<PAGE> 1
- -------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
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
- ---------------------------------------- -------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
600 KELLWOOD PARKWAY, P.O. BOX 14374, ST. LOUIS, MO 63178
- --------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 576-3100
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of common stock, par value $.01, outstanding at July 31,
1998 (only one class): 21,614,784
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KELLWOOD COMPANY
----------------
<TABLE>
INDEX
-----
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II. OTHER INFORMATION 12
</TABLE>
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<PAGE> 3
<TABLE>
PART I. FINANCIAL INFORMATION
------------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
<CAPTION>
July 31,
----------------------------- April 30,
1998 1997 1998
---------- -------- ----------
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and time deposits $ 27,804 $ 19,421 $ 31,752
Receivables, net 295,486 251,840 320,104
Inventories 395,086 362,120 374,472
Prepaid taxes and expenses 30,134 28,732 32,655
---------- -------- ----------
Total current assets 748,510 662,113 758,983
Property, plant and equipment, net 77,304 62,178 65,946
Intangible assets, net 101,910 112,755 105,425
Other assets 86,985 78,453 85,159
---------- -------- ----------
$1,014,709 $915,499 $1,015,513
========== ======== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Current portion of long-term debt $ 15,295 $ 15,392 $ 15,298
Notes payable 158,954 237,175 141,736
Accounts payable 100,537 100,660 110,725
Accrued expenses 62,164 52,312 74,746
---------- -------- ----------
Total current liabilities 336,950 405,539 342,505
Long-term debt 239,403 106,480 242,720
Deferred income taxes and other 47,133 46,593 46,123
Shareowners' equity:
Common stock 113,528 106,032 109,657
Retained earnings 327,336 296,749 323,035
Cumulative translation adjustment (8,591) (7,407) (8,542)
---------- -------- ----------
432,273 395,374 424,150
Less treasury stock, at cost (41,050) (38,487) (39,985)
---------- -------- ----------
Total shareowners' equity 391,223 356,887 384,165
---------- -------- ----------
$1,014,709 $915,499 $1,015,513
========== ======== ==========
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 4
<TABLE>
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
--------------------------------------------------------
(Amounts in thousands except per share data)
<CAPTION>
Three Months Ended
July 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $427,669 $400,604
Costs and expenses:
Cost of products sold 346,800 321,602
Selling, general and administrative expenses 56,372 56,423
Amortization of intangible assets 3,610 3,752
Interest expense 7,873 6,887
Interest income and other, net (440) (476)
-------- --------
Earnings before income taxes 13,454 12,416
Income taxes 5,700 5,200
-------- --------
Net earnings $ 7,754 $ 7,216
======== ========
Weighted average shares outstanding:
Basic 21,573 21,252
======== ========
Diluted 22,122 21,769
======== ========
Earnings per share:
Basic .36 .34
======== ========
Diluted .35 .33
======== ========
Dividends paid per share .16 .16
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 5
<TABLE>
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Three Months Ended
July 31,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net earnings $ 7,754 $ 7,216
Add (deduct) items not affecting operating
cash flows:
Depreciation and amortization 7,088 7,192
Increase in prepaid pension cost (1,200) (2,125)
Deferred taxes and other 322 4,961
-------- --------
13,964 17,244
Changes in noncash working capital components:
Receivables 24,618 19,789
Inventories (20,614) (63,182)
Prepaid expenses 2,521 (288)
Accounts payable (10,188) (21,389)
Accrued expenses (12,582) (25,511)
-------- --------
Net cash (used for) operating activities ( 2,281) (73,337)
-------- --------
Investing activities:
Additions to property, plant and equipment (14,455) (2,819)
Investment in subsidiaries (120) (2,610)
Other investing activities (343) 12
-------- --------
Net cash (used for) investing activities (14,918) (5,417)
-------- --------
Financing activities:
Proceeds from notes payable, net 17,218 78,046
Reduction of long-term debt (3,320) (3,368)
Dividends paid (3,453) (3,398)
Other financing activities 2,806 4,382
-------- --------
Net cash provided by financing activities 13,251 75,662
-------- --------
Net decrease in cash and time deposits (3,948) (3,092)
Cash and time deposits - beginning of period 31,752 22,513
-------- --------
Cash and time deposits - end of period $ 27,804 $ 19,421
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 6
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Amounts in thousands)
1. It is the opinion of management that all adjustments necessary for a
fair presentation of results for the interim periods have been
reflected in the statements presented. Such adjustments were normal and
recurring in nature.
Accounting policies have been continued without material change and are
described in the Summary of Significant Accounting Policies contained
in the Company's 1998 Annual Report to Shareowners. For additional
information regarding the Company's financial condition, refer to the
footnotes accompanying the annual financial statements. Details in
those notes have not changed significantly except as a result of normal
transactions in the interim.
2. Total inventory consisted of:
<TABLE>
<CAPTION>
July 31,
----------------------- April 30,
1998 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Finished goods $214,037 $186,596 $175,953
Work in process 105,549 106,237 128,051
Raw materials 75,500 69,287 70,468
-------- -------- --------
$395,086 $362,120 $374,472
======== ======== ========
</TABLE>
If inventories were valued at current replacement costs, they would
have totalled $405,828, $371,384, and $384,714 at July 31, 1998, July
31, 1997, and April 30, 1998, respectively.
3. Intangible assets consisted of:
<TABLE>
<CAPTION>
July 31,
----------------------- April 30,
1998 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Goodwill $116,421 $112,101 $116,301
Other identifiable
intangibles 81,083 81,446 81,106
-------- -------- --------
197,504 193,547 197,407
Less accumulated
amortization 95,594 80,792 91,982
-------- -------- --------
$101,910 $112,755 $105,425
======== ======== ========
</TABLE>
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<PAGE> 7
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Amounts in thousands)
(Continued)
4. A credit facility agreement dated May 31, 1996, in the amount of
$300,000 expires October 30, 1999. Under the agreement, up to $200,000
can be utilized for short-term loans and up to $200,000 can be utilized
for letters of credit. Each borrowing under the agreement bears
interest at one of several specified rates dependent upon several
factors including the Company's leverage ratio, senior debt rating and
the applicable Eurodollar margin. Facility fees can range from .1% to
.25% of the committed amount. At July 31, 1998, outstanding short-term
loans and letters of credit under the agreement were $100,000 and
$105,000, respectively. Covenants are more flexible than those
currently existing for Kellwood's notes due insurance companies.
5. During the year, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
requires the reporting of comprehensive earnings in addition to net
earnings. Comprehensive earnings is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net earnings.
The Company engaged in numerous transactions involving foreign
currency, resulting in before tax unrealized <losses> and gains of
<$49> and $873, for the three months ended July 31, 1998 and 1997,
respectively.
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<PAGE> 8
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OPERATING RESULTS
- -----------------
Sales reached record levels for the first quarter ended July 31, 1998,
increasing 6.8% vs. the first quarter of the prior fiscal year. Net Earnings
for the quarter increased 7.5%. Summarized comparative financial data for
fiscal 1999 and 1998 are as follows ($ in millions; percentages are
calculated based on actual data, but columns may not add due to rounding):
<TABLE>
<CAPTION>
Quarter ended July 31, % of Net Sales
------------------------------ ----------------
1998 1997 % Change 1998 1997
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $428 $401 6.8% 100.0% 100.0%
Cost of products sold 347 322 7.8% 81.1% 80.3%
S, G & A 56 56 -0.1% 13.2% 14.1%
---- ---- ---- ----- -----
Operating earnings 24 23 8.5% 5.7% 5.6%
Amort. of intangibles 4 4 -3.8% 0.8% 0.9%
Interest, net & other 7 6 15.9% 1.7% 1.6%
---- ---- ---- ----- -----
Earnings before tax 13 12 8.4% 3.1% 3.1%
Income Taxes 6 5 9.6% 1.3% 1.3%
---- ---- ---- ----- -----
Net Earnings $ 8 $ 7 7.5% 1.8% 1.8%
==== ==== ==== ===== =====
</TABLE>
Sales were up in nearly every channel of distribution. The principal drivers
of growth were Sag Harbor(R), Kathie Lee(R) sportswear for Wal-Mart, Studio
Ease(R) and MHM(R) dresses, and Smart Shirts. Sales by segment are
summarized as follows:
<TABLE>
<CAPTION>
Quarter ended July 31, % of Total Sales
----------------------------- ----------------
NET SALES: 1998 1997 % Change 1998 1997
---------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Branded Sportswear
Popular-to-Moderate $240 $196 22.2% 56.1% 49.0%
Private Label 60 76 -20.6% 14.1% 19.0%
Branded Sportswear
Better-to-Bridge 40 50 -19.2% 9.4% 12.4%
Smart Shirts 50 39 30.0% 11.7% 9.6%
Recreation Products 37 40 -7.2% 8.6% 9.9%
---- ---- ---- ----- -----
Total Net Sales $428 $401 6.8% 100.0% 100.0%
==== ==== ==== ===== =====
</TABLE>
The increased sales of Branded Sportswear in the Popular-to-Moderate price
category was driven by continued growth of the Sag Harbor(R) brand, including
a recently introduced line of Sag Harbor(R) dresses. In keeping with the
strategy of building on the Sag Harbor(R) name, a new line of casual
sportswear called Sag Harbor(R) Sport will be introduced in Spring 1999
(shipments expected to start in this fiscal year's third quarter).
Private label sales were down vs. the prior year primarily due to the loss of
the Brittania(R) license for men's casual pants (as a result of the brand
being sold to VF Corporation). Another factor contributing to the decline
was the lower orders for outerwear resulting from inventory carried over by
our customers due to the warm winter weather last year.
The Better-to-Bridge segment sales were down in line with our Plan (which was
for an 18% decline). Marketing and merchandising initiatives are underway to
address styling issues and lost market share in our better category brands in
this segment, and the Melrose(R) label has been repositioned as well. The
Plan for this segment contemplates a 20% decline in the second quarter vs.
the comparable period in the prior year before this segment is expected to
turn around and begin posting positive comparisons in the fourth quarter of
this fiscal year.
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<PAGE> 9
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
Smart Shirts sales for the first quarter were up 30% vs. the prior year.
Sales increased to Polo Ralph Lauren(R) as well as to a number of department
stores and major catalog houses. Also, shipments in the first quarter of
last year were delayed due to the moving of our sewing operation in China
into a new and larger facility. Second quarter sales for this segment are
expected to grow 16-20% vs. the prior year.
The Recreation Products segment had unusually strong sales (up 16%) in the
fourth quarter of fiscal '98, which marks the beginning of the camping sales
season. Sales in the first quarter of fiscal '99 were off due to a softening
in consumer demand at retail. The outlook for the second quarter is for
sales to be up 8-9% vs. the comparable quarter in the prior year.
Cost of Products Sold as a percentage of sales increased primarily in the
Private Label segment due to lower production levels and inefficiencies
resulting from the loss of the Brittania(R) business. Additionally, the
majority of the Company's sales growth came from businesses and programs
yielding gross margins below the company average.
S,G&A expense was basically flat in dollar terms vs. the prior year,
declining to 13.2% of sales from 14.1% of sales in the prior year due to
overhead reductions resulting from consolidation of operations in the
Better-to-Bridge segment and reduced S,G&A spending in response to lower
sales volume in both the Private Label and Better-to-Bridge segments. Vision
2000 expenses were consistent with the prior year.
Operating earnings (defined as net sales less cost of products sold and S,G&A
expenses) increased 8.5% vs. the prior year on a 6.8% increase in sales.
Control of S,G&A spending offset the decrease in Gross Profit margin
discussed above.
The increase in interest expense is due primarily to the increase in average
debt and the higher interest rate that resulted from replacing short term
debt with the 20 year debentures (discussed below).
FINANCIAL CONDITION
- -------------------
The current ratio increased from 1.6 to 1 at July 31, 1997 to 2.2 to 1 at
April 30, 1998 and July 31, 1998, primarily due to the use of debt proceeds
to retire short-term Notes Payable. Accounts receivable decreased 7.7% vs.
April 30, 1998 but increased 17.3% vs. July 31, 1997, which is ahead of the
6.8% increase in sales. This increase was due principally to the growth in
the volume of business the Company does with certain customers which have
terms of sale in excess of the company average. Inventory levels have
increased faster than sales (up 9.1% vs. July 31, 1997) because of a shift to
more offshore sourcing which results in higher inventories.
Total debt represents 51% of capital at July 31, 1998 vs. 50% at July 31,
1997. The increased leverage is due to increased working capital requirements
to support the sales growth of 6.8% vs. the prior year.
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<PAGE> 10
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
Kellwood maintains a $300 million credit facility agreement of which up to
$200 million can be utilized for short-term loans and up to $200 million can
be utilized for letters of credit. At July 31, 1998, $95 million was
available for future use. Management believes that the combined operating,
cash and equity position of the Company will continue to provide the capital
flexibility necessary to fund future opportunities and to meet existing
obligations.
Year 2000 Compliance
- --------------------
In July 1996 the Company outsourced its Information Systems function to
Electronic Data Systems Corporation (EDS). Together, EDS and Kellwood
employees have completed an assessment of all known potential year 2000
impacts. The Company has developed, and is continuing to develop, plans to
make key operational and financial systems compliant and to ensure
uninterrupted functionality through the year 2000. As part of the Vision
2000 initiative, several new information technologies have been and are being
installed to implement a Consistent Office Environment and to replace several
legacy systems with an Integrated Business System. These systems will be
year 2000 compliant. The Company believes that all systems necessary to
manage the business effectively will be replaced, modified or upgraded before
the year 2000.
Key trading partners such as customers, suppliers, banks, shipping companies
and insurance companies have been contacted to assess year 2000 compliance in
key potentially impacted business relationships. The Company does not have
control over these third parties and, as a result, the Company cannot
currently determine to what extent future operating results may be adversely
affected by the failure of these third parties to successfully address their
year 2000 issues. Based on the results of the Company's Year 2000 assessment
and the Year 2000 status information received from third parties, the Company
is currently developing contingency plans to minimize identified exposures.
Based on the Company's efforts to date, Management believes that it is
unlikely that the year 2000 problem will have a material adverse effect on
the Company's results of operations in the future.
The Company is incurring significant business process reengineering and
system replacement expenses as part of the Vision 2000 initiative. As a part
of this initiative, most of the company's legacy software that is not
currently year 2000 compliant will be replaced with new systems that are year
2000 compliant. The Company believes that the additional costs it will incur
to modify other systems that are not currently year 2000 compliant to bring
them into compliance will not be significant to the Company's financial
results.
OUTLOOK
- -------
Kellwood is into a period of solid internal growth led by the
Popular-to-Moderate Women's Branded Sportswear business. As the retail
industry continues to consolidate, Kellwood is increasingly becoming the
vendor of choice for popular-to-moderately priced women's sportswear, men's
woven shirts and other value priced categories of apparel. The Company
expects fiscal 1999 sales to be up approximately 4% to 6%.
The Company is investing in its Vision 2000 initiative which will further
enhance the Company's competitive position and ability to continue to gain
market share and improve profitability in the future.
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<PAGE> 11
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
Interest expense in the first half of fiscal 1999 will be higher than the
prior year due to the October 1997 $150 million twenty-year public debt
offering. Though management believes that the rate on this debt (7.625%) is
favorable, it is approximately 1.5% higher than the Company was paying for
short-term floating rate debt.
SAFE HARBOR REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------------------
This Form 10-Q includes "forward-looking statements" within the meaning of
the Securities Act of 1933, and of the Securities Exchange Act of 1934, which
represent the Company's expectations or beliefs concerning future events.
Although the Company believes that its expectations reflected in the
forward-looking statements are reasonable, it cannot and does not give any
assurance that such expectations will prove to be correct. Certain phases of
the Company's operations are subject to influences and factors outside its
control. Any one of these factors or any combination of these factors could
materially affect the results of the Company's operations and cause actual
results to differ materially from the Company's expectations. These factors
include but are not limited to national and regional economic conditions,
inflation or deflation, the overall level of consumer spending, the level of
consumer debt, currency exchange fluctuations, other capital market
conditions, competitive pressures, the performance of the Company's products
within the prevailing retail environment, customer acceptance of both new
designs and newly introduced product lines, the timing and magnitude of
spending on and savings realized from our Vision 2000 initiative, stable
governments and business conditions in the nations where the Company's
products are manufactured, and financial difficulties encountered by
customers. The words "believe", "expect", "will", "estimate", "project",
"forecast", "should", "anticipate" and similar expressions may identify
forward-looking statements. Additionally, all statements other than
statements of historical facts included in this Report on Form 10-Q,
including without limitation, the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
are also forward-looking statements. All forward-looking statements
contained herein and all subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf, are
expressly qualified in their entirety by this cautionary statement.
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<PAGE> 12
PART II. OTHER INFORMATION
---------------------------
KELLWOOD COMPANY
----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) EXHIBITS:
<TABLE>
<CAPTION>
S.E.C. Exhibit
Reference No. Description
-------------- -----------
<C> <S>
27 Financial Data Schedule, filed herewith.
</TABLE>
b) REPORTS ON FORM 8-K:
No reports were filed on Form 8-K during the three months ended July 31,
1998.
- 12 -
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLWOOD COMPANY
September 11, 1998 /s/ Thomas H. Pollihan
-------------------------------------
Thomas H. Pollihan
Vice President, Secretary and General
Counsel
September 11, 1998 /s/ James C. Jacobsen
-------------------------------------
James C. Jacobsen
Vice Chairman
(Principal Financial and Accounting
Officer)
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM KELLWOOD COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET AT JULY 31,
1998, AND FROM THE CONDENSED CONSOLIDATED STATEMENT
OF EARNINGS AND CONDENSED CONSOLIDATED STATEMENT OF
CASH FLOWS FOR THE THREE MONTHS ENDED JULY 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 27,804
<SECURITIES> 0
<RECEIVABLES> 307,053
<ALLOWANCES> 11,567
<INVENTORY> 395,086
<CURRENT-ASSETS> 748,510
<PP&E> 203,022
<DEPRECIATION> 125,718
<TOTAL-ASSETS> 1,014,709
<CURRENT-LIABILITIES> 336,950
<BONDS> 239,403
0
0
<COMMON> 113,528
<OTHER-SE> 277,695
<TOTAL-LIABILITY-AND-EQUITY> 1,014,709
<SALES> 427,669
<TOTAL-REVENUES> 427,669
<CGS> 346,800
<TOTAL-COSTS> 346,800
<OTHER-EXPENSES> 59,542
<LOSS-PROVISION> 899
<INTEREST-EXPENSE> 7,873
<INCOME-PRETAX> 13,454
<INCOME-TAX> 5,700
<INCOME-CONTINUING> 7,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,754
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>