10-Q 1 cal20170429.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 29, 2017
 
 
[  ]
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 26, 2017, 42,990,364 common shares were outstanding.

1



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

($ thousands)
April 29, 2017

 
April 30, 2016

 
January 28, 2017

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
71,816


$
149,534


$
55,332

Receivables, net
107,021


116,961


153,121

Inventories, net
565,051


487,876


585,764

Prepaid expenses and other current assets
38,318


39,809


49,528

Total current assets
782,206

 
794,180

 
843,745

 
 
 
 
 
 
Other assets
67,289


116,347


68,574

Goodwill
127,081

 
13,954

 
127,098

Intangible assets, net
215,127

 
116,025

 
216,660

Property and equipment
533,421

 
484,280

 
531,104

Allowance for depreciation
(315,567
)
 
(298,694
)
 
(311,908
)
Property and equipment, net
217,854


185,586


219,196

Total assets
$
1,409,557

 
$
1,226,092

 
$
1,475,273

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
85,000

 
$

 
$
110,000

Trade accounts payable
225,032


189,154


266,370

Other accrued expenses
146,315


125,405


151,225

Total current liabilities
456,347

 
314,559

 
527,595

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,118


196,659


197,003

Deferred rent
50,881


46,728


51,124

Other liabilities
83,478


60,169


85,065

Total other liabilities
331,477

 
303,556

 
333,192

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
430

 
434

 
430

Additional paid-in capital
121,826

 
127,755

 
121,537

Accumulated other comprehensive loss
(29,778
)
 
(4,054
)
 
(30,434
)
Retained earnings
527,909

 
482,744

 
521,584

Total Caleres, Inc. shareholders’ equity
620,387


606,879


613,117

Noncontrolling interests
1,346


1,098


1,369

Total equity
621,733

 
607,977

 
614,486

Total liabilities and equity
$
1,409,557

 
$
1,226,092

 
$
1,475,273

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 29, 2017

April 30, 2016

Net sales
$
631,509

$
584,733

Cost of goods sold
360,601

336,940

Gross profit
270,908

247,793

Selling and administrative expenses
244,075

219,050

Restructuring and other special charges, net
1,108


Operating earnings
25,725

28,743

Interest expense
(5,044
)
(3,610
)
Interest income
235

247

Earnings before income taxes
20,916

25,380

Income tax provision
(6,032
)
(7,502
)
Net earnings
14,884

17,878

Net (loss) earnings attributable to noncontrolling interests
(18
)
96

Net earnings attributable to Caleres, Inc.
$
14,902

$
17,782

 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.35

$
0.41

 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.35

$
0.41

 
 
 
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 29, 2017

April 30, 2016

Net earnings
$
14,884

$
17,878

Other comprehensive (loss) income, net of tax:
 

 

Foreign currency translation adjustment
(540
)
2,310

Pension and other postretirement benefits adjustments
418

(288
)
Derivative financial instruments
778

(212
)
Other comprehensive income, net of tax
656

1,810

Comprehensive income
15,540

19,688

Comprehensive (loss) income attributable to noncontrolling interests
(23
)
110

Comprehensive income attributable to Caleres, Inc.
$
15,563

$
19,578

See notes to condensed consolidated financial statements.


4



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
April 29, 2017

April 30, 2016

Operating Activities
 
 

Net earnings
$
14,884

$
17,878

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

 

Depreciation
11,156

9,019

Amortization of capitalized software
3,560

3,161

Amortization of intangible assets
1,033

920

Amortization of debt issuance costs and debt discount
432

432

Share-based compensation expense
2,711

1,987

Excess tax benefit related to share-based plans

(3,163
)
Loss on disposal of property and equipment
130

79

Impairment charges for property and equipment
949

465

Deferred rent
(243
)
222

Provision for doubtful accounts
91

182

Changes in operating assets and liabilities:
 

 

Receivables
46,002

36,522

Inventories
20,515

60,532

Prepaid expenses and other current and noncurrent assets
11,014

16,438

Trade accounts payable
(41,142
)
(48,648
)
Accrued expenses and other liabilities
(5,836
)
(31,631
)
Other, net
128

765

Net cash provided by operating activities
65,384

65,160

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(10,978
)
(16,367
)
Capitalized software
(1,390
)
(1,820
)
Net cash used for investing activities
(12,368
)
(18,187
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
195,000

103,000

Repayments under revolving credit agreement
(220,000
)
(103,000
)
Dividends paid
(3,025
)
(3,068
)
Acquisition of treasury stock
(5,993
)
(12,130
)
Issuance of common stock under share-based plans, net
(2,422
)
(4,149
)
Excess tax benefit related to share-based plans

3,163

Net cash used for financing activities
(36,440
)
(16,184
)
Effect of exchange rate changes on cash and cash equivalents
(92
)
594

Increase in cash and cash equivalents
16,484

31,383

Cash and cash equivalents at beginning of period
55,332

118,151

Cash and cash equivalents at end of period
$
71,816

$
149,534

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 28, 2017.

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. Several ASUs to clarify the implementation guidance in ASU 2014-09 have also been issued 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.  Although the ASUs will impact revenue recognition for both of the Company's reportable segments, the Company anticipates a more significant impact on its Famous Footwear segment, primarily due to the ASUs' required treatment for loyalty programs (such as Rewards, the Company's loyalty program). The Company has established an implementation team to develop and execute the plan to adopt the ASUs. The Company will continue to refine and execute the implementation plan throughout 2017, including the determination of the adoption method, prior to adopting the ASUs in the first quarter of 2018.  The implementation plan includes changes to the Company's accounting policies and practices, systems and controls to support the new revenue recognition and disclosure requirements. Although the implementation may result in a significant initial adjustment to certain liabilities, including deferred revenue, the adoption of the standard is not anticipated to significantly impact the Company's condensed consolidated statements of earnings on an ongoing basis.
 
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330), 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 the last-in, first-out (LIFO) method. The Company adopted the ASU during the first quarter of 2017, which did not have a material impact on the 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 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company has formed an implementation team and is in the process of evaluating its leases and upgrading its accounting systems to comply with the ASU. Due to the large

6



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 material. However, the adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations. 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), 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 Company adopted the ASU during the first quarter of 2017, which had the following impact to the condensed consolidated financial statements:

The Company recognized excess tax benefits of $1.1 million related to share-based plans during the thirteen weeks ended April 29, 2017, which are required to be recognized in the statements of earnings on a prospective basis. Prior to the adoption of the ASU, the excess tax benefit related to share-based plans was recorded in additional paid-in-capital.
The Company elected to adopt the provision of the ASU to account for forfeitures as they occur. This election was applied on a modified retrospective basis, resulting in a net increase to Caleres, Inc. shareholders' equity of $0.4 million.
The ASU requires cash flows from excess tax benefits related to share-based payments to be reported as operating activities in the condensed consolidated statements of cash flows. The Company elected to adopt this provision on a prospective basis and as a result, the excess tax benefit related to share-based plans for the thirteen weeks ended April 30, 2016 is presented as a financing activity, while the benefit for the thirteen weeks ended April 29, 2017 is presented as an operating activity.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The ASU's provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is adopted. As credit losses from our trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on the Company's condensed consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and intra-entity transfers of assets, other than inventory, when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted only during the first quarter of 2017. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements upon adoption during the first quarter of 2018.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption only permitted for the Company in the first quarter of 2017, provided all provisions of the ASU are adopted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements upon adoption during the first quarter of 2018.

Note 3
Acquisition

On December 13, 2016, the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with Apollo Investors, LLC (the "Seller") and Apollo Buyer Holding Company, Inc. (the "Holding Company"), pursuant to which the Company acquired all outstanding capital stock of Allen Edmonds ("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was $259.9 million, net of cash received of $0.7 million. The purchase was funded with cash and funds available under the Company's revolving credit agreement. The operating results of Allen Edmonds have been included in the Company’s condensed consolidated financial statements within the Brand Portfolio segment since December 13, 2016.

The assets and liabilities of Allen Edmonds were recorded at their estimated fair values and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill during the fourth quarter of 2016. The allocation of the purchase price is based on certain preliminary valuations and analyses. As of the

7



date of this filing, the purchase price allocation is considered substantially complete. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined.

The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies.

During the thirteen weeks ended April 29, 2017, the Company recognized $3.0 million in cost of goods sold ($1.9 million on an after-tax basis, or $0.04 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. As further discussed in Note 5 to the condensed consolidated financial statements, the Company also incurred integration costs during the thirteen weeks ended April 29, 2017.

Note 4
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 29, 2017 and April 30, 2016:
 
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
April 29, 2017

April 30, 2016

NUMERATOR
 

 

Net earnings
$
14,884

$
17,878

Net loss (earnings) attributable to noncontrolling interests
18

(96
)
Net earnings allocated to participating securities
(408
)
(486
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
14,494

$
17,296

 
 
 
DENOMINATOR
 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,832

42,433

Dilutive effect of share-based awards
169

163

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,001

42,596


 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.35

$
0.41


 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.35

$
0.41

 
Options to purchase 16,667 and 66,165 shares of common stock for the thirteen weeks ended April 29, 2017 and April 30, 2016 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive.

During the thirteen weeks ended April 29, 2017 and April 30, 2016, the Company repurchased 225,000 shares and 450,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. As of April 29, 2017, the Company has repurchased a total of 1.3 million shares under this program.


8



Note 5
Restructuring and Other Initiatives
 
During the thirteen weeks ended April 29, 2017, the Company incurred integration and reorganization costs totaling $1.1 million ($0.7 million on an after-tax basis, or $0.01 per diluted share) related to the men's business. Of the $1.1 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings, $0.8 million is reflected within the Brand Portfolio segment and $0.3 million is reflected within the Other category. There were no restructuring and other special charges incurred during the thirteen weeks ended April 30, 2016.
 
Note 6
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the thirteen weeks ended April 29, 2017 and April 30, 2016.  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended April 29, 2017
External sales
$
366,494

$
265,015

$

$
631,509

Intersegment sales

14,700


14,700

Operating earnings (loss)
20,279

13,314

(7,868
)
25,725

Segment assets
540,417

743,256

125,884

1,409,557

 
 
 
 
 
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

 
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 29, 2017

April 30, 2016

Operating earnings
$
25,725

$
28,743

Interest expense
(5,044
)
(3,610
)
Interest income
235

247

Earnings before income taxes
$
20,916

$
25,380


Note 7
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
April 29, 2017

April 30, 2016

January 28, 2017

Raw materials
$
15,114

$
771

$
15,378

Work-in-process
863


1,093

Finished goods
549,074

487,105

569,293

Inventories, net
$
565,051

$
487,876

$
585,764



9



Note 8
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
April 29, 2017

April 30, 2016

January 28, 2017

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
285,988

183,068

286,488

Total intangible assets
288,788

185,868

289,288

Accumulated amortization
(73,661
)
(69,843
)
(72,628
)
Total intangible assets, net
215,127

116,025

216,660

Goodwill
 

 

 

Brand Portfolio
127,081

13,954

127,098

Total goodwill
127,081

13,954

127,098

Goodwill and intangible assets, net
$
342,208

$
129,979

$
343,758


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Allen Edmonds on December 13, 2016. The allocation of the purchase price resulted in incremental intangible assets of $102.9 million, consisting of trademarks and customer relationships of $97.5 million and $5.4 million, respectively, and incremental goodwill of $113.1 million.

The Company's intangible assets as of April 29, 2017, April 30, 2016 and January 28, 2017 were as follows:
($ thousands)
 
 
 
April 29, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
73,526

 
$
91,762

Trademarks
 
Indefinite
 
118,100

(1 
) 

 
118,100

Customer relationships
 
15 years
 
5,400

(1 
) 
135

 
5,265

 
 
 
 
$
288,788

 
$
73,661

 
$
215,127

 
 
 
 
April 30, 2016
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,068

 
$
69,843

 
$
95,225

Trademarks
 
Indefinite
 
20,800

 

 
20,800

 
 
 
 
$
185,868

 
$
69,843

 
$
116,025

 
 
 
 
January 28, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
72,604

 
$
92,684

Trademarks
 
Indefinite
 
117,900

(1 
) 

 
117,900

Customer relationships
 
15 years
 
6,100

(1 
) 
24

 
6,076

 
 
 
 
$
289,288

 
$
72,628

 
$
216,660

(1) The Allen Edmonds trademark and customer relationships intangible assets were acquired in the Allen Edmonds acquisition, as further discussed in Note 3 to the condensed consolidated financial statements. Immaterial adjustments attributable to the purchase price allocation were recorded during the thirteen weeks ended April 29, 2017, resulting in an adjustment to the original cost.

Amortization expense related to intangible assets was $1.0 million and $0.9 million for the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively.  

10



Note 9
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended April 29, 2017 and April 30, 2016:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings (loss)
14,902

(18
)
14,884

Other comprehensive income (loss)
656

(5
)
651

Dividends paid
(3,025
)

(3,025
)
Acquisition of treasury stock
(5,993
)

(5,993
)
Issuance of common stock under share-based plans, net
(2,422
)

(2,422
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441


441

Share-based compensation expense
2,711


2,711

Equity at April 29, 2017
$
620,387

$
1,346

$
621,733

 
($ 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
)
Excess 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



11



Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the thirteen weeks ended April 29, 2017 and April 30, 2016:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive (loss) income before reclassifications
(540
)

753

213

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

679

47

726

Tax benefit

(261
)
(22
)
(283
)
Net reclassifications

418

25

443

Other comprehensive (loss) income
(540
)
418

778

656

Balance April 29, 2017
$
(348
)
$
(29,666
)
$
236

$
(29,778
)
 
 
 
 
 
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

(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
)
(1)
Amounts reclassified are included in selling and administrative expenses. See Note 11 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, selling and administrative expenses and interest expense. See Notes 12 and 13 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 10
Share-Based Compensation
 
The Company recognized share-based compensation expense of $2.7 million and $2.0 million during the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively. In addition to share-based compensation expense, the Company recognized cash-based expense related to performance share units and cash awards granted under the performance share plans of $0.1 million and $0.8 million during the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively.
 
The Company issued 254,358 and 186,772 shares of common stock during the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to directors, net of forfeitures and shares withheld to satisfy the minimum tax withholding requirement.


12



Restricted Stock 
The following table summarizes restricted stock activity for the thirteen weeks ended April 29, 2017 and April 30, 2016:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
April 29, 2017
 
 
April 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
January 28, 2017
1,128,049

 
$
25.85

 
January 30, 2016
1,262,449

 
$
19.55

Granted
351,820

 
26.90

 
Granted
336,800

 
26.64

Forfeited
(12,500
)
 
26.63

 
Forfeited
(29,250
)
 
20.53

Vested
(250,035
)
 
17.00

 
Vested
(419,250
)
 
9.18

April 29, 2017
1,217,334

 
$
27.96

 
April 30, 2016
1,150,749

 
$
25.38


All of the restricted shares granted during the thirteen weeks ended April 29, 2017 and April 30, 2016 have a cliff-vesting term of four years. Share-based compensation expense is recognized on a straight-line basis over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended April 29, 2017 and April 30, 2016, the Company granted performance share awards for a targeted 169,500 and 159,000 shares, respectively with a weighted-average grant date fair value of $26.90 and $26.64, 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 for each tranche 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. During the thirteen weeks ended April 29, 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.

Stock Options
The following table summarizes stock option activity for the thirteen weeks ended April 29, 2017 and April 30, 2016:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
April 29, 2017
 
 
April 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
January 28, 2017
150,540

 
$
9.36

 
January 30, 2016
301,295

 
$
8.95

Granted

 

 
Granted

 

Exercised
(6,000
)
 
5.57

 
Exercised
(50,066
)
 
7.17

Forfeited

 

 
Forfeited
(7,499
)
 
15.94

Expired
(47,248
)
 
15.94

 
Expired
(14,625
)
 
10.75

April 29, 2017
97,292

 
$
6.39

 
April 30, 2016
229,105

 
$
8.99


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of cash-equivalent restricted stock units ("RSUs"). The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock and are automatically re-invested in additional RSUs. The Company granted 882 and 853 RSUs for dividend equivalents to non-employee directors during the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively, with weighted-average grant date fair values of $26.29 and $28.09, respectively. All RSUs for dividend equivalents vested immediately and compensation expense was fully recognized during the thirteen weeks ended April 29, 2017 and April 30, 2016.


13



Note 11
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit cost (income) for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
April 29, 2017

April 30, 2016

April 29, 2017

April 30, 2016

Service cost
$
2,467

$
2,263

$

$

Interest cost
3,747

3,861

18

15

Expected return on assets
(6,880
)
(7,223
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
1,152

38

(38
)
(55
)
Prior service income
(435
)
(460
)


Total net periodic benefit cost (income)
$
51

$
(1,521
)
$
(20
)
$
(40
)

Note 12
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 financial 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 May 2018. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses 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 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 29, 2017 and April 30, 2016 was not material. 
 
As of April 29, 2017, April 30, 2016 and January 28, 2017, the Company had forward contracts maturing at various dates through May 2018, April 2017 and February 2018, respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 
(U.S. $ equivalent in thousands)
April 29, 2017

April 30, 2016

January 28, 2017

Financial Instruments
 
 
 
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
$
20,813

$
15,767

$
18,826

Euro
16,446

15,182

13,297

Chinese yuan
4,476

14,066

7,723

Japanese yen
416

1,152

769

United Arab Emirates dirham
528

900

823

New Taiwanese dollars
545

514

526

Other currencies
66

170

124

Total financial instruments
$
43,290

$
47,751

$
42,088


14



 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of April 29, 2017, April 30, 2016 and January 28, 2017 are as follows:

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

 
Balance Sheet Location
Fair Value

 
 
 
 
 
 
Foreign exchange forward contracts:
 

 
 
 

April 29, 2017
Prepaid expenses and other current assets
$
610

 
Other accrued expenses
$
187

April 30, 2016
Prepaid expenses and other current assets
615

 
Other accrued expenses
962

January 28, 2017
Prepaid expenses and other current assets
234

 
Other accrued expenses
874

 
For the thirteen weeks ended April 29, 2017 and April 30, 2016, 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 29, 2017
April 30, 2016
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(32
)
$
18

$
(164
)
$
(36
)
Cost of goods sold
793

3

(113
)
83

Selling and administrative expenses
310

(67
)
51

(170
)
Interest expense
4

(1
)
(38
)


All gains and losses currently included within accumulated other comprehensive loss 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 13 to the condensed consolidated financial statements. 
 
Note 13
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.

15



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 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 statements of earnings. The fair value of each PSU 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). 
 
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 RSUs for non-employee directors is disclosed in Note 10 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).  During the thirteen weeks ended April 29, 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value. Additional information related to performance share units is disclosed in Note 10 to the condensed consolidated financial statements.

16



 
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 in Note 12 to the condensed consolidated financial statements. 

Secured Convertible Note
The Company received a secured convertible note as partial consideration for the 2014 disposition of Shoes.com, and the convertible note was measured at fair value using unobservable inputs (Level 3). During the fourth quarter of 2016, the convertible note was fully impaired.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at April 29, 2017, April 30, 2016 and January 28, 2017. The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirteen weeks ended April 29, 2017 or April 30, 2016.   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

April 29, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
43,531

 
$
43,531

$

$

Non-qualified deferred compensation plan assets
5,402

 
5,402



Non-qualified deferred compensation plan liabilities
(5,402
)
 
(5,402
)


Deferred compensation plan liabilities for non-employee directors
(2,189
)
 
(2,189
)


Restricted stock units for non-employee directors
(9,276
)
 
(9,276
)


Derivative financial instruments, net
423

 

423


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

January 28, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
27,530

 
$
27,530

$

$

Non-qualified deferred compensation plan assets
5,051

 
5,051



Non-qualified deferred compensation plan liabilities
(5,051
)
 
(5,051
)


Deferred compensation plan liabilities for non-employee directors
(1,909
)
 
(1,909
)


Restricted stock units for non-employee directors
(9,390
)
 
(9,390
)


Performance share units
(3,352
)
 
(3,352
)


Derivative financial instruments, net
(640
)
 

(640
)

 
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-

17



lived assets held and used with a carrying amount of $95.4 million and $95.6 million at April 29, 2017 and April 30, 2016, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
($ thousands)
April 29, 2017

April 30, 2016

Impairment Charges
 
 
Famous Footwear
$
150

$
250

Brand Portfolio
799

215

Total impairment charges
$
949

$
465


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.

The carrying amounts and fair values of the Company's other financial instruments subject to fair value disclosures are as follows:
 
April 29, 2017
 
April 30, 2016
 
January 28, 2017
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
85,000

 
$
85,000

 
$

 
$

 
$
110,000

 
$
110,000

Long-term debt
197,118

 
209,500

 
196,659

 
205,000

 
197,003

 
209,000

Total debt
$
282,118


$
294,500


$
196,659


$
205,000


$
307,003


$
319,000

 
The fair value of the borrowings under revolving credit agreement approximate its carrying value due to the short-term nature (Level 1), and 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 14
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 28.8% and 29.6% for the thirteen weeks ended April 29, 2017 and April 30, 2016, respectively. 

During the thirteen weeks ended April 29, 2017, the Company's effective tax rate was impacted by the adoption of ASU 2016-09, as further discussed in Note 2 to the condensed consolidated financial statements. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in the statements of earnings, resulting in the recognition of a discrete benefit of $1.1 million in excess tax benefits for the thirteen weeks ended April 29, 2017. During the thirteen weeks ended April 30, 2016, the Company recognized discrete tax benefits of $0.7 million reflecting the settlement of a federal tax audit issue. If the discrete tax benefits had not been recognized during the thirteen weeks ended April 29, 2017 and April 30, 2016, the Company's effective tax rates would have been 34.0% and 32.3%, respectively, reflecting a higher mix of domestic earnings in 2017, which carry a higher tax rate than earnings at the Company's international subsidiaries. The mix of domestic earnings is higher in 2017 due in part to the inclusion of the recently acquired Allen Edmonds business, which consists primarily of domestic operations.


18



Note 15
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.  The Company, through its consolidated subsidiary, B&H Footwear, sold Naturalizer footwear on a wholesale basis to CBI totaling $2.2 million for the thirteen weeks ended April 30, 2016, with no corresponding sales during the thirteen weeks ended April 29, 2017. During the second quarter of 2016, the Company communicated its intention to dissolve the joint venture with CBI upon the expiration of the license to sell Naturalizer footwear.

Note 16
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 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 received approval from the oversight authorities to begin implementing the revised plan.

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 work plan 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 work plan, 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 work plan that was accepted by the oversight authorities during 2015. The Company continues to implement the expanded remedy work plan.

The cumulative expenditures for both on-site and off-site remediation through April 29, 2017 were $29.2 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 29, 2017 is $9.5 million, of which $8.7 million is recorded within other liabilities and $0.8 million is recorded within other accrued expenses. Of the total $9.5 million reserve, $4.5 million is for on-site remediation and $5.0 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 $14.6 million as of April 29, 2017. The Company expects to spend approximately $0.6 million in the next fiscal year, $0.1 million in each of the following four years and $13.6 million in the aggregate thereafter related to the on-site remediation.
 
Other
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.

19



 
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 17
Financial Information for the Company and its Subsidiaries

The Company issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under our revolving credit facility ("Credit Agreement"). 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. On December 13, 2016, Allen Edmonds was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC and Allen Edmonds are each co-borrowers and guarantors under the Credit Agreement.

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.

20



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
43,201

$
15,601

$
13,014

$

$
71,816

Receivables, net
90,121

3,705

13,195


107,021

Inventories, net
117,815

422,911

24,325


565,051

Prepaid expenses and other current assets
20,499

15,134

7,313

(4,628
)
38,318

Intercompany receivable – current
1,487

159

18,297

(19,943
)

Total current assets
273,123

457,510

76,144

(24,571
)
782,206

Other assets
51,823

14,631

835


67,289

Goodwill and intangible assets, net
112,777

218,707

10,724


342,208

Property and equipment, net
32,093

173,567

12,194


217,854

Investment in subsidiaries
1,370,854


(22,994
)
(1,347,860
)

Intercompany receivable – noncurrent
581,957

409,466

591,105

(1,582,528
)

Total assets
$
2,422,627

$
1,273,881

$
668,008

$
(2,954,959
)
$
1,409,557

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
85,000

$

$

$

$
85,000

Trade accounts payable
65,364

140,924

18,744


225,032

Other accrued expenses
57,359

78,302

15,282

(4,628
)
146,315

Intercompany payable – current
10,398


9,545

(19,943
)

Total current liabilities
218,121

219,226

43,571

(24,571
)
456,347

Other liabilities
 

 

 

 

 

Long-term debt
197,118




197,118

Other liabilities
90,110

40,223

4,026


134,359

Intercompany payable – noncurrent
1,296,891

80,188

205,449

(1,582,528
)

Total other liabilities
1,584,119

120,411

209,475

(1,582,528
)
331,477

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
620,387

934,244

413,616

(1,347,860
)
620,387

Noncontrolling interests


1,346


1,346

Total equity
620,387

934,244

414,962

(1,347,860
)
621,733

Total liabilities and equity
$
2,422,627

$
1,273,881

$
668,008

$
(2,954,959
)
$
1,409,557



21



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
194,440

$
427,539

$
38,045

$
(28,515
)
$
631,509

Cost of goods sold
132,851

231,786

18,530

(22,566
)
360,601

Gross profit
61,589

195,753

19,515

(5,949
)
270,908

Selling and administrative expenses
52,424

182,347

15,253

(5,949
)
244,075

Restructuring and other special charges, net
1,108




1,108

Operating earnings
8,057

13,406

4,262


25,725

Interest expense
(5,035
)
(9
)


(5,044
)
Interest income
88


147


235

Intercompany interest income (expense)
2,083

(2,324
)
241



Earnings before income taxes
5,193

11,073

4,650


20,916

Income tax provision
(1,087
)
(3,875
)
(1,070
)

(6,032
)
Equity in earnings (loss) of subsidiaries, net of tax
10,796


(1,048
)
(9,748
)

Net earnings
14,902

7,198

2,532

(9,748
)
14,884

Less: Net loss attributable to noncontrolling interests


(18
)

(18
)
Net earnings attributable to Caleres, Inc.
$
14,902

$
7,198

$
2,550

$
(9,748
)
$
14,902

 
 
 
 
 
 
Comprehensive income
$
15,563

$
7,198

$
2,453

$
(9,674
)
$
15,540

Less: Comprehensive loss attributable to noncontrolling interests


(23
)

(23
)
Comprehensive income attributable to Caleres, Inc.
$
15,563

$
7,198

$
2,476

$
(9,674
)
$
15,563




22



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
8,601

$
55,017

$
1,766

$

$
65,384

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(1,915
)
(7,570
)
(1,493
)

(10,978
)
Proceeds from disposal of property and equipment
(17,238
)
17,238




Capitalized software
(1,167
)
(223
)


(1,390
)
Intercompany investing
(2,494
)
2,494




Net cash (used for) provided by investing activities
(22,814
)
11,939

(1,493
)

(12,368
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
195,000




195,000

Repayments under revolving credit agreement
(220,000
)



(220,000
)
Dividends paid
(3,025
)



(3,025
)
Acquisition of treasury stock
(5,993
)



(5,993
)
Issuance of common stock under share-based plans, net
(2,422
)



(2,422
)
Intercompany financing
69,855

(60,384
)
(9,471
)


Net cash provided by (used for) financing activities
33,415

(60,384
)
(9,471
)

(36,440
)
Effect of exchange rate changes on cash and cash equivalents


(92
)

(92
)
Increase (decrease) in cash and cash equivalents
19,202

6,572

(9,290
)

16,484

Cash and cash equivalents at beginning of period
23,999

9,029

22,304


55,332

Cash and cash equivalents at end of period
$
43,201

$
15,601

$
13,014

$

$
71,816



23



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
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



24



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

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total<