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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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-7340
KELLWOOD COMPANY
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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, 1999 (only one class): 27,765,557
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1
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KELLWOOD COMPANY
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INDEX
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Page No.
--------
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II. OTHER INFORMATION 16
2
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<TABLE>
PART I. FINANCIAL INFORMATION
------------------------------
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------
(Amounts in thousands)
----------------------
<CAPTION>
July 31,
------------------------- April 30,
1999 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and time deposits $ 71,578 $ 28,822 $ 25,482
Receivables, net 339,114 299,002 392,628
Inventories 382,447 453,942 340,778
Prepaid taxes and expenses 39,395 37,263 38,392
---------- ---------- ----------
Total current assets 832,534 819,029 797,280
Property, plant and equipment, net 105,048 85,744 102,298
Intangible assets, net 58,852 110,824 60,207
Other assets 97,165 89,417 94,427
---------- ---------- ----------
$1,093,599 $1,105,014 $1,054,212
========== ========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current liabilities:
Current portion of long-term debt $ 16,412 $ 19,456 $ 16,504
Notes payable 2,124 158,954 93,963
Accounts payable 118,014 118,271 117,014
Accrued expenses 80,552 73,855 104,264
---------- ---------- ----------
Total current liabilities 217,102 370,536 331,745
Long-term debt 373,494 247,809 227,659
Deferred income taxes and other 50,001 49,598 48,620
Shareowners' equity:
Common stock 165,420 137,493 163,097
Retained earnings 338,458 350,556 333,340
Accumulated other comprehensive income (9,558) (9,928) (9,330)
---------- ---------- ----------
494,320 478,121 487,107
Less treasury stock, at cost (41,318) (41,050) (40,919)
---------- ---------- ----------
Total shareowners' equity 453,002 437,071 446,188
---------- ---------- ----------
$1,093,599 $1,105,014 $1,054,212
========== ========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
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(Amounts in thousands except per share data)
<CAPTION>
Three Months Ended
July 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $470,575 $483,283
Costs and expenses:
Cost of products sold 369,859 384,821
Selling, general and administrative expenses 76,714 71,153
Amortization of intangible assets 1,659 3,832
Interest expense 6,357 8,984
Interest income and other, net (71) (380)
-------- --------
Earnings before income taxes 16,057 14,873
Income taxes 6,500 6,221
-------- --------
Net earnings $ 9,557 $ 8,652
======== ========
Weighted average shares outstanding:
Basic 27,722 26,218
======== ========
Diluted 28,081 27,038
======== ========
Earnings per share:
Basic $ .34 $ .33
======== ========
Diluted $ .34 $ .32
======== ========
Dividends paid per share $ .16 $ .16
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
KELLWOOD COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Three Months Ended
July 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net earnings $ 9,557 $ 8,652
Add (deduct) items not affecting operating
cash flows:
Depreciation and amortization 6,494 7,952
Increase in prepaid pension cost (1,442) (1,200)
Deferred income taxes and other (20) (693)
Changes in working capital components:
Receivables, net 53,514 29,346
Inventories (41,669) (26,172)
Prepaid taxes and expenses (1,003) 4,165
Accounts payable 1,000 (6,866)
Accrued expenses (23,712) (12,451)
-------- --------
Net cash provided by operating activities 2,719 2,733
-------- --------
Investing activities:
Additions to property, plant and equipment (7,810) (15,104)
Investment in subsidiaries (84) (120)
Other investing activities (118) 0
-------- --------
Net cash (used for) investing activities (8,012) (15,224)
-------- --------
Financing activities:
Proceeds from debentures 149,127 -
Reduction of notes payable, net (91,839) 17,218
Reduction of long-term debt (3,384) (4,696)
Dividends paid (4,435) (3,453)
Stock transactions under incentive plans 1,920 2,533
-------- --------
Net cash provided by financing activities 51,389 11,602
-------- --------
Net increase in cash and time deposits 46,096 (889)
Cash and time deposits - beginning of period 25,482 29,711
-------- --------
Cash and time deposits - end of period $ 71,578 $ 28,822
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
5
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KELLWOOD COMPANY AND SUBSIDIARIES
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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. All prior year data have been restated for the merger with
Koret which was effective April 30, 1999 and was accounted for as a
pooling of interests.
Accounting policies have been continued without change and are described
in the Summary of Significant Accounting Policies contained in the
Company's 1999 Annual Report to Shareowners. For additional information
regarding the Company's financial condition, refer to the footnotes
accompanying the annual financial statements. Details in those notes
have not changed significantly except as a result of normal transactions
in the interim.
2. Total inventory consisted of:
<TABLE>
<CAPTION>
July 31,
-------------------- April 30,
1999 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Finished goods $230,405 $259,121 $196,214
Work in process 89,574 116,916 77,992
Raw materials 62,468 77,905 66,572
-------- -------- --------
$382,447 $453,942 $340,778
======== ======== ========
</TABLE>
If inventories were valued at current replacement costs, they would have
totaled $387,743, $464,684 and $346,074 at July 31, 1999, July 31, 1998,
and April 30, 1999, respectively.
3. Intangible assets consisted of:
<TABLE>
<CAPTION>
July 31,
------------------- April 30,
1999 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Goodwill $63,887 $127,371 $65,477
Less accumulated
amortization 18,558 44,773 19,479
------- -------- -------
Net goodwill 45,329 82,598 45,998
------- -------- -------
Other identifiable
intangibles 40,156 85,927 40,229
Less accumulated
amortization 26,633 57,701 26,020
------- -------- -------
Net other
identifiable intangibles 13,523 28,226 14,209
------- -------- -------
Net intangible assets $58,852 $110,824 $60,207
======= ======== =======
</TABLE>
6
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KELLWOOD COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Amounts in thousands)
4. A credit facility agreement dated May 31, 1996 in the amount of
$300,000 expires October 30, 1999 (the "1996 Agreement"). Under the
1996 Agreement up to $200,000 can be utilized for short-term loans, and
up to $200,000 can be used for letters of credit. Each borrowing under
the 1996 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, 1999,
outstanding short-term loans and letters of credit under the agreement
were $0 and $105,000, respectively.
On August 31, 1999 the Company executed a $350,000 Senior Credit
Facility with Bank of America and other participating banks (the "1999
Facility"). This facility replaced the 1996 Agreement. In connection
with the execution of the 1999 Facility the Company paid various fees
and costs totaling approximately $750. Facility fees range from .15% to
.20% of the committed amount. The 1999 Facility comprises a $100,000
364 day revolving credit facility and a $250,000 three-year revolving
credit facility. The $250,000 three-year revolving credit facility can
also be used for letters of credit. Borrowings under the 1999 Facility
will bear interest at a spread of approximately .6% over LIBOR.
The Company maintains informal, uncommitted lines of credit with several
banks which totaled $165,000 at July 31, 1999. Borrowings under these
uncommitted lines totaled $0 at July 31, 1999.
On July 26 1999 the Company completed a 10-year public debt offering
totaling $150,000. The debentures mature July 15, 2009 and carry a
7.875% coupon rate.
Covenants related to both the 1999 Facility and the 10-year debentures
are more flexible than those currently existing for Kellwood's notes due
insurance companies.
5. The Company's business units are organized by product line. For
purposes of SFAS 131, these have been aggregated into the following five
reportable segments. Sales and operating earnings by segment for the
quarters ended July 31, 1999 and 1998 and a reconciliation of the
operating earnings of the reported segments to total Kellwood earnings
before income taxes are as follows:
<TABLE>
<CAPTION>
July 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net Sales:
Popular-to-Moderate $288,614 $295,668
Better-to-Bridge 34,397 40,256
Private Label Apparel 59,005 60,442
Smart Shirts 50,608 50,138
Recreation Products 37,951 36,779
-------- --------
Kellwood total $470,575 $483,283
======== ========
</TABLE>
7
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KELLWOOD COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<S> <C> <C>
Operating earnings:
Popular-to-Moderate $21,893 $20,196
Better-to-Bridge (115) 1,172
Private Label Apparel 2,868 6,008
Smart Shirts 3,480 4,448
Recreation Products 3,105 3,284
------- -------
Total segments 31,231 35,108
Amortization of Intangibles (1,659) (3,832)
Interest expense (6,357) (8,984)
General corporate and other (7,158) (7,419)
------- -------
Earnings before income taxes $16,057 $14,873
======= =======
</TABLE>
6. The Company's total comprehensive income for the three months
ended July 31, 1999 and 1998, was $9,329 and $8,331, respectively.
Differences between net earnings and total comprehensive income resulted
from foreign currency translation.
7. In the fourth quarter of fiscal 1999, the Company recorded a
provision for facilities shut-down. Details of activity during the
first quarter related to this provision and the accrual balances
remaining at July 31, 1999 are as follows:
<TABLE>
<CAPTION>
Spending Accrual
-------- -------
<S> <C> <C>
Employee severance $ 62 $3,533
Vacant facilities / lease termination 112 1,221
Other cash restructuring costs 71 189
---- ------
Total restructuring, excluding non-cash $245 $4,943
==== ======
</TABLE>
Facility consolidations represented by the July 31, 1999 accrual balance
are expected to be substantially completed by April 30, 2000.
8. During the first quarter of fiscal 2000, the Company granted
nonqualified stock options to certain officers and other key employees
for 467,350 shares of common stock at an exercise price of $23.68, which
was equal to the market value of the shares on that date.
9. On August 26, 1999, the company changed its fiscal year-end from
April 30 to January 31. This change will result in a transition period
of nine months beginning May 1, 1999 and ending January 31, 2000.
8
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KELLWOOD COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS - $ in MILLIONS
-----------------------------------------
OPERATING RESULTS
- -----------------
Results for the quarter came in as anticipated with sales of $471, down
$12 or 2.6% compared to the prior year. Net earnings increased 10.5%,
also in line with expectations. As indicated in our Annual Report (page
36), we expected flat sales through the first half of fiscal 2000 which
covers the fall selling season. We expect to more than pick up the $12
shortfall vs. the prior year in the second quarter, which will result in
flat sales for the first half. Detailed discussion of expectations for
the full year is included in the Outlook section below.
Kellwood's businesses are quite seasonal. The Company generally sells
its products prior to the principal retail selling seasons: spring,
summer, fall, and holiday. Sales and earnings for the first quarter
have historically been lower than the second or fourth quarters of the
fiscal year.
Summarized financial data for the quarters ended July 31, 1999 and 1998
are as follows. All prior year data have been restated for the merger
with Koret which was effective April 30, 1999 and was accounted for as a
pooling of interests. ($ in millions; percentages are calculated based on
actual data, but columns may not add due to rounding)
<TABLE>
<CAPTION>
Three Months Ended As a percentage
July 31, of Net Sales
----------------------- ----------------
1999 1998 % Change 1999 1998
----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net Sales $ 471 $ 483 -2.6% 100.0% 100.0%
Cost of products sold 370 385 -3.9% 78.6% 79.6%
S, G & A 77 71 7.8% 16.3% 14.7%
----- ----- ------ ------ ------
Operating earnings 24 27 -12.1% 5.1% 5.7%
Amort. of intangibles 2 4 -56.7% 0.4% 0.8%
Interest, net & other 6 9 -26.9% 1.3% 1.8%
----- ----- ------ ------ ------
Earnings before tax 16 15 8.0% 3.4% 3.1%
Income Taxes 6 6 4.5% 1.4% 1.3%
----- ----- ------ ------ ------
Net Earnings $ 10 $ 9 10.5% 2.0% 1.8%
===== ===== ====== ====== ======
Effective tax rate 40.5% 41.8% -1.3%
</TABLE>
The decrease in sales for the first quarter was anticipated due to
retailers' desire to take in Fall merchandise closer to the selling
season and carry less inventory to avoid having to take heavy end-of-
season markdowns. Sales for the quarter were also impacted by a change
in fashion direction away from heavier weight fabrics and structured
garments to less expensive lighter weight and softer looks, which
resulted in lower unit selling prices.
Cost of Products Sold as a percentage of sales decreased from 79.6% to
78.6% in the quarter vs. the comparable period in the prior year.
Approximately half of this improvement was due to improved sourcing and
savings generated from the Vision 2000 supplier management initiative,
and the remaining half of this improvement was the result of a shift in
mix to businesses which provide a higher than average gross margin.
9
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KELLWOOD COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
S,G&A expense for the quarter increased $5.6 to 16.3% of sales from
14.7% in the prior year due to the impact of the addition of Fritzi
which was acquired in December 1998. Adjusting for Fritzi, S,G&A
expense was actually down $.6. S,G&A as a percent of sales increased
due primarily to funding the start-up of the Slates(R) and Components
Sportswear(TM) lines and due to the largely fixed nature of most of the
Company's overhead.
Operating earnings decreased 12.1% for the quarter because the impact of
higher gross profit margins ($4.8) was offset by the impact of the sales
decline (-$2.6) and the higher S,G&A expense discussed above.
Amortization of intangible assets decreased compared to the prior year
as a result of the provision for goodwill impairment recorded in the
fourth quarter of fiscal 1999.
The $2.6 decrease in interest expense is primarily ($2.1) due to the
decrease in average debt as a result of improved working capital
management. Lower short-term market interest rates also contributed,
reducing interest expense by $.5 for the quarter.
The effective tax rate decreased to 40.5% from 41.8% in the prior year
as a result of the decreased amortization of goodwill discussed above.
Smaller permanent differences between book income and taxable income
resulted from the lower level of non-deductible amortization expense.
Restructuring
- -------------
In the fourth quarter of fiscal 1999 the Company recorded a provision
for facilities shut-down which included an accrual of $5.2 for costs of
plant closures planned to occur in fiscal 2000. During the first
quarter, $.25 was expended on termination benefits, vacant facilities
costs, and other costs pursuant to this charge.
Segment results
- ---------------
The decrease in sales for the quarter was spread throughout the women's
apparel segments, with Popular-to-Moderate declining $7 (2.4%) and
Better-to-Bridge declining $6 (14.6%). Sales by segment for the quarter
were as follows:
<TABLE>
<CAPTION>
Three Months Ended As a percentage of
July 31, total Net Sales
------------------------ ------------------
1999 1998 % Change 1999 1998
---- ---- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Branded Women's Sportswear:
Popular-to-Moderate $289 $296 -2.4% 61.3% 61.2%
Better-to-Bridge 34 40 -14.6% 7.3% 8.3%
Private Label 59 60 -2.4% 12.5% 12.5%
Smart Shirts 51 50 0.9% 10.8% 10.4%
Recreation Products 38 37 3.2% 8.1% 7.6%
---- ---- ------ ------ ------
Total Net Sales $471 $483 -2.6% 100.0% 100.0%
==== ==== ====== ====== ======
</TABLE>
Popular-to-Moderate women's sportswear sales for the first quarter were
down $7 (2%) compared to last year. After several years of continued
growth, sales of this segment declined due to consolidations at retail
and due to a shift in product mix away from more expensive wool and
constructed garments to lighter weight less constructed and therefore
less expensive garments. Partially offsetting this slippage was growth
from Sag Harbor(R) dresses and weekend wear, My Michelle(R) sportswear,
and IVY(R) and Vintage Blue(TM) sportswear. The current quarter also
includes $29 in sales of Fritzi since the acquisition in December 1998.
Operating earnings (defined as net sales less cost of products sold and
selling, general and administrative expenses) increased as a result of
cost savings from the Supplier Management Initiative and as a result of
business unit and product mix shifts, partially offset by the impact of
the sales decrease.
10
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KELLWOOD COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
The Better-to-Bridge Women's Sportswear business continues to struggle,
with sales for the quarter down 15% from the prior year. Marketing and
merchandising initiatives are underway to address styling issues and
lost market share in our better category brands in this segment, and
some office, warehousing and distribution functions have been
consolidated to reduce overhead.
Private label sales in the first quarter were down approximately 2% vs.
the prior year primarily due to reduced outerwear shipments. The
unseasonably warm winter weather last year caused the major catalog
houses who buy their outerwear from Kellwood to have a substantial
amount of carryover stock; therefore they cut back their "open-to-buy"
in this area. Sales of activewear to the major footwear companies and
sales of nightwear also declined due to weak customer demand at retail.
Operating earnings declined due to approximately $1 in start-up spending
for the launch of the Slates(R) line of woven and knit shirts, sweaters
and outerwear as well as unabsorbed burden and lower productivity as
certain domestic manufacturing plants scheduled to be closed are wound-
down.
Smart Shirts sales for the quarter were relatively flat (up 1%).
Operating earnings declined due to the need to purchase temporary quota
in Sri Lanka in order to meet customer delivery dates. See the Outlook
section for the segment's plans to fix this situation.
The Recreation Products segment reported a 3% increase in sales for the
first quarter. The segment's operating earnings margin declined to 8.2%
from 8.9% in the prior year as a result of higher S,G&A spending related
to the launch of several new products including child carriers, apparel,
camping furniture and travel gear.
FINANCIAL CONDITION
- -------------------
Cash flow from operations is ordinarily the Company's primary source of
liquidity. Kellwood uses financial leverage to minimize the overall
cost of capital and maintain adequate operating and financial
flexibility. Management monitors leverage through its debt-to-capital
ratio. Working capital management is monitored primarily by analysis of
the Company's investment in accounts receivable and inventories.
Leverage
- --------
Total debt represents 46% of capital at July 31, 1999 vs. 49% at July
31, 1998. This decrease is primarily due to a $35 dividend repatriated
from Smart Shirts
11
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
during the fourth quarter of fiscal 1999 and to the issuance of 844,000
shares of common stock for the purchase of Fritzi. The company's
borrowing needs were also held down by working capital management
initiatives. This was offset by a higher than normal cash balance at
quarter-end. The cash balance of $72 at July 31, 1999 was approximately
$51 higher than the normal level of cash balances carried by the company
at quarter-end as a result of the cash received in late July from the
bond issuance discussed below. Had cash balances been at a more normal
level of $21, and debt been lower by the same amount, the ratio of debt
to capital would have been 43%.
Working Capital
- ---------------
The current ratio increased to 3.8 at July 31, 1999 compared to 2.4 at
April 30, 1999 and 2.2 at July 31, 1998, largely as a result of the $150
long-term debt issuance discussed above. The debt issuance
substantially eliminated current Notes payable and temporarily increased
the Company's balance of Cash and time deposits.
Accounts Receivable at July 31 increased $40 or 13% vs. the prior year.
$17 of this increase represents the receivables of Fritzi (which was
acquired in December 1998). The remainder of the increase is due to
more aggressive payables actions on the part of the Company's customers
as well as an increase in the proportion of Kellwood's business coming
from customers that require longer terms of sale than the average.
The receivables increase was offset by a $71 (16%) decrease in inventory
levels as compared to the prior year as a result of better inventory
management in response to lower projected sales for the second quarter
of fiscal 2000 as compared to the prior year. Kellwood's overall
inventory days on hand were reduced to 66 at July 31, 1999 compared to
83 in the prior year.
Financing and investing activities
- ----------------------------------
Capital expenditures were $8 for the first quarter of this fiscal year
compared to $15 in the prior year. The prior year's capital
expenditures were unusually high due to the large number of Vision 2000
investment projects under way at that time; total capital spending for
fiscal 2000 is expected to be approximately $25 compared to $51 in
fiscal 1999.
The decrease in Intangible assets at July 31, 1999 compared to the
amount recorded as of July 31, 1998 is due to the provision for goodwill
impairment recorded in the fourth quarter of fiscal 1999.
On July 26, 1999 the Company completed a public debt offering totaling
$150. The Senior Notes issued mature July 15, 2009 and carry a 7.875%
coupon rate. They received investment grade ratings from Moody's and
S&P of Baa3/BBB. As a result of this issuance, fixed rate debt is 99%
of total debt at July 31, 1999 vs. 63% at July 31, 1998.
Kellwood maintains a $300 credit facility agreement of which up to $200
can be utilized for short-term loans and up to $200 can be utilized for
letters of credit. At July 31, 1999, $195 was available for future use.
On August 31, 1999 the Company executed a $350 credit facility which
replaced the $300 Agreement. The new facility comprises a $100 364 day
revolving credit facility and a $250 three-year revolving credit
facility which can also be used for letters of credit.
The Company continually evaluates possible acquisition candidates as a
part of its ongoing corporate development process. Various potential
acquisition candidates are in different stages of this process.
12
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KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
Management believes that the combined operating, cash and equity
position and credit facilities of the Company will continue to provide
the capital flexibility necessary to fund future opportunities and to
meet existing obligations.
OUTLOOK
- -------
Management expects Kellwood's sales in the first half of fiscal 2000 to
be relatively flat, with growth picking up to the high single-digit
range in the second half; sales for the year are expected to be up
approximately 5% to approximately $2,250. Kellwood is also starting up
a number of new programs that are expected to further drive growth rates
to the high single digit percentage rates in FY 2001 and beyond.
Our outlook for the Popular-to-Moderate segment for the second quarter
and the second half is very encouraging. Second quarter sales are
expected to be up 7-8%, more than offsetting the slippage in the first
quarter. Our new Components Sportswear(TM) updated bottoms division
began shipments in July, and retail sell-through has been excellent.
The Sag Harbor(R) Sport line, largely a Spring business, is also selling
well. Kellwood's updated lines are performing well at retail and
booking well for Spring. These brands include IVY(R), BICE(R), Vintage
Blue(TM) and Melrose(R). Also, our dress brands and new partner Koret
of California are booking well for Spring.
Sales of the Better-to-Bridge segment are expected to be down 15-20% in
the second quarter. The Robert Scott(R), David Brooks(R) and Northern
Isles(R) brands of traditional classic women's sportswear have been
considerably updated for Spring, but these updated lines will not be
shipped until the second half. Growth is not expected to return to the
Better-to-Bridge segment until the third quarter, with meaningful sales
growth not expected until fiscal 2001 when the new Perry Ellis(R)
licensed women's business casual sportswear begins to ship.
Private Label segment sales are expected to be flat in the second
quarter as growth from the new Slates(R) men's sportswear business will
be offset by lower sales of activewear and nightwear and by depressed
sales of outerwear. The lower outerwear sales result from lower
purchases by the major catalog companies which carried over a
substantial amount of inventory due to an unseasonably warm winter last
year. In the Private Label segment there are a number of favorable
developments which are expected to contribute to meaningful growth in
the second half, including the Slates(R) program as well as a major
sweater program for Wal-Mart.
Last year Smart Shirts grew by 25% ($13) vs. the prior year. While the
demand for the quality products and superior service provided by Smart
Shirts to its customers remains strong, the outlook for this year
(fiscal 2000) calls for slightly lower sales (down 3-5%) due to quota
constraints in Sri Lanka. To avoid this constraint in the future Smart
Shirts is expanding its knit shirt capability by building a plant in the
Maldives which is expected to be in production by the fourth quarter.
Other initiatives are under way to implement contractor and joint
venture arrangements in Singapore, Indonesia and the Philippines
(countries which have ample quota) to enable this segment to return to
growth in fiscal 2001. As retailers are demanding and receiving lower
prices, margins for 2000 will continue to be under pressure.
The Recreation products segment has a number of new products including a
new brand of sleeping bags, backpacks and tents (ROKK(TM)) targeted at
the upper/middle market. Sales for the Recreation products segment are
expected to grow well in the second quarter and for the full fiscal
year.
13
<PAGE>
<PAGE>
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
Change in the Company's fiscal year from April 30 to January 31, 2000
- ---------------------------------------------------------------------
On August 26, 1999, the company changed its fiscal year-end from April
30 to January 31 to bring Kellwood more in line with the operating cycle
of our business and the fiscal year-ends of our customers and other
apparel companies.
Market risk disclosures - Interest Rate Risk; Fair Value Disclosure
- -------------------------------------------------------------------
The issuance of the $150 of ten-year debt increased the market value and
the book value of Kellwood's long-term debt. Based on quoted market
prices obtained through independent pricing sources for the same or
similar types of borrowing arrangements, the Company believes the major
components of its long-term debt have a market value of approximately
$386 at July 31, 1999 which compares to their book value of $389. With
respect to the Company's fixed-rate debt outstanding at that date, a 10%
change in interest rates would have resulted in approximately a $21
change in the market value of Kellwood's fixed-rate debt.
Year 2000 Issue Readiness
- -------------------------
In 1996 the Company outsourced its Information Systems function to
Electronic Data Systems Corporation (EDS). Together, EDS and Kellwood
employees have completed an assessment and developed plans to make key
operational and financial systems year 2000 compliant and to ensure
uninterrupted functionality through the year 2000. The Company is
monitoring its progress and currently believes such plans are over 90%
implemented. The major components of the plans include:
* Replacement of certain Information Technology ("IT") systems.
Several new information technologies have been and are being
installed to:
* implement a Consistent Office Environment (which was completed in
fiscal 1999) and to
* replace several business and accounting systems with an Integrated
Business System (IBS). The IBS was successfully installed at one
of our business units operating on non-Y2K compliant systems in
August 1999.
* Testing and remediation of certain "IT" systems. Several of the
Company's business and accounting systems encompassing approximately
91% of fiscal 1999 sales are year 2000 compliant. Testing of year
2000 compliance for these systems has been substantially completed.
Implementation of IBS to replace these systems is not scheduled until
fiscal 2000 or later.
The Company is in the process of finalizing the remediation of non-
compliant pre-IBS systems at three locations. Testing of systems
modifications for the systems being remediated is substantially
complete for two of these locations with the third expected to be
complete by September 1999.
* Remediation or replacement of certain "non-IT" systems, including
telephone systems, CAD systems, voice mail and shipping software and
equipment is over 90% complete. Testing is currently in process
where necessary and is progressing as planned.
The Company is incurring significant business process reengineering and
system replacement expenses as part of the Vision 2000 initiative. The
portion of expenses that relate to remediation and replacement of non-
year 2000 compliant systems is estimated to be approximately $3.1, of
which approximately $2.9 has already been incurred. The Company has
utilized cash flow from operations to fund year 2000 expenditures.
The Company believes its most reasonably likely worst case scenario with
respect to its own systems would involve either:
* discrete modules of the IBS which do not handle year 2000 data
properly because they are not properly written, interfaced or
implemented, or
* components or subsystems of our legacy systems which are found to be
not fully or properly remediated.
14
<PAGE>
<PAGE>
KELLWOOD COMPANY AND SUBSIDIARIES
---------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - $ in MILLIONS (continued)
-----------------------------------------------------
In either case, the Company would utilize internal systems staff and
increase its utilization of EDS personnel and other qualified
consultants from our software vendors to correct the problems. Until
necessary system modifications could be made, manual procedures would be
employed. Such a situation may result in additional remediation costs
to be incurred and/or delays in operating activities.
As discussed more fully in the company's annual report, based on the
results of the Year 2000 readiness information received from third
parties the Company believes that its key trading partners are putting
forth their best efforts to minimize identified exposures. However, the
Company does not have control over these third parties and, as a result,
the Company cannot currently determine to what extent future operating
results may be adversely affected by the failure of these third parties
to successfully address their year 2000 issues. The Company believes
the most reasonably likely worst case scenario with respect to key
trading partners would involve the inability of such partners to conduct
business, requiring manual processes to be employed and/or alternative
partners to be utilized. Such a situation may result in temporary
increases in costs, delays in receiving cash payments and/or delays in
operating activities.
SAFE HARBOR REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------------------
This Form 10-Q includes "forward-looking statements" within the meaning
of the Securities Act of 1933, the Securities Exchange Act of 1934, and
the Private Securities Litigation Reform Act of 1995, which represent
the Company's expectations or beliefs concerning future events.
Although the Company believes that its expectations reflected in the
forward-looking statements are reasonable, it cannot and does not give
any assurance that such expectations will prove to be correct. Certain
phases of the Company's operations are subject to influences and factors
outside its control. Any one of these factors or any combination of
these factors could materially affect the results of the Company's
operations and cause actual results to differ materially from the
Company's expectations. These factors include but are not limited to
national and regional economic conditions, inflation or deflation, the
overall level of consumer spending, the level of consumer debt, currency
exchange fluctuations, other capital market conditions, competitive
pressures, the performance of the Company's products within the
prevailing retail environment, customer acceptance of both new designs
and newly introduced product lines, the timing and magnitude of spending
on and savings realized from our Vision 2000 initiative, stable
governments and business conditions in the nations where the Company's
products are manufactured, and financial difficulties encountered by
customers. The words "believe", "expect", "will", "estimate",
"project", "forecast", "should", "anticipate" and similar expressions
may identify forward-looking statements. Additionally, all statements
other than statements of historical facts included in this Report on
Form 10-Q, 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.
15
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
---------------------------
KELLWOOD COMPANY
----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) EXHIBITS:
S.E.C. Exhibit
Reference No. Description
------------- ----------------------------------------
27 Financial Data Schedule, filed herewith.
b) REPORTS ON FORM 8-K:
The following reports were filed on Form 8-K during the three
months ended July 31, 1999:
Current Report on Form 8-K dated May 6, 1999;
16
<PAGE>
<PAGE>
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 9, 1999 /s/ Thomas H. Pollihan
-------------------------------------
Thomas H. Pollihan
Vice President, Secretary and General
Counsel
September 9, 1999 /s/ Gerald M. Chaney
-------------------------------------
Gerald M. Chaney
Vice President Finance
(Principal Financial & Accounting Officer)
17
<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, 1999,
and from the Condensed Consolidated Statement of Earnings and Condensed
Consolidated Statement of Cash Flows for the three months ended July 31, 1999,
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-30-1999
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 71,578
<SECURITIES> 0
<RECEIVABLES> 350,444
<ALLOWANCES> 11,330
<INVENTORY> 382,447
<CURRENT-ASSETS> 832,534
<PP&E> 259,383
<DEPRECIATION> 154,335
<TOTAL-ASSETS> 1,093,599
<CURRENT-LIABILITIES> 217,102
<BONDS> 373,494
0
0
<COMMON> 165,420
<OTHER-SE> 287,582
<TOTAL-LIABILITY-AND-EQUITY> 1,093,599
<SALES> 470,575
<TOTAL-REVENUES> 470,575
<CGS> 369,859
<TOTAL-COSTS> 369,859
<OTHER-EXPENSES> 78,302
<LOSS-PROVISION> 623
<INTEREST-EXPENSE> 6,357
<INCOME-PRETAX> 16,057
<INCOME-TAX> 6,500
<INCOME-CONTINUING> 9,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,557
<EPS-BASIC> .34
<EPS-DILUTED> .34
</TABLE>
