interest, until it matures on December 12, 2019. Interest accrues at an annual rate of 6% until December 11, 2016, 7% until December 11, 2017, 8% until December 11, 2018, and 9% until the maturity date. The principal and outstanding accrued interest is convertible into common stock of an affiliate of ShoeMe Technologies Limited ("the Purchaser") at a specified conversion price per share, at the Company's option, or automatically upon a qualified initial public offering ("IPO") by the Purchaser at the IPO price. The convertible note is measured at fair value using unobservable inputs (Level 3). The fair value of the convertible note of $7.2 million, $7.0 million and $7.1 million at April 30, 2016, May 2, 2015 and January 30, 2016, respectively, is included in other assets on the condensed consolidated balance sheets. The change in fair value during the thirteen weeks ended April 30, 2016 and May 2, 2015 reflects interest income of $0.1 million for the respective periods.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at April 30, 2016, May 2, 2015 and January 30, 2016. The Company did not have any transfers between Level 1 and Level 2 during 2015 or the thirteen weeks ended April 30, 2016.   

16



 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

As of April 30, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
129,576

 
$
129,576

$

$

Non-qualified deferred compensation plan assets
4,557

 
4,557



Non-qualified deferred compensation plan liabilities
(4,557
)
 
(4,557
)


Deferred compensation plan liabilities for non-employee directors
(1,657
)
 
(1,657
)


Restricted stock units for non-employee directors
(8,576
)
 
(8,576
)


Performance share units
(1,838
)
 
(1,838
)


Derivative financial instruments, net
(347
)
 

(347
)

Secured convertible note
7,153

 


7,153

As of May 2, 2015:
 
 
 
 
 
Cash equivalents – money market funds
$
50,602

 
$
50,602

$

$

Non-qualified deferred compensation plan assets
3,795

 
3,795



Non-qualified deferred compensation plan liabilities
(3,795
)
 
(3,795
)


Deferred compensation plan liabilities for non-employee directors
(2,200
)
 
(2,200
)


Restricted stock units for non-employee directors
(9,683
)
 
(9,683
)


Performance share units
(2,526
)
 
(2,526
)


Derivative financial instruments, net
(59
)
 

(59
)

Secured convertible note
7,049

 


7,049

As of January 30, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
100,694

 
$
100,694

$

$

Non-qualified deferred compensation plan assets
3,383

 
3,383



Non-qualified deferred compensation plan liabilities
(3,383
)
 
(3,383
)


Deferred compensation plan liabilities for non-employee directors
(1,728
)
 
(1,728
)


Restricted stock units for non-employee directors
(8,879
)
 
(8,879
)


Performance share units
(3,780
)
 
(3,780
)


Derivative financial instruments, net
154

 

154


Secured convertible note
7,117

 


7,117

 
Impairment Charges 
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $95.6 million were assessed for indicators of impairment and written down to their fair value, resulting in impairment charges included in selling and administrative expenses of $0.5 million for the thirteen weeks ended April 30, 2016. Of the $0.5 million impairment charges, $0.3 million related to the Famous Footwear segment and $0.2 million related to the Brand Portfolio segment.  Long-lived assets held and used with a carrying amount of $86.4 million were assessed for indicators of impairment and written down to their fair value, resulting in impairment charges included in selling and administrative expenses of $0.4 million for the thirteen weeks ended May 2, 2015. Of the $0.4 million impairment charges, $0.3 million related to the Famous Footwear segment and $0.1 million related to the Brand Portfolio segment. 
 
Fair Value of the Company’s Other Financial Instruments 
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.

17




The carrying amounts and fair values of the Company's other financial instruments subject to fair value disclosures are as follows:
 
April 30, 2016
May 2, 2015
January 30, 2016
 
Carrying

(1) 
 
Fair

Carrying

(1) 
 
Fair

Carrying

(1) 
 
Fair

($ thousands)
Value

 
 
Value

Value

 
 
Value

Value

 
 
Value

Long-term debt - 2023 Senior Notes
$
196,659

 
 
$
205,000

$

 
 
$

$
196,544

 
 
$
196,000

Long-term debt - 2019 Senior Notes

 
 

196,904

 
 
207,500


 
 

Total debt
$
196,659

 
 
$
205,000

$
196,904

 
 
$
207,500

$
196,544

 
 
$
196,000

(1) 
The carrying value of the long-term debt is net of deferred issuance costs of $3.3 million, $2.3 million and $3.5 million as of April 30, 2016, May 2, 2015 and January 30, 2016, respectively, as a result of the adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, during the fourth quarter of 2015.
 
The fair value of the Company’s long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).

Note 12
Income Taxes
 
The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors.  The Company’s consolidated effective tax rates were 29.6% and 25.9% for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively. 

During the thirteen weeks ended April 30, 2016, the Company recognized a discrete tax benefit of $0.7 million reflecting the settlement of a federal tax audit issue. During the thirteen weeks ended May 2, 2015, the Company recognized discrete tax benefits of $1.6 million following the conversion of one of its primary operating subsidiaries to a limited liability company. As a result of that conversion, the Company recognized a tax benefit of $1.5 million upon the reversal of valuation allowances that had been previously fully reserved for certain operating loss carryforwards. If these discrete tax benefits had not been recognized during the thirteen weeks ended April 30, 2016 and May 2, 2015, the Company's effective tax rates would have been 32.3% and 32.1%, respectively.

Note 13
Related Party Transactions
 
C. banner International Holdings Limited
The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China, effective through August 2017. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. B&H Footwear sells Naturalizer footwear to a retail affiliate of CBI on a wholesale basis, which in turn sells the Naturalizer products through department store shops and free-standing stores in China.  During the thirteen weeks ended April 30, 2016 and May 2, 2015, the Company, through its consolidated subsidiary, B&H Footwear, sold $2.2 million and $2.6 million, respectively, of Naturalizer footwear on a wholesale basis to CBI.

Note 14
Commitments and Contingencies
 
Environmental Remediation 
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
 
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The current on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In May 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and expects, subject to the approval of the

18



oversight authorities, to begin implementing the revised plan later in 2016. As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. In 2014, the Company submitted a proposed expanded remedy workplan ("Expanded Remedy Workplan") that was accepted by the oversight authorities during 2015. The Company continues to implement the Expanded Remedy Workplan.

The cumulative expenditures for both on-site and off-site remediation through April 30, 2016 were $28.0 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at April 30, 2016 is $9.9 million, of which $9.1 million is recorded within other liabilities and $0.8 million is recorded within other accrued expenses. Of the total $9.9 million reserve, $5.0 million is for on-site remediation and $4.9 million is for off-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $15.1 million as of April 30, 2016. The Company expects to spend approximately $0.4 million, $0.3 million, $0.1 million, $0.1 million and $0.2 million during 2016, 2017, 2018, 2019 and 2020, respectively, and $14.0 million in the aggregate thereafter related to the on-site remediation.
 
Other
The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring through 2024. The Company has an accrued liability of $1.2 million at April 30, 2016 to complete the cleanup, maintenance and monitoring at these sites, which has been discounted at 6.4%. Of the $1.2 million reserve, $1.0 million is recorded in other liabilities and $0.2 million is recorded in other accrued expenses. On an undiscounted basis, this liability would be $1.4 million. The Company expects to spend approximately $0.2 million in each of the next five years and $0.4 million in the aggregate thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 
The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
 
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.

Note 15
Financial Information for the Company and its Subsidiaries

The Company's 2023 Senior Notes are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under the Credit Agreement, as further discussed in Note 4 to the condensed consolidated financial statements. The following tables present the condensed consolidating financial information for each of Caleres, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. Guarantors are 100% owned by the Parent.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups.

19



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
47,611

$
4,104

$
97,819

$

$
149,534

Receivables, net
99,021

761

17,179


116,961

Inventories, net
96,450

370,114

21,312


487,876

Prepaid expenses and other current assets
12,950

21,546

5,313


39,809

Intercompany receivable – current
571

185

10,084

(10,840
)

Total current assets
256,603

396,710

151,707

(10,840
)
794,180

Other assets
95,244

13,253

7,850


116,347

Goodwill and intangible assets, net
115,002

2,800

12,177


129,979

Property and equipment, net
31,473

144,427

9,686


185,586

Investment in subsidiaries
1,040,178


(20,061
)
(1,020,117
)

Intercompany receivable – noncurrent
462,382

375,975

561,419

(1,399,776
)

Total assets
$
2,000,882

$
933,165

$
722,778

$
(2,430,733
)
$
1,226,092

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
42,121

$
131,783

$
15,250

$

$
189,154

Other accrued expenses
41,347

69,268

14,790


125,405

Intercompany payable – current
2,228


8,612

(10,840
)

Total current liabilities
85,696

201,051

38,652

(10,840
)
314,559

Other liabilities
 

 

 

 

 

Long-term debt
196,659




196,659

Other liabilities
36,925

66,321

3,651


106,897

Intercompany payable – noncurrent
1,074,723

38,518

286,535

(1,399,776
)

Total other liabilities
1,308,307

104,839

290,186

(1,399,776
)
303,556

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
606,879

627,275

392,842

(1,020,117
)
606,879

Noncontrolling interests


1,098


1,098

Total equity
606,879

627,275

393,940

(1,020,117
)
607,977

Total liabilities and equity
$
2,000,882

$
933,165

$
722,778

$
(2,430,733
)
$
1,226,092



20



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
187,187

$
383,046

$
38,796

$
(24,296
)
$
584,733

Cost of goods sold
129,909

204,627

22,894

(20,490
)
336,940

Gross profit
57,278

178,419

15,902

(3,806
)
247,793

Selling and administrative expenses
49,542

157,103

16,211

(3,806
)
219,050

Operating earnings (loss)
7,736

21,316

(309
)

28,743

Interest expense
(3,608
)
(2
)


(3,610
)
Interest income
157


90


247

Intercompany interest income (expense)
2,254

(2,301
)
47



Earnings (loss) before income taxes
6,539

19,013

(172
)

25,380

Income tax provision
(866
)
(6,304
)
(332
)

(7,502
)
Equity in earnings (loss) of subsidiaries, net of tax
12,109


(537
)
(11,572
)

Net earnings (loss)
17,782

12,709

(1,041
)
(11,572
)
17,878

Less: Net earnings attributable to noncontrolling interests


96


96

Net earnings (loss) attributable to Caleres, Inc.
$
17,782

$
12,709

$
(1,137
)
$
(11,572
)
$
17,782

 
 
 
 
 
 
Comprehensive income
$
19,578

$
12,709

$
228

$
(12,827
)
$
19,688

Less: Comprehensive income attributable to noncontrolling interests


110


110

Comprehensive income attributable to Caleres, Inc.
$
19,578

$
12,709

$
118

$
(12,827
)
$
19,578



21



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
14,658

$
42,360

$
8,142

$

$
65,160

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(590
)
(15,434
)
(343
)

(16,367
)
Capitalized software
(1,097
)
(723
)


(1,820
)
Intercompany investing
(2,815
)
2,815




Net cash used for investing activities
(4,502
)
(13,342
)
(343
)

(18,187
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
103,000




103,000

Repayments under revolving credit agreement
(103,000
)



(103,000
)
Dividends paid
(3,068
)



(3,068
)
Acquisition of treasury stock
(12,130
)



(12,130
)
Issuance of common stock under share-based plans, net
(4,149
)



(4,149
)
Tax benefit related to share-based plans
3,163




3,163

Intercompany financing
22,639

(24,914
)
2,275



Net cash provided by (used for) financing activities
6,455

(24,914
)
2,275


(16,184
)
Effect of exchange rate changes on cash and cash equivalents


594


594

Increase in cash and cash equivalents
16,611

4,104

10,668


31,383

Cash and cash equivalents at beginning of period
31,000


87,151


118,151

Cash and cash equivalents at end of period
$
47,611

$
4,104

$
97,819

$

$
149,534



22



CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
31,000

$

$
87,151

$

$
118,151

Receivables, net
110,235

2,290

41,139


153,664

Inventories, net
151,704

371,538

23,503


546,745

Prepaid expenses and other current assets
29,765

24,597

8,109

(5,966
)
56,505

Intercompany receivable  – current
650

176

6,877

(7,703
)

Total current assets
323,354

398,601

166,779

(13,669
)
875,065

Other assets
94,767

15,772

7,810


118,349

Goodwill and intangible assets, net
115,558

2,800

12,541


130,899

Property and equipment, net
32,538

136,223

10,249


179,010

Investment in subsidiaries
1,028,143


(19,524
)
(1,008,619
)

Intercompany receivable  – noncurrent
431,523

354,038

556,259

(1,341,820
)

Total assets
$
2,025,883

$
907,434

$
734,114

$
(2,364,108
)
$
1,303,323

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
78,332

$
123,274

$
36,196

$

$
237,802

Other accrued expenses
80,053

62,729

15,681

(5,966
)
152,497

Intercompany payable – current
4,394


3,309

(7,703
)

Total current liabilities
162,779

186,003

55,186

(13,669
)
390,299

Other liabilities
 

 

 

 

 

Long-term debt
196,544




196,544

Other liabilities
44,011

66,302

3,695


114,008

Intercompany payable – noncurrent
1,021,065

39,175

281,580

(1,341,820
)

Total other liabilities
1,261,620

105,477

285,275

(1,341,820
)
310,552

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
601,484

615,954

392,665

(1,008,619
)
601,484

Noncontrolling interests


988


988

Total equity
601,484

615,954

393,653

(1,008,619
)
602,472

Total liabilities and equity
$
2,025,883

$
907,434

$
734,114

$
(2,364,108
)
$
1,303,323


23



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 2, 2015
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
3,564

$

$
62,766

$

$
66,330

Receivables, net
101,968

1,570

22,974


126,512

Inventories, net
95,948

380,104

22,461


498,513

Prepaid expenses and other current assets
12,519

22,119

6,365


41,003

Intercompany receivable – current
1,082

432

15,800

(17,314
)

Total current assets
215,081

404,225

130,366

(17,314
)
732,358

Other assets
121,441

13,551

6,977


141,969

Goodwill and intangible assets, net
117,226

2,800

13,631


133,657

Property and equipment, net
34,186

108,866

10,298


153,350

Investment in subsidiaries
955,609


(18,924
)
(936,685
)

Intercompany receivable  –  noncurrent
431,964

353,117

517,634

(1,302,715
)

Total assets
$
1,875,507

$
882,559

$
659,982

$
(2,256,714
)
$
1,161,334

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
3,417

$
145,328

$
23,371

$

$
172,116

Other accrued expenses
66,847

59,140

11,745


137,732

Intercompany payable – current
2,034


15,280

(17,314
)

Total current liabilities
72,298

204,468

50,396

(17,314
)
309,848

Other liabilities
 

 

 

 

 

Long-term debt
196,904




196,904

Other liabilities
34,689

61,678

3,895


100,262

Intercompany payable – noncurrent
1,018,142

37,477

247,096

(1,302,715
)

Total other liabilities
1,249,735

99,155

250,991

(1,302,715
)
297,166

Equity