Filed On 3/22/07 4:15pm ET · SEC File 1-07340 · Accession Number 1068800-7-804
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/22/07 Kellwood Co 10-K 2/03/07 9:100 Color Art Printing Co/FA
Document/Exhibit Description Pages Size
1: 10-K Annual Report 72 400K
2: EX-10.7 Material Contract 7 27K
3: EX-10.21 Material Contract 13 38K
4: EX-21 Subsidiaries of the Registrant 1 6K
5: EX-23 Consent of Experts or Counsel 1 5K
6: EX-24 Power of Attorney 1 6K
7: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 8K
8: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 8K
9: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 5K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-7340
KELLWOOD COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2472410
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
600 KELLWOOD PARKWAY, P.O. BOX 14374, ST. LOUIS, MO 63178
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 576-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------------------- -----------------------
Common Stock, par value $0.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The estimated aggregate market value of the Common Stock held by nonaffiliates
on July 29, 2006 (based upon the closing price of these shares on the New York
Stock Exchange) was approximately $685,275,914.
Number of shares of Common Stock, par value $0.01, outstanding at March 10,
2007: 25,913,470.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for Annual Meeting of
Shareowners to be held on June 7, 2007 are incorporated in Part III of this
Form 10-K.
1
[Enlarge/Download Table]
KELLWOOD COMPANY
FORM 10-K FOR THE YEAR ENDED FEBRUARY 3, 2007
TABLE OF CONTENTS
PART I
Item 1. Business..........................................................................3
Item 1A. Risk Factors......................................................................6
Item 1B. Unresolved Staff Comments........................................................11
Item 2. Properties.......................................................................12
Item 3. Legal Proceedings................................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............................12
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................13
Item 6. Selected Financial Data..........................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................32
Item 8. Financial Statements and Supplementary Data......................................34
Report of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm on Consolidated Financial Statements and
on Internal Control over Financial Reporting.................................35
Consolidated Statements of Operations..........................................37
Consolidated Balance Sheets....................................................38
Consolidated Statements of Cash Flows..........................................39
Consolidated Statements of Stockholders' Equity................................40
Notes to Consolidated Financial Statements.....................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................................64
Item 9A. Controls and Procedures..........................................................64
Item 9B. Other Information................................................................65
PART III
Item 10. Directors, Executive Officers, and Corporate Governance..........................65
Item 11. Executive Compensation...........................................................66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................66
Item 13. Certain Relationships and Related Transactions and Director Independence.........66
Item 14. Principal Accountant Fees and Services...........................................66
PART IV
Item 15. Exhibits and Financial Statement Schedules.......................................67
SIGNATURES.........................................................................................71
2
PART I
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ITEM 1. BUSINESS
We are marketers of women's and men's sportswear, infant apparel and
recreational camping products. We market branded as well as private label
products and market to all channels of distribution with product specific to
the particular channel.
Our fiscal year ends on the Saturday nearest January 31. References to our
fiscal years represent the following:
FISCAL YEAR REPRESENTS THE 52 WEEKS ENDED
----------- -----------------------------
2004 January 29, 2005
2005 January 28, 2006
FISCAL YEAR REPRESENTS THE 53 WEEKS ENDED
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2006 February 3, 2007
(a) We and our subsidiaries are marketers of apparel and consumer soft goods.
We specialize in branded as well as private label products, and market to all
channels of distribution with product specific to a particular channel. Most
of our products are purchased from foreign contract manufacturers. Our Smart
Shirts operation, discussed below, manufactures its own products.
Kellwood Company was founded in 1961 as the successor by merger of fifteen
independent suppliers to Sears. Beginning in 1985, we implemented a business
strategy to expand our branded label products, broaden our customer base,
increase our channels of distribution and further develop our global product
sourcing capability. As a result of this strategy, we have redirected our
focus from primarily the manufacturing of private label apparel and home
fashions for Sears to a marketing-driven emphasis on branded apparel and
related soft goods. Our strategy has expanded our branded label products,
diversified our customer base, broadened our channels of distribution and
further developed our global product sourcing capabilities. Also as part of
this strategy, we have acquired 26 domestic companies or businesses since
1985. The following companies were acquired since 2001:
COMPANY NAME DATE OF ACQUISITION
-------------------------------------- -------------------
o HOLLYWOULD, Inc. December 2006
o CRL Group, LLC (Vince) October 2006
o Phat Fashions, LLC/Phat Licensing, LLC February 2004
o Briggs New York Corp. February 2003
o Gerber Childrenswear, Inc. June 2002
These companies are principally marketers of branded apparel. In addition to
our domestic acquisitions, in the early 1980's, we acquired Smart Shirts
Limited (Smart Shirts) of Hong Kong, a leading shirt manufacturer in the Far
East. Since its acquisition, Smart Shirts has diversified its manufacturing
capabilities from its principal base of Hong Kong to China, Sri Lanka and the
Philippines.
(b) The information required by this Item constitutes part of our 2006
Consolidated Financial Statements, under the caption "Industry Segment and
Geographic Area Information," in Note 14 to Consolidated Financial Statements,
which information is included in Item 8 to this Form 10-K, which information
is incorporated herein by reference.
3
(c) We and our subsidiaries are principally engaged in the apparel and related
soft goods industry. Our products are manufactured primarily in Asia.
(i) Our divisions are aggregated into three major consumer market
product groupings along with General Corporate, which represent
our four reportable segments. The three major consumer segments
are as follows:
o WOMEN'S SPORTSWEAR designs, merchandises and sells women's
sportswear sold through leading retailers in all channels
of distribution. Product lines include blazers, dresses,
sweaters, blouses, vests, other tops, skirts, pants and
skorts. The business is primarily branded goods sold at the
popular-to-moderate price points, but the segment does
include some better-to-bridge lines - upper price point
women's sportswear sold principally to specialty stores,
department stores and catalog houses. A partial list of
such brands we own are Sag Harbor(R), Koret(R), Dorby(TM),
My Michelle(R), Briggs New York(R) (Briggs) and Vince(R).
Calvin Klein, XOXO(R), Liz Claiborne(R) Dresses and Suits,
O Oscar and David Meister(R) are Women's Sportswear brands
sold under licensing agreements. Sales of Women's
Sportswear accounted for 62%, 58% and 56% of our
consolidated revenue from continuing operations in 2004,
2005 and 2006, respectively.
o MEN'S SPORTSWEAR designs, manufactures and sells men's
woven and knit shirts, pants and jeans sold to leading
department stores, catalog houses and national chains. The
business is primarily private label but also includes a
number of branded programs such as Slates(R) business
casual shirts, sweaters and tops, Nautica(R), Claiborne(R)
and Dockers(R) dress shirts and Phat Farm(R) and Northern
Isles(R) sportswear. Sales of Men's Sportswear accounted
for 24%, 26% and 27% of our consolidated revenue from
continuing operations in 2004, 2005 and 2006, respectively.
o OTHER SOFT GOODS designs, merchandises and sells infant
apparel and recreation products (tents, sleeping bags,
backpacks and related products). The business is primarily
branded goods including Kelty(R) and Sierra Designs(R) for
recreation products and Gerber(R) for infant apparel. Sales
of Other Soft Goods accounted for 14%, 16% and 17% of our
consolidated revenue from continuing operations in 2004,
2005 and 2006, respectively.
(ii) We anticipate no significant change in products or new industry
segments, which would require a material investment. However,
business acquisitions and new brands (either developed
internally or through license agreements) within all three of
our consumer market segments are continually being considered.
Overall, it is anticipated that external and internal demands
will generate increasing requirements for capital investment.
In 2003 and 2004 we entered into several major licensing
agreements, including Calvin Klein and IZOD for women's
sportswear, XOXO(R) for junior's sportswear and dresses and Liz
Claiborne(R) for women's dresses and suits. In 2004, we acquired
Phat Fashions, LLC and Phat Licensing, LLC (together referred to
as Phat). Phat is a licensor of apparel for men, women and
children, athletic shoes and accessories through the Phat
Farm(R) and Baby Phat(R) brands. Part of the purchase was Phat's
option to buyout the license from the menswear licensee, which
we exercised shortly after the purchase. In 2006, we did the
following: entered into an amended agreement under which we
extended the Calvin Klein women's better sportswear license for
North America; were granted the ck Calvin Klein women's bridge
sportswear license for North America; agreed to re-launch O
Oscar, an Oscar de la Renta Company, as a better women's
sportswear collection exclusively at Macy's; extended the
XOXO(R) license for junior's sportswear and dresses; and
discontinued the New Campaign and IZOD operations, which
resulted in the termination of the related licensing agreements.
(iii) We purchase finished goods from numerous contract manufacturers
and to a lesser extent raw materials directly from numerous
textile mills and yarn producers and converters. We have not
experienced difficulty in obtaining finished goods or raw
materials essential to our business in any of our business
segments.
(iv) We are the owner of certain trade names essential to our business.
We also license certain trade names in each of our business
segments having various terms, which expire at various times
through 2012. Further information about our trade names is set
forth in our 2006 Consolidated Financial Statements, under the
caption "Industry Segment and Geographic Area Information," in
Note 14 to Consolidated Financial Statements, which information is
included in Item 8 to this Form 10-K.
4
(v) Although our various product lines are sold on a year-round
basis, the demand for specific styles is seasonal. Women's
Sportswear products are generally sold at the beginning of each
of the retail selling seasons including spring, summer, fall and
holiday. Sales of Men's Sportswear and Other Soft Goods are also
dependent, although to a lesser extent, on the retail selling
seasons.
(vi) Consistent with the seasonality of specific product offerings,
we carry necessary levels of inventory to meet the anticipated
delivery requirements of our customers.
(vii) Customers that accounted for more than ten percent of our
consolidated net sales during 2006 and the related sales amounts
are as follows:
Percent of Sales Net Sales
------------------ -------------
Wal-Mart 12% $ 222,893
Kohl's 11% $ 201,493
Sales to Wal-Mart occurred in our Women's Sportswear, Men's
Sportswear and Other Soft Goods segments. Sales to Kohl's
occurred in our Women's Sportswear and Men's Sportswear
segments. We believe that the relationship with these customers
will continue into the foreseeable future.
(viii) We do not believe that backlog is a meaningful or a material
indicator of sales that can be expected for any period. All of
our backlog is expected to be filled within 12 months, but there
can be no assurance that the backlog at any point in time will
translate into sales in any particular subsequent period.
(ix) Contracts or subcontracts with the government are not material.
(x) We have substantial competition from numerous manufacturers and
marketers, but accurate statistics relative to the competitive
position of our products and brands are not available. Our
ability to compete depends principally on styling, service to
the retailer, continued high regard for our brands and trade
names and price. Our competitors include, among others, Jones
Apparel Group Inc., Liz Claiborne Inc., Polo Ralph Lauren Corp.,
Tommy Hilfiger Group and V.F. Corporation.
(xi) We have a continuing program for the purpose of improving our
production machinery and products, which includes consumer
research and advertising programs. We are not engaged in any
material customer-sponsored research and development programs.
The amount spent on research and development activities during
2004, 2005 and 2006 was not material.
(xii) In the opinion of management, there will be no material effect
on us resulting from compliance with any federal, state or local
provisions, which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise
relating to the protection of the environment.
(xiii) At the end of 2006, we had approximately 30,000 employees.
Substantially all of the work force is non-union, and we
consider our relations with our employees to be satisfactory.
(d) Our Smart Shirts operations in the Men's Sportswear segment operate a
number of foreign manufacturing operations. We have no other material
foreign manufacturing operations and our foreign customers are not
material. The sales, operating profit and net assets attributable to
each segment are set forth under the caption "Industry Segment and
Geographic Area Information" in Note 14 to the Consolidated Financial
Statements, which information is included in Item 8 to this Form 10-K.
Smart Shirts' operations are included in the Men's Sportswear segment
and comprise 84% of sales and 87% of net assets from the continuing
operations of this segment for 2004; 84% of sales and 85% of net assets
from the continuing operations of this segment for 2005; and 85% of
sales and 97% of net assets from the continuing operations of this
segment for 2006. Almost all of Smart Shirts' net assets are located
outside of the United States. Almost all of Smart Shirts' sales were in
the United States in 2004, 2005 and 2006. Diversification of Smart
Shirts' manufacturing capacity to various countries helps to mitigate
these risks.
Because approximately 77% of our products are sourced from contract
manufacturers, primarily in the Eastern Hemisphere, we established Kellwood
Global Limited (KGL) in 2002, a Far Eastern sourcing infrastructure based in
Hong Kong. KGL provides sourcing only to Kellwood divisions and does not have
significant assets.
5
(e) We maintain a company website at www.kellwood.com. We make available, free
of charge through the website, our annual report on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after such reports are filed with or
furnished to the Securities and Exchange Commission (SEC). Information
relating to our corporate governance, including the Corporate Governance
Committee Charter, Compensation Committee Charter, Audit Committee Charter and
Corporate Governance Principles, is available at our website within the "About
Kellwood" section, under the caption "Corporate Governance" and is also
available in print to any shareowner who requests it.
ITEM 1A. RISK FACTORS
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
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This Form 10-K contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
These forward-looking statements represent our expectations or beliefs
concerning future events and are based on various assumptions and subject to a
wide variety of risks and uncertainties. Although we believe that our
expectations reflected in the forward-looking statements are reasonable, we
cannot and do not give any assurance that such expectations will prove to be
correct.
The reader is also directed to our periodic filings with the Securities and
Exchange Commission for additional factors that may impact our results of
operations and financial condition.
The words "believe", "expect", "will", "estimate", "project", "forecast",
"planned", "should", "anticipate" and similar expressions may identify
forward-looking statements. Additionally, all statements other than statements
of historical facts included in this Form 10-K are forward-looking.
Forward-looking statements are not guarantees, as actual results could differ
materially from those expressed or implied in forward-looking statements. We
specifically disclaim any obligation to publicly update, modify, retract or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. All forward-looking statements contained herein,
the entire contents of our website, and all subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf,
are expressly qualified in their entirety by this cautionary statement.
Our forward-looking statements are based on certain assumptions, and our
operations are subject to various risks and uncertainties. Any one of these
factors or any combination of these factors could materially affect the
results of our operations and cause actual results to differ materially from
our expectations.
Our financial condition and performance are subject to various risks and
uncertainties, including the risk factors described below. We may amend or
supplement the risk factors from time to time by other reports that are filed
with the SEC in the future.
INTENSE COMPETITION IN THE APPAREL INDUSTRY COULD REDUCE OUR SALES AND
PROFITABILITY.
As an apparel company, we face competition on many fronts including the
following:
o establishing and maintaining favorable brand recognition;
o developing products that appeal to consumers;
o pricing products appropriately; and
o obtaining access to and sufficient floor space in retail
outlets.
Competition in the apparel industry is intense and is dominated by a number of
very large brands, many of which have greater financial, technical and
marketing resources, greater manufacturing capacity and more extensive and
established customer relationships than we do. The competitive responses
encountered from these larger, more established apparel companies may be more
aggressive and comprehensive than anticipated, and we may not be able to
compete effectively. The aggressive and competitive nature of the apparel
industry may result in lower prices for our products and decreased gross
profit margins, either of which may materially adversely affect sales and
profitability.
6
OUR BUSINESS WILL SUFFER IF WE FAIL TO CONTINUALLY ANTICIPATE FASHION TRENDS
AND CUSTOMER TASTES.
Customer tastes and fashion trends can change rapidly. We may not be able to
anticipate, gauge or respond to these changes within a timely manner. If we
misjudge the market for products or product groups or if we fail to identify
and respond appropriately to changing consumer demands and fashion trends, we
may be faced with unsold finished goods inventory, which could materially
adversely affect expected operating results and decrease sales, gross margins
and profitability.
The apparel industry has relatively long lead times for the design and
production of products. Consequently, we must in some cases commit to
production in advance of orders based on forecasts of customer and consumer
demand. If we fail to forecast demand accurately, we may under-produce or
over-produce a product and encounter difficulty in filling customer orders or
in liquidating excess inventory. Additionally, if we over-produce a product
based on an aggressive forecast of demand, retailers may not be able to sell
the product and cancel future orders or require retrospective price
adjustments. These outcomes could have a material adverse effect on sales and
brand image and seriously affect sales and profitability.
OUR REVENUES AND PROFITS ARE SENSITIVE TO CONSUMER CONFIDENCE AND SPENDING
PATTERNS.
The apparel industry has historically been subject to cyclical variations,
recessions in the general economy or uncertainties regarding future economic
prospects that affect consumer spending habits which could negatively impact
our business overall, the carrying value of our tangible assets, intangible
assets and goodwill and specifically sales, gross margins and profitability.
The success of our operations depends on consumer spending. Consumer spending
is impacted by a number of factors, including actual and perceived economic
conditions affecting disposable consumer income (such as unemployment, wages,
energy costs, etc.), business conditions, interest rates, availability of
credit and tax rates in the general economy and in the international, regional
and local markets where our products are sold. Any significant deterioration
in general economic conditions or increases in interest rates could reduce the
level of consumer spending and inhibit consumers' use of credit. In addition,
war, terrorist activity or the threat of war and terrorist activity may
adversely affect consumer spending, and thereby have a material adverse effect
on our financial condition and results of operations.
THE CONCENTRATION OF OUR CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS.
Our twenty largest customers accounted for approximately 76% of sales in
fiscal 2006, with the largest customer accounting for 12% of total fiscal 2006
sales. We do not have long-term contracts with any customers, and sales to
customers generally occur on an order-by-order basis and are subject to
certain rights of cancellation and rescheduling by the customer.
A decision by any of our major customers, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease significantly the
amount of merchandise purchased from us, or to change their manner of doing
business with us, could substantially reduce revenues and materially adversely
affect our profitability.
CONSOLIDATION AND CHANGE IN THE RETAIL INDUSTRY MAY ELIMINATE EXISTING OR
POTENTIAL CUSTOMERS.
A number of apparel retailers have experienced significant changes and
difficulties over the past several years, including consolidation of
ownership, increased centralization of buying decisions, restructurings,
bankruptcies and liquidations. During past years, various apparel retailers,
including some of our customers, have experienced financial problems that have
increased the risk of extending credit to those retailers. Financial problems
with respect to any of our customers could cause us to reduce or discontinue
business with those customers or require us to assume more credit risk
relating to those customers' receivables, either of which could have a
material adverse effect on our business, results of operations and financial
condition.
There has been and continues to be merger, acquisition and consolidation
activity in the retail industry. Future consolidation could reduce the number
of our customers and potential customers. A smaller market for our products
could have a material adverse impact on our business and results of
operations. In addition, it is possible that the larger customers, which
result from mergers or consolidations, could decide to perform many of the
services that we currently provide. If that were to occur, it could cause our
business to suffer.
7
With increased consolidation in the retail industry, we are increasingly
dependent upon key retailers whose bargaining strength and share of our
business is growing. Accordingly, we face greater pressure from these
customers to provide more favorable trade terms. We could be negatively
affected by changes in the policies or negotiating positions of our customers.
Our inability to develop satisfactory programs and systems to satisfy these
customers could adversely affect operating results in any reporting period.
LOSS OF KEY PERSONNEL COULD DISRUPT OUR OPERATIONS.
Our continued success is dependent on the ability to attract, retain and
motivate qualified management, administrative and sales personnel to support
existing operations and future growth. Competition for qualified personnel in
the apparel industry is intense and we compete for these individuals with
other companies that in many cases have greater financial and other resources.
The loss of the services of any members of senior management, or the inability
to attract and retain other qualified personnel could have a material adverse
effect on our business, results of operations and financial condition.
THE EXTENT OF OUR FOREIGN SOURCING AND MANUFACTURING MAY ADVERSELY AFFECT OUR
BUSINESS.
For fiscal 2006, approximately 93% of our products were manufactured outside
the United States. As a result of the magnitude of our foreign sourcing and
manufacturing, our business is subject to the following risks:
o uncertainty caused by the elimination of import quotas in China.
Such quotas have been replaced by safeguard provisions that
continue to provide limits on importation of apparel on China.
The operation and effects of these safeguard provisions are
uncertain and could result in delays in imports and supplies. As
a result, we will have to monitor and manage our sourcing of
products and develop alternative sourcing plans, if necessary,
to alleviate the impact of any anticipated impact of safeguard
provisions;
o political and economic instability in countries, including
heightened terrorism and other security concerns, which could
subject imported or exported goods to additional or more
frequent inspections, leading to delays in deliveries or
impoundment of goods;
o imposition of regulations and quotas relating to imports,
including quotas imposed by bilateral textile agreements between
the United States and foreign countries;
o imposition of increased duties, taxes and other charges on
imports;
o significant fluctuation of the value of the dollar against
foreign currencies;
o restrictions on the transfer of funds to or from foreign
countries;
o political instability, military conflict, or terrorism involving
the United States, or any of the many countries where our
products are manufactured, which could cause a delay in
transportation, or an increase in transportation costs of raw
materials or finished product;
o disease epidemics and health related concerns, such as SARS, mad
cow or hoof and mouth disease outbreaks in recent years, which
could result in closed factories, reduced workforces, scarcity
of raw materials and scrutiny or embargoing of goods produced in
infected areas;
o reduced manufacturing flexibility because of geographic distance
between our foreign manufacturers and us, increasing the risk
that we may have to mark down unsold inventory as a result of
misjudging the market for a foreign-made product; and
o violations by foreign contractors of labor and wage standards
and resulting adverse publicity.
If these risks limit or prevent us from selling or manufacturing products in
any significant international market, prevent us from acquiring products from
foreign suppliers, or significantly increase the cost of our products, our
operations could be seriously disrupted until alternative suppliers are found
or alternative markets are developed, which could negatively impact our
business.
8
THE SUCCESS OF OUR LICENSES DEPENDS ON THE VALUE OF THE LICENSED BRANDS.
Many of our products are produced under license agreements with third parties.
Similarly, we license some of our brand names to other companies. Our success
depends on the value of the brands and trademarks that we license and sell.
Brands that we license from third parties are integral to our business as is
the implementation of our strategies for growing and expanding these brands
and trademarks. We market some of our products under the names and brands of
recognized designers. Our sales of these products could decline if any of
those designer's images or reputations were to be negatively impacted.
Additionally, we rely on continued good relationships with both licensees and
licensors, of certain trademarks and brand names. Adverse actions by any of
these third parties could damage the brand equity associated with these
trademarks and brands, which could have a material adverse effect on our
business, results of operations and financial condition.
OUR PROFITABILITY AND EARNINGS COULD BE NEGATIVELY AFFECTED IF SALES OF
CERTAIN PRODUCTS ARE NOT SUFFICIENT TO OFFSET THE MINIMUM ROYALTY PAYMENTS WE
MUST PAY WITH RESPECT TO THESE PRODUCTS.
Many of the license agreements we have require significant minimum royalty
payments. Our ability to generate sufficient sales and profitability to cover
these minimum royalty requirements is not guaranteed and if sales of such
products are not sufficient to generate these minimum payments, it could have
a material adverse effect on our business, results of operations and financial
condition.
OUR COMPETITIVE POSITION COULD SUFFER, IF OUR INTELLECTUAL PROPERTY RIGHTS ARE
NOT PROTECTED.
We believe that our trademarks, patents, technologies and designs are of great
value. From time to time, third parties have challenged, and may in the future
try to challenge, our ownership of our intellectual property. We are
susceptible to others imitating our products and infringing our intellectual
property rights. Our licensing agreements with more recognized designers may
cause us to be more susceptible to infringement of our intellectual property
rights, as some of our brands enjoy significant worldwide consumer recognition
and generally higher pricing thus creating additional incentive for
counterfeiters and infringers. Imitation or counterfeiting of our products or
infringement of our intellectual property rights could diminish the value of
our brands or otherwise adversely affect our revenues. We cannot assure the
reader that the actions we have taken to establish and protect our trademarks
and other intellectual property rights will be adequate to prevent imitation
of our products by others or to prevent others from seeking to invalidate our
trademarks or block sales of our products as a violation of the trademarks and
intellectual property rights of others. In addition, we cannot assure the
reader that others will not assert rights in, or ownership of, our trademarks
and other intellectual property rights or in similar marks or marks that we
license and/or market or that we will be able to successfully resolve these
conflicts to our satisfaction. We may need to resort to litigation to enforce
our intellectual property rights, which could result in substantial costs and
diversion of resources.
FLUCTUATIONS IN THE PRICE, AVAILABILITY AND QUALITY OF RAW MATERIALS COULD
CAUSE DELAYS AND INCREASE COSTS.
Fluctuations in the price, availability and quality of the fabrics or other
raw materials used in our manufactured apparel could have a material adverse
effect on cost of sales or our ability to meet customer demands. The prices
for fabrics depend largely on the market prices for the raw materials used to
produce them, particularly cotton. The price and availability of the raw
materials and, in turn, the fabrics used in our apparel may fluctuate
significantly, depending on many factors, including crop yields, weather
patterns and changes in oil prices. We may not be able to pass higher raw
materials prices and related transportation costs on to our customers.
OUR RELIANCE ON INDEPENDENT MANUFACTURERS COULD CAUSE DELAYS AND DAMAGE
CUSTOMER RELATIONSHIPS.
We use independent manufacturers to assemble or produce a substantial portion
of our products. We are dependent on the ability of these independent
manufacturers to adequately finance the production of goods ordered and
maintain sufficient manufacturing capacity. The use of independent
manufacturers to produce finished goods and the resulting lack of direct
control could subject us to difficulty in obtaining timely delivery of
products of acceptable quality. We generally do not have long-term contracts
with any independent manufacturers. Alternative manufacturers, if available,
may not be able to provide us with products or services of a comparable
quality, at an acceptable price or on a timely basis. There can be no
assurance that there will not be a disruption in the supply of our products
from independent manufacturers or, in the event of a disruption, that we would
be able to substitute suitable alternative manufacturers in a timely manner.
The failure of any independent manufacturer to perform or the loss of any
independent manufacturer could have a material adverse effect on our business,
results of operations and financial condition.
9
Additionally, we require our manufacturers to operate in compliance with
applicable laws, rules and regulations regarding working conditions,
employment practices and environmental compliance. We also sometimes impose
upon our business partners operating guidelines that require additional
obligations in those areas in order to promote ethical business practices, and
our staff periodically visits and monitors the operations of our independent
manufacturers to determine compliance. However, we do not control our
independent manufacturers or their labor and other business practices. If one
of our manufacturers violates labor or other laws or implements labor or other
business practices that are generally regarded as unethical in the United
States, the shipment of finished products could be interrupted, orders could
be cancelled, relationships could be terminated and our reputation could be
damaged. Any of these events could have a material adverse effect on our
revenues and, consequently, our results of operations.
ACQUISITIONS HAVE ACCOUNTED FOR A SIGNIFICANT PORTION OF OUR PAST SALES
GROWTH, AND WE MAY NOT FIND SUITABLE ACQUISITION CANDIDATES IN THE FUTURE.
Acquisitions have accounted for a significant portion of our sales growth in
the past, and we expect to continue to generate a significant portion of our
sales growth through acquisitions in the future. Our sales growth may be
adversely affected if we are unable to find suitable acquisition candidates at
reasonable prices, we are not successful in integrating any acquired
businesses in a timely manner, or such acquisitions do not achieve anticipated
results. In addition, future acquisitions could use substantial portions of
our available cash for all or a portion of the purchase price. We could also
issue additional securities as consideration for these acquisitions, which
could cause our stockholders to suffer significant dilution.
ACQUISITIONS MAY CREATE TRANSITIONAL CHALLENGES.
Our business strategy includes growth through strategic acquisitions. That
strategy depends on the availability of suitable acquisition candidates at
reasonable prices and our ability to quickly resolve challenges associated
with integrating these acquired businesses into our existing business. These
challenges include:
o integration of product lines, sales forces and manufacturing
facilities;
o decisions regarding divestitures, inventory write-offs and other
charges;
o employee turnover, including key management and creative
personnel of the acquired businesses;
o disruption in product cycles;
o loss of sales momentum;
o maintenance of acceptable standards, controls, procedures and
policies;
o potential disruption of ongoing business and distraction of
management;
o impairment of relationships with employees and customers, as a
result of integrating new personnel;
o inability to maintain relationships with customers of the
acquired business;
o failure to achieve the expected benefits of the acquisition;
o expenses of the acquisition; and
o potential unknown liabilities and unanticipated expenses
associated with the acquired businesses.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS IN
OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DELAY, DEFER OR PREVENT A
CHANGE IN CONTROL THAT OUR STOCKHOLDERS MIGHT CONSIDER TO BE IN THEIR BEST
INTERESTS.
We are subject to Section 203 of the Delaware General Corporation Law, which,
subject to certain exceptions, prohibits "business combinations" between a
publicly-held Delaware corporation and an "interested stockholder" which is
generally defined as a stockholder who becomes a beneficial owner of 15% or
more of a Delaware corporation's voting stock during the three-year period
following the date that such stockholder became an interested stockholder.
Section 203 could have the effect of delaying, deferring or preventing a
change in control of the Company that our stockholders might consider to be in
their best interests.
10
Our certificate of incorporation and bylaws contain provisions that are
intended to deter coercive takeover practices and inadequate takeover bids by
making them unacceptably expensive to the raider and to encourage prospective
acquirers to negotiate with our board of directors rather than to attempt a
hostile takeover. These provisions include, among others:
o a board of directors that is divided into two classes with
staggered terms;
o elimination of the right of our shareowners to act by written
consent;
o rules regarding how shareowners may present proposals or
nominate directors for election at shareowner meetings;
o the right of our board of directors to issue preferred stock
without shareowner approval;
o a supermajority vote of shareholders for business combinations
involving a holder of 25% or more of our outstanding common stock;
o a supermajority vote of shareowners to remove directors; and
o a supermajority vote of shareowners to amend these provisions.
We also have a rights agreement permitting under certain circumstances each
holder of common stock, other than potential acquirers, to purchase one
one-hundredth of a share of a newly created series of our Series A
Junior Preferred Stock at a purchase price of $100 or to acquire additional
shares of our common stock 50% of the current market price. The rights are not
exercisable or transferable until a person or group acquires 20% or more of
our outstanding common stock. The rights are not exercisable, if the
acquisition is pursuant to a qualified offer for all outstanding shares. The
agreement is reviewed by our independent directors at least every three years
to consider whether the maintenance of the agreement continues to be in the
best interests of our shareowners and us.
We believe these provisions protect our shareowners from coercive or otherwise
unfair takeover tactics by requiring potential acquirers to negotiate with our
board of directors and by providing our board of directors with more time to
assess any acquisition proposal. The provisions are not intended to make
us immune from takeovers. However, these provisions apply even if the
offer may be considered beneficial by some shareowners and could delay or
prevent an acquisition that our board of directors determines is not in the
best interests of our shareowners and us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
11
ITEM 2. PROPERTIES
At February 3, 2007, we operated 27 distribution or production facilities
worldwide. Our operating facilities are primarily owned or leased under
operating leases that generally contain renewal options. We also operated 83
retail stores at February 3, 2007, primarily in the Women's Sportswear
segment. Our retail space is leased under operating leases. We lease our
corporate office space in St. Louis County, Missouri and New York City, as
well as showrooms and division office space, a substantial portion of which is
in New York City.
WOMEN'S SPORTSWEAR
This segment currently operates seven warehousing and distribution centers
totaling approximately 2.1 million square feet including:
o A 533,000 square foot warehouse and distribution center in the
Los Angeles area;
o A multi-tiered 880,000 square foot warehouse and distribution
center in Trenton, Tennessee; and
o A 400,000 square foot warehouse and distribution center in
Chico, California.
These facilities serve multiple divisions, thereby generating economies of
scale in warehousing and distribution activities.
MEN'S SPORTSWEAR
This segment currently operates one warehouse and distribution center and
fourteen manufacturing facilities totaling approximately 1.5 million square
feet. All of these facilities are operated by our Smart Shirts subsidiary.
Smart Shirts' subsidiaries manage operations in Hong Kong, Sri Lanka,
Philippines and China.
Additionally, this segment shares the warehousing and distribution center in
Trenton, Tennessee with the Women's Sportswear segment.
OTHER SOFT GOODS
This segment operates four domestic warehousing and distribution facilities
and one warehousing and distribution facility in Canada totaling approximately
725,000 square feet.
In management's opinion, our current facilities generally are well maintained
and provide adequate capacity for future operations. However, management
continues to evaluate the need to reposition our portfolio of businesses and
facilities to meet the needs of the changing markets we serve and to reflect
the international business environment.
ITEM 3. LEGAL PROCEEDINGS
We are currently party to various legal proceedings. While management
currently believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse impact on
our financial position, cash flows or results of operations, litigation is
subject to inherent uncertainties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the year covered by this report.
12
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
[Enlarge/Download Table]
COMMON STOCK DATA
2005 2006
---------------------------------- ---------------------------------
Stock Price Dividends Stock Price Dividends
High Low Paid High Low Paid
-------- -------- ------------ -------- -------- -------------
First Quarter $30.55 $24.88 $0.16 $32.69 $23.69 $0.16
Second Quarter 28.42 23.75 0.16 34.57 24.80 0.16
Third Quarter 26.11 21.94 0.16 31.98 24.46 0.16
Fourth Quarter 24.84 21.83 0.16 34.84 29.02 0.16
Common stock of Kellwood Company is traded on the New York Stock Exchange,
ticker symbol KWD. At March 10, 2007, there were approximately 2,510
shareowners of record.
In July 2005, we announced a stock repurchase program (Stock Repurchase
Program). The Board of Directors authorized us to repurchase, at our
discretion, up to ten percent of the outstanding shares of our common stock
through open market or privately negotiated transactions. The Board of
Directors has approved the investment of up to $75,000,000 for this purpose.
During fiscal year 2005, we repurchased 2,218,200 shares at an average price
of $24.99 per share, totaling $55,430,070. During fiscal year 2006, we
repurchased 173,600 shares at an average price of $28.83 per share, totaling
$5,005,669. We made no repurchases during the fourth quarter of 2006. Payments
made under the Stock Repurchase Program are recorded in Treasury Stock on the
Consolidated Balance Sheets.
PERFORMANCE GRAPH
The following graph compares the performance of Kellwood common shares with
that of the S&P 500 and S&P 500 Apparel, Accessories & Luxury Goods Indices.
The graph plots the growth in value of an initial $100 investment over the
indicated time periods ended January 31, with dividends reinvested.
[Enlarge/Download Table]
[GRAPH]
-----------------------------------------------------------------------------------------------
1/02 1/03 1/04 1/05 1/06 1/07
-----------------------------------------------------------------------------------------------
Kellwood Co. $100 $101 $177 $128 $109 $151
S&P 500 Index $100 $77 $104 $110 $121 $139
S&P 500 Apparel, Accessories & Luxury Goods
Index $100 $85 $99 $126 $138 $177
-----------------------------------------------------------------------------------------------
<FN>
Note: Total return assumes reinvestment of dividends
13
ITEM 6. SELECTED FINANCIAL DATA
This section presents our selected historical financial data and certain
additional information.
In June 2002, we acquired Gerber Childrenswear, Inc., a manufacturer of baby
apparel as well as bath and bedding products. In February 2003, we acquired
Briggs New York Corp., a manufacturer of women's apparel. In February 2004, we
acquired Phat Fashions, LLC and Phat Licensing, LLC, manufacturers of men's
apparel. In October 2006, we acquired a women's apparel manufacturer named CRL
Group, LLC, which we refer to as Vince. In December 2006, we acquired
HOLLYWOULD, Inc., a manufacturer of women's apparel, shoes and accessories.
The selected financial data below for the last five fiscal years presents
consolidated financial information of Kellwood Company and subsidiaries and
have been derived from our audited consolidated financial statements (dollars
in thousands, except per share data).
[Enlarge/Download Table]
2002(1) 2003 2004 2005(3) 2006(3)
------------- -------------- ------------- -------------- -------------
Fiscal year ended 2/1/2003 1/31/2004 1/29/2005 1/28/2006 2/3/2007
Net sales $ 1,706,006 $ 1,925,491 $ 2,115,252 $ 1,962,039 $ 1,961,750
Net earnings from
continuing operations 34,861 66,720 62,221 18,756 21,083
Net earnings (loss) from
discontinued operations (2), (4), (5) 7,149 671 4,115 (57,169) 10,319
------------- -------------- ------------- -------------- -------------
Net earnings (loss) $ 42,010 $ 67,391 $ 66,336 $ (38,413) $ 31,402
============= ============== ============= ============== =============
Earnings (loss) per share:
Basic:
Continuing operations $ 1.42 $ 2.52 $ 2.26 $ 0.70 $ 0.82
Discontinued operations (2), (4), (5) 0.29 0.03 0.15 (2.12) 0.40
------------- -------------- ------------- -------------- -------------
Net earnings (loss) $ 1.71 $ 2.54 $ 2.41 $ (1.42) $1.22
============= ============== ============= ============== =============
Diluted:
Continuing operations $ 1.40 $ 2.46 $ 2.22 $ 0.69 $ 0.82
Discontinued operations (2), (4), (5) 0.29 0.02 0.15 (2.11) 0.40
------------- -------------- ------------- -------------- -------------
Net earnings (loss) $ 1.69 $ 2.49 $ 2.37 $ (1.42) $ 1.21
============= ============== ============= ============== =============
Cash dividends declared per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64
Cash $ 209,514 $ 154,466 $ 249,391 $ 406,706 $ 341,072
Working capital 600,161 584,746 720,909 686,378 642,452
Total assets 1,251,801 1,282,343 1,569,803 1,512,144 1,514,576
Long-term debt 278,115 271,877 469,657 492,028 486,627
Short-term debt 26,596 2,743 149 16,349 19,556
Total debt 304,711 274,620 469,806 508,377 506,183
Stockholders' Equity 565,853 636,240 713,524 609,367 635,126
Equity per Diluted Share 22.75 23.48 25.45 22.49 24.55
<FN>
(1) During 2002, we made the decision to implement realignment actions. These
actions decreased 2002 earnings by $14,083 before tax ($9,112 after tax) or
$0.37 per basic share ($0.37 per diluted share).
(2) During fiscal 2003, we discontinued our True Beauty by Emme(R) operations
and sold our domestic and European Hosiery operations. As such, these
operations have been reflected as discontinued operations for all periods
presented.
(3) During 2005, we announced a Restructuring Plan (the 2005 Restructuring
Plan). The costs associated with the 2005 Restructuring Plan decreased net
earnings from continuing operations and net loss from discontinued operations
for the fiscal year ended January 28, 2006 by $50,366 ($35,508 after tax) or
$1.32 per basic share ($1.31 per diluted share) and $71,948 ($50,508 after
tax) or $1.87 per basic share ($1.86 per diluted share), respectively. Of the
total costs mentioned above for continuing operations, $2,450 ($1,727 after
tax) was a decrease to net sales. The costs (income) associated with the 2005
Restructuring Plan decreased net earnings from continuing operations for the
fiscal year ended February 3, 2007 by $33,632 ($21,423 after tax) or $0.83 per
basic share ($0.83 per diluted share) and increased net earnings from
discontinued operations for the fiscal year ended February 3, 2007 by $1,852
($1,180 after tax) or $0.05 per basic share ($0.05 per diluted share),
respectively. See Note 2 to Consolidated Financial Statements for further
information.
14
(4) During fiscal 2005, we discontinued our Kellwood New England, several
labels at our Oakland Operation, Private Label Menswear operations and
Intimate Apparel, as part of the 2005 Restructuring Plan. As such, these
operations have been reflected as discontinued operations for all periods
presented. See Note 4 to Consolidated Financial Statements for further
information.
(5) During fiscal 2006, we discontinued our New Campaign and IZOD operations.
As such, these operations have been reflected as discontinued operations for
all periods presented. See Note 4 to Consolidated Financial Statements for
further information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL REVIEW
----------------
The following discussion is a summary of the key factors management considers
necessary in reviewing our results of operations, liquidity, capital resources
and operating segment results. The amounts and disclosures included in
management's discussion and analysis of financial condition and results of
operations, unless otherwise indicated, are presented on a continuing
operations basis. This discussion should be read in conjunction with the
Consolidated Financial Statements and related notes.
Our internal reporting and related ongoing management analyses utilize net
earnings, earnings per share and gross profit excluding the impairment,
restructuring and other non-recurring charges and the tax benefit from
repatriation discussed below as key financial measures. Such items excluding
the impairment, restructuring and other non-recurring charges and the income
tax benefit from repatriation are referred to as ongoing. Management evaluates
each of its divisions using these ongoing measures in order to isolate the
results of operations by excluding these charges and benefits, which were
infrequent and non-recurring. Therefore, throughout management's discussion
and analysis of financial condition and results of operations, there will be a
discussion of operating results both including and excluding the impairment,
restructuring and other non-recurring charges. The ongoing amounts that
exclude the impairment, restructuring and other non-recurring charges are
non-GAAP measures and may not be comparable to measures used by other
entities.
OPERATING RESULTS
-----------------
2005 RESTRUCTURING PLAN
During the second quarter of 2005, we announced a Restructuring Plan (the 2005
Restructuring Plan) aimed at advancing our corporate objectives of increasing
our penetration of consumer lifestyle brands with strong growth and profit
potential while reducing exposure to smaller volume brands and certain private
label businesses. The 2005 Restructuring Plan resulted from a thorough
strategic reassessment of all of our business operations. This reassessment
was performed in the second quarter of 2005 and was directed by our Chief
Executive Officer who was named to that position during the second quarter.
The strategic reassessment focused on our businesses that had experienced
profitability issues and considered the alignment of the businesses with our
refreshed strategy, which considered, among other things, market place
developments affecting the retail landscape and our retail customers.
The results of operations and impairment, restructuring and other
non-recurring charges for the businesses sold and shut down are reported as
discontinued operations. The gains and losses on consummated transactions
involving the sale of operations are included as part of net gain from
discontinued operations and are not significant. See Note 4 to Consolidated
Financial Statements for further information on the operating results and
financial position of the discontinued businesses.
The total 2005 Restructuring Plan provision recorded to date (the second
quarter of 2005 through the fourth quarter of 2006) related to our reportable
segments (before tax) is as follows:
[Download Table]
Continuing Discontinued
Operations Operations Total
-------------- -------------- --------------
Women's Sportswear $ 45,625 $ 22,362 $ 67,987
Men's Sportswear 1,022 13,197 14,219
Other Soft Goods 702 29,466 30,168
General Corporate 36,649 5,071 41,720
-------------- -------------- --------------
Total $ 83,998 $ 70,096 $ 154,094
============== ============== ==============
15
As of February 3, 2007, we have substantially completed the business
dispositions and shutdown activities contemplated by the 2005 Restructuring
Plan. We do not anticipate incurring significant expense related to the 2005
Restructuring Plan in future periods.
For the twelve months ended January 28, 2006, the costs related to the 2005
Restructuring Plan were recorded as follows:
[Enlarge/Download Table]
Fiscal Year ended January 28, 2006
-------------------------------------------------------------------------
Continuing Discontinued
Operations Operations Total
--------------------- --------------------- ---------------------
Net sales $ 2,450 $ 2,266 $ 4,716
Cost of products sold 5,575 11,751 17,326
Impairment of goodwill and intangibles 30,909 18,657 49,566
Fixed asset impairment 1,850 6,274 8,124
Restructuring and other
non-recurring charges 9,582 33,000 42,582
--------------------- --------------------- ---------------------
Total pretax cost $ 50,366 $ 71,948 $ 122,314
===================== ===================== =====================
Total after tax cost $ 35,508 $ 50,508 $ 86,016
===================== ===================== =====================
Diluted loss per share $ 1.31 $ 1.86 $ 3.17
===================== ===================== =====================
For the twelve months ended February 3, 2007, the costs (income) related to
the 2005 Restructuring Plan were recorded as follows:
[Enlarge/Download Table]
Fiscal Year ended February 3, 2007
-------------------------------------------------------------------------
Continuing Discontinued
Operations Operations Total
--------------------- --------------------- ---------------------
Net sales $ - $ (2,192) $ (2,192)
Cost of products sold - (348) (348)
Restructuring and other
non-recurring charges 33,632 688 34,320
--------------------- --------------------- ---------------------
Total pretax cost $ 33,632 $ (1,852) $ 31,780
===================== ===================== =====================
Total after tax cost $ 21,423 $ (1,180) $ 20,243
===================== ===================== =====================
Diluted loss (income) per share $ 0.83 $ (0.05) $ 0.78
===================== ===================== =====================
A rollforward of the major components of this restructuring and other
non-recurring charge from January 28, 2006 to February 3, 2007 recorded in
continuing operations is as follows:
[Enlarge/Download Table]
Accrual as of Accrual as of
January 28, February 3,
2006 Provision Reversals Utilization 2007
------------- ------------- --------------- -------------- -------------
Inventory and Purchase
Commitment Reserves $ 2,710 $ - $ (52) $ (2,658) $ -
Contractual Obligations 3,600 31,977 - (12,435) 23,142
Employee Severance and
Termination Benefits 520 1,707 - (1,561) 666
------------- ------------- --------------- -------------- -------------
Total $ 6,830 $ 33,684 $ (52) $ (16,654) $ 23,808
============= ============= =============== ============== =============
A rollforward of the major components of this restructuring and other
non-recurring charge from January 28, 2006 to February 3, 2007 recorded in
discontinued operations is as follows:
[Enlarge/Download Table]
Accrual as of Accrual as of
January 28, February 3,
2006 Provision Reversals Utilization 2007
------------- ------------- --------------- -------------- -------------
Inventory and Purchase
Commitment Reserves $ 1,273 $ 109 $ (603) $ (779) $ -
Sales Allowances 2,266 - (2,192) (74) -
Contractual Obligations 10,307 927 - (6,538) 4,696
Employee Severance and
Termination Benefits 9,783 307 (400) (5,512) 4,178
------------- ------------- --------------- -------------- -------------
Total $ 23,629 $ 1,343 $ (3,195) $ (12,903) $ 8,874
============= ============= =============== ============== =============
16
Inventory and Purchase Commitment Reserves include provisions to reduce
inventory and purchase commitments to net realizable values. Sales allowances
included provisions for anticipated increased deductions taken by customers on
previous sales for discontinued operations. Contractual Obligations are
adverse contractual arrangements under which losses are probable and estimable
and where there is no future economic benefit. These include leases and
minimum payments under license agreements. Employee Severance and Termination
Benefits are provided for in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Total employee severance
and termination benefits will be recorded as incurred and relates to
approximately 1,400 employees.
The provision for contractual obligations for the twelve months ended February
3, 2007 includes $19,333 before tax ($12,315 after tax) for estimated future
payments in connection with contractual obligations. These amounts were
previously planned to be expensed as they were incurred, in accordance with
accounting guidance in place when the 2005 Restructuring Plan was announced.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45-3, Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners, which was applicable
for certain contractual obligations entered into in the first quarter
subsequent to its issuance. Contracts under which we were obligated and that
are part of the 2005 Restructuring Plan were amended during the current year;
thus, the related obligations have been accrued in accordance with the new
guidance.
Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
for impairment at least annually and if a triggering event were to occur in an
interim period. The 2005 Restructuring Plan was a triggering event that
required impairment testing of certain divisions' goodwill and intangible
asset balances. In connection with the 2005 Restructuring Plan and pursuant to
our policies for assessing impairment of goodwill and long-lived assets,
$29,279 and $20,287 of goodwill and intangible assets, respectively, including
trademarks and customer lists, were written off during the second quarter of
2005. Of these amounts, $9,234 and $9,423 of goodwill and intangible assets,
respectively, relate to divisions that are included in discontinued
operations. Included in continuing operations is the write-off of $20,045 and
$10,864 of goodwill and intangible assets, respectively.
DISCONTINUED OPERATIONS
During the third quarter of 2006, our New Campaign and IZOD women's sportswear
operations became discontinued. The discontinuance of New Campaign was the
result of our agreement during the third quarter to transfer the business and
sell business assets to the licensor. We expect to receive proceeds of
approximately $9 million and do not anticipate a significant gain or loss from
this sale. We expect to close this transaction in the first quarter of 2007.
The discontinuance of our IZOD women's sportswear operation was the result of
our agreement during the three months ended October 28, 2006 to terminate the
licensing agreement. We expect to close this transaction in the second quarter
of 2007 with no significant gain or loss. Prior to being classified as
discontinued, the New Campaign and IZOD operations were included in the
Women's Sportswear segment.
Related to our 2005 Restructuring Plan, as discussed in Note 2 to Consolidated
Financial Statements, our Private Label Menswear (which does not include our
Smart Shirts subsidiary) and several labels at our Oakland Operation were
discontinued during the fourth quarter of 2005. During the third quarter of
2005, our Intimate Apparel and Kellwood New England operations became
discontinued. Prior to being classified as discontinued, Kellwood New England
and the labels at the Oakland Operation were included in the Women's
Sportswear segment, the Private Label Menswear operations were included in the
Men's Sportswear segment, and Intimate Apparel was included in the Other Soft
Goods segment.
The results of operations and impairment, restructuring and other
non-recurring charges for the discontinued operations (as discussed in Note 2
to Consolidated Financial Statements) are reported as discontinued operations
for all periods presented. Additionally, assets and liabilities of the
discontinued operations are segregated in the accompanying Consolidated
Balance Sheets.
17
Operating results for the discontinued operations, including all charges
incurred during the periods presented for the 2005 Restructuring Plan related
to these divisions as described in Note 2 to Consolidated Financial
Statements, are as follows:
[Enlarge/Download Table]
Fiscal Year
------------------------------------------------
2004 2005 2006
--------------- -------------- ---------------
Net sales $ 440,453 $ 389,359 $ 86,790
=============== ============== ===============
Impairment, restructuring and other
non-recurring charges $ - $ 57,931 $ 688
=============== ============== ===============
Earnings (loss) before income taxes 6,933 (81,942) 6,392
Income taxes 2,818 (24,773) (3,927)
--------------- -------------- ---------------
Net earnings (loss) $ 4,115 $ (57,169) $ 10,319
=============== ============== ===============
Diluted earnings (loss) per share $ 0.15 $ (2.11) $ 0.40
=============== ============== ===============
The 2004 income tax rate of 40.6% for discontinued operations differs from our
overall 2004 tax rate due to foreign losses for which no benefit will be
obtained. The 2005 income tax benefit rate of 30.2% for discontinued
operations differs from our overall tax rate due to the non-deductibility of
certain costs (goodwill impairment) recorded under the 2005 Restructuring
Plan. The 2006 income taxes for discontinued operations includes a $6,300
reversal of allowances for tax exposures (related to a 2003 discontinued
operation) no longer deemed necessary due to finalization of an open tax year.
Summarized assets and liabilities of the discontinued operations are as
follows:
[Download Table]
2005 2006
-------------- ---------------
Cash and cash equivalents $ 253 $ 5
Receivables, net 42,806 12,898
Inventories 13,481 12,248
Current deferred taxes and prepaid expenses 33,671 3,485
-------------- ---------------
Current assets of discontinued operations $ 90,211 $ 28,636
============== ===============
Property, plant and equipment, net $ 1,648 $ 1,190
Goodwill 2,995 2,995
Other assets 1,155 251
-------------- ---------------
Long-term assets of discontinued operations $ 5,798 $ 4,436
============== ===============
Accounts payable $ 17,924 $ 9,363
Accrued liabilities 25,660 12,911
-------------- ---------------
Current liabilities of discontinued operations $ 43,584 $ 22,274
============== ===============
Deferred income taxes and other $ - $ 347
-------------- ---------------
Long-term liabilities of discontinued operations $ - $ 347
============== ===============
The accrued liabilities reflect the discontinued operations classification of
New Campaign and IZOD and also include charges taken in connection with the
2005 Restructuring Plan that have not yet been paid and primarily related to
contractual obligations and employee severance and termination benefits. As
noted above, the transactions related to the New Campaign and IZOD women's
sportswear operations are expected to close in the first quarter and second
quarter of 2007, respectively.
18
FISCAL 2006 VS. 2005
--------------------
Summarized comparative financial data for continuing operations for fiscal
years 2005 and 2006 is as follows (percentages are calculated based on actual
data, and columns may not add due to rounding):
[Enlarge/Download Table]
Amounts Percentage of net sales
------------------------------------------------- ------------------------------
Percent
2005 2006 Change 2005 2006
--------------- --------------- ------------- -------------- --------------
Net sales $ 1,962,039 $ 1,961,750 0.0% 100.0% 100.0%
Cost of products sold 1,559,453 1,547,242 (0.8%) 79.5% 78.9%
--------------- --------------- ------------- -------------- --------------
Gross profit 402,586 414,508 3.0% 20.5% 21.1%
SG&A 318,010 322,586 1.4% 16.2% 16.4%
--------------- --------------- ------------- -------------- --------------
Operating earnings before
stock option expense,
amortization and impairment,
restructuring and other non-
recurring charges (1) 84,576 91,922 8.7% 4.3% 4.7%
Stock option expense - 4,345 0.0% 0.0% 0.2%
Amortization of intangibles 10,685 10,935 2.3% 0.5% 0.6%
Impairment, restructuring and
other non-recurring charges 42,341 33,632 (20.6%) 2.2% 1.7%
--------------- --------------- ------------- -------------- --------------
Operating earnings 31,550 43,010 36.3% 1.6% 2.2%
Interest expense, net 23,241 15,676 (32.6%) 1.2% 0.8%
Other income, net (1,302) (1,743) 33.9% (0.1%) (0.1%)
--------------- --------------- ------------- -------------- --------------
Earnings before taxes 9,611 29,077 202.6% 0.5% 1.5%
Income taxes (9,145) 7,994 (187.4%) (0.5%) 0.4%
--------------- --------------- ------------- -------------- --------------
Net earnings from
continuing operations $ 18,756 $ 21,083 12.4% 1.0% 1.1%
=============== =============== ============= ============== ==============
Effective tax rate NM 27.5%
=============== ===============
<FN>
NM - Not meaningful
(1) Operating earnings before stock option expense, amortization and
impairment, restructuring and other non-recurring charges is a non-GAAP
measure that differs from operating earnings in that it excludes stock option
expense, amortization of intangibles and impairment, restructuring and other
non-recurring charges. Operating earnings before stock option expense,
amortization and impairment, restructuring and other non-recurring charges
should not be considered as an alternative to operating earnings. Operating
earnings before stock option expense, amortization and impairment,
restructuring and other non-recurring charges is the primary measure used by
management to evaluate our performance, as well as the performance of our
divisions and segments. Management believes the comparison of operating
earnings before stock option expense, amortization and impairment,
restructuring and other non-recurring charges between periods is useful in
showing the interaction of changes in gross profit and SG&A without inclusion
of stock option expense, amortization of intangibles and impairment,
restructuring and other non-recurring charges, the changes in which are
explained elsewhere. The subtotal of operating earnings before stock option
expense, amortization and impairment, restructuring and other non-recurring
charges may not be comparable to any similarly titled measure used by another
company.
19
RECONCILIATION OF OPERATING RESULTS - CONTINUING OPERATIONS: The following
tables provide operating results for ongoing operations, impairment,
restructuring and other non-recurring charges and income tax repatriation,
separately, for the fiscal years ended January 28, 2006 and February 3, 2007.
The tables present this breakdown of our operations in a manner that
reconciles to our consolidated results as presented in the Consolidated
Financial Statements. The non-GAAP results of operations for the ongoing
operations are presented separately from the impairment, restructuring and
other non-recurring charges and the income tax repatriation in order to
enhance the user's overall understanding of our current financial performance.
We believe the non-GAAP adjusted operating results provide useful information
to both management and investors by excluding non-recurring benefits and
expenses that we believe are not indicative of our core operating results.
Operating results for ongoing operations is the primary measure used by
management to evaluate our performance, as well as the performance of our
divisions and segments. The non-GAAP financial information should be
considered in addition to, not as a substitute for or as being superior to,
operating income, cash flows or other measures of financial performance
prepared in accordance with GAAP. The following reconciliation and analysis is
for continuing operations only.
[Enlarge/Download Table]
FISCAL YEAR ENDED JANUARY 28, 2006
Impairment,
restructuring and
Total other non- Income Tax Ongoing
Continuing recurring charges Repatriation Operations
------------------ ------------------ ------------------- -------------------
Net sales $ 1,962,039 $ 2,450 $ - $ 1,964,489
Cost of products sold 1,559,453 (5,575) - 1,553,878
------------------ ------------------ ------------------- -------------------
Gross profit 402,586 8,025 - 410,611
SG&A 318,010 - - 318,010
Stock option expense - - - -
Amortization of intangibles 10,685 - - 10,685
Impairment, restructuring and
other non-recurring charges 42,341 (42,341) - -
Interest expense, net 23,241 - - 23,241
Other income, net (1,302) - - (1,302)
------------------ ------------------ ------------------- -------------------
Earnings before taxes 9,611 50,366 - 59,977
Income taxes (9,145) 14,858 13,000 18,713
------------------ ------------------ ------------------- -------------------
Net earnings from
continuing operations $ 18,756 $ 35,508 $ (13,000) $ 41,264
================== ================== =================== ===================
Effective tax rate NM 29.5% NM 31.2%
FISCAL YEAR ENDED FEBRUARY 3, 2007
Impairment,
restructuring and
Total other non- Income Tax Ongoing
Continuing recurring charges Repatriation Operations
------------------ ------------------ ------------------- -------------------
Net sales $ 1,961,750 $ - $ - $ 1,961,750
Cost of products sold 1,547,242 - - 1,547,242
------------------ ------------------ ------------------- -------------------
Gross profit 414,508 - - 414,508
SG&A 322,586 - - 322,586
Stock option expense 4,345 - - 4,345
Amortization of intangibles 10,935 - - 10,935
Impairment, restructuring
and other non-recurring
charges 33,632 (33,632) - -
Interest expense, net 15,676 - - 15,676
Other income, net (1,743) - - (1,743)
------------------ ------------------ ------------------- -------------------
Earnings before taxes 29,077 33,632 - 62,709
Income taxes 7,994 12,209 - 20,203
------------------ ------------------ ------------------- -------------------
Net earnings from
continuing operations $ 21,083 $ 21,423 $ - $ 42,506
================== ================== =================== ===================
Effective tax rate 27.5% 36.3% NM 32.2%
<FN>
NM - Not meaningful
20
INCOME TAXES. In October 2004, the American Jobs Creation Act of 2004 (the
Act) was signed into law. The Act provides a special one-time deduction of 85%
of foreign earnings that are repatriated under a domestic reinvestment plan,
as defined therein. During 2005, we adopted a formal domestic reinvestment
plan that resulted in the repatriation of $160,000 of foreign earnings. This
repatriation resulted in a one-time tax benefit of $13,000 recorded during the
second quarter of 2005 due to the reversal of $23,500 of previously provided
taxes on foreign earnings, which will not be incurred under the new
regulations, offset by $10,500 of taxes provided on earnings to be
repatriated.
Our effective tax rates on all charges associated with the 2005 Restructuring
Plan included in continuing operations for 2005 and 2006 were 29.5% and 36.3%,
respectively. The 2005 effective rate is less than the U.S. statutory rate of
35.0% primarily due to the non-deductibility of the goodwill and intangible
asset impairment recorded under the 2005 Restructuring Plan. The 2006
effective tax rate differs from the U.S. statutory rate of 35.0% primarily due
to the provision of state taxes.
CONTINUING OPERATIONS - ONGOING OPERATIONS: The following table provides
summarized financial data for the fiscal years ended January 28, 2006 and
February 3, 2007 (amounts based on actual data, therefore columns/rows may not
add due to rounding). This table presents the same information for the ongoing
operations as presented in the Reconciliation of Operating Results -
Continuing Operations shown earlier. The non-GAAP financial information should
be considered in addition to, not as a substitute for or as being superior to,
operating income, cash flows or other measures of financial performance
prepared in accordance with GAAP.
[Enlarge/Download Table]
Amounts Percentage of net sales
------------------------------------------------- ------------------------------
Percent
2005 2006 Change 2005 2006
--------------- --------------- -------------- -------------- --------------
Net sales $ 1,964,489 $ 1,961,750 (0.1%) 100.0% 100.0%
Cost of products sold 1,553,878 1,547,242 (0.4%) 79.1% 78.9%
--------------- --------------- ------------- -------------- --------------
Gross profit 410,611 414,508 0.9% 20.9% 21.1%
SG&A 318,010 322,586 1.4% 16.2% 16.4%
--------------- --------------- ------------- -------------- --------------
Operating earnings before
stock option expense
and amortization (1) 92,601 91,922 (0.7%) 4.7% 4.7%
Stock option expense - 4,345 NM 0.0% 0.2%
Amortization of intangibles 10,685 10,935 2.3% 0.5% 0.6%
--------------- --------------- ------------- -------------- --------------
Operating earnings 81,916 76,642 (6.4%) 4.2% 3.9%
Interest expense, net 23,241 15,676 (32.6%) 1.2% 0.8%
Other income, net (1,302) (1,743) 33.9% (0.1%) (0.1%)
--------------- --------------- ------------- -------------- --------------
Earnings before taxes 59,977 62,709 4.6% 3.1% 3.2%
Income taxes 18,713 20,203 8.0% 1.0% 1.0%
--------------- --------------- ------------- -------------- --------------
Net earnings from
continuing operations $ 41,264 $ 42,506 3.0% 2.1% 2.2%
=============== =============== ============= ============== ==============
Effective tax rate 31.2% 32.2%
<FN>
(1) Operating earnings before stock option expense and amortization is a
non-GAAP measure that differs from operating earnings in that it excludes
stock option expense and amortization of intangibles. Operating earnings
before stock option expense and amortization should not be considered as an
alternative to operating earnings. Operating earnings before stock option
expense and amortization for ongoing divisions is the primary measure used by
management to evaluate our performance, as well as the performance of our
divisions and segments. Management believes the comparison of operating
earnings before stock option expense and amortization between periods is
useful in showing the interaction of changes in gross profit and SG&A
excluding stock option expense and amortization of intangibles, the change in
which is explained elsewhere. The subtotal of operating earnings before stock
option expense and amortization may not be comparable to any similarly titled
measure used by another company.
21
SALES for ongoing operations for 2006 were $1,961,750, decreasing $2,739 or
0.1% versus 2005. The decline in sales is due to a decrease in orders for
certain legacy brands and consolidations at retail associated with our Women's
Sportswear segment. These decreases were partially offset by a growth in sales
driven by our Smart Shirts' private label and branded businesses and the
acquisition of Vince.
GROSS PROFIT for ongoing operations for 2006 was $414,508 or 21.1% of sales,
increasing $3,897 or 0.2 percentage points of sales versus 2005. The increase
in gross profit was due to a reduction in markdown expense, a reduction in the
cost of liquidating surplus and obsolete inventory and improved retail
performance related to the Women's Sportswear segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) for 2006 were $322,586,
increasing $4,576 or 1.4% versus 2005. SG&A expense as a percentage of sales
increased from 16.2% for 2005 to 16.4% for 2006. The increase in SG&A expense
and as a percent of sales is primarily due to the addition of retail stores,
higher expense in accordance with various incentive programs and the
acquisitions during 2006.
STOCK OPTION EXPENSE for 2006 was $4,345. On January 29, 2006, we adopted SFAS
No. 123(R), Share-Based Payment, requiring the recognition of compensation
expense in the Consolidated Statement of Operations related to the fair value
of our employee share-based options. Therefore, stock option expense was not
recorded in 2005. See Note 9 to Consolidated Financial Statements for
additional information.
INTEREST EXPENSE, NET for 2006 was $15,676, decreasing $7,565 or 32.6% versus
2005. Interest expense for 2006 was $35,073, increasing $2,437 versus 2005.
Interest income for 2006 was $19,397, increasing $10,002 versus 2005. The
decline in our interest expense, net for 2006 is due to an increase in
interest income resulting from a higher average cash balance and higher short
term interest rates.
INCOME TAXES. Our effective tax rates on pretax earnings for ongoing
operations, excluding impairment, restructuring and other non-recurring
charges and the income tax benefit from repatriation for 2005 and 2006 were
31.2% and 32.2%, respectively. These rates differ from the U.S. statutory rate
of 35.0% due to the lower tax rate on foreign earnings that will be
permanently invested offshore, partially offset by the provision of state
taxes. Our 2006 tax rate was lowered to 32.2% during the fourth quarter of
2006 based on higher projected foreign earnings, which are taxed at a lower
rate.
WEIGHTED AVERAGE DILUTED SHARES outstanding decreased due to the Stock
Repurchase Program.
22
FISCAL 2005 VS. 2004
--------------------
CONTINUING OPERATIONS - ONGOING OPERATIONS: The following table provides
summarized financial data for the fiscal years ended January 29, 2005 and
January 28, 2006 (amounts based on actual data, therefore columns/rows may not
add due to rounding). The table provides non-GAAP summarized financial data
for the fiscal year ended January 28, 2006 and is the same information for the
ongoing operations as presented in the Reconciliation of Operating Results -
Continuing Operations shown earlier. The non-GAAP financial information should
be considered in addition to, not as a substitute for or as being superior to,
operating income, cash flows or other measures of financial performance
prepared in accordance with GAAP. The operating results for the fiscal year
ended January 29, 2005 do not include income tax repatriation or impairment,
restructuring and other non-recurring charges; therefore, continuing and
ongoing are the same, and no reconciliation is necessary.
[Enlarge/Download Table]
Amounts Percentage of net sales
------------------------------------------------- ------------------------------
Percent
2004 2005 Change 2004 2005
--------------- --------------- -------------- -------------- --------------
Net sales $ 2,115,252 $ 1,964,489 (7.1%) 100.0% 100.0%
Cost of products sold 1,654,901 1,553,878 (6.1%) 78.2% 79.1%
--------------- --------------- ------------- -------------- --------------
Gross profit 460,351 410,611 (10.8%) 21.8% 20.9%
SG&A 331,670 318,010 (4.1%) 15.7% 16.2%
--------------- --------------- ------------- -------------- --------------
Operating earnings before
amortization (1) 128,681 92,601 (28.0%) 6.1% 4.7%
Amortization of intangibles 11,205 10,685 (4.6%) 0.5% 0.5%
--------------- --------------- ------------- -------------- --------------
Operating earnings 117,476 81,916 (30.3%) 5.6% 4.2%
Interest expense, net 25,860 23,241 (10.1%) 1.2% 1.2%
Other income, net (2,091) (1,302) (37.7%) (0.1%) (0.1%)
--------------- --------------- ------------- -------------- --------------
Earnings before taxes 93,707 59,977 (36.0%) 4.4% 3.1%
Income taxes 31,486 18,713 (40.6%) 1.5% 1.0%
--------------- --------------- ------------- -------------- --------------
Net earnings from
continuing operations $ 62,221 $ 41,264 (33.7%) 2.9% 2.1%
=============== =============== ============= ============== ==============
Effective tax rate 33.6% 31.2%
<FN>
(1) Operating earnings before amortization is a non-GAAP measure that differs
from operating earnings in that it excludes the amortization of intangibles.
Operating earnings before amortization should not be considered as an
alternative to operating earnings. Operating earnings before amortization for
ongoing operations is the primary measure used by management to evaluate our
performance as well as the performance of our divisions and segments.
Management believes the comparison of operating earnings before amortization
between periods is useful in showing the interaction of changes in gross
profit and SG&A excluding the amortization of intangibles, the change in which
is explained elsewhere. The subtotal of operating earnings before amortization
may not be comparable to any similarly titled measure used by another company.
SALES for ongoing operations for 2005 were $1,964,489, decreasing $150,763 or
7.1% versus 2004. The decline in sales was due to decreased sales of
popular-to-moderately priced women's sportswear brands and private label
business. Additionally, the dress market has shrunk dramatically.
GROSS PROFIT for ongoing operations for 2005 was $410,611 or 20.9% of sales,
decreasing $49,740 or 0.9 percentage points of sales versus 2004. The decline
in our gross profit rate in 2005 resulted from competitive price pressure and
higher markdown expense, primarily in the Women's Sportswear segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) for ongoing operations for
2005 were $318,010, decreasing $13,660 or 4.1% versus 2004. The decline in
SG&A expense is primarily due to a decrease in overhead, primarily
compensation expense, in divisions experiencing lower sales partially offset
by increased advertising expense. SG&A expense as a percentage of sales
increased from 15.7% for 2004 to 16.2% for 2005 primarily due to decreased
sales. We have reduced SG&A expense but the sales levels have decreased faster
than the decrease in SG&A expense.
INTEREST EXPENSE, NET for 2005 was $23,241, decreasing $2,619 or 10.1% versus
2004. Interest expense for 2005 was $32,636, increasing $2,730 versus 2004.
Interest income for 2005 was $9,395, increasing $5,348 versus 2004. The
decline in our interest expense, net is primarily due to an increase in
interest income resulting from increased cash balances and higher interest
rates on cash investments in 2005 as compared to 2004.
23
INCOME TAXES. Our effective tax rate on earnings before income taxes before
impairment, restructuring and other non-recurring charges and the income tax
benefit from repatriation for 2005 was lowered in 2005 (33.6% in 2004 versus
31.2% in 2005) as the incremental U.S. tax on current year foreign earnings
was significantly less.
WEIGHTED AVERAGE DILUTED SHARES outstanding decreased due to the Stock
Repurchase Program.
DISCONTINUED OPERATIONS: The following table provides summarized operating
results for the fiscal years ended January 29, 2005, January 28, 2006 and
February 3, 2007, for the discontinued operations.
[Enlarge/Download Table]
Fiscal Year Percent Change
--------------------------------------------------- ---------------------------------
2004 2005 2006 2004-2005 2005-2006
---------------- --------------- ---------------- ---------------- ----------------
Net sales $ 440,453 $ 389,359 $ 86,790 (11.6%) (77.7%)
Cost of products sold 358,764 351,528 63,805 (2.0%) (81.8%)
---------------- --------------- ---------------- --------------- ---------------
Gross profit 81,689 37,831 22,985 (53.7%) (39.2%)
SG&A 72,560 61,146 14,546 (15.7%) (76.2%)
---------------- --------------- ---------------- --------------- ---------------
Operating earnings (loss)
before amortization and
impairment, restructuring
and other non-recurring
charges (1) 9,129 (23,315) 8,439 NM NM
Amortization of intangibles 2,228 842 - (62.2%) NM
Impairment, restructuring
and other non-recurring
charges - 57,931 688 NM NM
---------------- --------------- ---------------- ---------------- ----------------
Operating earnings (loss) 6,901 (82,088) 7,751 NM NM
Interest (income) expense, net (4) (1) - (67.7%) NM
Other income, net (28) (145) 1,359 NM NM
---------------- --------------- ---------------- ---------------- ----------------
Earnings (loss) before taxes 6,933 (81,942) 6,392 NM NM
Income taxes 2,818 (24,773) (3,927) NM (84.2%)
---------------- --------------- ---------------- ---------------- ---------------
Net earnings (loss) $ 4,115 $ (57,169) $ 10,319 NM NM
================ =============== ================ ================ ================
Effective tax rate 40.6% 30.2% NM
<FN>
NM - Not meaningful
(1) Operating earnings (loss) before amortization and impairment,
restructuring and other non-recurring charges is a non-GAAP measure that
differs from operating earnings (loss) in that it excludes amortization of
intangibles and impairment, restructuring and other non-recurring charges.
Operating earnings (loss) before amortization and impairment, restructuring
and other non-recurring charges should not be considered as an alternative to
operating earnings (loss). Operating earnings (loss) before amortization and
impairment, restructuring and other non-recurring charges is the primary
measure used by management to evaluate our performance, as well as the
performance of our divisions and segments. Management believes the comparison
of operating earnings (loss) before amortization and impairment, restructuring
and other non-recurring charges between periods is useful in showing the
interaction of changes in gross profit and SG&A excluding the amortization of
intangibles and impairment, restructuring and other non-recurring charges, the
changes in which are explained elsewhere. The subtotal of operating earnings
(loss) before amortization and impairment, restructuring and other
non-recurring charges may not be comparable to any similarly titled measure
used by another company.
Sales for 2005 were $389,359, decreasing $51,094 or 11.6% versus 2004, due
primarily to the loss of business after the announcement of the 2005
Restructuring Plan and to sales that were eliminated when certain discontinued
operations were sold prior to the end of 2005. Gross profit for 2005 was
$37,831, decreasing $43,858 or 53.7% versus 2004. This decrease was primarily
caused by $14,017 of sales allowances and inventory reserves related to the
2005 Restructuring Plan included in gross profit for 2005. SG&A expense for
2005 decreased $11,414 versus 2004 primarily due to decreased spending at the
discontinued operations.
Sales for 2006 were $86,790, decreasing $302,569 or 77.7% primarily due to
sales that were eliminated when certain discontinued operations ceased
operations in 2005. During the third quarter of 2006, our New Campaign and
IZOD women's sportswear operations became discontinued. Fiscal year 2006
operating results for discontinued operations primarily relate to the New
Campaign and IZOD operations. The transactions related to New Campaign and
IZOD are expected to close in the first quarter and the second quarter of
2007, respectively.
24
Income taxes for the fiscal year ended February 3, 2007 include a $6,300
reversal of allowances for tax exposures (related to a 2003 discontinued
operation) no longer deemed necessary due to finalization of an open tax year.
Our effective tax rate on discontinued operations, excluding the reversal of
tax reserves (see Note 4 to Consolidated Financial Statements for further
information related to the reversal of tax reserves), was 37.1% for the fiscal
year ended February 3, 2007.
SEGMENT RESULTS
---------------
We and our subsidiaries are principally engaged in the apparel and related
soft goods industry. Our divisions are aggregated into the following
reportable segments:
o Women's Sportswear,
o Men's Sportswear,
o Other Soft Goods, and
o General Corporate.
RECONCILIATION OF SEGMENT RESULTS - CONTINUING OPERATIONS: The following
tables provide non-GAAP segment net sales and earnings (loss) for the fiscal
year ended January 28, 2006, for the ongoing operations and impairment,
restructuring and other non-recurring charges, separately. The tables present
this breakdown of our operations in a manner that reconciles to our
consolidated results. The non-GAAP segment net sales and earnings (loss) for
the ongoing operations are provided separately from impairment, restructuring
and other non-recurring charges to enhance the user's overall understanding of
our current financial performance. We believe that the non-GAAP segment net
sales and earnings (loss) provide useful information to both management and
investors by excluding sales and expenses that we believe are not indicative
of our core operating results. Segment net sales and earnings (loss) for
ongoing operations are the primary measures we use to evaluate our
performance, as well as the performance of our divisions. The non-GAAP
financial information should be considered in addition to, not as a substitute
for or as being superior to, operating income, cash flows or other measures of
financial performance prepared in accordance with GAAP. Segment sales and
earnings (loss) for the fiscal years ended January 29, 2005 and February 3,
2007 do not include impairment, restructuring and other non-recurring charges;
therefore, ongoing and continuing operations are the same, and no
reconciliation is necessary.
[Enlarge/Download Table]
Fiscal year ended January 28, 2006
-------------------------------------------------------------
Impairment,
restructuring
and other
Total non-recurring Ongoing
Net sales Continuing charges Operations
--------- ------------------- ------------------- -------------------
Women's Sportswear $ 1,144,607 $ 2,400 $ 1,147,007
Men's Sportswear 498,061 - 498,061
Other Soft Goods 319,371 50 319,421
------------------- ------------------- -------------------
Total net sales $ 1,962,039 $ 2,450 $ 1,964,489
=================== =================== ===================
Fiscal year ended January 28, 2006
-------------------------------------------------------------
Impairment,
restructuring
and other
Total non-recurring Ongoing
Segment earnings (loss) Continuing charges Operations
----------------------- ------------------- ------------------- -------------------
Women's Sportswear $ 54,814 $ 7,562 $ 62,376
Men's Sportswear 43,262 - 43,262
Other Soft Goods 31,205 463 31,668
General Corporate (44,705) - (44,705)
------------------- ------------------- -------------------
Total segment earnings $ 84,576 $ 8,025 $ 92,601
=================== =================== ===================
25
CONTINUING OPERATIONS - ONGOING OPERATIONS: The following tables provide
segment sales and earnings (loss) for the fiscal years ended January 29, 2005,
January 28, 2006 and February 3, 2007. These tables provide non-GAAP data for
ongoing operations and present the same information for the ongoing operations
as presented in the Reconciliation of Segment Results - Continuing Operations
shown earlier for fiscal year 2005. The non-GAAP information should be
considered in addition to, not as a substitute for or as being superior to,
operating income, cash flows or other measures of financial performance
prepared in accordance with GAAP. Segment sales and earnings (loss) for fiscal
years 2004 and 2006 do not include impairment, restructuring and other
non-recurring charges; therefore, ongoing and continuing operations are the
same.
[Enlarge/Download Table]
Amounts Percent Change
---------------------------------------------- -----------------------------
Net sales 2004 2005 2006 2004-2005 2005-2006
--------- -------------- -------------- -------------- ------------- --------------
Women's Sportswear $ 1,304,740 $ 1,147,007 $ 1,107,571 (12.1%) (3.4%)
Men's Sportswear 505,318 498,061 525,005 (1.4%) 5.4%
Other Soft Goods 305,194 319,421 329,174 4.7% 3.1%
-------------- -------------- -------------- ------------ -------------
Total net sales $ 2,115,252 $ 1,964,489 $ 1,961,750 (7.1%) (0.1%)
============== ============== ============== ============ =============
Segment earnings (loss)
-----------------------
Women's Sportswear $ 93,742 $ 62,376 $ 68,421 (33.5%) 9.7%
Men's Sportswear 52,645 43,262 38,297 (17.8%) (11.5%)
Other Soft Goods 28,211 31,668 35,085 12.3% 10.8%
General Corporate (45,917) (44,705) (49,881) (2.6%) 11.6%
-------------- -------------- -------------- ------------ -------------
Total segment earnings $ 128,681 $ 92,601 $ 91,922 (28.0%) (0.7%)
============== ============== ============== ============ =============
Segment earnings (loss) margins
-------------------------------
Women's Sportswear 7.2% 5.4% 6.2%
Men's Sportswear 10.4% 8.7% 7.3%
Other Soft Goods 9.2% 9.9% 10.7%
General Corporate NM NM NM
-------------- -------------- --------------
Total segment earnings 6.1% 4.7% 4.7%
============== ============== ==============
<FN>
NM - Not meaningful
WOMEN'S SPORTSWEAR. Sales for ongoing operations of Women's Sportswear for
2005 were $1,147,007, decreasing $157,733 or 12.1% versus 2004. The decrease
in sales is primarily due to reduced orders for some of our traditionally
styled popular-to-moderately priced sportswear brands. Additionally, the dress
market has shrunk dramatically with some of our customers having either
dropped the category altogether or significantly cut open-to-buy. These
decreases were partially offset by growth in junior sportswear and suits.
Women's Sportswear segment earnings for ongoing operations for 2005 were
$62,376 or 5.4% of net sales, decreasing $31,366 or 1.8 percentage points of
net sales versus 2004, due to the decline in segment sales and the decrease in
gross profit as a percent of sales related to markdown support provided to
customers and higher off-price sales for 2005 compared to 2004. This was
partially offset by increased profit from higher junior sportswear sales.
Sales of Women's Sportswear for 2006 were $1,107,571, decreasing $39,436 or
3.4% versus 2005. The sales decrease was primarily due to cutbacks in Fall
open-to-buy for some of our legacy brands and customer consolidation at
retail.
Women's Sportswear segment earnings for 2006 were $68,421 or 6.2% of net
sales, increasing $6,045 or 0.8 percentage points of net sales versus 2005.
The increase was greater in the second half of the year than the first half of
the year. The primary reasons for the increase in segment earnings for 2006
was due to decreased markdown expense and improved inventory management.
MEN'S SPORTSWEAR. Sales of Men's Sportswear for 2005 were $498,061, decreasing
$7,257 or 1.4% versus 2004 primarily due to decreased private label sales.
Men's Sportswear segment earnings for 2005 were $43,262 or 8.7% of net sales,
decreasing $9,383 or 1.7 percentage points of net sales versus 2004. The
decrease in earnings was primarily due to decreasing private label and branded
margins resulting from increased competitive pricing pressure and increased
markdown support provided to customers.
Sales of Men's Sportswear for 2006 were $525,005, increasing $26,944 or 5.4%
versus 2005. The increase in sales resulted primarily from Smart Shirts
private label and branded business sales.
26
Men's Sportswear segment earnings for 2006 were $38,297, decreasing $4,965
versus 2005. The decline in earnings was due to lower gross margins resulting
from competitive price pressure and enhancing the quality and fashion level of
our products.
OTHER SOFT GOODS. Sales for ongoing operations of Other Soft Goods for 2005
were $319,421, increasing $14,227 or 4.7% versus 2004. The increase in sales
was due to the strength of our major consumer brands as retail selling prices
were flat across most product categories following several years of price
deflation.
Segment earnings for ongoing operations of Other Soft Goods for 2005 were
$31,668 or 9.9% of net sales, increasing $3,457 or 0.7 percentage points of
net sales versus 2004. Segment earnings increased primarily due to the
increase in sales.
Sales of Other Soft Goods for 2006 were $329,174, increasing $9,753 or 3.1%
versus 2005. The increase in sales was due to strong replenishment orders and
increased sales of seasonal product for Gerber Childrenswear and increased
sales of non-traditional camping products.
Segment earnings of Other Soft Goods for 2006 were $35,085, increasing $3,417
versus 2005. The increase in segment earnings was primarily due to the
increase in sales while controlling selling, general and administrative
expenses at their previous level.
GENERAL CORPORATE. General corporate expenses for 2005 were $44,705,
decreasing $1,212 or 2.6% versus 2004. The decrease resulted from reduced
operating expenses in several areas.
General corporate expenses for 2006 were $49,881, increasing $5,176 or 11.6%
versus 2005 due to increased spending for strategic initiatives and higher
expense in accordance with various incentive programs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results will differ from those estimates and
assumptions and the differences may be material. Significant accounting
policies, estimates and judgments which management believes are the most
critical to aid in fully understanding and evaluating the reported financial
results are discussed below.
ACCOUNTS RECEIVABLE - RESERVES FOR ALLOWANCES
---------------------------------------------
Accounts receivable are recorded net of allowances for bad debts as well as
existing and expected future chargebacks from customers. It is the nature of
the apparel and soft goods industry that suppliers like us face significant
pressure from customers in the retail industry to provide allowances to
compensate for customer margin shortfalls. This pressure often takes the form
of customers requiring us to provide price concessions on prior shipments as a
prerequisite for obtaining future orders. Pressure for these concessions is
largely determined by overall retail sales performance and, more specifically,
the performance of our products at retail. To the extent our customers have
more of our goods on hand at the end of the season, there will be greater
pressure for us to grant markdown concessions on prior shipments. Our accounts
receivable balances are reported net of expected allowances for these matters
based on the historical level of concessions required and our estimates of the
level of markdowns and allowances that will be required in the coming season
in order to collect the receivables. We evaluate the allowance balances on a
continuing basis and adjust them as necessary to reflect changes in
anticipated allowance activity.
ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS
-----------------------------------------------------
We maintain an allowance for doubtful accounts receivable for estimated losses
resulting from customers that are unable to meet their financial obligations.
Our estimation of the allowance for doubtful accounts involves consideration
of the financial condition of specific customers as well as general estimates
of future collectibility based on historical experience and expected future
trends. The estimation of these factors involves significant judgment. In
addition, actual collection experience, and thus bad debt expense, can be
significantly impacted by the financial difficulties of as few as one
customer.
27
INVENTORY VALUATION
-------------------
Inventories are recorded at cost. Inventory values are reduced to net
realizable value when there are factors indicating that certain inventories
will not be sold on terms sufficient to recover their cost. Our products can
be classified into two types: replenishment and non-replenishment.
Replenishment items are those basics (dress shirts, infant apparel, etc.) that
are not highly seasonal or dependent on fashion trends. The same products are
sold by retailers 12 months a year, and styles evolve slowly. Retailers
generally replenish their stocks of these items as they are sold. Only a
relatively small portion of our business involves replenishment items.
The majority of our products consist of items that are non-replenishment as a
result of being highly tied to a season or fashion look. These products are
economically "perishable". The value of this seasonal merchandise might be
sufficient for us to generate a profit over its cost at the beginning of its
season, but by the end of its season a few months later the same inventory
might be salable only at less than cost. For these products, the selling
season generally ranges from three to six months. The value may rise again the
following year when the season in which the goods sell approaches - or it may
not, depending on the level of prior year merchandise on the market and on
year-to-year fashion changes.
While we sell some "prior year" merchandise through our own outlet stores, the
majority of out-of-season inventories must be sold to off-price retailers and
other customers who serve a customer base that will purchase prior year
fashions. The amount, if any, that these customers will pay for prior year
fashions is determined by the desirability of the inventory itself as well as
the general level of prior year goods available to these customers. The
assessment of inventory value, as a result, is highly subjective and requires
an assessment of the seasonality of the inventory, its future desirability,
and future price levels in the "off-price" sector.
Many of our products are purchased for and sold to specific customers' orders.
Others are purchased in anticipation of selling them to a specific customer.
The loss of a major customer, whether due to the customer's financial
difficulty or other reasons, could have a significant negative impact on the
value of the inventory expected to be sold to that customer. This negative
impact can also extend to purchase obligations for goods that have not yet
been received. These obligations involve product to be received into inventory
over the next one to six months.
MARKET VALUE ASSESSMENTS OF GOODWILL AND INTANGIBLE ASSETS
----------------------------------------------------------
Before the implementation of SFAS No. 142, Goodwill and Other Intangible
Assets, the values of goodwill and intangible assets were written off over the
period expected to be benefited through regular amortization charges. Under
SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer
be written off through periodic charges to the income statement over the
defined period. Future impairment charges may be required if the value of the
division becomes less than its book value. The determination of the fair value
of the divisions is highly subjective, as it is determined largely by
projections of future profitability and cash flows. This evaluation utilizes
discounted cash flow analysis and analyses of historical and forecasted
operating results of our divisions. The fair value of the division as a whole
is compared to the book value of the division (including goodwill). If a
deficiency exists, impairment will be calculated. Impairment is measured as
the difference between the fair value of the goodwill and its carrying amount.
The fair value of goodwill is the difference between the fair value of the
division as a whole and the fair value of the division's individual assets and
liabilities. The annual impairment testing is performed in the fourth quarter,
and additional testing would be necessary if a triggering event were to occur
in an interim period.
Identifiable intangible assets include trademarks, customer base and license
agreements, which are being amortized over their useful lives ranging from 2
to 20 years (weighted average life of 20 years). Impairment testing of these
would occur if and when a triggering event occurs.
It is possible that our estimates of future operating results for certain of
our divisions could change adversely and impact the evaluation of the
recoverability of the carrying value of goodwill and that the effect of such
changes on our Consolidated Financial Statements could be material. While we
believe that the current recorded carrying value of our goodwill is not
impaired, there can be no assurance that a significant non-cash write-down or
write-off will not be required in the future.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In November 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) Financial Accounting Standard (FAS) No. 123(R)-3 (FSP No.
123(R)-3), Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. This FSP provides an alternative method of
calculating the excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123(R). We have adopted FSP
No. 123(R)-3 in the first quarter of 2006 and implemented the method contained
in the original announcement. See Note 9 to Consolidated Financial Statements
for detailed disclosure.
28
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the financial statement effects of a tax
position taken or expected to be taken in a tax return are to be recognized in
the financial statements when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination,
including resolution of any related appeals or litigation processes. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and we will be
required to adopt this interpretation in the first quarter of fiscal year
2007. Based on our evaluation as of February 3, 2007, we do not believe that
FIN 48 will have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 158, Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS No. 158), which requires an
employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
the funded status in the year in which the changes occur. SFAS No. 158 also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
recognition provisions of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006 while the measurement date provisions are effective
for fiscal years ending after December 15, 2008. An employer with publicly
traded equity securities is required to initially recognize the funded status
of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15, 2006.
We have adopted the recognition requirements of SFAS No. 158 in the fourth
quarter of 2006. See Note 8 to Consolidated Financial Statements for detailed
disclosure.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP) and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently evaluating the
impact of SFAS No. 157 on our financial statements, but do not expect it to
have a material impact on our financial statements.
FINANCIAL CONDITION
-------------------
Cash flow from operations is our primary source of funds to finance operating
needs, capital expenditures, debt service and acquisitions. We use financial
leverage to minimize the overall cost of capital and maintain adequate
operating and financial flexibility. Management monitors leverage through its
debt-to-capital ratio (defined as total debt divided by the sum of total debt
and total stockholders' equity, or total capital). At February 3, 2007, our
debt-to-capital ratio was 44.4%, down 1.1 percentage points from January 28,
2006 primarily due to increased net earnings and decreased debt.
In July 2005, we announced a Stock Repurchase Program of up to ten percent or
$75,000 of our stock. During fiscal year 2005, we repurchased 2,218,200 shares
at an average price of $24.99 per share, totaling $55,430. During fiscal year
2006, we repurchased 173,600 shares at an average price of $28.83 per share,
totaling $5,006. Management believes that the current cash will provide the
capital flexibility necessary to fund the restructuring and the announced
stock repurchase program and to meet existing obligations.
NET CASH PROVIDED BY OPERATING ACTIVITIES decreased from $217,830 for 2005 to
$67,093 for 2006. This $150,737 decrease was primarily due to the change in
working capital discussed below and the significant decrease in working
capital related to the discontinued businesses being liquidated and sold.
Working Capital
Working capital is significantly influenced by sales patterns, which are
highly seasonal. Inventories, accounts payable and accrued expenses are highly
dependent upon sales levels and order lead times. Receivable levels are
dependent upon recent months' sales and customer payment experience.
29
The year-to-year changes in the major components of working capital from
continuing operations are discussed below:
o Accounts receivable increased $24,263 from $278,270 at January 28,
2006 to $302,533 at February 3, 2007 due to increased sales in the
fourth quarter of 2006 versus the fourth quarter of 2005.
o Inventories increased $24,747 from $219,639 at January 28, 2006 to
$244,386 at February 3, 2007. Days supply were 52 days at January
28, 2006 compared to 60 days at February 3, 2007. The increase in
inventory levels and days supply is primarily due to the expansion
of retail, an increase to more sustainable inventory levels by
certain of our businesses and to a lesser extent, the push out of
delivery dates by certain customers at February 3, 2007.
o Accounts payable increased $11,807 from $160,769 at January 28, 2006
to $172,576 at February 3, 2007 as a result of an increase in
inventory purchases to support higher sales volumes.
o Accrued expenses decreased $18,018 from $133,722 at January 28, 2006
to $115,704 at February 3, 2007 primarily due to decreased accrued
income taxes resulting from the continued ability to offset current
taxes with loss carryforwards from the 2005 Restructuring Plan.
Working capital of discontinued operations decreased $40,265 from January 28,
2006 to February 3, 2007 due to reduced inventory and accounts receivable
balances as these businesses are being liquidated and/or sold.
NET CASH USED IN INVESTING ACTIVITIES increased $85,989 from $28,228 for 2005
to $114,217 for 2006. The net cash used in investing activities primarily
relates to acquisitions as discussed below. In addition to those described, we
continually evaluate possible acquisition candidates as a part of our ongoing
corporate development process. Various potential acquisition candidates are in
different stages of this process. Capital expenditures were $27,436 for 2004,
$19,583 for 2005 and $22,922 for 2006.
BRIGGS. In connection with our acquisition of Briggs New York Corp. (Briggs)
in 2003, additional cash purchase consideration has and will be due if Briggs
achieves certain annual operating results for each of the four years after the
acquisition (2003 through 2006). Additional cash consideration paid in 2004,
2005 and 2006 was $8,226, $8,750 and $6,446, respectively. The additional
consideration for fiscal year 2006 is estimated at $3,580, which resulted in
an increase to goodwill and accrued expenses in the fourth quarter of 2006
and will be paid in 2007.
PHAT. On February 3, 2004, we completed the acquisition of Phat Fashions, LLC
and Phat Licensing, LLC (together referred to as Phat). Phat is a licensor of
apparel for men, women and children, athletic shoes and accessories through
the Phat Farm(R) and Baby Phat(R) brands. The acquisition of Phat adds
important consumer lifestyle brands to our portfolio of brands. The purchase
price (including acquisition costs) for Phat was $136,497 in cash, net of cash
acquired. Included in this amount was the exercise price for Phat's option to
buyout the license from the menswear licensee for $25,000, which we exercised
in February 2004. Additional cash purchase consideration has been and will be
due if Phat achieves certain specified financial performance targets for 2004
through 2010. Such consideration, if earned, would be accounted for as
additional goodwill. This additional cash purchase consideration is calculated
based on a formula applied to annual royalty revenue through 2010. Additional
cash consideration paid in 2005 and 2006 was $3,427 and $2,095, respectively.
The additional consideration for fiscal year 2006 is estimated at $3,385,
which resulted in an increase to goodwill and accrued expenses in the fourth
quarter of 2006 and will be paid in 2007.
VINCE. On October 31, 2006, we completed the acquisition of CRL Group, LLC,
owner of the Vince(R) brand and trademark. Vince is a contemporary women's
sportswear collection. The acquisition of Vince expands our marketing-focused
portfolio with higher profile, upscale brand offerings. The purchase price
(including acquisition costs) for Vince was $80,937 in cash, including net
working capital of $11,652. Additional cash purchase consideration will be due
if Vince achieves certain specified financial performance targets for each of
the five years after the acquisition (2007 through 2011).
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES decreased $13,777 from
$32,287 for 2005 to $18,510 for 2006. The $13,638 decrease was primarily due
to reduced stock purchases under the Stock Repurchase Program partially offset
by lower net borrowings of notes payable and long-term debt for 2006 compared
to 2005.
30
On December 21, 2005, our Asian operations executed a $50,000 five-year
unsecured, syndicated term and revolving credit facility agreement to support
its working capital needs (the Asian Credit Facility). The term portion of the
Asian Credit Facility (the Asian Term Credit Facility) is $25,000 and requires
semiannual payments of principal that began in November 2006. The revolving
portion of the Asian Credit Facility (the Asian Revolving Credit Facility) is
$25,000 and can be used for borrowings and/or letters of credit. Borrowings
under the Asian Credit Facility bear interest at LIBOR plus a spread ranging
from 1.10% to 1.35% with such spread depending on our Asian operations'
leverage ratio. The Asian Credit Facility contains certain customary
covenants, which among other things, restrict our Asian operations' ability to
incur indebtedness, grant liens, make investments and acquisitions and sell
assets. The financial covenants of the Asian Credit Facility include
requirements that our Asian operations satisfy an interest coverage ratio, a
leverage ratio and a net worth maintenance covenant. At February 3, 2007, we
were in compliance with the covenants of the Asian Credit Facility. At
February 3, 2007, there were $14,000 and $22,222 of borrowings outstanding
under the revolving and term portions of the Asian Credit Facility,
respectively.
On April 12, 2006, we executed a $400,000 five-year secured, syndicated credit
facility (the Senior Credit Facility) and terminated our prior $400,000
five-year unsecured, syndicated credit facility entered into on October 20,
2004. We and our subsidiaries (the Borrowers) are the borrowers under the
Senior Credit Facility. Borrowings under the Senior Credit Facility are
secured by the Borrowers' domestic current assets, principally consisting of
accounts receivable and inventory. This does not include the stock of any
subsidiaries. Borrowings under the Senior Credit Facility are limited to the
lesser of the commitment amount or the borrowing base as defined in the credit
agreement. The Senior Credit Facility can be used to refinance existing
indebtedness, for letters of credit, for working capital needs and for other
general corporate purposes. Borrowings under the Senior Credit Facility bear
interest at a rate equal to LIBOR plus a spread of 1.00% to 2.00%, with such
spread depending upon excess liquidity, as defined in the credit agreement.
The Senior Credit Facility contains certain customary covenants, including:
(a) when availability under the Senior Credit Facility becomes less than
$40,000, a minimum fixed charge coverage ratio is required; and (b) so long as
availability remains above $60,000, Borrowers would generally not be
restricted in terms of distributions and dividends, investments, issuance of
new indebtedness, granting of liens (except to assets securing the Senior
Credit Facility), acquisitions and capital expenditures. At February 3, 2007,
there were no borrowings outstanding under the Senior Credit Facility, and we
were in compliance with all covenants. Letters of credit outstanding under the
Senior Credit Facility were $23,646 at February 3, 2007.
In addition to the revolving credit facilities discussed above, we maintain
uncommitted lines of credit, which totaled $38,804 at February 3, 2007. There
were no borrowings outstanding under these lines at February 3, 2007. We have
$6,291 in outstanding letters of credit used by our foreign operations under
these lines at February 3, 2007.
After the announcement of the 2005 Restructuring Plan, Standard & Poor's
downgraded our credit rating to BB from BBB-, and Moody's downgraded our
credit rating to Ba2 from Ba1. These actions are not expected to impact our
operations.
Management believes that our operating, cash and equity position will continue
to provide the capital flexibility necessary to fund future opportunities and
to meet existing obligations.
DISCLOSURES CONCERNING "OFF-BALANCE SHEET" ARRANGEMENTS. We own 50% of a
Singaporean manufacturing joint venture that has a $5,043 credit facility. We
have guaranteed one half of the amount of any borrowing under this facility
not otherwise paid when due by the joint venture. At the end of fiscal year
2006, $3,317 was outstanding under this facility.
31
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our long-term obligations at February 3, 2007 is as follows:
[Enlarge/Download Table]
Future payments due by period
-----------------------------------------------------------------------
Less than 1 - 3 4 - 5 After
1 year Years Years 5 years Total
------------ ------------ ------------ ------------ -------------
Long-term debt - principal $ 5,556 $ 151,406 $ 5,556 $ 329,665 $ 492,183
Long-term debt - interest 29,367 52,085 34,147 214,693 330,292
Operating lease obligations 25,413 31,813 10,591 4,795 72,612
Minimum royalty/advertising obligations 28,334 48,588 43,633 18,283 138,838
Purchase orders/commitments 232,603 - - - 232,603
Contingent purchase price (1) 6,965 - - - 6,965
Deferred compensation (2) 2,000 4,000 4,000 10,000 20,000
Unfunded pension obligations (3):
Defined benefit plans - 1,000 1,000 2,000 4,000
Multiemployer plans' exit liability 600 600 600 600 2,400
------------ ------------ ------------ ------------ -------------
Total $ 330,838 $ 289,492 $ 99,527 $ 580,036 $ 1,299,893
============ ============ ============ ============ =============
<FN>
(1) Additional cash purchase consideration will be due if acquired entities
achieve certain specified financial performance targets through 2011. Such
consideration, if earned, would be accounted for as additional goodwill. This
additional cash purchase consideration is calculated based on a formula
applied to operating results. A minimum level of performance must be reached
in order for this additional consideration to be paid. The amount of
consideration increases with increased levels of earnings or royalty revenue
depending on the agreement. There is no maximum amount of incremental purchase
price. The table includes the estimated obligation based on actual 2006
performance only for those entities where additional cash purchase
consideration has been accrued as estimable and probable. There is a potential
for additional cash purchase consideration related to entities where such
amounts are not yet estimable and probable.
(2) The timing of payment of the deferred compensation is based on the
individual participants' payment elections and the timing of their retirement
or termination. There are 108 participants in the deferred compensation plan.
(3) The timing of the pension funding obligations associated with our frozen
defined benefit pension plans and exit obligations under multiemployer pension
plans as discussed in Note 8 to Consolidated Financial Statements and is
dependent on a number of factors including investment results and other
factors that contribute to future pension expense. The defined benefit plan
obligation is ratably allocated over the nine year payout period.
STOCK REPURCHASES
In July 2005, we announced the Stock Repurchase Program. The Board of
Directors authorized us to repurchase, at our discretion, up to ten percent of
the outstanding shares of our common stock through open market or privately
negotiated transactions. The Board of Directors has approved the investment of
up to $75,000 for this purpose. During fiscal year 2005, we repurchased
2,218,200 shares at an average price of $24.99 per share, totaling $55,430.
During fiscal year 2006, we repurchased 173,600 shares at an average price of
$28.83 per share, totaling $5,006. Payments made under the Stock Repurchase
Program are recorded in Treasury Stock on the Consolidated Balance Sheet. See
Note 10 to Consolidated Financial Statements for further information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. We do not believe that we have significant foreign
currency transactional exposures. Almost all of our sales are denominated in
U.S. dollars. Most of our purchases are denominated in U.S. dollars. A
significant amount of our underlying sourcing and production costs would be
impacted by changes in local currencies. Sourcing is not concentrated in any
one foreign country. Approximately 28% is sourced in China with all other
countries representing less than 15% each. The impact of a ten percent
unfavorable change in the exchange rate of the U.S. dollar against the
prevailing market rates of the foreign currencies in which we do have
transactional exposures would be immaterial. In addition, there are
discussions about strengthening the Chinese Renminbi against the U.S. dollar.
If this were to occur and subject to the extent of the revaluation, we do not
believe it will have a material impact on the financial position or results of
operations. These foreign currency risks are similar to those experienced by
our competitors.
32
INTEREST RATE RISK. At February 3, 2007, our debt portfolio was composed of
93% fixed-rate debt. Our strategy regarding management of our exposure to
interest rate fluctuations did not change significantly during 2006. We do not
expect any significant changes in our exposure to interest rate fluctuations
or in how such exposure is managed in the coming year.
Based on quoted market prices obtained through independent pricing sources for
the same or similar types of borrowing arrangements, our long-term debt has a
market value of approximately $500,732, which compares to the book value of
$506,183.
We issue various financial instruments that are sensitive to changes in
interest rates. Market interest rate changes would result in increases or
decreases in the market value of our fixed-rate debt. With respect to our
fixed-rate debt outstanding at February 3, 2007, a 10% increase in interest
rates would have resulted in approximately a $21,101 decrease in the market
value of our fixed-rate debt; a 10% decrease in interest rates would have
resulted in approximately a $22,729 increase in the market value of our
fixed-rate debt.
COMMODITY PRICE RISK. We are subject to commodity price risk arising from
price fluctuations in the market prices of sourced garments and the various
raw materials that comprise our manufactured products (synthetic fabrics,
woolens, denim, cotton, etc.). We are subject to commodity price risk to the
extent that any fluctuations in the market prices of our purchased garments
and raw materials are not reflected by adjustments in selling prices of our
products or if such adjustments significantly trail changes in these costs.
Historically, there have been no significant risks due to commodity price
fluctuations. We do not use derivative instruments in the management of these
risks.
INFLATION RISK. Our inflation risks are managed by each division through
selective price increases when possible, productivity improvements and
cost-containment measures. We do not believe that inflation risk is material
to our business or our consolidated financial position, results of operations
or cash flows.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The management of Kellwood Company is responsible for the preparation of the
financial statements and other financial information included in this report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations
in conformity with generally accepted accounting principles. Management has
also included in the Company's financial statements amounts that are based on
estimates and judgments, which it believes are reasonable under the
circumstances.
PricewaterhouseCoopers LLP audits the Company's consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States).
The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, the internal
auditors and PricewaterhouseCoopers LLP to discuss accounting, control,
auditing and financial reporting matters. Both the internal auditors and
PricewaterhouseCoopers LLP have direct access to the Audit Committee.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
----------------------------------------------------------------
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a- 15(f). Under the supervision and with the
participation of our management, including the Company's Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control - Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of February 3, 2007.
Management's assessment of the effectiveness of our internal control over
financial reporting as of February 3, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report.
Management has excluded Vince and HOLLYWOULD from its assessment of internal
control over financial reporting as of February 3, 2007 because they were
acquired by the Company in the fourth quarter of the fiscal year. Vince and
HOLLYWOULD are wholly-owned subsidiaries whose total assets and total sales
represent 0.5% and 0.6%, respectively, of the related Consolidated Financial
Statements as of and for the year ended February 3, 2007.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Shareowners and Board of Directors of Kellwood Company:
We have completed integrated audits of Kellwood Company's consolidated
financial statements and of its internal control over financial reporting as
of February 3, 2007, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
---------------------------------
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Kellwood Company and its subsidiaries at February 3, 2007 and
January 28, 2006, and the results of their operations and their cash flows for
each of the three years in the period ended February 3, 2007 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 8 to the consolidated financial statements, the Company
changed the manner in which it accounts for defined benefit retirement plans
in fiscal 2006.
As discussed in Note 9 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation in fiscal
2006.
Internal control over financial reporting
-----------------------------------------
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
February 3, 2007 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting
as of February 3, 2007, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on management's
assessment and on the effectiveness of the Company's internal control over
financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over
financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)
-------------------------------------------------------------------
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial
Reporting, management has excluded CRL Group, LLC and HOLLYWOULD, Inc. from
its assessment of internal control over financial reporting as of February 3,
2007 because they were acquired by the Company in a purchase business
combination during 2006. We have also excluded CRL Group, LLC and HOLLYWOULD,
Inc. from our audit of internal control over financial reporting. CRL Group,
LLC and HOLLYWOULD, Inc. are wholly-owned subsidiaries whose total assets and
total revenues represent less than one percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended February
3, 2007.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 21, 2007
36
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Amounts in thousands, except per share data)
2004 2005 2006
------------ ------------ ------------
Net sales $ 2,115,252 $ 1,962,039 $ 1,961,750
Cost of products sold 1,654,901 1,559,453 1,547,242
------------ ------------ ------------
Gross profit 460,351 402,586 414,508
Selling, general and administrative expenses 331,670 318,010 322,586
Stock option expense - - 4,345
Amortization of intangible assets 11,205 10,685 10,935
Impairment, restructuring and other non-recurring charges - 42,341 33,632
Interest expense, net 25,860 23,241 15,676
Other income, net (2,091) (1,302) (1,743)
------------ ------------ ------------
Earnings before income taxes 93,707 9,611 29,077
Income taxes 31,486 (9,145) 7,994
------------ ------------ ------------
Net earnings from continuing operations 62,221 18,756 21,083
Net earnings (loss) from discontinued operations 4,115 (57,169) 10,319
------------ ------------ ------------
Net earnings (loss) $ 66,336 $ (38,413) $ 31,402
============ ============ ============
Weighted average shares outstanding:
Basic 27,504 26,986 25,709
Diluted 28,039 27,094 25,866
Earnings (loss) per share:
Basic:
Continuing operations $ 2.26 $ 0.70 $ 0.82
Discontinued operations 0.15 (2.12) 0.40
------------ ------------ ------------
Net earnings (loss) $ 2.41 $ (1.42) $ 1.22
============ ============ ============
Diluted:
Continuing operations $ 2.22 $ 0.69 $ 0.82
Discontinued operations 0.15 (2.11) 0.40
------------ ------------ ------------
Net earnings (loss) $ 2.37 $ (1.42) $ 1.21
============ ============ ============
See accompanying notes to Consolidated Financial Statements.
37
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Amounts in thousands, except per share data)
January 28, 2006 February 3, 2007
----------------- -----------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 406,706 $ 341,072
Receivables, net 278,270 302,533
Inventories 219,639 244,386
Current deferred taxes and prepaid expenses 45,976 55,935
Current assets of discontinued operations 90,211 28,636
----------------- -----------------
Total current assets 1,040,802 972,562
Property, plant and equipment:
Land 2,199 2,471
Buildings and improvements 94,541 96,881
Machinery and equipment 112,676 119,569
Capitalized software 52,690 60,460
----------------- -----------------
Total property, plant and equipment 262,106 279,381
Less accumulated depreciation and amortization (183,932) (203,384)
----------------- -----------------
Property, plant and equipment, net 78,174 75,997
Intangible assets, net 160,027 202,704
Goodwill 200,837 228,168
Other assets 26,506 30,709
Long-term assets of discontinued operations 5,798 4,436
----------------- -----------------
Total assets $ 1,512,144 $ 1,514,576
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable and current portion of long-term debt $ 16,349 $ 19,556
Accounts payable 160,769 172,576
Accrued salaries and employee benefits 39,873 37,061
Other accrued expenses 93,849 78,643
Current liabilities of discontinued operations 43,584 22,274
----------------- -----------------
Total current liabilities 354,424 330,110
Long-term debt 492,028 486,627
Deferred income taxes and other 56,325 62,366
Long-term liabilities of discontinued operations - 347
Stockholders' equity:
Common stock, par value $0.01 per share, 50,000 shares authorized,
25,902 shares issued and outstanding (25,651 at January 28, 2006) 272,073 280,236
Retained earnings 499,613 514,559
Accumulated other comprehensive loss (8,634) (8,259)
Less treasury stock, at cost, 8,185 shares (8,435 at
January 28, 2006) (153,685) (151,410)
----------------- -----------------
Total stockholders' equity 609,367 635,126
----------------- -----------------
Total liabilities and stockholders' equity $ 1,512,144 $ 1,514,576
================= =================
See accompanying notes to Consolidated Financial Statements.
38
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Amounts in thousands)
2004 2005 2006
------------ ------------ -------------
OPERATING ACTIVITIES:
Net earnings (loss) $ 66,336 $ (38,413) $ 31,402
Add/(deduct) items not affecting operating cash flows:
Depreciation and amortization 41,841 39,869 36,957
Stock-based compensation expense - - 4,345
Deferred income taxes and other 4,516 (25,672) 2,377
Incremental tax benefits from stock options exercised - - (326)
Non-cash adjustments related to impairment, restructuring
and other non-recurring charges - 86,017 20,177
Changes in working capital components:
Receivables, net (57,621) 55,905 17,024
Inventories 7,614 77,504 (17,835)
Prepaid expenses 790 (2,703) (4,670)
Accounts payable and accrued expenses (2,551) (3,332) (7,772)
Payment of liabilities associated with the 2005 Restructuring Plan - (12,330) (28,082)
Current deferred and accrued income taxes 14,225 40,985 13,496
------------ ------------ -------------
Net cash provided by operating activities 75,150 217,830 67,093
------------ ------------ -------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (27,436) (19,583) (22,922)
Acquisitions (144,722) (12,177) (94,500)
Receipts for note receivable 2,063 2,750 2,750
Dispositions of fixed assets 436 782 455
------------ ------------ -------------
Net cash used in investing activities (169,659) (28,228) (114,217)
------------ ------------ -------------
FINANCING ACTIVITIES:
Borrowings of notes payable - 13,565 97,952
Payments of notes payable - - (97,517)
Borrowings of long-term debt 195,343 25,000 -
Payments of long-term debt (4,448) - (2,778)
Decrease in bank overdraft (1,372) (2,203) (5,542)
Dividends paid (17,584) (17,361) (16,453)
Stock purchases under Stock Repurchase Program - (55,430) (5,006)
Stock transactions under incentive plans 17,495 4,142 10,508
Incremental tax benefits from stock options exercised - - 326
------------ ------------ -------------
Net cash provided by / (used in) financing activities 189,434 (32,287) (18,510)
------------ ------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 94,925 157,315 (65,634)
Cash and cash equivalents, beginning of year 154,466 249,391 406,706
------------ ------------ -------------
Cash and cash equivalents, end of year $ 249,391 $ 406,706 $ 341,072
============ ============ =============
Supplemental cash flow information:
Interest paid $ 27,659 $ 30,957 $ 34,085
============ ============ =============
Income taxes (refunded) paid, net $ (628) $ (16,399) $ 942
============ ============ =============
See accompanying notes to Consolidated Financial Statements.
39
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(Dollars in thousands, except per share data)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Other Stock-
Shares Common Treasury Retained Comprehensive holders'
Outstanding Stock Stock Earnings Income (Loss) Equity
----------- ----------- ----------- ---------- ------------- -------
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2004 26,850,183 $ 247,684 $ (103,010) $ 506,635 $ (11,621) $ 639,688
Net earnings 66,336 66,336
Unrecognized gain on derivatives 31 31
Foreign currency translation adjustment (338) (338)
Minimum pension liability adjustment, net
of income tax expense of $312 532 532
-----------
Total comprehensive income 66,561
Cash dividends declared, $0.64 per share (17,584) (17,584)
Shares issued under stock plans 921,104 22,580 5,815 28,395
Treasury stock acquired in conjunction
with incentive plans (86,282) (3,536) (3,536)
------------ ----------- ----------- ---------- ------------- -----------
BALANCE, JANUARY 29, 2005 27,685,005 270,264 (100,731) 555,387 (11,396) 713,524
Net loss (38,413) (38,413)
Unrecognized gain on derivatives 259 259
Foreign currency translation adjustment 1,691 1,691
Minimum pension liability adjustment, net
of income tax expense of $477 812 812
-----------
Total comprehensive loss (35,651)
Cash dividends declared, $0.64 per share (17,361) (17,361)
Shares purchased under
Stock Repurchase Program (2,218,200) (55,430) (55,430)
Shares issued under stock plans 206,473 1,475 3,074 4,549
Treasury stock acquired in conjunction
with incentive plans (22,055) (598) (598)
Deferred stock unit costs 334 334
------------ ----------- ----------- ---------- ------------- -----------
BALANCE, JANUARY 28, 2006 25,651,223 272,073 (153,685) 499,613 (8,634) 609,367
Net earnings 31,402 31,402
Unrecognized loss on derivatives (66) (66)
Foreign currency translation adjustment (1,638) (1,638)
Minimum pension liability adjustment, net
of income tax expense of $97 165 165
-----------
Total comprehensive income 29,863
Adjustment to initially apply FASB
Statement No. 158, net of tax 1,914 1,914
Cash dividends declared, $0.64 per share (16,456) (16,456)
Shares purchased under
Stock Repurchase Program (173,600) (5,006) (5,006)
Shares issued under stock plans 452,938 7,750 8,224 15,974
Treasury stock acquired in conjunction
with incentive plans (28,965) (943) (943)
Deferred stock unit costs 413 413
------------ ----------- ----------- ---------- ------------- -----------
BALANCE, FEBRUARY 3, 2007 25,901,596 $ 280,236 $ (151,410) $ 514,559 $ (8,259) $ 635,126
============ =========== =========== ========== ============= ===========
Accumulated other comprehensive income (loss) at February 3, 2007
includes:
Unrecognized gain on derivatives $ 33
Foreign currency translation adjustment (10,206)
Adjustment to initially apply FASB Statement No. 158, net of tax 1,914
-----------
Total accumulated other comprehensive loss $ (8,259)
===========
See accompanying notes to Consolidated Financial Statements.
40
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollars in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS: We are marketers of women's and men's sportswear,
infant apparel and recreational camping products. We market branded as well as
private label products and market to all channels of distribution with product
specific to the particular channel. We market products under many brands, some
of which we own, and others that we use are under licensing agreements.
Approximately 77% of our products are sourced from contract manufacturers,
primarily in the Eastern Hemisphere. Products are manufactured to meet our
product specifications and labor standards. In addition, we manufacture
certain products in our own plants located primarily in the Eastern
Hemisphere.
(B) BASIS OF PRESENTATION: The consolidated financial statements include our
accounts and the accounts of our majority-owned subsidiaries. Substantially
all foreign subsidiaries are consolidated based upon a fiscal year ending
December 31 due to the timing of receipt of financial information. All
significant intercompany accounts and transactions have been eliminated. The
amounts and disclosures included in the notes to the consolidated financial
statements, unless otherwise indicated, are presented on a continuing
operations basis. In the opinion of management, the financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
and disclosures necessary to make the information presented therein not
misleading. As used in this Report, unless the context requires otherwise,
"our," "us" and "we" refer to Kellwood Company and its subsidiaries.
(C) FISCAL YEAR: Our fiscal year ends on the Saturday nearest January 31.
References to our fiscal years represent the following:
FISCAL YEAR REPRESENTS THE 52 WEEKS ENDED
----------- -----------------------------
2004 January 29, 2005
2005 January 28, 2006
FISCAL YEAR REPRESENTS THE 53 WEEKS ENDED
----------- -----------------------------
2006 February 3, 2007
(D) USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires that management make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates and assumptions.
(E) CASH AND CASH EQUIVALENTS: All highly liquid short-term time deposits with
original maturities of three months or less maintained under cash management
activities are considered cash equivalents. The effect of foreign currency
exchange rate fluctuations on cash and cash equivalents was not significant
for 2004, 2005 or 2006.
(F) ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK: We maintain an
allowance for accounts receivable estimated to be uncollectible. The activity
in this allowance is summarized as follows:
[Download Table]
2004 2005 2006
----------- ----------- -----------
Balance, beginning of year $ 4,005 $ 4,813 $ 3,144
Provision/(Reversals) for bad debt expense 1,465 (611) 872
Bad debts written off (657) (1,058) (1,123)
----------- ----------- -----------
Balance, end of year $ 4,813 $ 3,144 $ 2,893
=========== =========== ===========
The provision for bad debts is included in selling, general and administrative
expense. Substantially all of our trade receivables are derived from sales to
retailers and are recorded at the invoiced amount and do not bear interest. We
perform ongoing credit evaluations of our customers' financial condition and
require collateral as deemed necessary. Account balances are charged off
against the allowance when we feel it is probable the receivable will not be
recovered.
There was no customer that accounted for more than ten percent of our
consolidated net sales in 2004 or 2005. Customers that accounted for more than
ten percent of our consolidated net sales during 2006 and the related sales
amounts are as follows:
Percent of Sales Net Sales
---------------- ------------
Wal-Mart 12% $ 222,893
Kohl's 11% $ 201,493
41
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
Sales to Wal-Mart occurred in our Women's Sportswear, Men's Sportswear and
Other Soft Goods segments. Sales to Kohl's occurred in our Women's Sportswear
and Men's Sportswear segments.
(G) INVENTORIES: Inventories are stated at the lower of cost or market. Cost
is determined on the first-in, first-out (FIFO) basis. The cost of inventory
includes manufacturing or purchase cost as well as sourcing, pre-production,
transportation, duty and other processing costs associated with acquiring,
importing and preparing inventory for sale. Inventory costs are included in
cost of products sold at the time of their sale. In addition to inventory
costs, other costs included in cost of products sold are royalties for
licensed brand names and distribution costs. Product development costs are
expensed when incurred. Inventory values are reduced to net realizable value
when there are factors indicating that certain inventories will not be sold on
terms sufficient to recover their cost. Inventories consist of the following:
2005 2006
----------- -----------
Finished goods $ 168,343 $ 184,396
Work in process 29,240 32,163
Raw materials 22,056 27,827
----------- -----------
Total inventories $ 219,639 $ 244,386
=========== ===========
Net of obsolescence reserves of: $ 20,307 $ 26,500
=========== ===========
(H) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed generally on the straight-line method over
estimated useful lives of 15 years for buildings and of 3 to 10 years for
machinery and equipment. Leasehold improvements are amortized principally on
the straight-line basis over the shorter of their estimated useful lives or
the remaining lease term, excluding renewal terms. Capitalized software is
amortized on the straight-line basis over the estimated economic useful life
of the software, generally 3 to 7 years. Depreciation expense was $25,764,
$26,049 and $24,331 for 2004, 2005 and 2006, respectively. This includes
computer software amortization of $8,095, $8,406 and $7,868 for 2004, 2005 and
2006, respectively.
(I) IMPAIRMENT OF LONG-LIVED ASSETS: We review long-lived assets and other
intangibles with a finite life if facts and circumstances exist which indicate
that the asset useful life is shorter than previously estimated or the
carrying amount may not be recoverable from future operations based on
undiscounted expected future cash flows. Impairment losses are recognized in
operating results when discounted expected future cash flows are less than the
carrying value of the asset. See Note 2 and Note 5 for discussion of
impairment of long-lived assets related to the 2005 Restructuring Plan.
(J) GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill is recorded when the
consideration paid for an acquisition exceeds the fair value of identifiable
net tangible and identifiable intangible assets acquired. In accordance with
the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, goodwill and other indefinite-lived intangible assets
are no longer amortized, but are reviewed for impairment at least annually and
if a triggering event were to occur in an interim period. Goodwill impairment
is determined using a two-step process. The first step of the impairment test
is used to identify potential impairment by comparing the fair value of a
division to the book value, including goodwill. If the fair value of a
division exceeds its book value, goodwill of the division is not considered
impaired and the second step of the impairment test is not required. If the
book value of a division exceeds its fair value, the second step of the
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the impairment test compares the implied fair value of the
division's goodwill with the book value of that goodwill. If the book value of
the division's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The implied
fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. The annual impairment testing
is performed in the fourth quarter. This evaluation utilizes discounted cash
flow analysis and multiple analyses of the historical and forecasted operating
results of our divisions. During the second quarter of 2005, we announced a
Restructuring Plan (the 2005 Restructuring Plan) (see Note 2). As a result of
this triggering event, interim impairment testing was deemed necessary and
impairment charges were recorded. See Note 5 for more information on SFAS No.
142 and accounting for goodwill as well as the details surrounding the
impairment charges. At the end of 2005 and 2006, no additional impairment was
indicated.
42
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
It is possible that our estimates of future operating results for certain of
our divisions could change adversely and impact the evaluation of the
recoverability of the carrying value of goodwill and that the effect of such
changes on our Consolidated Financial Statements could be material. While we
believe that the current recorded carrying value of our goodwill is not
impaired, there can be no assurance that a significant non-cash write-down or
write-off will not be required in the future.
Identifiable intangible assets are valued and assigned lives based on
independent appraisals. Identifiable intangible assets include trademarks,
customer relationships, and license agreements, which are being amortized over
their useful lives ranging from 2 to 20 years. Impairment testing of these
would occur if and when a triggering event occurs. In connection with the 2005
Restructuring Plan, interim impairment testing was deemed necessary and
impairment charges were recorded. See Note 5 for more information on SFAS No.
142 and the details surrounding the impairment charges.
(K) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: We periodically enter into
forward currency exchange contracts to hedge our exposure to foreign currency
fluctuations for purchases of certain inventories and sales of certain
products. Company policy allows for the use of derivatives only for
identifiable exposures, and therefore, we do not enter into derivative
instruments for speculative purposes where the objective is to generate
profits. We use derivatives that have an initial term of less than one year.
Management expects these derivatives to be highly effective in hedging the
intended foreign currency fluctuation risks. As of January 28, 2006 and
February 3, 2007, our derivatives have been designated as hedges of variable
cash flows of forecasted transactions. As such, the fair values of the
derivatives have been recorded in the Consolidated Balance Sheets, with the
offset recorded in other comprehensive income. The fair value of these
derivatives on January 28, 2006 and February 3, 2007 was not material. The
gain or loss related to these derivatives will be reclassified to earnings as
the forecasted transactions take place between February 2007 and December
2007.
(L) FAIR VALUE DISCLOSURE FOR FINANCIAL INSTRUMENTS: Our financial instruments
consist of cash equivalents, accounts receivable, notes receivable, notes
payable and long-term debt. For cash equivalents, accounts receivable, notes
receivable and notes payable, the carrying amounts approximate fair value.
Based on quoted market prices obtained through independent pricing sources for
the same or similar types of borrowing arrangements, our long-term debt has a
market value of $500,732 that compares to its book value of $506,183 at
February 3, 2007.
(M) FOREIGN CURRENCY TRANSLATION: The financial statements of foreign
subsidiaries are translated into United States dollars in accordance with SFAS
No. 52, Foreign Currency Translation. Where the functional currency of a
foreign subsidiary is its local currency, income statement items are
translated at the average exchange rate for the period and balance sheet
accounts are translated using period-end exchange rates. Gains and losses
resulting from translation are reported as a separate component of other
comprehensive income within stockholders' equity.
Where the local currency of a foreign subsidiary is not its functional
currency, financial statements are translated at either current or historical
exchange rates as appropriate. These adjustments, together with gains and
losses on foreign currency transactions, are recognized in the income
statement as incurred.
(N) REVENUE RECOGNITION: Sales are recognized when goods are shipped in
accordance with customer orders. The estimated amounts of sales discounts,
returns and allowances are accounted for as reductions of sales when the
associated sale occurs. These estimated amounts are adjusted periodically
based on changes in facts and circumstances when the changes become known to
us. Accrued discounts, returns and allowances are included as an offset to
accounts receivable in the balance sheet. The activity in the accrued
discounts, returns and allowances account is summarized as follows:
[Download Table]
2004 2005 2006
----------- ----------- -----------
Balance, beginning of year $ 61,382 $ 54,008 $ 48,474
Provision 146,634 138,283 139,367
(Charges)/Recoveries (154,008) (143,817) (140,047)
----------- ----------- -----------
Balance, end of year $ 54,008 $ 48,474 $ 47,794
=========== =========== ===========
43
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
Amounts billed to customers for shipping and handling costs are not
significant. Our stated terms are FOB shipping point. There is no stated
obligation to customers after shipment, other than specifically set forth
allowances or discounts that are accrued at the time of sale. The rights of
inspection or acceptance contained in certain sales agreements are limited to
whether the goods received by our customers are in conformance with the order
specifications.
(O) LICENSE AGREEMENTS: We have exclusive license agreements to market apparel
and other soft goods under trademarks owned by other parties. These agreements
contain provisions for minimum guaranteed royalty and advertising payments
based on anticipated sales. In any year, if we do not anticipate meeting the
minimum sales amounts to satisfy the guaranteed minimum royalty and
advertising amounts, the guaranteed minimum royalty and advertising amounts
are accrued. In 2004, 2005 and 2006 sales of licensed products were
approximately $417,406, $437,222 and $452,407, respectively. See Note 2 and
Note 13 for additional discussion regarding commitments.
(P) ADVERTISING: We provide cooperative advertising allowances to certain of
our customers. These allowances are accounted for as reductions in sales as
discussed in "Revenue Recognition" above. Advertising expense includes
contractually set forth amounts paid to licensors that are specifically
identified as advertising payments and advertising we conduct for products we
sell. Production expense related to company-directed advertising is deferred
until the first time at which the advertisement runs. Communication expense
related to Company-directed advertising is expensed as incurred. Advertising
expense was $22,788 in 2004, $27,778 in 2005 and $26,756 in 2006. There were
no significant amounts of production expenses associated with company-directed
advertising deferred at January 28, 2006 and February 3, 2007.
(Q) INCOME TAXES: Income taxes are based upon income for financial reporting
purposes. Deferred income taxes are recognized for the effect of temporary
differences between financial and tax reporting in accordance with the
requirements of SFAS No. 109, Accounting for Income Taxes.
(R) STOCK-BASED COMPENSATION: We have two stock-based employee compensation
plans, which are described more fully in Note 9. On January 29, 2006, we
adopted SFAS No. 123(R), Share-Based Payment, requiring the recognition of
compensation expense in the Consolidated Statement of Operations related to
the fair value of our employee share-based options. SFAS No. 123(R) revises
SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees. SFAS No. 123(R) is supplemented by Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment.
SAB No. 107 expresses the SEC staff's views regarding the interaction between
SFAS No. 123(R) and certain SEC rules and regulations including the valuation
of share-based payment arrangements. SFAS No. 123(R) amends SFAS No. 95,
Statement of Cash Flows, to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid, which is
included within operating cash flows.
Compensation expense for restricted stock awards is measured at fair value on
the date of grant based on the number of shares granted and the quoted market
price of our common stock. For stock option awards, no compensation cost was
recognized prior to January 28, 2006. If the fair value method had been
applied, our net earnings and earnings per share for 2004 and 2005 would have
been the pro-forma amounts as follows:
[Download Table]
2004 2005
----------- -----------
Net earnings from continuing operations as reported $ 62,221 $ 18,756
Stock-based employee compensation expense
determined under fair value-based method for
all stock option awards, net of tax effect (3,710) (7,404)
----------- -----------
Pro-forma net earnings from continuing operations $ 58,511 $ 11,352
=========== ===========
Earnings per share from continuing operations:
Basic, as reported $ 2.26 $ 0.70
Basic, pro-forma $ 2.13 $ 0.42
Diluted, as reported $ 2.22 $ 0.69
Diluted, pro-forma $ 2.09 $ 0.42
Further discussion of the methodology and key assumptions used in developing
the option fair values, as well as other information regarding the option
plans and the adoption of SFAS No. 123(R), is included in Note 9.
44
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
(S) RECLASSIFICATIONS: Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year's
presentation.
(T) NEW ACCOUNTING STANDARDS: In November 2005, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting
Standard (FAS) No. 123(R)-3 (FSP No. 123(R)-3), Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards. This FSP
provides an alternative method of calculating the excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of
SFAS No. 123(R). We have adopted FSP No. 123(R)-3 in the first quarter of 2006
and implemented the method contained in the original announcement. See Note 9
for detailed disclosure.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the financial statement effects of a tax
position taken or expected to be taken in a tax return are to be recognized in
the financial statements when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination,
including resolution of any related appeals or litigation processes. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and we will be
required to adopt this interpretation in the first quarter of fiscal year
2007. Based on our evaluation as of February 3, 2007, we do not believe that
FIN 48 will have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 158, Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS No. 158), which requires an
employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
the funded status in the year in which the changes occur. SFAS No. 158 also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
recognition provisions of SFAS 158 are effective for fiscal years ending after
December 15, 2006 while the measurement date provisions are effective for
fiscal years ending after December 15, 2008. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. We have adopted
the recognition provisions of SFAS No. 158 in the fourth quarter of 2006. See
Note 8 for detailed disclosure.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP) and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently evaluating the
impact of SFAS No. 157 on our financial statements, but do not expect it to
have a material impact on our financial statements.
NOTE 2. IMPAIRMENT, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the second quarter of 2005, we announced a Restructuring Plan (the 2005
Restructuring Plan) aimed at advancing our corporate objectives of increasing
our penetration of consumer lifestyle brands with strong growth and profit
potential while reducing exposure to smaller volume brands and certain private
label businesses. The 2005 Restructuring Plan resulted from a thorough
strategic reassessment of all of our business operations. This reassessment
was performed in the second quarter of 2005 and was directed by our Chief
Executive Officer who was named to that position during the second quarter.
The strategic reassessment focused on our businesses that had experienced
profitability issues and considered the alignment of the businesses with our
refreshed strategy, which considered, among other things, market place
developments affecting the retail landscape and our retail customers.
The results of operations and impairment, restructuring and other
non-recurring charges for the businesses sold and shut down are reported as
discontinued operations. The gains and losses on consummated transactions
involving the sale of operations are included as part of net gain from
discontinued operations and are not significant. See Note 4 for further
information on the operating results and financial position of the
discontinued businesses.
45
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
The total 2005 Restructuring Plan provision recorded to date (the second
quarter of 2005 through the fourth quarter of 2006) related to our reportable
segments (before tax) is as follows:
[Download Table]
Continuing Discontinued
Operations Operations Total
----------------- ----------------- ------------------
Women's Sportswear $ 45,625 $ 22,362 $ 67,987
Men's Sportswear 1,022 13,197 14,219
Other Soft Goods 702 29,466 30,168
General Corporate 36,649 5,071 41,720
----------------- ----------------- ------------------
Total $ 83,998 $ 70,096 $ 154,094
================= ================= ==================
As of February 3, 2007, we have substantially completed the business
dispositions and shutdown activities contemplated by the 2005 Restructuring
Plan. We do not anticipate incurring significant expense related to the 2005
Restructuring Plan in future periods.
For the twelve months ended January 28, 2006, the costs related to the 2005
Restructuring Plan were recorded as follows:
[Enlarge/Download Table]
Fiscal Year ended January 28, 2006
-------------------------------------------------------------------------
Continuing Discontinued
Operations Operations Total
--------------------- --------------------- ---------------------
Net sales $ 2,450 $ 2,266 $ 4,716
Cost of products sold 5,575 11,751 17,326
Impairment of goodwill and intangibles 30,909 18,657 49,566
Fixed asset impairment 1,850 6,274 8,124
Restructuring and other
non-recurring charges 9,582 33,000 42,582
--------------------- --------------------- ---------------------
Total pretax cost $ 50,366 $ 71,948 $ 122,314
===================== ===================== =====================
Total after tax cost $ 35,508 $ 50,508 $ 86,016
===================== ===================== =====================
Diluted loss per share $ 1.31 $ 1.86 $ 3.17
===================== ===================== =====================
For the twelve months ended February 3, 2007, the costs (income) related to
the 2005 Restructuring Plan were recorded as follows:
[Enlarge/Download Table]
Fiscal Year ended February 3, 2007
-------------------------------------------------------------------------
Continuing Discontinued
Operations Operations Total
--------------------- --------------------- ---------------------
Net sales $ - $ (2,192) $ (2,192)
Cost of products sold - (348) (348)
Restructuring and other
non-recurring charges 33,632 688 34,320
--------------------- --------------------- ---------------------
Total pretax cost $ 33,632 $ (1,852) $ 31,780
===================== ===================== =====================
Total after tax cost $ 21,423 $ (1,180) $ 20,243
===================== ===================== =====================
Diluted loss (income) per share $ 0.83 $ (0.05) $ 0.78
===================== ===================== =====================
A rollforward of the major components of this restructuring and other
non-recurring charge from January 28, 2006 to February 3, 2007 recorded in
continuing operations is as follows:
[Enlarge/Download Table]
Accrual as of Accrual as of
January 28, February 3,
2006 Provision Reversals Utilization 2007
------------- ------------- --------------- -------------- -------------
Inventory and Purchase
Commitment Reserves $ 2,710 $ - $ (52) $ (2,658) $ -
Contractual Obligations 3,600 31,977 - (12,435) 23,142
Employee Severance and
Termination Benefits 520 1,707 - (1,561) 666
------------- ------------- --------------- -------------- -------------
Total $ 6,830 $ 33,684 $ (52) $ (16,654) $ 23,808
============= ============= =============== ============== =============
46
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
A rollforward of the major components of this restructuring and other
non-recurring charge from January 28, 2006 to February 3, 2007 recorded in
discontinued operations is as follows:
[Enlarge/Download Table]
Accrual as of Accrual as of
January 28, February 3,
2006 Provision Reversals Utilization 2007
------------- ------------- --------------- -------------- -------------
Inventory and Purchase
Commitment Reserves $ 1,273 $ 109 $ (603) $ (779) $ -
Sales Allowances 2,266 - (2,192) (74) -
Contractual Obligations 10,307 927 - (6,538) 4,696
Employee Severance and
Termination Benefits 9,783 307 (400) (5,512) 4,178
------------- ------------- --------------- -------------- -------------
Total $ 23,629 $ 1,343 $ (3,195) $ (12,903) $ 8,874
============= ============= =============== ============== =============
Inventory and Purchase Commitment Reserves include provisions to reduce
inventory and purchase commitments to net realizable values. Sales allowances
included provisions for anticipated increased deductions taken by customers on
previous sales for discontinued operations. Contractual Obligations are
adverse contractual arrangements under which losses are probable and estimable
and where there is no future economic benefit. These include leases and
minimum payments under license agreements. Employee Severance and Termination
Benefits are provided for in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Total employee severance
and termination benefits will be recorded as incurred and relates to
approximately 1,400 employees.
The provision for contractual obligations for the twelve months ended February
3, 2007 includes $19,333 before tax ($12,315 after tax) for estimated future
payments in connection with contractual obligations. These amounts were
previously planned to be expensed as they were incurred, in accordance with
accounting guidance in place when the 2005 Restructuring Plan was announced.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45-3, Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners, which was applicable
for certain contractual obligations entered into in the first quarter
subsequent to its issuance. Contracts under which we were obligated and that
are part of the 2005 Restructuring Plan were amended during the current year;
thus, the related obligations have been accrued in accordance with the new
guidance.
Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
for impairment at least annually and if a triggering event were to occur in an
interim period. The 2005 Restructuring Plan was a triggering event that
required impairment testing of certain divisions' goodwill and intangible
asset balances. In connection with the 2005 Restructuring Plan and pursuant to
our policies for assessing impairment of goodwill and long-lived assets,
$29,279 and $20,287 of goodwill and intangible assets, respectively, including
trademarks and customer lists, were written off during the second quarter of
2005. Of these amounts, $9,234 and $9,423 of goodwill and intangible assets,
respectively, relate to divisions that are included in discontinued
operations. Included in continuing operations is the write-off of $20,045 and
$10,864 of goodwill and intangible assets, respectively.
NOTE 3. BUSINESS COMBINATIONS
On February 4, 2003, we completed the acquisition of substantially all of the
assets of Briggs New York Corp. (Briggs). Briggs is a leading provider of
women's pants and skirts for the moderate market to department stores and
national chains. Additional cash purchase consideration has and will be due if
Briggs achieves certain annual operating results for each of the four years
after the acquisition (2003 through 2006). Additional cash consideration paid
is recorded as goodwill. Additional cash purchase consideration paid in 2004,
2005 and 2006 was $8,226, $8,750 and $6,446, respectively. The additional
consideration for fiscal year 2006 is estimated at $3,580, which resulted in
an increase to goodwill and accrued expenses in the fourth quarter of 2006 and
will be paid in 2007.
47
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
On February 3, 2004, we completed the acquisition of Phat Fashions, LLC and
Phat Licensing, LLC (together referred to as Phat). Phat is a licensor of
apparel for men, women and children, athletic shoes and accessories through
the Phat Farm(R) and Baby Phat(R) brands. The acquisition of Phat adds
important consumer lifestyle brands to our portfolio of brands. The purchase
price (including acquisition costs) for Phat was $136,497 in cash, net of cash
acquired. Included in this amount was the exercise price for Phat's option to
buyout the license from the menswear licensee for $25,000, which we exercised
in February 2004. Additional cash purchase consideration has been and will be
due if Phat achieves certain specified financial performance targets for 2004
through 2010. Such consideration, if earned, is accounted for as additional
goodwill. This additional cash purchase consideration is calculated based on a
formula applied to annual royalty revenue through 2010. A minimum level of
royalty revenue must be earned in order for this additional consideration to
be paid. There is no maximum amount of incremental purchase price. Additional
cash consideration paid in 2005 and 2006 was $3,427 and $2,095, respectively.
The additional consideration for fiscal year 2006 is estimated at $3,385,
which resulted in an increase to goodwill and accrued expenses in the fourth
quarter of 2006 and will be paid in 2007.
On October 31, 2006, we completed the acquisition of CRL Group, LLC, owner of
the Vince(R) brand and trademark. Vince is a contemporary women's sportswear
collection. The acquisition of Vince expands our marketing-focused portfolio
with higher profile, upscale brand offerings. The purchase price (including
acquisition costs) for Vince was $80,937 in cash, including net working
capital of $11,652. Additional cash purchase consideration will be due if
Vince achieves certain specified financial performance targets for each of the
five full years after the acquisition (2007 through 2011). Such consideration,
if earned, would be accounted for as additional goodwill.
On December 5, 2006, we completed the acquisition of HOLLYWOULD, Inc., owner
of the HOLLYWOULD(R) brand and trademark. HOLLYWOULD is an upscale women's
line that includes apparel, accessories and shoes. The acquisition of
HOLLYWOULD augments our strategy to expand our marketing-focused portfolio
with higher profile, upscale brands. The purchase price (including acquisition
costs) for HOLLYWOULD was $5,022 in cash, net of cash acquired. Additional
cash purchase consideration will be due if HOLLYWOULD achieves certain
specified financial performance targets for each of the five years after the
acquisition (2007 through 2011). Such consideration, if earned, would be
accounted for as additional goodwill.
Briggs, Vince and HOLLYWOULD are part of the Women's Sportswear segment. Phat
is part of the Men's Sportswear segment. These acquisitions were accounted for
under the purchase method of accounting. Accordingly, their results have been
included in the Consolidated Financial Statements from the acquisition dates.
Unaudited consolidated results of operations on a pro-forma basis, assuming
these acquisitions had occurred at the beginning of the year in which they
occurred, are not required as the acquisitions were at the beginning of a
fiscal year or they were immaterial to our consolidated results of operations.
48
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
For the more significant acquisitions, the following table summarizes the fair
value of the assets acquired and liabilities assumed at the date of
acquisition. For Phat, the table represents the final fair values of the
assets acquired and liabilities assumed at the date of acquisition. For Vince,
the table represents the estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition. We are in the process of
finalizing third-party valuations of certain intangible assets; thus, the
allocation of the purchase price for Vince is subject to refinement.
[Download Table]
Phat Vince
-------------- -------------
Cash $ 5,437 $ -
Other current assets 3,331 12,211
Property, plant & equipment 2,940 105
Intangible assets 89,340(1) 51,112(2)
Goodwill 48,060 18,045
Other assets - 23
-------------- -------------
Total assets acquired 149,108 81,496
-------------- -------------
Current liabilities 7,174 559
-------------- -------------
Net assets acquired $ 141,934 $ 80,937
============== =============
<FN>
(1) Identified intangible assets related to the acquisition of Phat are
trademarks ($86,290) and customer relationships ($3,050) with useful lives of
20 and 15 years, respectively, based on an independent appraisal. The amount
of goodwill expected to be deductible for tax purposes is $48,060, not
including additional consideration based on operating results.
(2) Preliminary identified intangible assets related to the acquisition of
Vince are trademarks ($16,908) and customer relationships ($34,204) with
useful lives of 20 years each based on an independent appraisal. The amount of
goodwill expected to be deductible for tax purposes is $18,045, not including
increases related to additional consideration based on operating results and
further refinement to the purchase price allocation.
NOTE 4. DISCONTINUED OPERATIONS
During the third quarter of 2006, our New Campaign and IZOD women's sportswear
operations became discontinued. The discontinuance of New Campaign was the
result of our agreement during the third quarter to transfer the business and
sell business assets to the licensor. We expect to receive proceeds of
approximately $9 million and do not anticipate a significant gain or loss from
this sale. We expect to close this transaction in the first quarter of 2007.
The discontinuance of our IZOD women's sportswear operation was the result of
our agreement during the three months ended October 28, 2006 to terminate the
licensing agreement. We expect to close this transaction in the second quarter
of 2007 with no significant gain or loss. Prior to being classified as
discontinued, the New Campaign and IZOD operations were included in the
Women's Sportswear segment.
Related to our 2005 Restructuring Plan, as discussed in Note 2, our Private
Label Menswear (which does not include our Smart Shirts subsidiary) and
several labels at our Oakland Operation were discontinued during the fourth
quarter of 2005. During the third quarter of 2005, our Intimate Apparel and
Kellwood New England operations became discontinued. Prior to being classified
as discontinued, Kellwood New England and the labels at the Oakland Operation
were included in the Women's Sportswear segment, the Private Label Menswear
operations were included in the Men's Sportswear segment, and Intimate Apparel
was included in the Other Soft Goods segment.
The results of operations and impairment, restructuring and other
non-recurring charges for the discontinued operations (as discussed in Note 2)
are reported as discontinued operations for all periods presented.
Additionally, assets and liabilities of the discontinued operations are
segregated in the accompanying Consolidated Balance Sheets.
49
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
Operating results for the discontinued operations, including all charges
incurred during the periods presented for the 2005 Restructuring Plan related
to these divisions as described in Note 2, are as follows:
[Enlarge/Download Table]
Fiscal Year
------------------------------------------------
2004 2005 2006
--------------- -------------- ---------------
Net sales $ 440,453 $ 389,359 $ 86,790
=============== ============== ===============
Impairment, restructuring and other
non-recurring charges $ - $ 57,931 $ 688
=============== ============== ===============
Earnings (loss) before income taxes 6,933 (81,942) 6,392
Income taxes 2,818 (24,773) (3,927)
--------------- -------------- ---------------
Net earnings (loss) $ 4,115 $ (57,169) $ 10,319
=============== ============== ===============
Diluted earnings (loss) per share $ 0.15 $ (2.11) $ 0.40
=============== ============== ===============
The 2004 income tax rate of 40.6% for discontinued operations differs from our
overall 2004 tax rate due to foreign losses for which no benefit will be
obtained. The 2005 income tax benefit rate of 30.2% for discontinued
operations differs from our overall tax rate due to the non-deductibility of
certain costs (goodwill impairment) recorded under the 2005 Restructuring
Plan. The 2006 income taxes for discontinued operations includes a $6,300
reversal of allowances for tax exposures (related to a 2003 discontinued
operation) no longer deemed necessary due to finalization of an open tax year.
Summarized assets and liabilities of the discontinued operations are as
follows:
[Download Table]
2005 2006
-------------- ---------------
Cash and cash equivalents $ 253 $ 5
Receivables, net 42,806 12,898
Inventories 13,481 12,248
Current deferred taxes and prepaid expenses 33,671 3,485
-------------- ---------------
Current assets of discontinued operations $ 90,211 $ 28,636
============== ===============
Property, plant and equipment, net $ 1,648 $ 1,190
Goodwill 2,995 2,995
Other assets 1,155 251
-------------- ---------------
Long-term assets of discontinued operations $ 5,798 $ 4,436
============== ===============
Accounts payable $ 17,924 $ 9,363
Accrued liabilities 25,660 12,911
-------------- ---------------
Current liabilities of discontinued operations $ 43,584 $ 22,274
============== ===============
Deferred income taxes and other $ - $ 347
-------------- ---------------
Long-term liabilities of discontinued operations $ - $ 347
============== ===============
The accrued liabilities reflect the discontinued operations classification of
New Campaign and IZOD and also include charges taken in connection with the
2005 Restructuring Plan that have not yet been paid and primarily related to
contractual obligations and employee severance and termination benefits. As
noted above, the transactions related to the New Campaign and IZOD women's
sportswear operations are expected to close in the first quarter and second
quarter of 2007, respectively.
50
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill balances and changes therein since the beginning of fiscal year 2005
by segment are as follows:
[Enlarge/Download Table]
Women's Men's Other
Sportswear Sportswear Soft Goods Total
------------ ------------ ------------ -------------
Balance as of January 29, 2005 $ 134,120 $ 51,390 $ 26,243 $ 211,753
Impairment charges (20,045) - - (20,045)
Adjustment to contingent purchase price
for 2004 541 97 - 638
Contingent purchase price for 2005 6,487 2,004 - 8,491
------------ ------------ ------------ -------------
Balance as of January 28, 2006 121,103 53,491 26,243 200,837
Adjustment to contingent purchase price
for 2005 (41) 91 - 50
Contingent purchase price for 2006 3,580 3,385 - 6,965
Acquisitions 20,316 - - 20,316
------------ ------------ ------------ -------------
Balance as of February 3, 2007 $ 144,958 $ 56,967 $ 26,243 $ 228,168
============ ============ ============ =============
Identifiable intangible assets that are being amortized are as follows:
[Enlarge/Download Table]
Life (1) Gross Accumulated Net
(Years) Amount Amortization Book Value
-------- ------------ --------------- ---------------
AS OF JANUARY 28, 2006:
Customer base 20 $ 46,708 $ 7,934 $ 38,774
Trademarks 20 130,356 17,844 112,512
License agreements 19 13,931 5,190 8,741
Other 10 662 662 -
------------ --------------- ---------------
Total intangibles 19 $ 191,657 $ 31,630 $ 160,027
============ =============== ===============
AS OF FEBRUARY 3, 2007:
Customer base 20 $ 82,162 $ 10,817 $ 71,345
Trademarks 20 148,513 24,723 123,790
License agreements 19 12,220 4,651 7,569
Other 10 660 660 -
------------ --------------- ---------------
Total intangibles 20 $ 243,555 $ 40,851 $ 202,704
============ =============== ===============
<FN>
(1) Weighted Average - original lives
Amortization of identifiable intangible assets for continuing operations was
$11,205 for 2004, $10,685 for 2005 and $10,935 for 2006. Amortization expense
for the years 2007 to 2010 is expected to be approximately $13,000 per year.
In connection with the restructuring activities described in Note 2 and
pursuant to our policies for assessing impairment of goodwill and long-lived
assets, $29,279 and $20,287 of goodwill and intangible assets, respectively,
including trademarks and customer lists, were written off during 2005. These
write-offs occurred in the second quarter of 2005. Of these amounts, $9,234
and $9,423 of goodwill and intangible assets, respectively, relate to
divisions that are included in discontinued operations. The remaining
impairment charges of $10,864 for intangible assets and $20,045 for goodwill
are included in continuing operations and are discussed in the following
paragraph.
51
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
for impairment at least annually and if a triggering event were to occur in an
interim period. Our annual impairment testing is performed in the fourth
quarter. In 2005, the Restructuring Plan was a triggering event that required
impairment testing of certain divisions' goodwill and intangible asset
balances. The impairment resulting from this test was due to the operating
results for the first half of 2005 and expectations regarding future results
of our dress business being well below the expectations reflected in the test
performed in the fourth quarter of 2004. This business has experienced several
years of significant sales decreases resulting from weakness in the retail
market for dresses. Expectations reflected in prior period impairment tests
were that these market decreases were ending. The reassessment of our
businesses performed as part of the 2005 Restructuring Plan during the second
quarter of 2005 resulted in the conclusion that the negative trends were
likely to continue into the future. The first step of the impairment testing
showed that the book value of the dress business in the Women's Sportswear
segment, which is not being exited, exceeded its fair value. The second step
of the impairment testing showed that the identifiable intangible assets of
this business (customer relationships and trademarks) had no fair value, and
that the book value of the division's goodwill exceeded the implied fair value
of that goodwill. This evaluation utilized discounted cash flow analyses and
multiple analyses of the historical and updated forecasted operating results.
As a result, impairment charges of $20,045 and $10,864 for goodwill and
intangible assets, including trademarks and customer lists, respectively, of
this division were recorded during the second quarter of 2005. At the end of
2005 and 2006, no additional impairment was indicated.
It is possible that our estimates of future operating results for certain of
our divisions could change adversely and impact the evaluation of the
recoverability of the carrying value of goodwill and that the effect of such
changes on our Consolidated Financial Statements could be material. While we
believe that the current recorded carrying value of our goodwill is not
impaired, there can be no assurance that a significant non-cash write-down or
write-off will not be required in the future.
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable:
On October 20, 2004, we executed a $400,000 five-year unsecured, syndicated
credit facility (the U.S. Revolving Credit Facility). The U.S. Revolving
Credit Facility could have been used for borrowings and/or letters of credit.
Borrowings under the U.S. Revolving Credit Facility bore interest at LIBOR
plus a spread ranging from 0.60% to 1.25% with such spread depending on our
consolidated leverage ratio. The U.S. Revolving Credit Facility contained
certain customary covenants, which, among other things, restricted our ability
to incur indebtedness, grant liens, make investments and acquisitions and sell
assets. The financial covenants of the U.S. Revolving Credit Facility included
requirements that we satisfy an interest coverage ratio, a leverage ratio and
a net worth maintenance covenant.
On September 1, 2005, the U.S. Revolving Credit Facility was amended to
accommodate the impact of the 2005 Restructuring Plan and lower earnings from
certain brands of women's sportswear included in our ongoing operations. The
amendments to the U.S. Revolving Credit Facility changed the interest rate
spread to LIBOR plus 0.60% to 1.45%, depending on our consolidated leverage
ratio. In addition, provisions were added to include a borrowing base
calculation, and the financial covenants were updated. The updated financial
covenants included the exclusion of the charges related to the 2005
Restructuring Plan, a lowered pretax interest coverage threshold and
modification of the consolidated leverage ratio.
On December 21, 2005, our Asian operations executed a $50,000 five-year
unsecured, syndicated term and revolving credit facility agreement to support
its working capital needs (the Asian Credit Facility). The term portion of the
Asian Credit Facility (the Asian Term Credit Facility) is discussed in the
long-term debt section of this footnote. The revolving portion of the Asian
Credit Facility (the Asian Revolving Credit Facility) is $25,000 and can be
used for borrowings and/or letters of credit. Borrowings under the Asian
Credit Facility bear interest at LIBOR plus a spread ranging from 1.10% to
1.35% with such spread depending on our Asian operations' leverage ratio. The
Asian Credit Facility contains certain customary covenants, which among other
things, restrict our Asian operations' ability to incur indebtedness, grant
liens, make investments and acquisitions and sell assets. The financial
covenants of the Asian Credit Facility include requirements that our Asian
operations satisfy an interest coverage ratio, a leverage ratio and a net
worth maintenance covenant. We were in compliance with the covenants of the
Asian Credit Facility at the end of 2006. At February 3, 2007, there was
$14,000 of borrowings outstanding under the Asian Revolving Credit Facility.
52
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
On April 12, 2006, we executed a $400,000 five-year secured, syndicated credit
facility (the Senior Credit Facility) and terminated our prior U.S. Revolving
Credit Facility. We and our subsidiaries (the Borrowers) are the borrowers
under the Senior Credit Facility. Borrowings under the Senior Credit Facility
are secured by the Borrowers' domestic current assets, principally consisting
of accounts receivable and inventory. This does not include the stock of any
subsidiaries. Borrowings under the Senior Credit Facility are limited to the
lesser of the commitment amount or the borrowing base as defined in the credit
agreement. The Senior Credit Facility can be used to refinance existing
indebtedness, for letters of credit, for working capital needs and for other
general corporate purposes. Borrowings under the Senior Credit Facility bear
interest at a rate equal to LIBOR plus a spread of 1.00% to 2.00%, with such
spread depending upon excess liquidity, as defined in the credit agreement.
The Senior Credit Facility contains certain customary covenants, including:
(a) when availability under the Senior Credit Facility becomes less than
$40,000, a minimum fixed charge coverage ratio is required; and (b) so long as
availability remains above $60,000, Borrowers would generally not be
restricted in terms of distributions and dividends, investments, issuance of
new indebtedness, granting of liens (except to assets securing the Senior
Credit Facility), acquisitions and capital expenditures. At February 3, 2007,
there were no borrowings outstanding under the Senior Credit Facility, and we
were in compliance with all covenants. Letters of credit outstanding under the
Senior Credit Facility were $23,646 at February 3, 2007.
In addition to the revolving credit facilities discussed above, we maintain
uncommitted lines of credit, which totaled $38,804 at February 3, 2007. There
were no borrowings outstanding under these lines at February 3, 2007. We have
$6,291 in outstanding letters of credit used by our foreign operations under
these lines at February 3, 2007.
The weighted average interest rate on the notes payable was 5.81% and 6.45% as
of January 28, 2006 and February 3, 2007, respectively.
Long-term Debt:
Long-term debt is comprised of the following at January 28, 2006 and
February 3, 2007:
[Enlarge/Download Table]
January 28, 2006 February 3, 2007
---------------- ----------------
3.50% 2004 Convertible Debentures due June 15, 2034 $ 200,000 $ 200,000
7.625% 1997 Debentures due October 15, 2017 129,592 129,665
7.875% 1999 Debentures due July 15, 2009 140,214 140,296
Asian Term Credit Facility 25,000 22,222
Other 6 -
---------------- ----------------
494,812 492,183
Less current maturities (2,784) (5,556)
---------------- ----------------
$ 492,028 $ 486,627
================ ================
On December 21, 2005, our Asian operations executed a $50,000 five-year
unsecured, syndicated term and revolving credit facility agreement to support
its working capital needs (the Asian Credit Facility). The term portion of the
Asian Credit Facility (the Asian Term Credit Facility) is $25,000 and requires
semiannual payments of principal that began in November 2006. See the notes
payable section of this footnote for a discussion of the revolving portion and
additional information related to the Asian Credit Facility. At February 3,
2007, there was $22,222 of borrowings outstanding under the Asian Term Credit
Facility, of which $5,556 is current.
During the second quarter of 2004, we privately placed $200,000 of 3.50%
Convertible Senior Debentures due 2034. The debentures are convertible into
shares of Kellwood's common stock at an initial conversion rate of 18.7434
shares per one thousand dollars original principal amount of debentures (which
is equivalent to an initial conversion price of $53.35 per share) if the last
reported sale price of the common stock is greater than or equal to $70.05 per
share for at least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the preceding fiscal quarter. The
holders may also convert the debentures into shares of Kellwood common stock
prior to the stated maturity if we call the debentures for redemption and
under certain other circumstances. In July 2004, we irrevocably elected to
satisfy in cash (in lieu of issuance of stock) 100% of the accreted principal
amount of debentures converted. We may still satisfy the remainder of our
conversion obligation to the extent it exceeds the accreted principal amount
in cash or common stock or any combination thereof.
53
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
The debentures accrue interest at an annual rate of 3.50%, payable
semi-annually until June 15, 2011. After June 15, 2011 interest will not be
paid, but instead the recorded value of the bonds will increase until
maturity. At maturity, the holder will receive the accreted principal amount,
which will be equal to the original principal amount of one thousand dollars
per debenture plus the accreted interest.
The debentures will mature on June 15, 2034, unless we convert, redeem or
repurchase them at an earlier date. We may redeem some or all of the
debentures for cash, at any time and from time to time, on or after June 20,
2011 at a redemption price equal to 100% of the accreted principal amount of
the debentures to be redeemed, plus accrued and unpaid interest. Holders have
the right to require us to repurchase some or all of the debentures for cash
at a repurchase price equal to 100% of the accreted principal amount of the
debentures to be repurchased, plus accrued and unpaid interest on June 15,
2011, June 15, 2014, June 15, 2019, June 15, 2024 and June 15, 2029, or if we
undergo a fundamental change as defined in the debentures agreement.
During 1997, $150,000 of 7.625% Debentures were issued under a shelf
registration. Principal on the notes is due October 15, 2017. Interest is
payable semi-annually on each April 15 and October 15. During 1999, $150,000
of 7.875% Debentures were issued under a shelf registration. Principal on the
notes is due July 15, 2009. Interest is payable semi-annually on each January
15 and July 15. In prior fiscal years, we have purchased portions of these
securities on the open market.
Aggregate maturities on long-term debt for the next five years are as follows:
2007 - $5,556; 2008 - $5,555; 2009 - $145,851; 2010 - $5,556; 2011 - $0; 2012
& thereafter - $329,665.
We own 50% of a Singaporean shirt manufacturing joint venture that has a
$5,043 credit facility. We have guaranteed one half of the borrowings under
this facility not otherwise paid when due by the joint venture. At the end of
fiscal year 2006, $3,317 was outstanding under this facility.
NOTE 7. LEASES
We lease substantially all of our office space, certain distribution
facilities, retail outlet stores and certain machinery and equipment under
operating leases having remaining terms ranging up to 10 years, excluding
renewal terms. Rent under leases with scheduled rent changes or lease
concessions is recorded on a straight-line basis over the lease term. Rent
expense under all operating leases for 2006 totaled $30,135 ($29,783 for 2004
and $30,087 for 2005).
The future minimum lease payments under operating leases at February 3, 2007
were as follows:
Operating
-------------
2007 $ 25,413
2008 19,072
2009 12,741
2010 6,997
2011 3,594
Thereafter 4,795
-------------
Total minimum lease payments $ 72,612
=============
Minimum operating lease payments were not reduced for future minimum sublease
rentals of approximately $311.
54
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 8. RETIREMENT BENEFITS
Various contributory and/or noncontributory retirement plans cover
substantially all domestic and certain foreign employees. Total retirement
benefits expense includes the following:
[Download Table]
2004 2005 2006
------------ ----------- -----------
Defined contribution plans $ 6,105 $ 6,085 $ 6,552
Single-employer defined benefit plans 1,815 1,309 997
Multi-employer defined benefit plan 333 299 19
------------ ----------- -----------
Total retirement benefits expense $ 8,253 $ 7,693 $ 7,568
============ =========== ===========
Defined Contribution Plans:
We sponsor or contribute to various defined contribution retirement benefit
and savings plans covering substantially all employees.
Single-Employer Defined Benefit Plans:
Our Smart Shirts subsidiary maintains a defined benefit plan for certain of
its employees. This plan was closed to new hires after December 1, 2000. Our
Gerber Childrenswear (Gerber) subsidiary maintains a defined benefit plan for
certain of its employees. This plan was frozen effective December 2002. We use
a December 31 measurement date for these plans.
Summarized information on our single-employer defined benefit plans (Gerber
and Smart Shirts) is as follows:
[Enlarge/Download Table]
2004 2005 2006
----------- ----------- ------------
Components of Net Periodic Pension Cost and other
amounts recognized in Other Comprehensive Income:
Service cost $ 903 $ 494 $ 480
Interest cost 2,742 2,176 2,127
Expected return on plan assets (2,173) (1,996) (2,102)
Amortization of prior service costs and actuarial losses 343 239 104
Settlement loss / (gain) - 396 (5)
----------- ----------- ------------
Net periodic pension cost $ 1,815 $ 1,309 $ 604
=========== =========== ============
The weighted average key actuarial assumptions used to determine:
[Download Table]
Benefit obligations:
Discount rate 5.8% 5.4% 5.6%
Expected long-term rate of return on plan assets 6.8% 6.8% 7.0%
Net periodic benefit cost:
Discount rate 6.0% 5.8% 5.4%
Expected long-term rate of return on plan assets 6.6% 6.8% 6.8%
Rate of compensation increases 3.0% 3.0% 3.0%
55
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
The market assumptions for the defined benefit plans are developed using
several approaches, including an analysis of historical returns, developing an
inflation expectation and real return risk premiums over inflation for each
asset class, and developing returns based on the drivers of return for each
asset class.
[Download Table]
2005 2006
----------- -----------
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of year $ 41,123 $ 40,105
Service cost 753 708
Interest cost 2,176 2,127
Actuarial (gain)/loss (368) (113)
Settlement loss 396 (192)
Benefits paid (3,975) (3,018)
----------- -----------
Projected benefit obligation, end of year $ 40,105 $ 39,617
=========== ===========
Change in Plan Assets:
Fair value of plan assets, beginning of year $ 32,154 $ 33,066
Actual return on plan assets 2,607 4,294
Employer contributions 2,053 1,428
Employee contributions 227 212
Benefits paid (3,975) (3,203)
----------- -----------
Fair value of plan assets, end of year $ 33,066 $ 35,797
=========== ===========
2005 2006
----------- -----------
Reconciliation of funded status to prepaid pension cost:
Funded Status - Plan assets in excess of
projected benefit obligation $ (7,039) $ (3,820)
Unamortized prior service costs 23 *
Unrecognized actuarial (gain)/loss (1,156) *
----------- -----------
Accrued pension costs $ (8,172) $ (3,820)
=========== ===========
Amounts recognized in the Consolidated Balance Sheets consist of the
following:
[Download Table]
2005 2006
----------- -----------
Accrued pension cost $ (8,337) $ *
Accumulated other comprehensive income 165 *
Noncurrent liability * (3,820)
----------- -----------
Net amount recognized $ (8,172) $ (3,820)
=========== ===========
Amounts recognized in Accumulated Other Comprehensive Income consist of the
following:
[Download Table]
2005 2006
----------- -----------
Unamortized prior service costs $ * $ 13
Net actuarial gain * (3,540)
----------- -----------
Net amount recognized $ * $ (3,527)
=========== ===========
<FN>
* Not applicable due to adoption of SFAS No. 158.
We adopted SFAS No. 158 as of February 3, 2007. The incremental effect of
applying SFAS No. 158 on individual line items in the consolidated balance
sheet at February 3, 2007, is as follows:
[Enlarge/Download Table]
Before application After application
of SFAS No. 158 Adjustments of SFAS No. 158
------------------ --------------- -----------------
Deferred tax asset $ - $ 1,613 $ 1,613
Accrued pension liability 7,347 (3,527) 3,820
Accumulated other comprehensive loss, net of tax - 1,914 1,914
56
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
The decrease in the minimum liability included in other comprehensive income
in 2006 was $262 (a decrease of $1,289 for 2005). The accumulated benefit
obligation for all defined benefit pension plans was $38,336 and $39,617 at
January 28, 2006 and February 3, 2007, respectively. Information for the
defined benefit pension plans with accumulated benefit obligation in excess of
plan assets is as follows:
[Download Table]
2005 2006
------------ ------------
Projected benefit obligation $ 40,105 $ 39,617
Accumulated benefit obligation 38,336 39,617
Fair value of plan assets 33,066 35,797
The weighted average asset allocations for each of our pension plans by asset
category are as follows:
[Download Table]
Gerber Plan Assets Smart Shirts Plan Assets
--------------------------- --------------------------
Asset Category 2005 2006 2005 2006
-------------- ------------ ------------ ------------ -----------
Equity securities 70% 69% 47% 55%
Debt securities 29% 29% 53% 44%
Other 1% 2% 0% 1%
------------ ------------ ------------ -----------
100% 100% 100% 100%
============ ============ ============ ===========
Gerber's retirement assets are invested in a series of broadly diversified
asset class specific portfolios. Assets are allocated to these funds in
accordance with the strategic target allocation as follows: equity securities
of 67%, debt securities of 30% and cash of 3%. Smart Shirts' investment
policies are to maintain solvency for the future, establish an overall average
company contribution rate and ensure the ability to pay short-term
distributions. The target allocations for the Smart Shirts' plan assets are 50%
debt securities and 50% equity securities.
We expect to contribute approximately $1,700 to our pension plans during 2007.
We expect that the plans will make payments ranging from $2,300 to $3,400
annually for the next five years and payments totaling $18,700 for the years
2012 through 2016.
Multi-Employer Defined Benefit Plan:
Certain of our subsidiaries make contributions to a multi-employer defined
benefit plan on behalf of their participating employees. The plan
administrator estimates that if we were to withdraw from the plan, its
potential liability for unfunded plan benefits would be approximately $2,400
as of December 31, 2006, the date of the most recent actuarial valuation
report.
NOTE 9. STOCK PLANS
On January 29, 2006, we adopted SFAS No. 123(R), Share-Based Payment,
requiring the recognition of compensation expense in the Consolidated
Statement of Operations related to the fair value of our employee share-based
options. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based
Compensation, and supercedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123(R) is supplemented by
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No.
107, Share-Based Payment. SAB No. 107 expresses the SEC staff's views
regarding the interaction between SFAS No. 123(R) and certain SEC rules and
regulations including the valuation of share-based payment arrangements. SFAS
No. 123(R) amends SFAS No. 95, Statement of Cash Flows, to require that excess
tax benefits be reported as a financing cash inflow rather than as a reduction
of taxes paid, which is included within operating cash flows.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating the expected term that stock options will be
outstanding prior to exercise, the associated volatility and the expected
dividends. Judgment is also required in estimating the amount of share-based
awards expected to be forfeited prior to vesting. If actual forfeitures differ
significantly from these estimates, share-based compensation expense could be
materially impacted. Prior to adopting SFAS No. 123(R), we applied APB Opinion
No. 25, and related Interpretations, in accounting for our stock-based
compensation plans. All employee stock options were granted at or above the
grant date market price. Accordingly, no compensation cost was recognized for
fixed stock option grants in prior periods.
57
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
We will recognize the cost of all employee stock options on a straight-line
attribution basis over their respective vesting periods. We have selected the
modified prospective method of transition; accordingly, prior periods have not
been restated. Total stock option expense recorded in fiscal year 2006 and in
the pro-forma table in Note 1 for 2004 and 2005 has been reduced by an
estimated forfeiture rate of 5.0%. This estimate will be revised in subsequent
periods if actual forfeitures differ from the original estimates.
We have issued stock options and restricted shares to employees under
share-based compensation plans. Stock options are issued at the current market
price, subject to a three to five year vesting period with a contractual term
of 10 years. Shares are issued from treasury stock upon the exercise of stock
options.
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model. No options have been granted since the
first quarter of 2005. The following weighted average assumptions were used
for the options granted in the first quarter of 2005:
Expected option life 6 years
Risk-free interest rate 4.5%
Expected volatility of Kellwood stock 33.6%
Expected dividend yield on Kellwood stock 2.2%
A summary of stock options outstanding as of January 28, 2006 and the plans'
activity during the twelve months ended February 3, 2007 is presented below:
[Enlarge/Download Table]
Weighted Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
(Shares in thousands) Shares Exercise Price Term (Years) Value
---------------- ------------------ ------------------ -------------
Outstanding at January 28, 2006 2,748 $ 28.84
Granted - -
Exercised (461) 23.61
Forfeited or expired (135) 34.72
---------------- ------------------ ------------------ -------------
Outstanding at February 3, 2007 2,152 $ 29.60 5.6 $ 10,809
---------------- ------------------ ------------------ -------------
Exercisable at February 3, 2007 1,586 $ 30.38 5.1 $ 7,924
---------------- ------------------ ------------------ -------------
The total intrinsic value of options exercised during 2004, 2005 and 2006 was
$13,024, $1,483 and $3,209, respectively. The amount of cash received from the
exercise of stock options for the twelve months ended February 3, 2007 was
$10,264.
A summary of the activity for nonvested stock option awards as of February 3,
2007 and changes during 2006 is presented below:
[Download Table]
Weighted Average
Grant Date
(Shares in thousands) Awards Fair Value per Award
---------------- ---------------------
Nonvested at January 28, 2006 1,043 $ 8.53
Granted - -
Vested (742) 8.44
Cancelled (38) 8.65
---------------- ---------------------
Nonvested at February 3, 2007 263 $ 8.78
---------------- ---------------------
For the twelve months ended February 3, 2007, we recorded $4,344 of stock
option expense and a related deferred tax asset of $1,605. As of February 3,
2007, there was $1,371 of total unrecognized compensation cost related to
nonvested share-based compensation awards granted under the stock option
plans, which will all be expensed in fiscal year 2007.
58
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 10. CAPITAL STOCK
The reported outstanding shares of common stock have been reduced by treasury
stock totaling 8,184,894 shares at February 3, 2007 (8,435,267 shares at
January 28, 2006).
Authorized capital includes 500,000 shares of preferred stock, none of which
have been issued.
We have adopted a Rights Agreement. Each outstanding common share has
associated with it one right to purchase a specified amount of Series A Junior
Preferred Stock at a stipulated price in certain circumstances related to
changes in the ownership of our common shares. There are 160,000 shares of
Preferred Stock reserved for the exercise of the rights. None of the rights
were exercisable as of February 3, 2007.
In July 2005, we announced a stock repurchase program (Stock Repurchase
Program). The Board of Directors authorized us to repurchase, at our
discretion, up to ten percent of the outstanding shares of our common stock
through open market or privately negotiated transactions. The Board of
Directors has approved the investment of up to $75,000 for this purpose.
During fiscal year 2005, we repurchased 2,218,200 shares at an average price
of $24.99 per share, totaling $55,430. During fiscal year 2006, we repurchased
173,600 shares at an average price of $28.83 per share, totaling $5,006.
Payments made under the Stock Repurchase Program are recorded in Treasury
Stock on the Consolidated Balance Sheets.
NOTE 11. INCOME TAXES
The provision (benefit) for income taxes for continuing operations consists of
the following:
[Enlarge/Download Table]
2004 2005 2006
----------- ----------- -----------
Current:
Domestic:
Federal $ 10,830 $ (5,114) $ 1,481
State 541 1,102 1,092
Foreign 4,970 5,514 1,754
----------- ----------- -----------
Total current provision for income taxes 16,341 1,502 4,327
Deferred (primarily federal) 15,145 2,353 3,667
Effect of repatriation of foreign earnings - (13,000) -
----------- ----------- -----------
Total (benefit) provision for income taxes $ 31,486 $ (9,145) $ 7,994
=========== =========== ===========
The sources of income (loss) before income taxes are:
United States $ 66,664 $ (18,788) $ 10,010
Foreign 27,043 28,399 19,067
----------- ----------- -----------
Kellwood total $ 93,707 $ 9,611 $ 29,077
=========== =========== ===========
Current income taxes are the amounts payable under the respective tax laws and
regulations on each year's earnings and on foreign earnings remitted during
the year. A reconciliation of the federal statutory income tax rate to the
effective tax rate (including impairment, restructuring and other
non-recurring charges and repatriation) is as follows:
[Enlarge/Download Table]
2004 2005 2006
-------------------------- -------------------------- --------------------------
Dollars Percentage Dollars Percentage Dollars Percentage
------------ ------------ ------------ ------------ ------------ ------------
Statutory rate $ 32,797 35.0% $ 3,364 35.0% $ 10,177 35.0%
State taxes, net of federal benefit 1,183 1.3% 831 8.6% 1,729 5.9%
Foreign tax rate differential (1,403) (1.5%) (4,430) (46.1%) (4,928) (16.9%)
Non-deductible impairment - 0.0% 2,866 29.8% - 0.0%
Other (1,091) (1.2%) 1,224 12.8% 1,016 3.5%
------------ ----------- ------------ ----------- ------------ -----------
Prior to repatriation benefit 31,486 33.6% 3,855 40.1% 7,994 27.5%
Repatriation benefit - 0.0% (13,000) (135.3%) - 0.0%
------------ ------------ ------------ ----------- ------------ -----------
Total $ 31,486 33.6% $ (9,145) (95.2%) $ 7,994 27.5%
============ ============ ============ =========== ============ ===========
59
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed
into law. The Act provides a special one-time deduction of 85% of foreign
earnings that are repatriated under a domestic reinvestment plan, as defined
therein. During 2005, we adopted a formal domestic reinvestment plan that
resulted in the repatriation of $160,000 of foreign earnings. This
repatriation resulted in a one-time tax benefit of $13,000 recorded during the
second quarter of 2005 due to the reversal of $23,500 of previously provided
taxes on foreign earnings, which will not be incurred under the new
regulations, offset by $10,500 of taxes provided on earnings to be
repatriated.
Deferred income tax assets and liabilities consisted of the following:
[Enlarge/Download Table]
2005 2006
------------------ -------------------
Deferred tax assets
Employee related costs $ 18,003 $ 13,845
Allowance for asset valuations 17,023 13,609
Net operating losses - 21,450
Other 10,056 17,262
------------------ -------------------
Net deferred income tax assets $ 45,082 $ 66,166
------------------ -------------------
Deferred tax liabilities
Depreciation and amortization $ (15,373) $ (16,544)
Other (5,067) (8,449)
------------------ -------------------
Net deferred income tax liabilities $ (20,440) $ (24,993)
------------------ -------------------
Net deferred income tax assets / (liabilities) $ 24,642 $ 41,173
================== ===================
Included in:
Current deferred taxes and prepaid expenses $ 26,400 $ 33,363
Other assets - 7,810
Deferred income taxes and other (1,758) -
------------------ -------------------
Net deferred income tax assets / (liabilities) $ 24,642 $ 41,173
================== ===================
Substantially all available net operating loss carryforwards as of February 3,
2007 will expire in 2026. We expect to utilize these net operating loss
carryforwards in 2007 and 2008. As of January 28, 2006 and February 3, 2007,
the other deferred tax asset shown above consists substantially of deferred tax
assets for accrued expenses not deductible until paid and the other deferred
tax liability shown above is primarily related to accrued interest.
Federal income taxes are provided on earnings of foreign subsidiaries except
to the extent that such earnings are currently expected to be permanently
reinvested abroad. Undistributed foreign earnings that we currently consider
to be permanently reinvested abroad totaled approximately $14,045 through
February 3, 2007.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the financial statement effects of a tax
position taken or expected to be taken in a tax return are to be recognized in
the financial statements when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination,
including resolution of any related appeals or litigation processes. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and we will be
required to adopt this interpretation in the first quarter of fiscal year
2007. Based on our evaluation as of February 3, 2007, we do not believe that
FIN 48 will have a material impact on our financial statements.
60
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 12. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been calculated as follows:
[Enlarge/Download Table]
2004 2005 2006
----------- ----------- -----------
Numerators:
Net earnings from continuing operations $ 62,221 $ 18,756 $ 21,083
Net earnings (loss) from discontinued operations 4,115 (57,169) 10,319
----------- ----------- -----------
Net earnings (loss) $ 66,336 $ (38,413) $ 31,402
=========== =========== ===========
Denominators (000's):
Average shares outstanding - Basic 27,504 26,986 25,709
Impact of stock options 535 108 157
----------- ----------- -----------
Average shares outstanding - Diluted 28,039 27,094 25,866
----------- ----------- -----------
Continuing operations $ 2.26 $ 0.70 $ 0.82
Discontinued operations 0.15 (2.12) 0.40
----------- ----------- -----------
Basic earnings (loss) per share $ 2.41 $ (1.42) $ 1.22
=========== =========== ===========
Continuing operations $ 2.22 $ 0.69 $ 0.82
Discontinued operations 0.15 (2.11) 0.40
----------- ----------- -----------
Diluted earnings (loss) per share $ 2.37 $ (1.42) $ 1.21
=========== =========== ===========
The calculation of diluted earnings per share excludes the impact of the
contingent convertible debt for 2004, 2005 and 2006, and 601,000, 2,318,975
and 1,065,066 of stock options in 2004, 2005 and 2006, respectively, because to
include them would have been antidilutive.
NOTE 13. COMMITMENTS AND CONTINGENCIES
We are currently party to various legal proceedings. While management,
including internal counsel, currently believes that the ultimate outcome of
these proceedings, individually and in the aggregate, will not have a material
adverse impact on our financial position or results of operations, litigation
is subject to inherent uncertainties.
We have exclusive license agreements to market apparel under trademarks owned
by other parties. These include Calvin Klein for women's better sportswear,
Liz Claiborne(R) for women's dresses and suits, O Oscar for women's better
sportswear and XOXO(R) for junior's sportswear and dresses. These agreements
contain provisions for minimum royalty and advertising payments based on
anticipated sales in future periods.
During 2006, there were changes to our license agreements. We entered into an
amended agreement under which we extended the Calvin Klein women's better
sportswear license for North America; we were granted the ck Calvin Klein
women's bridge sportswear license for North America; we agreed to re-launch O
Oscar, an Oscar de la Renta Company, as a better women's sportswear collection
exclusively at Macy's; and we extended the XOXO(R) license for junior's
sportswear and dresses. In addition, as discussed in Note 4, we discontinued
the New Campaign and IZOD operations, which resulted in the termination of the
related licensing agreements. In 2006, the royalty and advertising expense for
all agreements totaled $21,351 and $9,698, respectively ($21,665 and $11,610
in 2004 and $21,199 and $9,769 in 2005).
Our future minimum payments for all license agreements is as follows:
[Download Table]
Royalties Advertising
----------- ------------
2007 $ 17,455 $ 10,879
2008 15,958 11,287
2009 13,062 8,281
2010 14,400 6,805
2011 15,210 7,218
Thereafter 12,224 6,059
----------- ------------
Total $ 88,309 $ 50,529
=========== ============
61
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 14. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
We and our subsidiaries are principally engaged in the apparel and related
soft goods industries. Our operations are managed in a number of divisions
that are organized around individual product lines and brands. These divisions
are aggregated into three major consumer market product groupings along with
General Corporate, which represent our reportable segments. These segments
are:
o WOMEN'S SPORTSWEAR designs, merchandises and sells women's
sportswear sold through leading retailers in all channels of
distribution. The product line includes blazers, dresses, sweaters,
blouses, vests, other tops, skirts, pants and skorts. The business
is primarily branded goods sold at the popular-to-moderate price
points, but the segment does include some better-to-bridge lines -
upper price point women's sportswear sold principally to specialty
stores, department stores and catalog houses. A partial list of such
brands are Sag Harbor(R), Koret(R), Dorby(TM), My Michelle(R),
Briggs New York(R) (Briggs) and Vince(R). Calvin Klein, XOXO(R), Liz
Claiborne(R) Dresses and Suits, O Oscar and David Meister(R) are
produced under licensing agreements.
o MEN'S SPORTSWEAR designs, manufactures and sells men's woven and
knit shirts, pants and jeans sold to leading department stores,
catalog houses and national chains. The business is primarily
private label but also includes a number of branded programs such as
Nautica(R), Claiborne(R) and Dockers(R) dress shirts and Phat
Farm(R) and Northern Isles(R) sportswear.
o OTHER SOFT GOODS designs, merchandises and sells infant apparel and
recreation products (tents, sleeping bags, backpacks and related
products). The business is primarily branded goods including
Kelty(R) and Sierra Design(R) for recreation products and Gerber(R)
for infant apparel.
o GENERAL CORPORATE includes general and administrative expenses at
the corporate level that are not allocated to the above segments.
Management evaluates the performance of our operating segments separately to
individually monitor the different factors affecting financial performance.
Segment earnings for the three major consumer market product segments includes
substantially all of the segment's costs of production, distribution and
administration.
Segment net assets measures net working capital, net fixed assets and other
noncurrent assets and liabilities of each segment. Goodwill, net intangibles
and certain corporate assets, including capitalized software, shared
distribution centers, and debt and cash balances, are accounted for at the
corporate level and as a result are included in the General Corporate segment
net assets. Amortization of intangibles is accounted for at the corporate
level and is not allocated to the segments. Capital expenditures exclude the
cost of long-lived assets included in acquisitions accounted for under
purchase accounting.
62
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
[Download Table]
2004 2005 2006
------------- -------------- -------------
Net sales:
Women's Sportswear $ 1,304,740 $ 1,144,607 $ 1,107,571
Men's Sportswear 505,318 498,061 525,005
Other Soft Goods 305,194 319,371 329,174
------------- -------------- -------------
Total net sales $ 2,115,252 $ 1,962,039 $ 1,961,750
============= ============== =============
Segment earnings:
Women's Sportswear $ 93,742 $ 54,814 $ 68,421
Men's Sportswear 52,645 43,262 38,297
Other Soft Goods 28,211 31,204 35,085
General Corporate (45,917) (44,704) (49,881)
------------- -------------- -------------
Total segments 128,681 84,576 91,922
Stock option expense - - 4,345
Amortization of intangible assets 11,205 10,685 10,935
Impairment, restructuring and
other non-recurring charges - 42,341 33,632
Interest expense, net 25,860 23,241 15,676
Other income, net (2,091) (1,302) (1,743)
------------- -------------- -------------
Earnings before income taxes $ 93,707 $ 9,611 $ 29,077
============= ============== =============
Net assets at end of year:
Women's Sportswear $ 243,415 $ 168,164 $ 178,313
Men's Sportswear 160,060 111,426 115,089
Other Soft Goods 51,893 38,030 46,957
General Corporate 97,256 239,322 284,316
------------- -------------- -------------
Continuing operations 552,624 556,942 624,675
Discontinued operations 160,900 52,425 10,451
------------- -------------- -------------
Kellwood total $ 713,524 $ 609,367 $ 635,126
============= ============== =============
Capital expenditures:
Women's Sportswear $ 3,292 $ 3,197 $ 3,360
Men's Sportswear 8,254 11,371 8,830
Other Soft Goods 915 354 589
General Corporate 9,386 4,602 10,127
------------- -------------- -------------
Continuing operations 21,847 19,524 22,906
Discontinued operations 5,589 58 16
------------- -------------- -------------
Kellwood total $ 27,436 $ 19,582 $ 22,922
============= ============== =============
Depreciation expense:
Women's Sportswear $ 6,359 $ 6,051 $ 3,535
Men's Sportswear 8,110 8,854 7,979
Other Soft Goods 2,147 1,351 705
General Corporate 9,148 9,793 12,112
------------- -------------- -------------
Continuing operations 25,764 26,049 24,331
Discontinued operations 1,388 1,251 246
------------- -------------- -------------
Kellwood total $ 27,152 $ 27,300 $ 24,577
============= ============== =============
Substantially all sales are to U.S. customers. Sales and transfers between
segments were not significant. Approximately $31,024 of our net property,
plant and equipment is located in Asia.
63
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
[Enlarge/Download Table]
Quarter First Second Third Fourth
-------------- -------------- -------------- --------------
FISCAL 2005(1):
Net sales $ 528,196 $ 467,406 $ 519,962 $ 446,476
Gross profit 117,881 95,031 102,759 86,917
Net earnings (loss) from continuing operations 14,412 (7,624) 7,879 4,090
Net (loss) earnings from discontinued operations (2,593) (71,308) 8,309 8,423
-------------- -------------- -------------- --------------
Net earnings (loss) $ 11,819 $ (78,932) $ 16,188 $ 12,513
============== ============== ============== ==============
Diluted earnings (loss) per share:
Continuing operations $ 0.52 $ (0.27) $ 0.29 $ 0.16
Discontinued operations (0.09) (2.56) 0.31 0.33
-------------- -------------- -------------- --------------
Net earnings (loss) $ 0.42 $ (2.84) $ 0.60 $ 0.49
============== ============== ============== ==============
FISCAL 2006:
Net sales $ 493,777 $ 459,648 $ 516,397 $ 491,928
Gross profit 99,669 96,598 113,776 104,464
Net earnings from continuing operations 1,077 7,946 5,521 6,538
Net earnings (loss) from discontinued operations 8,116 (780) 2,554 429
-------------- -------------- -------------- --------------
Net earnings $ 9,193 $ 7,166 $ 8,075 $ 6,967
============== ============== ============== ==============
Diluted earnings (loss) per share:
Continuing operations $ 0.04 $ 0.31 $ 0.21 $ 0.25
Discontinued operations 0.31 (0.03) 0.10 0.02
-------------- -------------- -------------- --------------
Net earnings (loss) $ 0.36 $ 0.28 $ 0.31 $ 0.27
============== ============== ============== ==============
<FN>
(1) Included in net loss from continuing operations and net loss from
discontinued operations in the second quarter of 2005 were charges taken in
connection with the 2005 Restructuring Plan of $25,952 and $67,397,
respectively. The net charges associated with the 2005 Restructuring Plan
decreased net earnings from continuing operations in the third and fourth
quarters of 2005 by $8,272 and $3,374, respectively, while the net reversal of
charges associated with the 2005 Restructuring Plan increased net earnings
from discontinued operations in the third and fourth quarters of 2005 by
$7,225 and $10,530, respectively. Reversals of previously recorded expenses
were $863 and $1,228 for continuing operations in the third and fourth
quarters of 2005, respectively, and $15,388 and $19,255 for discontinued
operations in the third and fourth quarters of 2005, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by
this report, that the Company's disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a- 15(e) and 15d- 15(e)) are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in
the reports that it files or submits under the Act is accumulated and
communicated to the issuer's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's Report on Internal Control Over Financial Reporting and the
Report of Independent Registered Public Accounting Firm thereon are set forth
in Part II, Item 8 of this Form 10-K.
64
CHANGE IN INTERNAL CONTROLS
There were no changes in the Company's internal control over financial
reporting during the quarter ended February 3, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
(a) The information required by this Item regarding directors constitutes part
of our Proxy Statement for the 2007 Annual Meeting of Shareowners, under the
captions "Nominees for Election to Serve Until 2009" and "Directors Continuing
to Serve Until 2008," which information is incorporated herein by reference.
The information regarding compliance with section 16(a) of the Securities and
Exchange Act of 1934 constitutes part of our Proxy Statement for the 2007
Annual Meeting of Shareowners under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is incorporated herein by
reference.
(b) Executive Officers of the Registrant as of March 10, 2007:
[Enlarge/Download Table]
Name of Officer Age Office and Employment During the Last Five Years
---------------------- --- ------------------------------------------------
Robert C. Skinner, Jr. 52 Chairman, President and Chief Executive Officer since February 1, 2006;
President and Chief Executive Officer (June 1, 2005 - January 31, 2006);
President and Chief Operating Officer (2003 - June 1, 2005);
Vice President and President Menswear (2002 - 2003);
President Kellwood Menswear (2000 - 2002)
W. Lee Capps III 59 Chief Financial Officer, Chief Operating Officer and Treasurer since November 30, 2006;
Chief Operating Officer and Chief Financial Officer (June 1, 2005 - November 30, 2006);
Executive Vice President Finance and Chief Financial Officer (2003 - June 1, 2005);
Senior Vice President Finance and Chief Financial Officer (2002 - 2003);
Vice President Finance and Chief Financial Officer (2000 - 2002)
Thomas H. Pollihan 57 Executive Vice President, Secretary and General Counsel since June 1, 2005;
Senior Vice President, Secretary and General Counsel (2002 - 2005);
Vice President, Secretary and General Counsel (1993 - 2002)
Gregory W. Kleffner 52 Senior Vice President Finance and Controller since June 1, 2006;
Vice President Finance and Controller (June 1, 2005 - June 1, 2006);
Vice President Controller (2002 - 2005);
Partner, Arthur Andersen (1988 - 2002)
Donna B. Weaver 56 Vice President Corporate Communications since April 24, 2002;
Director Corporate Communications (1998 - 2002)
(c) The information called for with respect to the identification of certain
significant employees is not applicable to the registrant.
(d) There are no family relationships between the directors and executive
officers listed above. There are neither arrangements nor understandings
between any named officer and any other person pursuant to which such person
was selected as an officer.
(e) Each of the officers named in Item 10(b) above was elected to serve in the
office indicated for a period of one year and until his successor is elected
and qualified.
(f) There are no legal proceedings involving directors, nominees for
directors, or officers.
(g) The information called for with respect to this item is not applicable to
the registrant.
65
(h) The Board, in its business judgment, has determined that Mr. Larry R.
Katzen and Mr. Ben B. Blount, Jr. meet the Securities and Exchange
Commission's definition of audit committee financial expert and has so
designated them as such. The Board has determined that Mr. Katzen and Mr.
Blount are independent as such term is used under Schedule 14A of the
Securities Exchange Act of 1934.
We have adopted a Code of Ethical Conduct for Senior Financial Officers and
Financial Management. This Code applies to, and has been signed by, all key
financial management personnel as well as the Chief Financial Officer and the
Chief Executive Officer. The full text of the Code of Ethical Conduct for
Senior Financial Officers and Financial Management is available at our website
at www.kellwood.com and is available in print to any shareowner who requests
it. The Corporate Governance Committee determined that should any changes to
or waivers of this Code of Ethical Conduct occur, such changes or waivers will
be timely disclosed on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy Statement for
the 2007 Annual Meeting of Shareowners, under the captions "Director
Compensation," "Compensation Discussion and Analysis - Executive Officer
Agreements," and "Compensation Discussion and Analysis - Summary Compensation
Table" which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Some of the information required by this Item is
set forth in our Proxy Statement for the 2007 Annual Meeting of Shareowners,
under the captions "Security Ownership - Security Ownership of Certain
Beneficial Owners" and "Security Ownership - Security Ownership of Directors
and Executive Officers," which information is incorporated herein by
reference. In addition, set forth below is certain equity compensation plan
information.
[Enlarge/Download Table]
EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------------------
Plan Category Number Of Securities To Weighted-Average Number Of Securities Remaining
Be Issued Upon Exercise Exercise Price Of Available For Future Issuance Under
Of Outstanding Options, Outstanding Options, Equity Compensation Plans (Excluding
Warrants And Rights Warrants And Rights Securities Reflected In Columnn (A))
---------------------------------------------------------------------------------------------------------------------------
(A) (B) (C)
---------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security Holders 2,151,581 $29.60 2,485,782
Equity Compensation Plans not
Approved by Security Holders N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------------
TOTAL 2,151,581 $29.60 2,485,782
---------------------------------------------------------------------------------------------------------------------------
Additional information required by this Item is set forth under the caption
"Stock Plans" in Note 9 to the Consolidated Financial Statements included in
our 2006 Annual Report to Shareowners, which information is included in Item 8
to this Form 10-K and incorporated herein by reference.
Our 1995 Stock Option Plan provides for an annual increase in the shares
available for issuance by an amount equal to 2% of the adjusted average common
stock outstanding we used to calculate diluted earnings per share for the
preceding fiscal year. Additional shares reserved based upon the 2006 adjusted
average common stock outstanding are reflected in the amounts in column (C)
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this Item is set forth in our Proxy Statement for
the 2007 Annual Meeting of Shareowners, under the caption "Certain
Relationships and Related Transactions," which information is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is set forth in our Proxy Statement for
the 2007 Annual Meeting of Shareowners, under the caption "Independent
Registered Public Accounting Firm," which information is incorporated herein
by reference.
66
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules
(i) Financial Statements:
The following financial statements are included in this Form 10-K:
Reports of Independent Registered Public Accounting Firm
Financial Statements
--------------------
Consolidated Statement of Operations..................37
Consolidated Balance Sheets...........................38
Consolidated Statements of Cash Flows.................39
Consolidated Statements of Stockholders' Equity.......40
Notes to Consolidated Financial Statements............41
(ii) Financial Statement Schedules:
Schedules have been omitted because they are not
required or are not applicable or because the
information required to be set forth therein is included
in the Consolidated Financial Statements or the notes to
the Consolidated Financial Statements.
(iii) Exhibits:
Exhibits filed as part of this report are listed below.
Certain exhibits have been previously filed with the
Commission and are incorporated herein by reference.
S.E.C. Exhibit
Reference No. Description
------------- -----------
3.1 Restated Certificate of Incorporation of Kellwood Company, as
amended, incorporated herein by reference to Form 10-Q for the
quarter ended July 31, 1987, SEC File No. 1-7340.
3.2 By-Laws, as amended, incorporated herein by reference to Form
8-K filed with the SEC on March 21, 2007, SEC File No. 1-7340.
4.1 Indenture for senior debt securities dated as of September 30,
1997 between Kellwood Company and JPMorgan Chase Bank,
formerly known as the Chase Manhattan Bank, as Trustee, under
which certain of the Company's debt securities are
outstanding, incorporated herein by reference to Form S-3
filed October 24, 1997, SEC File No. 333-36559.
4.2 [Intentionally Omitted]
4.3 [Intentionally Omitted]
4.4 Rights to Acquire Series A Junior Preferred Stock, pursuant to
a Rights Agreement between the registrant and Centerre Trust
Company of St. Louis, incorporated herein by reference to
Registration Statement on Form 8-A, effective June 24, 1986
and Amendment dated August 21, 1990, incorporated herein by
reference to Form 10-Q for the quarter ended October 31, 1990,
and Amendment dated May 31, 1996 incorporated herein by
reference to Form 8-A/A effective June 3, 1996, SEC File No.
1-7340, and Amendment dated November 21, 2000 incorporated
herein by reference to Form 10-K for the fiscal year ended
February 3, 2001, SEC File No. 1-7340.
4.5 [Intentionally Omitted]
4.6 [Intentionally Omitted]
67
S.E.C. Exhibit
Reference No. Description
-------------- -----------
4.7 [Intentionally Omitted]
4.8 Loan and Security Agreement dated as of April 12, 2006 among
Kellwood Company and certain of its domestic subsidiaries,
certain commercial lending institutions, and Bank of America,
N.A., as Agent incorporated herein by reference to Form 8-K
filed with the SEC on April 17, 2006, SEC File No. 1-7340.
4.9 Indenture for senior debt securities dated as of June 22, 2004
between Kellwood Company and Union Bank of California, N.A.,
as Trustee, under which certain of the Company's debt
securities are outstanding, incorporated herein by reference
to Form S-3 filed July 30, 2004, SEC File No. 333-117833.
4.10 [Intentionally Omitted]
4.11 Guaranty Agreement executed and delivered as of March 15,
2005, made by certain domestic subsidiaries of the Company to
Union Bank of California, N.A., incorporated by reference to
Exhibit 4.01 to Form 8-K filed March 15, 2005, File No.
1-7340.
4.12 Supplemental Indenture to the 3.50% Convertible Senior
Debenture Indenture, dated as of March 15, 2005, with
Union Bank of California, N.A., incorporated by reference to
Exhibit 4.02 to Form 8-K filed March 15, 2005, File No.
1-7340.
4.13 Guaranty Agreement executed and delivered as of March 15,
2005, made be certain domestic subsidiaries of the Company to
JPMorgan Chase Bank, as trustee, with respect to the Company's
$150,000,000 7.625% 1997 Debentures due October 15, 2017 and
$150,000,000 7.875% 1999 Debentures due July 15, 2009,
incorporated by reference to Exhibit 4.03 to Form 8-K filed
March 15, 2005, File No. 1-7340.
4.14 Supplemental Indenture to the Master Trust Indenture, dated as
of March 15, 2005, with JPMorgan Chase Bank, as trustee,
governing the Company's $150,000,000 7.625% 1997 Debentures
due October 15, 2017 and $150,000,000 7.875% 1999 Debentures
due July 15, 2009, incorporated by reference to Exhibit 4.04
to Form 8-K filed March 15, 2005, File No. 1-7340.
10.1 Form of Rights Agreement dated June 10, 2006, between Kellwood
Company and American Stock Transfer and Trust Company,
incorporated by reference to Exhibit 10.1 of Form 8-K filed
June 12, 2006, SEC file No. 1-7340.
10.2* Restricted Stock Compensation Plan of 1969, as Amended,
incorporated herein by reference to Form 10-K/A (Amendment No.
1) for the fiscal year ended January 29, 2005, SEC File No.
1-7340.
10.3* Form of Employment Agreement regarding change of control
matters dated November 30, 1984, between Kellwood Company and
executive officers, incorporated herein by reference to Form
10-K for the fiscal year ended April 30, 1985, SEC File No.
1-7340.
10.4* 1995 Stock Option Plan For Nonemployee Directors and 1995
Omnibus Incentive Stock Option Plan, incorporated herein by
reference to Appendices A & B to the Company's definitive
Proxy Statement dated July 13, 1995, SEC File No. 1-7340.
10.5* Executive Deferred Compensation Plan, adopted and effective as
of January 1, 1997; and Executive Deferred Compensation Plan
Amendment, adopted March 18, 1997, incorporated herein by
reference to Form 10-K for the fiscal year ended April 30,
1997, SEC File No. 1-7340.
10.6** Information Technology Service Agreement between Kellwood
Company and Electronic Data Systems Corporation dated March
31, 2002, incorporated herein by reference to Form 10-K for
the fiscal year ended February 2, 2002, SEC File No. 1-7340.
68
S.E.C. Exhibit
Reference No. Description
-------------- -----------
10.7* Corporate Development Incentive Plan, As Restated, filed
herewith.
10.8 [Intentionally Omitted]
10.9* 1995 Stock Option Plan For Nonemployee Directors As Amended,
dated May 30, 2002, incorporated herein by reference to
Appendix A to the Company's definitive Proxy Statement dated
April 16, 2002, SEC File No. 1-7340.
10.10* Executive Deferred Compensation Plan II, effective as of
January 1, 2005, and the Kellwood Company Deferred
Compensation Plan II for Non-Employee Directors, effective as
of January 1, 2005, incorporated herein by reference to Form
8-K dated December 6, 2004, SEC File No. 1-7340.
10.11* Form of Non-Qualified Stock Option, incorporated herein by
reference to Exhibit 99.1 of Form 8-K filed March 14, 2005,
SEC File No. 1-7340.
10.12* Form of Incentive Stock Option, incorporated herein by
reference to Exhibit 99.2 of Form 8-K filed March 14, 2005,
SEC File No. 1-7340.
10.13 [Intentionally Omitted]
10.14 [Intentionally Omitted]
10.15 [Intentionally Omitted]
10.16 [Intentionally Omitted]
10.17 [Intentionally Omitted]
10.18 [Intentionally Omitted]
10.19* Form of Death Benefit Agreement dated June 2, 1994 entered
into between the Company and each of Hal J. Upbin and Thomas
H. Pollihan, effective June 2, 1994, incorporated herein by
reference to Form 10-K/A (Amendment No. 1) for the fiscal year
ended January 29, 2005, SEC File No. 1-7340.
10.20* Form of First Amendment to Death Benefit Agreement dated May
22, 2001 entered into between the Company and each of Hal J.
Upbin and Thomas H. Pollihan, effective December 8, 2000,
incorporated herein by reference to Form 10-K/A (Amendment No.
1) for the fiscal year ended January 29, 2005, SEC File No.
1-7340.
10.21* Form of Long-Term Incentive Plan of 2005, As Restated, filed
herewith.
10.22* Form of 2005 Stock Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 99.2 of Form 8-K
filed June 3, 2005, SEC File No. 1-7340.
10.23* Consulting Agreement dated June 1, 2005, between Kellwood
Company and Hal J. Upbin, incorporated herein by reference to
Exhibit 99.3 of Form 8-K filed June 3, 2005, SEC File No.
1-7340.
10.24* Employment Agreement dated June 1, 2005, between Kellwood
Company and Robert C. Skinner, Jr., incorporated herein by
reference to Exhibit 99.4 of Form 8-K filed June 3, 2005, SEC
File No. 1-7340.
10.25* Form of Deferred Stock Units Agreement, incorporated herein by
reference to Exhibit 99.6 of Form 8-K filed June 3, 2005, SEC
File No. 1-7340.
69
S.E.C. Exhibit
Reference No. Description
-------------- -----------
10.26* Form of annual compensation term sheet for Robert C. Skinner,
Jr., including the form of stock grant award under the
Kellwood Corporate Development Incentive Plan, as restated,
incorporated herein by reference to Exhibit 99.1 of Form 8-K
filed March 15, 2006, SEC File No. 1-7340.
10.27* Form of annual compensation term sheet for Stephen L. Ruzow,
including the form of stock grant award under the Kellwood
Corporate Development Incentive Plan, as restated,
incorporated herein by reference to Exhibit 99.2 of Form 8-K
filed March 15, 2006, SEC File No. 1-7340.
10.28* Form of annual compensation term sheet for W. Lee Capps III,
including the form of stock grant award under the Kellwood
Company Development Incentive Plan, as restated, incorporated
herein by reference to Exhibit 99.3 of Form 8-K filed March
15, 2006, SEC File No. 1-7340.
10.29* Form of annual compensation term sheet for Thomas H. Pollihan,
including the form of stock grant award under the Kellwood
Corporate Development Incentive Plan, as restated,
incorporated herein by reference to Exhibit 99.4 of Form 8-K
filed March 15, 2006, SEC File No. 1-7340.
10.30 [Intentionally Omitted]
10.31 US $50,000,000 Term and Revolving Credit Facility Agreement by
and among Smart Shirts Limited, certain guarantors thereto and
Banc of America Securities as facility Agent, incorporated
herein by reference to Exhibit 4.9 to Current Report on Form
8-K filed with the SEC on April 17, 2006.
10.32 Supplemental Amendment No. 1 dated August 3, 2006 to US
$50,000,000 Term and Revolving Credit Facility Agreement by
and among Smart Shirts Limited, certain guarantors thereto and
Banc of America Securities Asia Limited as facility agent,
incorporated herein by reference to Exhibit 10.32 of the
Quarterly Report on Form 10-Q for the quarterly period ended
October 28, 2006 filed with the SEC on December 6, 2006.
21 Subsidiaries of the Company, filed herewith.
23 Consent of Independent Registered Public Accounting Firm,
filed herewith.
24 Powers of Attorney: Ms. Dickerson and Page and Messrs. Baer,
Blount, Hunter, Katzen, Miller, Skinner and Weinberg, filed
herewith.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith.
<FN>
* Denotes management contract or compensatory plan.
** Pursuant to the Securities Exchange Act of 1934, Rule 24b-2, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Commission pursuant to a request for confidential treatment.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 22, 2007
/s/ Robert C. Skinner, Jr.
--------------------------
Robert C. Skinner, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of Kellwood Company
and in the capacities and on the dates indicated.
[Download Table]
Signature Title Date
--------- ----- ----
/s/ Robert C. Skinner, Jr. Chairman, President and March 22, 2007
----------------------------- Chief Executive Officer
Robert C. Skinner, Jr.
/s/ W. Lee Capps III Chief Operating Officer, March 22, 2007
----------------------------- Chief Financial Officer and
W. Lee Capps III Treasurer
(principal financial officer)
/s/ Gregory W. Kleffner Senior Vice President Finance March 22, 2007
----------------------------- and Controller
Gregory W. Kleffner (principal accounting officer)
Robert J. Baer* Director
Ben B. Blount, Jr.* Director
Kitty G. Dickerson, Ph.D.* Director
Jerry M. Hunter* Director
Larry R. Katzen* Director
Philip B. Miller* Director
Janice E. Page* Director
Harvey A. Weinberg* Director
/s/ W. Lee Capps III
-----------------------------
W. Lee Capps III
<FN>
*Attorney-in-fact
March 22, 2007
71
APPENDIX
Page 13 of the Form 10-K contains a Performance Graph. The
information contained within the graph is presented in a tabular format
immediately following the graph.
Dates Referenced Herein and Documents Incorporated By Reference
| Referenced-On Page |
|---|
| This 10-K Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 6/2/94 | | 69 |
| | 7/13/95 | | 68 | | | | | DEF 14A, 10-K405 |
| | 5/31/96 | | 67 |
| | 6/3/96 | | 67 | | | | | 8-A12B/A |
| | 1/1/97 | | 68 |
| | 3/18/97 | | 68 |
| | 4/30/97 | | 68 | | | | | 10-K405 |
| | 9/30/97 | | 67 |
| | 10/24/97 | | 67 | | | | | 424B2 |
| | 11/21/00 | | 67 | | | | | 8-K |
| | 12/1/00 | | 55 | | | | | 8-K |
| | 12/8/00 | | 69 |
| | 2/3/01 | | 67 |
| | 5/22/01 | | 69 |
| | 2/2/02 | | 68 |
| | 3/31/02 | | 68 |
| | 4/16/02 | | 69 | | | | | DEF 14A |
| | 4/24/02 | | 65 | | | | | 10-K |
| | 5/30/02 | | 69 | | | | | DEF 14A |
| | 2/4/03 | | 47 | | | | | 8-K |
| | 2/3/04 | | 30 | | 48 |
| | 6/22/04 | | 68 |
| | 7/30/04 | | 68 | | | | | 8-K, S-3 |
| | 10/20/04 | | 31 | | 52 | | | 8-K |
| | 12/6/04 | | 69 | | | | | 8-K |
| | 1/1/05 | | 69 |
| | 1/29/05 | | 3 | | 69 | | | 10-K, 10-K/A |
| | 3/14/05 | | 69 | | | | | 4, 8-K |
| | 3/15/05 | | 68 | | | | | SC 13G, 8-K |
| | 6/1/05 | | 65 | | 69 | | | 8-K, 4 |
| | 6/3/05 | | 69 | | | | | 4, 8-K |
| | 9/1/05 | | 52 | | | | | 3, 8-K |
| | 11/10/05 | | 17 | | 47 |
| | 12/21/05 | | 31 | | 53 |
| | 1/28/06 | | 3 | | 60 | | | 5, 10-K |
| | 1/29/06 | | 22 | | 57 |
| | 1/31/06 | | 65 |
| | 2/1/06 | | 65 |
| | 2/3/06 | | 16 | | 47 |
| | 3/15/06 | | 70 | | | | | 8-K |
| | 4/12/06 | | 31 | | 68 | | | 8-K |
| | 4/17/06 | | 68 | | 70 | | | 8-K |
| | 6/1/06 | | 65 | | | | | 8-K, DEF 14A |
| | 6/10/06 | | 68 | | | | | 8-K |
| | 6/12/06 | | 68 | | | | | 8-A12B, 8-K, 4 |
| | 7/29/06 | | 1 | | | | | 10-Q |
| | 8/3/06 | | 70 |
| | 10/28/06 | | 17 | | 70 | | | 10-Q |
| | 10/31/06 | | 30 | | 48 |
| | 11/30/06 | | 65 |
| | 12/5/06 | | 48 |
| | 12/6/06 | | 70 | | | | | 10-Q, 4 |
| | 12/15/06 | | 29 | | 60 |
| | 12/31/06 | | 57 |
| For The Period Ended | | 2/3/07 | | 1 | | 65 |
| | 3/10/07 | | 1 | | 65 |
| | 3/21/07 | | 36 | | 67 | | | 8-K |
| Filed On / Filed As Of | | 3/22/07 | | 71 |
| | 6/7/07 | | 1 |
| | 11/15/07 | | 29 | | 45 |
| | 12/15/08 | | 29 | | 45 |
| | 7/15/09 | | 54 | | 68 |
| | 6/15/11 | | 54 |
| | 6/20/11 | | 54 |
| | 6/15/14 | | 54 |
| | 10/15/17 | | 54 | | 68 |
| | 6/15/19 | | 54 |
| | 6/15/24 | | 54 |
| | 6/15/29 | | 54 |
| | 6/15/34 | | 53 | | 54 |
| |
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