-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ts69VQOUX4VRmEgcSyx04/zNtP8Gj1ojLRaDLZUCyDcIL5kzFXhfwZ8nwKD1c8gM feMkNTSV1nQDcUU4XFU3Bw== 0001068800-99-000433.txt : 19991215 0001068800-99-000433.hdr.sgml : 19991215 ACCESSION NUMBER: 0001068800-99-000433 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLWOOD CO CENTRAL INDEX KEY: 0000055080 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 362472410 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07340 FILM NUMBER: 99773965 BUSINESS ADDRESS: STREET 1: 600 KELLWOOD PKWY STREET 2: P O BOX 14374 CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145763100 MAIL ADDRESS: STREET 1: 600 KELLYWOOD PKWY STREET 2: P O BOX 14374 CITY: ST LOUIS STATE: MO ZIP: 63178 10-Q 1 KELLWOOD COMPANY FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 1-7340 KELLWOOD COMPANY - ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-2472410 - ---------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 600 KELLWOOD PARKWAY, P.O. BOX 14374, ST. LOUIS, MO 63178 - --------------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (314) 576-3100 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of common stock, par value $.01, outstanding at October 31, 1999 (only one class): 27,846,014 ----------- 1 KELLWOOD COMPANY ---------------- INDEX ----- Page No. -------- PART I. FINANCIAL INFORMATION Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statement of Earnings 4 Condensed Consolidated Statement of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 PART II. OTHER INFORMATION 17 2 PART I. FINANCIAL INFORMATION ------------------------------ KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) ------------------------------------------------ (Amounts in thousands)
October 31, ---------------------------- April 30, 1999 1998 1999 ---------- ---------- ---------- ASSETS - ------ Current assets: Cash and time deposits $ 111,958 $ 37,748 $ 25,482 Receivables, net 417,138 311,723 392,628 Inventories 301,580 375,770 340,778 Prepaid taxes and expenses 38,093 36,907 38,392 ---------- ---------- ---------- Total current assets 868,769 762,148 797,280 Property, plant and equipment, net 108,647 91,020 102,298 Intangible assets, net 57,255 106,813 60,207 Other assets 101,833 90,585 94,427 ---------- ---------- ---------- Total assets $1,136,504 $1,050,566 $1,054,212 ========== ========== ========== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Current liabilities: Current portion of long-term debt $ 15,791 $ 19,928 $ 16,504 Notes payable 2,609 98,544 93,963 Accounts payable 129,507 103,387 117,014 Accrued expenses 93,049 81,142 104,264 ---------- ---------- ---------- Total current liabilities 240,956 303,001 331,745 Long-term debt 369,544 242,778 227,659 Deferred income taxes and other 50,699 48,566 48,620 Shareowners' equity: Common stock 166,288 137,778 163,097 Retained earnings 360,075 369,450 333,340 Accumulated other comprehensive income (9,286) (10,024) (9,330) ---------- ---------- ---------- 517,077 497,204 487,107 Less treasury stock, at cost (41,772) (40,983) (40,919) ---------- ---------- ---------- Total shareowners' equity 475,305 456,221 446,188 ---------- ---------- ---------- Total liabilities & shareowners' equity $1,136,504 $1,050,566 $1,054,212 ========== ========== ========== See notes to condensed consolidated financial statements.
3 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) -------------------------------------------------------- (Amounts in thousands except per share data)
Three Months Ended Six Months Ended October 31, October 31, -------------------------- ---------------------------- 1999 1998 1999 1998 -------- -------- ---------- ---------- Net sales $633,456 $600,540 $1,104,031 $1,083,823 Costs and expenses: Cost of products sold 495,657 467,998 865,516 852,819 Selling, general and administrative expenses 84,216 80,894 160,930 152,047 Amortization of intangible assets 1,640 3,932 3,299 7,764 Interest expense 8,453 8,967 14,810 17,951 Interest income and other, net (276) (65) (347) (445) -------- -------- ---------- ---------- Earnings before income taxes 43,766 38,814 59,823 53,687 Income taxes 17,700 16,462 24,200 22,683 -------- -------- ---------- ---------- Net earnings $ 26,066 $ 22,352 $ 35,623 $ 31,004 ======== ======== ========== ========== Weighted average shares outstanding: Basic 27,805 26,838 27,763 26,528 ======== ======== ========== ========== Diluted 28,046 27,231 28,063 27,135 ======== ======== ========== ========== Earnings per share: Basic $ .94 $ .83 $ 1.28 $ 1.17 ======== ======== ========== ========== Diluted $ .93 $ .82 $ 1.27 $ 1.14 ======== ======== ========== ========== Dividends paid per share $ .16 $ .16 $ .32 $ .32 ======== ======== ========== ========== See notes to condensed consolidated financial statements.
4 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) ---------------------------------------------------------- (Amounts in thousands)
Six Months Ended October 31, -------------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net earnings $ 35,623 $ 31,004 Add/(deduct) items not affecting operating cash flows: Depreciation and amortization 13,106 16,470 Increase in prepaid pension cost (2,884) (2,306) Deferred income taxes and other (2,346) (1,601) Changes in working capital: Receivables, net (24,510) 16,625 Inventories 39,198 52,000 Prepaid taxes and expenses 299 4,521 Accounts payable 12,493 (21,750) Accrued expenses (11,215) (5,164) -------- -------- Net cash provided/(used) by operating activities 59,764 89,799 -------- -------- INVESTING ACTIVITIES: Additions to fixed assets (16,800) (31,213) Investment in subsidiaries (84) (121) Other investing activities 328 6,045 -------- -------- Net cash provided/(used) by investing activities (16,556) (25,289) -------- -------- FINANCING ACTIVITIES: Proceeds from debentures 149,127 - Reduction of notes payable, net (91,354) (43,192) Reduction of long-term debt (8,035) (9,255) Dividends paid (8,884) (6,911) Stock transactions under incentive plans 2,414 2,885 -------- -------- Net cash provided/(used) by financing activities 43,268 (56,473) -------- -------- NET INCREASE IN CASH AND TIME DEPOSITS 86,476 8,037 Cash and time deposits, beginning of period 25,482 29,711 -------- -------- Cash and time deposits, end of period $111,958 $ 37,748 ======== ======== See notes to condensed consolidated financial statements.
5 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Amounts in thousands) 1. ACCOUNTING POLICIES. It is the opinion of management that all adjustments necessary for a fair presentation of results for the interim periods have been reflected in the statements presented. Such adjustments were normal and recurring in nature. All prior year data have been restated for the merger with Koret effective April 30, 1999 which was accounted for as a pooling of interests. Accounting policies have been continued without change and are described in the Summary of Significant Accounting Policies contained in the Company's 1999 Annual Report to Shareowners. For additional information regarding the Company's financial condition, refer to the footnotes accompanying the annual financial statements. Details in those notes have not changed significantly except as indicated herein and as a result of normal transactions in the interim. 2. CHANGE IN FISCAL YEAR. On August 26, 1999, the company changed its fiscal year-end from April 30 to January 31. This change will result in a transition period of nine months beginning May 1, 1999 and ending January 31, 2000. 3. FACILITY CONSOLIDATIONS. In the fourth quarter of fiscal 1999, the Company recorded a provision for facilities shut-down. Details of activity during the first and second quarters related to this provision and the accrual balances remaining at October 31, 1999 are as follows:
Spending in the Quarter ended Accrual ------------------------- Balance at July 31 Oct. 31 October 31 ------- ------- ---------- Employee severance $ 62 $61 $3,472 Vacant facilities / lease termination 112 28 1,193 Other cash restructuring costs 71 0 189 ---- --- ------ Total restructuring, excluding non-cash $245 $89 $4,854 ==== === ======
Facility consolidations represented by the October 31, 1999 accrual balance are expected to be substantially completed by April 30, 2000. 4. SUPPLEMENTAL BALANCE SHEET INFORMATION:
October 31, -------------------------- April 30, 1999 1998 1999 -------- -------- --------- Inventories: Finished goods $169,769 $211,013 $196,214 Work in process 72,020 97,058 77,992 Raw materials 59,791 67,699 66,572 -------- -------- -------- Total Inventories $301,580 $375,770 $340,778 ======== ======== ========
If inventories were valued at current replacement costs, they would have 6 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ---------------------------------------------------------------- (AMOUNTS IN THOUSANDS) totaled $303,976, $384,012 and $346,074 at October 31, 1999, October 31, 1998, and April 30, 1999, respectively.
October 31, ------------------------- April 30, 1999 1998 1999 ------- -------- --------- Intangible assets: Goodwill $63,886 $127,370 $65,477 less accumulated amortization 19,549 47,211 19,479 ------- -------- ------- Net goodwill 44,337 80,159 45,998 ------- -------- ------- Other identifiable intangibles 40,220 84,858 40,229 less accumulated amortization 27,302 58,204 26,020 ------- -------- ------- Net other identifiable intangibles 12,918 26,654 14,209 ------- -------- ------- Net intangible assets $57,255 $106,813 $60,207 ======= ======== =======
5. DEBT. On August 31, 1999 the Company executed a $350,000 Senior Credit Facility with Bank of America as lead arranger and other participating banks (the "1999 Facility"). This facility replaced a credit facility dated May 31, 1996. In connection with the execution of the 1999 Facility the Company paid various fees and costs totaling approximately $750. Facility fees range from .15% to .18% of the committed amount. The 1999 Facility comprises a $100,000 364 day revolving credit facility and a $250,000 three-year revolving credit facility. The $250,000 three-year revolving credit facility can also be used for letters of credit. Borrowings under the 1999 Facility will bear interest at a spread of approximately .6% over LIBOR. At October 31, 1999, outstanding short-term loans and letters of credit under the agreement were $0 and $153,000, respectively. The Company maintains informal, uncommitted lines of credit with several banks which totaled $120,000 at October 31, 1999. Borrowings under these uncommitted lines totaled $0 at October 31, 1999. On July 26, 1999 the Company completed a 10-year public debt offering totaling $150,000. The debentures mature July 15, 2009 and carry a 7.875% coupon rate. Covenants related to both the 1999 Facility and the 10-year debentures are more flexible than those currently existing for Kellwood's notes due insurance companies. 6. REPORTABLE SEGMENTS. Sales and operating earnings by segment for the quarters ended October 31, 1999 and 1998 and the six month periods ended October 31, 1999 7 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ---------------------------------------------------------------- (AMOUNTS IN THOUSANDS) and 1998 as well as a reconciliation of the operating earnings (defined as Net Sales less Cost of Products Sold and Selling, General and Administrative expenses) of the reported segments to total Kellwood earnings before income taxes are as follows:
Three Months Ended Six Months Ended October 31, October 31, -------------------------- ---------------------------- 1999 1998 1999 1998 -------- -------- ---------- ---------- Net Sales: Popular-to-Moderate $414,451 $380,115 $ 703,064 $ 675,784 Better-to-Bridge 43,933 49,147 78,330 89,402 Private Label Apparel 82,088 82,105 141,094 142,547 Smart Shirts 63,447 63,840 114,055 113,978 Recreation Products 29,537 25,333 67,488 62,112 -------- -------- ---------- ---------- Kellwood net sales $633,456 $600,540 $1,104,031 $1,083,823 ======== ======== ========== ========== Operating earnings: Popular-to-Moderate $ 38,642 $ 36,818 $ 60,532 $ 57,015 Better-to-Bridge 1,412 2,084 1,297 3,256 Private Label Apparel 10,320 12,817 13,188 18,826 Smart Shirts 7,699 6,028 11,180 10,475 Recreation Products 1,148 1,094 4,254 4,377 -------- -------- ---------- ---------- Total segments 53,583 51,648 90,451 93,949 Amortization of Intangibles (1,640) (3,932) (3,299) (7,764) Interest expense (8,177) (8,902) (14,463) (17,506) General corporate and other (5,638) (7,193) (12,866) (14,992) -------- -------- ---------- ---------- Earnings before income taxes $ 43,766 $ 38,814 $ 59,823 $ 53,687 ======== ======== ========== ==========
7. COMPREHENSIVE INCOME. The Company's total comprehensive income for the six months ended October 31, 1999 and 1998, was $26,338 and $22,256, respectively. Total comprehensive income for the three months ended October 31, 1999 and 1998, was $35,667 and $30,587, respectively. Differences between net earnings and total comprehensive income resulted from foreign currency translation. 8. STOCK OPTION PLANS. During the first quarter of fiscal 2000, the Company granted nonqualified stock options to certain officers and other key employees for 467,350 shares of common stock at an exercise price of $23.68, which was equal to the market value of the shares on that date. 8 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - $ IN MILLIONS EXCEPT PER SHARE DATA ----------------------------------------------------------- OPERATING RESULTS - ----------------- Kellwood Company achieved record sales and earnings for the second quarter ended October 31, 1999. Sales for the quarter were $633.5, up 5.5% from last year's record quarter of $600.5. Net earnings increased 16.6% to $26.1 or $.93 per share from $22.4 or $.82 per share on a diluted basis. Summarized financial data for the quarters and six month periods ended October 31, 1999 and 1998 are as follows. All prior year data have been restated for the merger with Koret which was effective April 30, 1999 and was accounted for as a pooling of interests. (percentages are calculated based on actual data, but columns may not add due to rounding)
Three Months Ended Six Months Ended October 31, October 31, ------------------------------ ------------------------------- 1999 1998 % Change 1999 1998 % Change ------ ----- -------- ------ ------ -------- Net Sales $ 633 $ 601 5.5% $1,104 $1,084 1.9% Cost of products sold 496 468 5.9% 866 853 1.5% S, G & A 84 81 4.1% 161 152 5.8% ------ ------ ------ ------ ------ ------ Operating earnings 54 52 3.7% 78 79 -1.7% Amort. of intangibles 2 4 -58.3% 3 8 -57.5% Interest, net & other 8 9 -8.1% 14 18 -17.4% ------ ------ ------ ------ ------ ------ Earnings before tax 44 39 12.8% 60 54 11.4% Income Taxes 18 16 7.5% 24 23 6.7% ------ ------ ------ ------ ------ ------ Net Earnings $ 26 $ 22 16.6% $ 36 $ 31 14.9% ====== ====== ====== ====== ====== ====== Effective tax rate 40.4% 42.4% -2.0% 40.5% 42.3% -1.8% As a percentage of Net Sales: Net Sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 78.2% 77.9% 78.4% 78.7% S, G & A 13.3% 13.5% 14.6% 14.0% ------ ------ ------ ------ Operating earnings 8.5% 8.6% 7.0% 7.3% Amort. of intangibles .3% .7% .3% .7% Interest, net & other 1.3% 1.5% 1.3% 1.6% ------ ------ ------ ------ Earnings before tax 6.9% 6.5% 5.4% 5.0% Income Taxes 2.8% 2.7% 2.2% 2.1% ------ ------ ------ ------ Net Earnings 4.1% 3.7% 3.2% 2.9% ====== ====== ====== ======
Our Popular-to-Moderate Women's Branded Sportswear and Recreation Products segments accounted for the quarter's sales growth. Sales grew in every major channel of distribution with the exception of catalog sales, which were impacted by a soft demand for outerwear. Cost of Products Sold as a percentage of sales in the second quarter increased to 78.2% from 77.9% in the prior year; for the first half it decreased to 78.4% from 78.7% in the prior year. Improved sourcing and savings generated from the Vision 2000 supplier management initiative worked to lower the cost of products 9 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- sold margin, but this improvement was offset in the quarter by the impact of the startup of the new distribution center in Trenton, Tennessee, the startup of a new plant in Mexico, and the phasing out of most of our domestic sewing operations which resulted in unabsorbed burden and labor inefficiency. S,G&A expense for the second quarter increased $3.3 to 13.3% of sales from 13.5% in the prior year due to the impact of the addition of Fritzi which was acquired in December 1998. Adjusting for Fritzi, S,G&A expense would have been flat for the first half and actually down $2.6 in the second quarter. Factors reducing S,G&A spending in the second quarter included lower spending on the Vision 2000 program, lower spending by Smart Shirts due to the resolution of quota constraints out of Sri Lanka, and the elimination of certain costs as a result of the consolidation of certain business units, partially offset by increased S,G&A spending to fund the start-up of the Slates(R) and Components Sportswear(TM) lines. Amortization of intangible assets decreased compared to the prior year as a result of the provision for goodwill impairment recorded in the fourth quarter of fiscal 1999. The decrease in interest expense is primarily due to the decrease in average debt as a result of improved working capital management. This was partially offset by the impact of the $150 debt offering in July which bears interest at 7.875% (as compared to approximately 6% for the short-term debt it replaced) and which resulted in a $.7 increase in interest expense for the second quarter. The effective tax rate decreased to 40.5% from 42.3% in the prior year as a result of the decreased amortization of goodwill discussed above. Smaller permanent differences between book income and taxable income resulted from the lower level of non-deductible amortization expense. RESTRUCTURING - ------------- In the fourth quarter of fiscal 1999 the Company recorded a provision for facilities shut-down which included an accrual of $5.2 for costs of plant closures planned to be substantially completed by April 30, 2000. During the first half, $.35 was expended on termination benefits, vacant facilities costs, and other costs pursuant to this charge. SEGMENT RESULTS - --------------- The increase in sales for the quarter and the first half was primarily in the Popular-to-Moderate women's apparel segment (up $34 or 9.0% for the quarter and $27 or 4.0% for the six month period). This growth was partially offset by a decline in the Better-to-Bridge segment which continues to become a smaller part of Kellwood's business. Sales by segment for the quarter and the six month period were as follows:
Three Months Ended Six Months Ended October 31, October 31, ----------------------------- ------------------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ------ ------ -------- Popular-to-Moderate $414 $380 9.0% $703 $ 676 4.0% Better-to-Bridge 44 49 -10.6% 78 89 -12.4% Private Label Apparel 82 82 0.0% 141 143 -1.0% Smart Shirts 63 64 -0.6% 114 114 0.1% Recreation Products 30 25 16.6% 67 62 8.7% ---- ---- ------ ------ ------ ------ Total Net Sales $633 $601 5.5% $1,104 $1,084 1.9% ==== ==== ====== ====== ====== ======
10 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- The five business portfolios contributed the following percentages of Kellwood Net Sales for the quarter and for the six months ended October 31, 1999, respectively:
Three Months Ended Six Months Ended October 31, October 31, ------------------ ------------------ 1999 1998 1999 1998 ------ ------ ------ ------ Popular-to-Moderate 65.4% 63.3% 63.7% 62.4% Better-to-Bridge 6.9% 8.2% 7.1% 8.2% Private Label Apparel 13.0% 13.7% 12.8% 13.2% Smart Shirts 10.0% 10.6% 10.3% 10.5% Recreation Products 4.7% 4.2% 6.1% 5.7% ------ ------ ------ ------ Total Net Sales 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ======
Popular-to-Moderate women's sportswear sales for the second quarter and the first half were up 9% and 4%, respectively, compared to the prior year due primarily to the acquisition of Fritzi in December 1998. Excluding the sales of Fritzi, sales for the quarter were flat due to consolidations at retail and due to a shift in product mix away from more expensive wool and constructed garments to lighter weight less constructed and therefore less expensive garments. Partially offsetting this slippage was growth from Sag Harbor(R) dresses and weekend wear, Kathie Lee(R), Studio Ease(R) and M by David Meister(R) dresses, and IVY(R) and Vintage Blue(TM) sportswear. Operating earnings (defined as net sales less cost of products sold and selling, general and administrative expenses) increased as a result of cost savings from the Supplier Management Initiative and as a result of business unit and product mix shifts. The Better-to-Bridge Women's Sportswear business continues to struggle, with sales for the quarter down 11% from the prior year, in line with our Plan. Marketing and merchandising initiatives are underway to address styling issues and lost market share in our better category brands in this segment, and some office, warehousing and distribution functions have been consolidated to reduce overhead. Private label sales in the first quarter were relatively flat vs. the prior year primarily due to reduced outerwear shipments, lower sales of activewear to the major footwear companies, and reduced sales of nightwear. Operating earnings declined due to start-up spending for the launch of the Slates(R) line of woven and knit shirts, sweaters and outerwear, the start-up of a new lingerie facility in Mexico, as well as unabsorbed burden and lower productivity as certain domestic manufacturing plants scheduled to be closed are wound-down. 11 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- Smart Shirts sales for the quarter and the half were relatively flat due to quota constraints for the first half of the year. Operating earnings increased due to decreased air freight expense partially offset by the cost of purchasing temporary quota in Sri Lanka in order to meet customer delivery dates. The Recreation Products segment reported a 17% increase in sales for the second quarter as a result of the introduction of new products and a new brand of sleeping bags and outerwear as well as a growing international business. The segment's operating earnings margin for the quarter and the half declined slightly as compared to the prior year as a result of higher S,G&A spending related to the launch of several new products including child carriers, apparel, camping furniture and travel gear. FINANCIAL CONDITION - ------------------- Cash flow from operations is ordinarily the Company's primary source of liquidity. Kellwood uses financial leverage to minimize the overall cost of capital and maintain adequate operating and financial flexibility. Management monitors leverage through its debt-to-capital ratio. Working capital management is monitored primarily by analysis of the Company's investment in accounts receivable and inventories. LEVERAGE - -------- Total debt represents 45% of capital at October 31, 1999 vs. 44% at October 31, 1998. The major item impacting leverage in this period was a higher than normal cash balance at quarter-end. The cash balance of $112 at October 31, 1999 was approximately $80 higher than the normal level of cash balances carried by the company at quarter-end as a result of the cash received in July from the bond issuance discussed below. This factor was partially offset by a $35 dividend repatriated from Smart Shirts during the fourth quarter of fiscal 1999 and the issuance of 844,000 shares of common stock for the purchase of Fritzi. The company's borrowing needs were also held down by working capital management initiatives. WORKING CAPITAL - --------------- The current ratio increased to 3.6 at October 31, 1999 compared to 2.4 at April 30, 1999 and 2.5 at October 31, 1998, largely as a result of the $150 long-term debt issuance discussed above. The debt issuance substantially eliminated current Notes payable and temporarily increased the Company's balance of Cash and time deposits. Accounts Receivable at October 31 increased $105 or 34% vs. the prior year. $65 of this increase relates to acquisitions ($44 due to the elimination of the factor for Koret's receivables and $21 representing the receivables of Fritzi, which was acquired in December 1998). The remainder of the increase is due to more aggressive payables actions on the part of the Company's customers as well as an increase in the proportion of Kellwood's business coming from customers that require longer terms of sale than the average. The receivables increase was offset by a $74 (20%) decrease in inventory levels as compared to the prior year as a result of better inventory management. Kellwood's overall inventory days on hand were reduced to 73 at October 31, 1999 compared to 93 in the prior year. FINANCING AND INVESTING ACTIVITIES - ---------------------------------- Capital expenditures were $17 for the first half of this fiscal year compared to $31 in the prior year. The prior year's capital expenditures were unusually high due to the large number of Vision 2000 investment projects under way at that time; total capital spending for fiscal 2000 is expected to be approximately $25 compared to $51 in fiscal 1999. 12 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- The decrease in Intangible assets at October 31, 1999 compared to the amount recorded as of October 31, 1998 is due to the provision for goodwill impairment recorded in the fourth quarter of fiscal 1999. On July 26, 1999 the Company completed a public debt offering totaling $150. The Senior Notes issued mature July 15, 2009 and carry a 7.875% coupon rate. They received investment grade ratings from Moody's and S&P of Baa3/BBB. As a result of this issuance, fixed rate debt is 95% of total debt at October 31, 1999 vs. 67% at October 31, 1998. On August 31, 1999 the Company executed a $350 credit facility which replaced the previous $300 Credit Agreement. The new facility comprises a 364 day revolving credit facility in the amount of $100, and a $250 three-year revolving credit facility which can also be used for letters of credit. At October 31, 1999, $197 was available for future use. The Company continually evaluates possible acquisition candidates as a part of its ongoing corporate development process. Various potential acquisition candidates are in different stages of this process. One company has signed a letter of intent to be acquired by Kellwood. This company has annual sales of approximately $60 and would become part of our private label segment. This acquisition is still subject to the negotiation and execution of a definitive merger agreement, FTC approval, successful completion of due diligence and other customary contingencies. Had the acquisition occurred at the beginning of the earliest period presented, the impact would not have been significant to the results of operations or financial position of Kellwood. On November 23, 1999 the Board of Directors authorized the Company to repurchase up to ten percent of the outstanding shares of its Common Stock (up to approximately 2.7 million shares) in the open market or through privately negotiated transactions at management's discretion and depending on market conditions. Purchases will be financed out of the Company's cash resources. Pursuant to this authorization, on December 9, 1999 the Company purchased 1.68 million shares through a privately negotiated transaction with an institutional holder at $18.00 per share, which was below the market price. Management believes that the combined operating, cash and equity position and credit facilities of the Company will continue to provide the capital flexibility necessary to fund future opportunities and to meet existing obligations. 13 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- OUTLOOK - ------- Management expects Kellwood's sales in the third quarter of fiscal 2000 to be up 6%-7%; sales for the year are expected to be up approximately 5% to approximately $2,250. Kellwood is also starting up a number of new programs that are expected to further drive growth rates to the mid- to-high single digit percentage rates in FY 2001 and beyond. Our outlook for the Popular-to-Moderate segment for the second half is very encouraging. Third quarter sales are expected to be up 8-9%. Our new Components Sportswear(TM) updated bottoms division began shipments in July, and retail sell-through has been excellent. The Sag Harbor(R) Sport line, largely a Spring business, is also selling well. Kellwood's updated lines are performing well at retail and are booking well for Spring. These brands include IVY(R), BICE(R), Vintage Blue(TM) and Melrose(R). Also, our dress brands and new partner Koret of California are booking well for Spring. Sales of the Better-to-Bridge segment are expected to be down about 10% in the third quarter. The Robert Scott(R), David Brooks(R) and Northern Isles(R) brands of traditional classic women's sportswear have been considerably updated for Spring, and these updated lines are expected to be shipped in the second half. Growth is not expected to return to the Better-to-Bridge segment until fiscal 2001 when the new Perry Ellis(R) licensed women's business casual sportswear begins to ship. Private Label segment sales are expected to be up about 6% in the third quarter as growth from the new Slates(R) men's sportswear business will be offset by lower sales of activewear and nightwear and by depressed sales of outerwear. In the Private Label segment there are a number of favorable developments which are expected to contribute to meaningful growth in the second half, including the Slates(R) program as well as a major knitwear program for Wal-Mart. Throughout the first half of last year (fiscal '99) Smart Shirts grew by 25% vs. the prior year. While the demand for the quality products and superior service provided by Smart Shirts to its customers remains strong, the outlook for this year (fiscal 2000) calls for slightly lower sales (down 1-3%) due to quota constraints in Sri Lanka. To avoid this constraint in the future Smart Shirts is expanding its knit shirt capability by obtaining manufacturing capacity in the Maldives which is expected to be in production by the third quarter. Other initiatives are under way to implement contractor and joint venture arrangements in Singapore, Indonesia and the Philippines (countries which have ample quota) to enable this segment to return to growth in fiscal 2001. As retailers are demanding and receiving lower prices, margins for 2000 will continue to be under pressure. The Recreation products segment has a number of new products including a new brand of sleeping bags, backpacks and tents (ROKK(TM)) targeted at the upper/middle market. Sales for the Recreation products segment are expected to grow well in the third quarter and for the full fiscal year. CHANGE IN THE COMPANY'S FISCAL YEAR FROM APRIL 30 TO JANUARY 31, 2000 - --------------------------------------------------------------------- On August 26, 1999, the company changed its fiscal year-end from April 30 to January 31 to bring Kellwood more in line with the operating cycle of our business and the fiscal year-ends of our customers and other apparel companies. MARKET RISK DISCLOSURES - INTEREST RATE RISK; FAIR VALUE DISCLOSURE - ------------------------------------------------------------------- The issuance of the $150 of ten-year debt increased the market value and the book value of Kellwood's long-term debt. Based on quoted market prices obtained through independent pricing sources for the same or similar types of borrowing arrangements, the Company believes the major components of its long-term debt have a market value of approximately $383 at October 31, 1999 which compares to 14 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- their book value of $385. With respect to the Company's fixed-rate debt outstanding at that date, a 10% change in interest rates would have resulted in approximately a $21 change in the market value of Kellwood's fixed-rate debt. The Company is considering the execution of a Cancelable Reverse Interest Rate Swap agreement with a bank whereby the Company would pay a floating interest rate based on LIBOR relating to its $150 public debentures due July 2009. This agreement would be cancelable by the bank on a future date or dates, which cancellation would be expected to occur in the event fixed interest rates are lower on the cancellation dates than on the execution date. Actual execution of such a swap agreement is still subject to the negotiation and execution of a definitive agreement. YEAR 2000 ISSUE READINESS - ------------------------- In 1996 the Company outsourced its Information Systems function to Electronic Data Systems Corporation (EDS). Together, EDS and Kellwood employees have completed an assessment and developed plans to make key operational and financial systems year 2000 compliant and to ensure uninterrupted functionality through the year 2000. The Company is monitoring its progress and currently believes that the implementation of these plans is substantially complete. The major components of the plans include: * Replacement of certain Information Technology ("IT") systems. Several new information technologies have been and are being installed to: * implement a Consistent Office Environment (which was completed in fiscal 1999) and to * replace several business and accounting systems with an Integrated Business System (IBS). The IBS was successfully installed at one of our business units operating on non-Y2K compliant systems in August 1999. * Testing and remediation of certain "IT" systems. Remediation and testing of the Company's business and accounting systems for year 2000 compliance has been completed. * Remediation or replacement of certain "non-IT" systems, including telephone systems, CAD systems, voice mail and shipping software and equipment is about 98% complete. Final "clean-up" is currently in process where necessary and is progressing as planned. The Company is incurring significant business process reengineering and system replacement expenses as part of the Vision 2000 initiative. The portion of 15 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- expenses that relate to remediation and replacement of non-year 2000 compliant systems is estimated to be approximately $3.1, of which approximately $2.9 has already been incurred. The Company has utilized cash flow from operations to fund year 2000 expenditures. The Company believes its most reasonably likely worst case scenario with respect to its own systems would involve either: * discrete modules of the IBS which do not handle year 2000 data properly because they are not properly written, interfaced or implemented, or * components or subsystems of our legacy systems which are found to be not fully or properly remediated. In either case, the Company would utilize internal systems staff and increase its utilization of EDS personnel and other qualified consultants from our software vendors to correct the problems. Until necessary system modifications could be made, manual procedures would be employed. Such a situation may result in additional remediation costs to be incurred and/or delays in operating activities. As discussed more fully in the company's annual report, based on the results of the Year 2000 readiness information received from third parties the Company believes that its key trading partners are putting forth their best efforts to minimize identified exposures. However, the Company does not have control over these third parties and, as a result, the Company cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to successfully address their year 2000 issues. The Company believes the most reasonably likely worst case scenario with respect to key trading partners would involve the inability of such partners to conduct business, requiring manual processes to be employed and/or alternative partners to be utilized. Such a situation may result in temporary increases in costs, delays in receiving cash payments and/or delays in operating activities. SAFE HARBOR REGARDING FORWARD-LOOKING STATEMENTS - ------------------------------------------------ This Form 10-Q includes "forward-looking statements" within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, which represent the Company's expectations or beliefs concerning future events. Although the Company believes that its expectations reflected in the forward-looking statements are reasonable, it cannot and does not give any assurance that such expectations will prove to be correct. Certain phases of the Company's operations are subject to influences and factors outside its control. Any one of these factors or any combination of these factors could materially affect the results of the Company's operations and cause actual results to differ materially from the Company's expectations. These factors include but are not limited to national and regional economic conditions, inflation or deflation, the overall level of consumer spending, the level of consumer debt, currency exchange fluctuations, other capital market conditions, competitive pressures, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly introduced product lines, the timing and magnitude of spending on and savings realized from our Vision 2000 initiative, stable governments and business conditions in the nations where the Company's products are manufactured, and financial difficulties encountered by customers. The words "believe", "expect", "will", "estimate", "project", "forecast", "should", "anticipate" and similar expressions may identify forward-looking statements. Additionally, all statements other than statements of historical facts included in this Report on Form 10-Q, 16 KELLWOOD COMPANY AND SUBSIDIARIES --------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS - $ IN MILLIONS (CONTINUED) ----------------------------------------------------- including without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations", are also forward-looking statements. All forward-looking statements contained herein and all subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf, are expressly qualified in their entirety by this cautionary statement. 17 PART II. OTHER INFORMATION --------------------------- KELLWOOD COMPANY ---------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ At the August 26, 1999 Annual Meeting of Shareholders, six directors were elected to serve for two-year terms. The tabulation was as follows:
Shares Shares Shares against, abstaining Directors Voted For Withheld and broker non-votes - --------- --------- -------- -------------------------- Raymond F. Bentele 24,935,593 315,676 - Edward S. Bottum 25,069,944 181,325 - Kitty G. Dickerson 25,069,142 182,127 - Leonard A Genovese 24,938,653 312,616 - Martin J. Granoff 25,073,798 177,471 - Hal J. Upbin 25,072,237 179,031 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) EXHIBITS: S.E.C. Exhibit Reference No. Description -------------- ---------------------------------------- 27 Financial Data Schedule, filed herewith. b) REPORTS ON FORM 8-K: The following reports were filed on Form 8-K during the three months ended October 31, 1999: Current Report on Form 8-K dated August 26, 1999 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KELLWOOD COMPANY December 13, 1999 /s/ Thomas H. Pollihan --------------------------------------------- Thomas H. Pollihan Vice President, Secretary and General Counsel December 13, 1999 /s/ Gerald M. Chaney --------------------------------------------- Gerald M. Chaney Vice President Finance (Principal Financial & Accounting Officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Kellwood Company and Subsidiaries Condensed Consolidated Balance Sheet at October 31, 1999, and from the Condensed Consolidated Statement of Earnings and Condensed Consolidated Statement of Cash Flows for the six months ended October 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS APR-30-1999 MAY-01-1999 OCT-31-1999 111,958 0 429,265 12,127 301,580 868,769 263,979 155,332 1,136,504 240,956 369,544 0 0 166,288 309,017 1,136,504 1,104,031 1,104,031 865,516 865,516 163,882 2,476 14,810 59,823 24,200 35,623 0 0 0 35,623 1.28 1.27
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