UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended May 31, 2005
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 1-8501
HARTMARX CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3217140
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Wacker Drive
Chicago, Illinois 60606
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 312/372-6300
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark |X| 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 |X| whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------ -------
At June 30, 2005 there were 36,833,798 shares of the Company's common stock
outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statement of Earnings
for the three months and six months ended
May 31, 2005 and May 31, 2004. 3
Unaudited Condensed Consolidated Balance Sheet
as of May 31, 2005, November 30, 2004 and
May 31, 2004. 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the six months ended May 31, 2005
and May 31, 2004. 6
Notes to Unaudited Condensed Consolidated
Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 23
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted, except per share amounts)
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------------ ------------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net sales $ 145,742 $ 142,383 $ 289,564 $ 278,996
Licensing and other income 283 334 1,048 903
--------------- --------------- --------------- ---------------
146,025 142,717 290,612 279,899
--------------- --------------- --------------- ---------------
Cost of goods sold 95,165 97,846 190,823 193,709
Selling, general and administrative expenses 40,179 38,402 80,583 74,608
--------------- --------------- --------------- ---------------
135,344 136,248 271,406 268,317
--------------- --------------- --------------- ---------------
Operating earnings 10,681 6,469 19,206 11,582
Interest expense 1,806 1,579 3,381 3,122
--------------- --------------- --------------- ---------------
Earnings before taxes 8,875 4,890 15,825 8,460
Tax provision (3,450) (1,930) (6,195) (3,340)
--------------- --------------- --------------- ---------------
Net earnings $ 5,425 $ 2,960 $ 9,630 $ 5,120
=============== =============== =============== ===============
Earnings per share:
Basic $ .15 $ .08 $ .27 $ .15
=============== ============== ============== ===============
Diluted $ .15 $ .08 $ .26 $ .14
=============== =============== =============== ===============
Dividends per common share $ - $ - $ - $ -
=============== =============== =============== ===============
Average shares outstanding:
Basic 36,412 34,950 36,168 34,417
=============== =============== =============== ===============
Diluted 37,245 36,215 37,020 35,951
=============== =============== =============== ===============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's Omitted)
May 31, Nov. 30, May 31,
2005 2004 2004
----------------- --------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 6,459 $ 2,356 $ 7,735
Accounts receivable, less allowance
for doubtful accounts of $5,298,
$6,735 and $8,402 110,899 119,033 116,258
Inventories 149,198 130,139 127,923
Prepaid expenses 10,178 6,843 5,630
Deferred income taxes 26,203 21,783 14,521
-------------- --------------- ----------------
Total current assets 302,937 280,154 272,067
-------------- --------------- ----------------
GOODWILL 24,049 24,131 23,045
-------------- --------------- ----------------
INTANGIBLE ASSETS 34,580 35,594 447
-------------- --------------- ----------------
DEFERRED INCOME TAXES 26,062 34,167 52,280
-------------- --------------- ----------------
OTHER ASSETS 6,808 7,441 7,090
-------------- --------------- ----------------
INTANGIBLE PENSION ASSET 39,411 39,411 42,860
-------------- --------------- ----------------
PROPERTIES
Land 1,886 1,908 1,980
Buildings and building improvements 41,480 35,749 36,395
Furniture, fixtures and equipment 101,238 102,733 104,946
Leasehold improvements 26,519 24,664 25,645
-------------- --------------- ----------------
171,123 165,054 168,966
Accumulated depreciation and amortization (137,187) (137,411) (141,039)
-------------- --------------- ----------------
Net properties 33,936 27,643 27,927
-------------- --------------- ----------------
TOTAL ASSETS $ 467,783 $ 448,541 $ 425,716
============== =============== ================
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's Omitted, except share data)
May 31, Nov. 30, May 31,
2005 2004 2004
---------------- ---------------- ----------------
CURRENT LIABILITIES
Current portion of long-term debt $ 25,699 $ 25,679 $ 15,648
Accounts payable and accrued expenses 72,913 72,905 69,275
---------------- ---------------- ----------------
Total current liabilities 98,612 98,584 84,923
---------------- ---------------- ----------------
NON-CURRENT LIABILITIES 25,142 25,402 12,037
---------------- ---------------- ----------------
LONG-TERM DEBT 80,181 76,353 84,834
---------------- ---------------- ----------------
ACCRUED PENSION LIABILITY 28,204 26,416 43,922
---------------- ---------------- ----------------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued - - -
Common shares, $2.50 par value; 75,000,000
shares authorized; 36,763,964 shares
issued at May 31, 2005, 36,023,846 shares
issued at November 30, 2004 and 35,889,314
shares issued at May 31, 2004. 91,910 90,060 89,723
Capital surplus 66,457 63,784 63,997
Retained earnings 80,770 71,140 60,395
Unearned employee benefits (1,167) (1,332) -
Common shares in treasury, at cost,
0 at May 31, 2005,
41,204 at November 30, 2004 and
413,660 at May 31, 2004. - (344) (2,460)
Accumulated other comprehensive income (loss) (2,326) (1,522) (11,655)
---------------- ---------------- ----------------
Total shareholders' equity 235,644 221,786 200,000
---------------- ---------------- ----------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 467,783 $ 448,541 $ 425,716
================ ================ ================
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's Omitted)
Six Months Ended
----------------------------------------
Increase (Decrease) in Cash and Cash Equivalents May 31, May 31,
2005 2004
---------------- ----------------
Cash Flows from operating activities:
Net earnings $ 9,630 $ 5,120
Reconciling items to adjust net earnings to
net cash provided by operating activities:
Depreciation and amortization of fixed assets 2,360 2,859
Amortization of long lived assets, intangible assets, and
unearned employee benefits 1,756 2,359
Tax effect of option exercises 1,263 1,482
Changes in assets and liabilities:
Accounts receivable, inventories, prepaid expenses
and other assets (14,566) (5,488)
Accounts payable, accrued expenses and
non-current liabilities 1,501 2,522
Taxes and deferred taxes on earnings 3,800 1,468
-------------- ----------------
Net cash provided by operating activities 5,744 10,322
-------------- ----------------
Cash Flows from investing activities:
Capital expenditures (8,724) (1,729)
Payments made re: acquisitions (2,203) (1,392)
Cash proceeds from sale of asset held for sale 300 -
-------------- ----------------
Net cash used in investing activities (10,627) (3,121)
-------------- ----------------
Cash Flows from financing activities:
Borrowings (payments) under Credit Facility 4,183 (3,612)
Payment of other debt (335) (310)
Grant proceeds related to facility renovation 500 -
Financing fees and expenses (400) -
Change in checks drawn in excess of bank balances 1,408 (668)
Proceeds from exercise of stock options 2,773 1,503
Other equity transactions 857 657
-------------- ----------------
Net cash provided by (used in) financing activities 8,986 (2,430)
-------------- ----------------
Net increase in cash and cash equivalents 4,103 4,771
Cash and cash equivalents at beginning of period 2,356 2,964
-------------- ----------------
Cash and cash equivalents at end of period $ 6,459 $ 7,735
============== ================
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 3,189 $ 2,844
Income taxes 1,004 196
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations,
financial position and cash flows for the applicable period presented. Results
of operations for any interim period are not necessarily indicative of results
for any other periods or for the full year. These unaudited interim financial
statements should be read in conjunction with the financial statements and
related notes contained in the Annual Report on Form 10-K for the year ended
November 30, 2004. Certain prior year amounts have been reclassified to conform
to the current year's presentation.
Note 2
The calculation of basic earnings per share for each period is based on the
weighted average number of common shares outstanding. The calculation of diluted
earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock using the treasury stock method. The number of shares in
computing basic and diluted shares were as follows (000's omitted):
Three Months Ended Six Months Ended
May 31, May 31,
-------------------------------------- --------------------------------------
2005 2004 2005 2004
------------- -------------- ------------- -------------
Basic 36,412 34,950 36,168 34,417
Dilutive effect of:
Stock options and awards 784 790 811 781
Restricted stock awards 49 475 41 753
------------- -------------- ------------- -------------
Diluted 37,245 36,215 37,020 35,951
============= ============== ============= =============
For the three months and six months ended May 31, 2005 and May 31, 2004, the
following number of options and restricted stock awards were not included in the
computation of diluted earnings per share as the average price per share of the
Company's common stock was below the grant or award price for the respective
period:
Three Months Ended Six Months Ended
May 31, May 31,
-------------------------------------- --------------------------------------
2005 2004 2005 2004
------------- -------------- ------------- -------------
Anti-dilutive:
Stock options - 66,685 - 129,238
Restricted stock awards - - - -
The Company accounts for its employee stock based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost related to stock options is reflected in net earnings, as all
options granted under those plans had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation (in millions, except per share amounts):
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
Net earnings, as reported $ 5.4 $ 3.0 $ 9.6 $ 5.1
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects (0.2) (0.2) (0.3) (0.3)
-------------- ------------- ------------- -------------
Pro forma net earnings $ 5.2 $ 2.8 $ 9.3 $ 4.8
============== ============= ============= =============
Earnings per share:
Basic - as reported $ .15 $ .08 $ .27 $ .15
============== ============= ============= =============
Basic - pro forma $ .14 $ .08 $ .26 $ .14
============== ============= ============= =============
Diluted - as reported $ .15 $ .08 $ .26 $ .14
============== ============= ============= =============
Diluted - pro forma $ .14 $ .08 $ .25 $ .13
============== ============= ============= =============
The fair value of each option granted in the respective period is estimated at
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
Note 3
Long-term debt comprised the following (000's omitted):
May 31, Nov. 30, May 31,
2005 2004 2004
-------------- -------------- --------------
Borrowings under Credit Facility $ 71,113 $ 66,930 $ 65,062
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 17,517 17,852 18,170
-------------- -------------- --------------
105,880 102,032 100,482
Less - current 25,699 25,679 15,648
-------------- -------------- --------------
Long-term debt $ 80,181 $ 76,353 $ 84,834
============== ============== ==============
Pursuant to an amendment dated on January 3, 2005, and effective January 1,
2005, the Credit Facility was amended, extending its term by three years to
February 28, 2009; the Company retains its option to extend the term for an
additional year, to February 28, 2010. The Company paid $.4 million to the
lender group related to the January 2005 amendment to the Credit Facility. The
Credit Facility provides for a $50 million letter of credit sub-facility.
Interest rates under the Credit Facility continue to be based on a spread in
excess of either LIBOR or prime as the benchmark rate and on the level of excess
availability. The weighted average interest rate was approximately 5.0% at May
31, 2005, based on LIBOR and prime rate loans. The facility provides for an
unused commitment fee of .375% per annum based on the $200 million maximum, less
the outstanding borrowings and letters of credit issued. Eligible receivables
and inventories provide the principal collateral for the borrowings, along with
certain other tangible and intangible assets of the Company.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining to
minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2005 and as
of May 31, 2005, the Company was in compliance with all covenants under the
Credit Facility and its other borrowing agreements. At May 31, 2005, the Company
had approximately $23 million of letters of credit outstanding, relating to
either contractual commitments for the purchase of inventories from unrelated
third parties or for such matters as workers' compensation requirements in lieu
of cash deposits. Such letters of credit are issued pursuant to the Company's
Credit Facility and are considered as usage for purposes of determining
borrowing availability. During the twelve months ended May 31, 2005, borrowing
availability ranged from $35 million to $102 million. At May 31, 2005,
additional borrowing availability under the Credit Facility was approximately
$76 million.
Mortgages and other debt includes the Company's ongoing guarantee of a $2.5
million industrial development bond retained by a former subsidiary, due
September 1, 2007, on which the annual interest rate of 8.5% is paid
semi-annually and there is no collateral.
Note 4
Components of net periodic pension expense for the Company's defined benefit and
non-qualified supplemental pension plans for the three months and six months
ended May 31, 2005 and May 31, 2004 were as follows (000's omitted):
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------------ ------------------------------------
2005 2004 2005 2004
--------------- ---------------- ---------------- ---------------
Service cost $ 1,364 $ 1,074 $ 2,732 $ 2,509
Interest cost 3,487 3,203 6,980 7,415
Expected return on plan assets (4,636) (3,795) (9,279) (8,167)
Recognized net actuarial gain (5) (228) (13) (46)
Net amortization 846 847 1,693 1,693
--------------- ---------------- ---------------- ---------------
Net periodic pension expense $ 1,056 $ 1,101 $ 2,113 $ 3,404
=============== ================ ================ ===============
As the Company had not completed its actuarial valuation as of the respective
interim dates, the above amounts for the three months and six months ended May
31, 2005 and May 31, 2004 have been calculated based upon the Company's estimate
of pension expense for the respective period.
Through May 31, 2005, approximately $.2 million of contributions had been made
to the Company's pension plans. Contributions of approximately $2.2 million were
made during June 2005 and the Company anticipates aggregate contributions in the
$6 million to $8 million range will be made in fiscal 2005.
Note 5
Inventories at each date consisted of (000's omitted):
May 31, Nov. 30, May 31,
2005 2004 2004
--------------- --------------- ---------------
Raw materials $ 38,685 $ 37,560 $ 36,862
Work-in-process 7,943 7,674 7,975
Finished goods 102,570 84,905 83,086
--------------- --------------- ---------------
$ 149,198 $ 130,139 $ 127,923
=============== =============== ===============
Inventories are stated at the lower of cost or market. At May 31, 2005, November
30, 2004 and May 31, 2004, approximately 49%, 45% and 49%, respectively, of the
Company's total inventories are valued using the last-in, first-out (LIFO)
method representing certain work-in-process and finished goods. The first-in,
first-out (FIFO) method is used for substantially all raw materials and the
remaining inventories.
Note 6
On July 20, 2004, the Company acquired certain assets, properties and
operations of Exclusively Misook, Inc. ("Misook"), a designer and marketer of
upscale women's knit products sold through leading specialty and department
stores. The purchase price for Misook as of the acquisition date was $32.6
million. Additional cash purchase consideration is due as Misook achieves
certain specified financial performance targets over a five-year period
commencing August 1, 2004. This additional contingent cash purchase
consideration is calculated based on a formula applied to operating results. A
minimum level of performance, as defined in the purchase agreement, must be
achieved during any of the periods in order for additional consideration to be
paid. The additional consideration anticipated applicable to the six months
ending May 31, 2005 was approximately $1.8 million. At the minimum level of
performance (annualized operating earnings, as defined, of at least $12
million), additional annual consideration of $3.6 million would be paid over
the five year period following the acquisition. The amount of consideration
increases with increased levels of earnings and there is no maximum amount of
incremental purchase price.
If the Misook business is sold within five years of the acquisition date
("Sale Transaction"), the purchase agreement provides, at the option of the
seller, for a lump sum payment covering the remaining earnout period based on
the average annual contingent consideration earned prior to the date of the
Sale Transaction. The Misook acquisition has been accounted for under the
purchase method of accounting. Accordingly, the results of Misook are included
in the consolidated financial statements from the acquisition date. Misook's
results of operations and assets are included in the Women's Apparel Group
segment.
The Company has allocated the purchase price to the Misook assets acquired and
liabilities assumed at estimated fair values, considering a number of factors,
including the use of an independent appraisal. The excess of fair value of the
net assets acquired compared to the amount paid as of the acquisition date has
been reflected as "estimated amount due seller" (reflected principally in
non-current liabilities), in accordance with SFAS No. 141 ("Business
Combinations"). Any contingent consideration payable subsequent to the
acquisition date is first applied to reduce the amount recorded as "estimated
amount due seller", and thereafter to goodwill. The following table summarizes
the estimated fair values of the assets acquired and liabilities assumed at
the date of acquisition (000's omitted):
Cash consideration $ 32,616
Direct acquisition costs 235
---------------
Total purchase price $ 32,851
===============
Allocation of purchase price:
Accounts receivable $ 6,715
Inventories 1,155
Other current assets 392
Intangible assets 36,150
Deferred taxes (related to minimum pension liability) 568
Property, plant and equipment 58
Other assets 48
Current liabilities (428)
Estimated amount due seller (10,455)
Minimum pension liability (1,352)
---------------
Total purchase price $ 32,851
===============
The components of the Intangible Assets listed in the above table as of the
acquisition date were as follows (000's omitted):
Amount Life
----------------- ------------------
Tradename $ 28,400 Indefinite
Customer relationships 3,000 10 years
Supply agreement 4,400 5 years
Covenant not to compete 350 4 years
---------------
$ 36,150
===============
The tradename was deemed to have an indefinite life and, accordingly, is not
being amortized, but is subject to periodic impairment testing at future
periods in accordance with SFAS No. 142 ("Goodwill and Other Intangible
Assets"). The customer relationships and covenant not to compete are being
amortized based on estimated weighted cash flows over their life. The supply
agreement is being amortized on a straight line basis over the life of the
agreement.
The Misook acquisition was financed utilizing borrowing availability under the
Company's Credit Facility.
Regarding the 2001 acquisition of the Consolidated Apparel Group, no
additional contingent consideration can be earned by the former owners
subsequent to November 30, 2004, pursuant to a November 2004 amendment to the
purchase agreement.
The amounts of contingent consideration related to fiscal 2004 accrued as of
November 30, 2004 for Misook, approximately $1.2 million, and CAG,
approximately $1.0 million, were each paid in the first quarter of fiscal
2005.
The pro forma financial information presented below gives effect to the Misook
acquisition as if it had occurred as of the beginning of the Company's fiscal
year 2004. The pro forma amounts below reflect interest on the purchase price
assuming the acquisition occurred as of December 1, 2003, with interest
calculated at the Company's borrowing rate under its Credit Facility for the
period. The pro forma earnings below assumes an income tax provision at the
Company's consolidated tax rate for the period. The information presented
below is for illustrative purposes only and is not indicative of results that
would have been achieved if the acquisition had occurred as of the beginning
of the Company's 2004 fiscal year or of future operating performance. Amounts
in millions, except per share amounts:
Three Months Ended Six Months Ended
May 31, 2004 May 31, 2004
------------------------ --------------------
Net sales $ 154.7 $ 301.3
Net earnings 5.5 9.3
Net earnings per share:
Basic .16 .27
Diluted .15 .26
Impairment tests, which involve the use of estimates related to the fair value
of the applicable reporting unit with which goodwill and intangible assets not
subject to amortization are associated, were performed during the second
quarter. These tests indicated that there was no impairment of the recorded
goodwill and intangible asset not subject to amortization.
Note 7
Amounts billed to customers for shipping and handling are included in sales.
The cost of goods sold caption includes, where applicable, the following
components: product cost, including inbound freight, duties, internal
inspection costs, internal transfer costs and certain other costs of the
distribution network. The warehousing, picking and packing of finished
products totaled $9.9 million in the first six months of 2005 and $9.6 million
in the first six months of 2004 and $5.1 million for the second quarter of
2005 and $4.9 million for the second quarter of 2004, and are included as a
component of Selling, General and Administrative Expenses.
Note 8
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The Company 's Men's Apparel
Group designs, manufactures and markets tailored clothing, slacks, sportswear
and dress furnishings. The Women's Apparel Group markets women's career
apparel, designer knitwear, sportswear and accessories to both retailers and
to individuals who purchase women's apparel through a direct to consumer
catalog and using the internet.
Information on the Company's operations and total assets for the three months
and six months ended and as of May 31, 2005 and May 31, 2004 is summarized as
follows (in millions):
Men's Women's
Apparel Apparel
Group Group Adj. Consol.
---------- ---------- --------- -------------
Three Months Ended May 31,
2005
Sales $ 123.7 $ 22.0 $ - $ 145.7
Earnings (loss) before taxes 11.9 2.4 (5.4) 8.9
2004
Sales $ 121.7 $ 20.7 $ - $ 142.4
Earnings (loss) before taxes 7.9 2.4 (5.4) 4.9
Six Months Ended May 31,
2005
Sales $ 247.7 $ 41.9 $ - $ 289.6
Earnings (loss) before taxes 23.0 4.7 (11.9) 15.8
Total assets 296.4 65.4 106.0 467.8
2004
Sales $ 240.9 $ 38.1 $ - $ 279.0
Earnings (loss) before taxes 15.4 3.8 (10.7) 8.5
Total assets 268.8 31.2 125.7 425.7
During the three months and six months ended May 31, 2005 and May 31, 2004,
there were no intergroup sales and there was no change in the basis of
measurement of group earnings or loss.
Operating expenses incurred by the Company in generating sales are charged
against the respective group; indirect operating expenses are allocated to the
groups benefitted. Group results exclude any allocation of general corporate
expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings (loss) before taxes
consist principally of interest expense and general corporate expenses.
Adjustments of total assets are for cash, deferred income taxes, investments,
other assets, corporate properties and the intangible pension asset.
At May 31, 2005 and May 31, 2004, the Men's Apparel Group total assets
includes $24.0 million and $23.0 million, respectively, of goodwill related to
acquisitions. At May 31, 2005, Women's Apparel Group total assets included
intangible assets of $34.5 million related to acquisitions; there were no
intangible assets related to acquisitions at May 31, 2004.
Sales and long-lived assets by geographic region are as follows (in millions):
Sales Long-Lived Assets
--------------------------------------------------------------- ---------------------------
Three Months Ended Six Months Ended
May 31, May 31, May 31,
------------------------------- ------------------------------ ---------------------------
2005 2004 2005 2004 2005 2004
------------- ------------- -------------- ------------- ---------- ------------
USA $ 139.6 $ 136.5 $ 278.6 $ 269.6 $ 136.0 $ 98.1
Canada 5.6 5.4 10.4 9.0 2.7 2.4
All Other 0.5 0.5 0.6 0.4 0.1 0.9
---------- ---------- ---------- ---------- ---------- ------------
$ 145.7 $ 142.4 $ 289.6 $ 279.0 $ 138.8 $ 101.4
========== ========== ========== ========== ========== ============
Sales by Canadian subsidiaries to customers in the United States are included
in USA sales. Sales to customers in countries other than the USA or Canada are
included in All Other.
Long-lived assets includes intangible pension asset, net properties, goodwill,
intangible assets and other assets.
Note 9
Comprehensive income, which includes all changes in the Company's equity
during the period, except transactions with stockholders, was as follows
(000's omitted):
Six Months Ended
-----------------------------------
May 31, May 31,
2005 2004
--------------- --------------
Net earnings $ 9,630 $ 5,120
Other comprehensive income (loss):
Change in fair value of foreign exchange
contracts, net of tax (189) (172)
Currency translation adjustment, net of tax (615) (283)
-------------- --------------
Comprehensive earnings $ 8,826 $ 4,665
============== ==============
The change in Accumulated Other Comprehensive Income (Loss) was as follows
(000's omitted):
Fair Value Foreign Accumulated
Minimum of Foreign Currency Other
Pension Exchange Translation Comprehensive
Liability Contracts Adjustment Income (Loss)
---------------- ------------------ ------------------ ------------------
Fiscal 2005
---------------------
Balance Nov. 30, 2004 $ (3,425) $ 123 $ 1,780 $ (1,522)
Change in fiscal 2005 - (189) (615) (804)
---------------- ------------------ ------------------ ---------------
Balance May 31, 2005 $ (3,425) $ (66) $ 1,165 $ (2,326)
================ ================== ================== ================
Fiscal 2004
---------------------
Balance Nov. 30, 2003 $ (11,735) $ 249 $ 286 $ (11,200)
Change in fiscal 2004 - (172) (283) (455)
---------------- ------------------ ------------------ -----------------
Balance May 31, 2004 $ (11,735) $ 77 $ 3 $ (11,655)
================ ================== ================== =================
The pre-tax amounts, the related income tax (provision) benefit and after-tax
amounts allocated to each component of the change in other comprehensive income
(loss) was as follows (000's omitted):
Six months ended May 31, 2005 Pre-tax Tax After-Tax
----------------------------------------------- ---------------- -------------- ---------------
Fair value of foreign exchange contracts $ (304) $ 115 $ (189)
Foreign currency translation adjustment (615) - (615)
-------------- ------------- ---------------
$ (919) $ 115 $ (804)
============== ============= ===============
Six months ended May 31, 2004
---------------------------------------------
Fair value of foreign exchange contracts $ (284) $ 112 $ (172)
Foreign currency translation adjustment (468) 185 (283)
-------------- ------------ ---------------
$ (752) $ 297 $ (455)
============== ============ ===============
Note 10
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004) "Share-Based Payment", which requires companies to
recognize in the income statement the grant date fair value of stock options
and other equity-based compensation issued to employees and disallows the use
of the intrinsic value method of accounting for stock options, but expresses
no preference for a type of valuation model. This statement supersedes
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees", but does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS No. 123 as originally issued. SFAS No. 123 (revised 2004) is effective
for the Company's fiscal year beginning December 1, 2005. While the Company
has not yet determined the precise impact that this statement will have on its
financial condition and results of operations, assuming future annual stock
option awards are comparable to prior years annual awards and the
Black-Scholes method is used to compute the value of the awards, the
annualized impact is expected to lower diluted earnings per share in the range
of $.03 to $.04.
In December 2004, FASB issued SFAS No. 151 "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4". FAS 151 clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material and
requires that these items be recognized as current period charges. FAS 151
applies only to inventory costs incurred during periods beginning after the
effective date and also requires that the allocation of fixed production
overhead to conversion costs be based on the normal capacity of the production
facilities. FAS 151 is effective for the Company's fiscal year beginning
December 1, 2005. The Company does not anticipate that implementation of this
statement will have a material impact on its financial condition, results of
operations or cash flows.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets,
An Amendment of APB Opinion No. 29". FAS 153 eliminates the exception for
exchange of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance.
FAS 153 is effective for non-monetary assets and exchanges occurring in fiscal
periods beginning after June 15, 2005, the Company's third fiscal quarter. As
the Company does not engage in exchanges of non-monetary assets, the Company
does not anticipate that implementation of this statement will have a material
impact on its financial conditions, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Overview
The Company operates exclusively in the apparel business. Its operations are
comprised of the Men's Apparel Group ("MAG") and Women's Apparel Group. MAG
designs, manufactures and markets men's tailored clothing, slacks, sportswear
(including golfwear) and dress furnishings (shirts and ties). Products are
sold at luxury, premium and moderate price points under a broad variety of
apparel brands, both owned and under license, to an extensive range of retail
channels. The Women's Apparel Group markets women's career apparel, designer
knitwear, sportswear and accessories to department and specialty stores under
owned and licensed brand names and through a direct to consumer operation
offering a wide range of apparel and accessories to business and professional
women through catalogs and its e-commerce website.
The Company's principal operational challenges have been to address the
following:
< The trend to casual dressing in the workplace has been a major
contributor to the overall market decline for tailored clothing products
over the past decade, especially for tailored suits, the Company's core
product offering.
< The need to diversify the Company's product offerings in non-tailored
product categories in light of the declining demand for tailored
clothing.
< The market share declines experienced by certain department store
retailers, an important distribution channel for the Company.
The Company has continued to expand its non-tailored clothing product
offerings through internally developed programs, new licensing arrangements
and acquisitions. On July 20, 2004, the Company acquired certain assets,
properties and operations of Exclusively Misook, Inc. ("Misook"), a designer
and marketer of upscale women's knit products sold through leading specialty
and department stores. The purchase price for Misook as of the acquisition
date was $32.6 million. As described in the Notes to Unaudited Condensed
Consolidated Financial Statements, additional contingent consideration is due
if Misook achieves certain specified financial performance targets. The
acquisition of Misook, which provides for strategic growth opportunities in
womenswear and further diversification of non-tailored product categories,
contributed $9.0 million in revenues and approximately $.04 in earnings per
diluted share to second quarter results in 2005 and $15.8 million in revenues
and $.07 in earnings per diluted share to first half results in 2005. The
Company acquired the Consolidated Apparel Group ("CAG"), a marketer of
moderate priced men's sportswear, in 2001. These product diversification
actions, along with the introductions of Bobby Jones and Nicklaus golfwear in
earlier years, have opened up or expanded distribution channels for the
Company's products, such as through "green grass" and resort shops for
golfwear and warehouse clubs for moderate-priced sportswear. Although
representing only a small percentage of consolidated revenues,
direct-to-consumer marketing is increasing, including internet-based marketing
for certain womenswear and higher end sportswear products and through a small
number of stores marketing the Bobby Jones and Hickey-Freeman brands.
Sales of non-tailored apparel (men's sportswear, golfwear, slacks and
womenswear) represented 46% of total sales during both the first half of 2005
and the first half of 2004. For the full year, non-tailored apparel sales
represented 47% of total sales in fiscal 2004 compared to 44% in fiscal 2003.
The increase in first half pre-tax earnings to $15.8 million in 2005 from $8.5
million in 2004 reflected a 3.8% revenue increase to $289.6 million from
$279.0 million and improved operating margins. A significant portion of these
improvements was attributable to Misook, as previously noted.
Liquidity and Capital Resources
November 30, 2004 to May 31, 2005
---------------------------------
For the six months ended May 31, 2005, net cash provided by operating
activities was $5.7 million compared to $10.3 million for the six months ended
May 31, 2004. The decrease in cash provided by operating activities during the
current period over the prior period was attributable to higher working
capital, principally inventories. Since November 30, 2004, net accounts
receivable decreased $8.1 million or 7% to $110.9 million. Inventories of
$149.2 million increased $19.1 million or 15%, reflecting in part the receipt
of fall season goods in advance of anticipated shipments. Net properties
increased $6.3 million to $33.9 million as capital additions in the current
period included approximately $5.8 million related to the in-process
renovation of the Hickey-Freeman manufacturing and distribution facility,
which is included in buildings and building improvements. Total debt,
including current maturities, increased $3.8 million to $105.9 million and was
the principal component of net cash provided by financing activities; this
increase reflected both higher capital expenditures and working capital. Total
debt represented 31% of total capitalization at May 31, 2005 compared to 32%
at November 30, 2004. Shareholders' equity increased $13.9 million from the
earnings as well as from the favorable impact of stock option exercises and
equity sales to the Company's employee stock purchase plan, resulting in
784,322 additional shares issued during the first half of 2005.
In addition to the information provided below relating to debt, credit
facilities, guarantees, future commitments, liquidity and risk factors, the
reader should also refer to the Company's Annual Report on Form 10-K for the
year ended November 30, 2004.
The Company's borrowing arrangements consist of a senior revolving credit
facility ("Credit Facility"), mortgages and industrial development bonds. The
current $200 million Credit Facility expires in February 2009 with an
additional one year renewal at the Company's option (i.e., until February
2010), and also provides for a $50 million letter of credit sub-facility.
Interest rates under the Credit Facility are based on a spread in excess of
either LIBOR or prime as the benchmark rate and on the level of excess
availability. The weighted average interest rate was approximately 5.0% at May
31, 2005, based on LIBOR and prime rate loans. The facility provides for an
unused commitment fee of .375% per annum, based on the $200 million maximum,
less the outstanding borrowings and letters of credit issued. Eligible
receivables and inventories provide the principal collateral for the
borrowings, along with certain other tangible and intangible assets of the
Company. The weighted average interest rate on all borrowings was
approximately 6.0% at May 31, 2005 compared to 5.0% at May 31, 2004.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2005 and
as of May 31, 2005, the Company was in compliance with all covenants under the
Credit Facility and its other borrowing agreements.
There are several factors which can affect the Company's ability to remain in
compliance with the financial covenants currently contained in its Credit
Facility, and to a lesser extent, in its other borrowing arrangements. The
following summarizes certain of the most significant risk factors:
o The apparel environment is cyclical, and the level of consumer spending
on apparel can decline during recessionary periods when disposable income
declines. The tailored clothing market relating to suits has stabilized in
recent periods after experiencing unit declines over the previous several
years. If the tailored clothing market declines further, sales and
profitability would be adversely affected.
o Continuation of widespread casual dressing in the workplace could further
reduce the demand for tailored clothing products, especially for tailored
suits. While the Company markets several sportswear and casual product lines,
consumer receptiveness to these sportswear and casual product offerings may
not offset the declines in the tailored clothing unit sales.
o The Company's customers include major U.S. retailers (certain of which
are under common ownership and control). The ten largest customers represented
approximately 55% of consolidated sales during fiscal 2004 with the largest
customer representing approximately 23% of sales. A decision by the
controlling management of a group of stores or any other significant customer,
whether motivated by competitive conditions, financial difficulties or
otherwise, to decrease the amount of merchandise purchased from the Company,
or change their manner of doing business, could have a material adverse effect
on the Company's financial condition and results of operations.
At May 31, 2005, the Company had approximately $23 million of letters of
credit outstanding, relating to either contractual commitments for the
purchase of inventories from unrelated third parties or for such matters as
workers' compensation requirements in lieu of cash deposits. Such letters of
credit are issued pursuant to the Credit Facility and are considered as usage
for purposes of determining borrowing availability. Availability levels on any
date are impacted by the level of outstanding borrowings under the Credit
Facility, the level of eligible receivables and inventory and outstanding
letters of credit. Availability levels generally decline towards the end of
the first and third quarters and increase during the second and fourth
quarters. For the trailing twelve months, additional availability levels have
ranged from $35 million to $102 million. At May 31, 2005, additional borrowing
availability under the Credit Facility was approximately $76 million. The
Company has also entered into surety bond arrangements aggregating
approximately $11 million with unrelated parties, primarily for the purposes
of satisfying workers' compensation deposit requirements of various states
where the Company has operations. At May 31, 2005, there were an aggregate of
$4.1 million of outstanding foreign exchange contracts primarily attributable
to approximately 1.2 million Canadian dollars related to anticipated U.S.
dollar collections by the Company's Canadian business in the next three
months, approximately 1.8 million Euros related to anticipated inventory
purchases to be made in the next six months, and approximately 80 million
Japanese yen, primarily related to anticipated licensing revenues in the next
three months. Other than the Company's ongoing guarantee of a $2.5 million
industrial development bond included as a component of consolidated debt, the
Company has not committed to and has not provided any guarantees of other
lines of credit, repurchase obligations, etc., with respect to the obligations
for any unconsolidated entity or to any unrelated third party.
The Company's various borrowing arrangements are either fixed rate or variable
rate borrowing arrangements. None of the arrangements have rating agency
"triggers" which would impact either the borrowing rate or borrowing
commitment.
Off-Balance Sheet Arrangements. The Company has not entered into off balance
sheet financing arrangements, other than operating leases, and has made no
financial commitments or guarantees with any unconsolidated subsidiaries or
special purpose entities. All of the Company's subsidiaries are wholly owned
and included in the accompanying consolidated financial statements. There have
been no related party transactions nor any other transactions which have not
been conducted on an arm's-length basis.
The Company believes its liquidity and expected cash flows are sufficient to
finance its operations after due consideration of its various borrowing
arrangements, other contractual obligations and earnings prospects.
May 31, 2004 to May 31, 2005
----------------------------
Net accounts receivable of $110.9 million decreased $5.4 million or 5%, as the
higher sales in the last three months were offset by improved collections; the
allowance for doubtful accounts declined $3.1 million to $5.3 million
reflecting the write off of amounts previously reserved. The current period
included $5.0 million of net receivables related to Misook. Inventories of
$149.2 million increased $21.3 million or 17%, primarily attributable to the
earlier receipt of foreign sourced inventories in the Men's Apparel Group;
inventories attributable to Misook aggregated $1.3 million. The increase in
intangible assets to $34.6 million from $.4 million in the year earlier period
was attributable to the fair value of intangible assets acquired in the Misook
transaction, including the Misook tradename. Net properties of $33.9 million
increased $6.0 million, as capital additions, including amounts related to the
in-process renovation of the Hickey-Freeman manufacturing and distribution
facility, exceeded depreciation expense. At May 31, 2005, cash and equivalents
were $6.5 million compared to $7.7 million in the year earlier period. Total
debt of $105.9 million increased $5.4 million compared to the year earlier
level. Debt levels have been favorably impacted by the higher cash earnings
offset by the cash paid related to the Misook acquisition and higher working
capital. Total debt represented 31% of total capitalization at May 31, 2005
compared to 33% at May 31, 2004. The increase in non-current liabilities to
$25.1 million compared to $12.0 million was principally attributable to the
estimated amount due to the seller of the Misook business.
Results of Operations
Second Quarter 2005 Compared to Second Quarter 2004
---------------------------------------------------
Second quarter sales were $145.7 million compared to $142.4 million in 2004.
Men's Apparel Group revenues increased 1.6% to $123.7 million. In general,
wholesale selling prices for comparable products were approximately even in
2005 compared to 2004, although product mix changes impacted comparability of
both unit sales and average wholesale selling prices. Tailored clothing
average wholesale selling prices decreased approximately 2% from 2004,
reflecting a shift in product mix in 2005 from the prior year. Suit unit sales
increased approximately 10% and sport coat unit sales increased approximately
7%, each reflecting the effect of new programs, partially offset by the
non-renewal of an expiring tailored clothing license. Slack product categories
decreased approximately 13%. Slack average wholesale selling prices increased
approximately 6% reflecting higher prices for casual pants. While unit sales
of sportswear products decreased approximately 21%, attributable to declines
in moderate priced sportswear, average wholesale selling prices were 16%
higher than 2004, reflecting product mix changes to higher priced products,
such as Bobby Jones, with higher gross margins. Women's Apparel Group
revenues, which represented approximately 15% of consolidated sales in 2005
and 14% in 2004, increased $1.3 million. The current period included $9.0
million of revenue attributable to Misook; the prior period included $6.4
million related to a one year private label program which commenced in the
Fall of 2003 and was substantially completed in the second quarter of 2004.
Excluding this program, unit sales of women's apparel increased 16% and
average selling prices increased 35%, primarily attributable to Misook.
Aggregate sportswear and other non-tailored clothing product categories,
including women's, represented approximately 47% of total second quarter
revenues this year compared to 49% in last year's second quarter.
The consolidated gross margin percentage to sales improved to 34.7% from 31.3%
last year. The higher gross margin rate compared to last year's second quarter
reflected changes in product mix, improved manufacturing utilization in owned
facilities, and continuing cost effective utilization of off-shore contractors
for moderate priced tailored clothing. Approximately $5.1 million in 2005 and
$4.9 million in 2004 of costs related to warehousing, picking and packing of
finished products are included as a component in Selling, General and
Administrative Expenses; accordingly, gross margin may not be comparable to
those other entities that include all of the costs related to their
distribution network in arriving at gross margin. Consolidated selling,
general and administrative expenses increased to $40.2 million in the current
period compared to $38.4 million in 2004, primarily from $1.5 million
attributable to Misook; the ratio to sales was 27.6% in 2005 compared to 27.0%
in 2004.
Consolidated operating earnings increased to $10.7 million in 2005 compared to
$6.5 million last year, attributable to the Men's Apparel Group, and
represented 7.3% of net sales in 2005 and 4.5% of net sales in 2004; the
improvement was attributable to the higher gross margin ratio compared to the
prior year. Men's Apparel Group operating earnings were $11.9 million in 2005
compared to $7.9 million in 2004, attributable to the higher sales and
improved gross margins with tailored clothing products representing the most
significant contributor to earnings and cash flow in each year. Women's
Apparel Group operating earnings were $2.4 million in each period, as the
effect of the higher sales and operating margins from Misook were offset by
the conclusion of the private label program during 2004.
Interest expense increased to $1.8 million this period compared to $1.6
million last year, due to higher average outstanding borrowings and higher
rates. Consolidated pre-tax earnings were $8.9 million compared to $4.9
million last year. After reflecting the applicable tax provision, consolidated
net earnings were $5.4 million this period compared to $3.0 million last year.
Diluted earnings per share was $.15 compared to $.08 per share in 2004.
Six Months 2005 Compared to Six Months 2004
-------------------------------------------
First half sales were $289.6 million compared to $279.0 million in 2004. Men's
Apparel Group revenues increased to $247.7 million compared to $240.9 million
in the year earlier period. In general, wholesale selling prices for
comparable products were approximately even in 2005 compared to 2004, although
product mix changes impacted comparability of both unit sales and average
wholesale selling prices. Tailored clothing average wholesale selling prices
decreased approximately 5% from 2004, reflecting a shift in product mix in
2005 compared to the prior year. Suit unit sales decreased approximately 1%
reflecting the effect of new programs offset by the non-renewal of an expiring
tailored clothing license; sport coat units increased approximately 20% and
slack product units increased approximately 35%, each benefitting from the
initial shipments of two new separates programs. Slack average wholesale
selling prices decreased approximately 18%, reflecting a shift in product mix
in the first quarter weighted towards casual pants. While unit sales of
sportswear products decreased approximately 21%, attributable to declines in
moderate priced sportswear, average wholesale selling prices were 17% higher
than 2004, reflecting product mix changes to higher priced products such as
Bobby Jones. Women's Apparel Group revenues, which represented approximately
14% of consolidated sales in 2005 and 2004, increased $3.8 million. The
current period reflected $15.8 of revenues attributable to Misook. The prior
period included $10.7 million related to the now completed one year private
label program. Excluding the effect of this program, unit sales of women's
apparel increased approximately 25%, and average selling prices increased
approximately 25%, each attributable principally to Misook. Aggregate
sportswear and other non-tailored clothing product categories, including
women's, represented approximately 46% of total first half revenues in fiscal
2005 and 2004.
The consolidated gross margin percentage to sales increased to 34.1% compared
to 30.6% last year. The higher gross margin rate compared to last year's first
half reflected changes in product mix, improved manufacturing utilization in
owned facilities, fewer dispositions of off-price tailored clothing units, and
continuing cost effective utilization of off-shore contractors for moderate
priced tailored clothing. Gross margins may not be comparable to those of
other entities since some entities include all of the costs related to their
distribution network in arriving at gross margin, whereas the Company included
$9.9 million in 2005 and $9.6 million in 2004 of costs related to warehousing,
picking and packing of finished products as a component in Selling, General
and Administrative Expenses. Consolidated selling, general and administrative
expenses were $80.6 million in 2005 compared to $74.6 million in 2004; the
ratio to sales was 27.8% in 2005 compared to 26.7% in 2004. The increase
relative to sales reflected, in part, changes in revenue mix among the various
product lines. The dollar increase reflected $3.0 million of expenses related
to Misook and $1.6 million of incremental professional fees related to the
documentation and testing of internal controls as required by the
Sarbanes-Oxley Act.
Operating earnings were $19.2 million in 2005 compared to $11.6 million in
2004 and represented 6.6% of consolidated sales in 2005 and 4.2% of sales in
2004. Men's Apparel Group operating earnings were $23.0 million in 2005
compared to $15.4 million in 2004, attributable to both the higher sales and
improved gross margins; tailored clothing products represented the most
significant contributor to earnings and cash flow in each year. Women's
Apparel Group operating earnings were $4.7 million in 2005 compared to $3.8
million in 2004, as the incremental earnings attributable to Misook were
partially offset by declines in other lines, including the impact of the
private label program which was substantially completed in the second quarter
of 2004.
Interest expense was $3.4 million in 2005 compared to $3.1 million in 2004, as
the small increase was attributable to both higher average borrowings and
higher rates. Consolidated pre-tax earnings were $15.8 million in 2005
compared to $8.5 million in 2004. After reflecting the applicable tax
provision, consolidated net earnings were $9.6 million in 2005 compared to
$5.1 million in 2004. Diluted earnings per share were $.26 in 2005 compared to
$.14 per share in 2004.
Based on current conditions, the Company continues to anticipate a
consolidated sales increase for the year ending November 30, 2005 in the low
to mid single digit percentage range. In the Men's Apparel Group, tailored
clothing revenues should increase, benefitting from the introduction of new
licensing programs, but partially offset by the non-renewal of a license which
generated approximately $14 million of revenues during 2004. Sportswear
product lines are anticipated to increase at the higher price points from
expected growth in the Bobby Jones and Ted Baker lines, while moderate priced
sportswear revenues are expected to decline from reduced business with the
warehouse club channel. Women's Apparel Group revenues, which represented
approximately 14% of total sales in 2004, are anticipated to increase,
principally from the incremental impact of the Misook acquisition for the full
year, partially offset by the conclusion during 2004 of the one year private
label program.
Operating margins are expected to improve compared to the prior year on the
higher sales due to improved gross margins generally and from product mix.
Debt reduction compared to year earlier levels, excluding acquisitions, is
anticipated to commence in the second half of the year. The January 2005
extension of the Company's $200 million senior credit facility to February
2009, with an option to February 2010, provides additional flexibility for the
Company to implement its operating strategies. Net earnings are anticipated to
increase in the 40% to 45% range for the full year over 2004's $15.9 million
or $.44 per diluted share.
The Company's longer term objectives are to increase revenues and continue
pre-tax margin improvements, with growth realized from a combination of both
internal revenue growth and from acquisitions. The Company continues to
evaluate acquisition opportunities which can produce positive cash flows, are
accretive to earnings in the near to mid-term, and which do not create
excessive debt leverage.
This quarterly report on Form 10-Q contains forward-looking statements made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The statements could be significantly impacted by such
factors as the level of consumer spending for men's and women's apparel, the
prevailing retail environment, the Company's relationships with its suppliers,
customers, lenders, licensors and licensees, actions of competitors that may
impact the Company's business and the impact of unforeseen economic changes,
such as interest rates, or in other external economic and political factors
over which the Company has no control. The reader is also directed to the
Company's 2004 Annual Report on Form 10-K for additional factors that may
impact the Company's results of operations and financial condition.
Forward-looking statements are not guarantees as actual results could differ
materially from those expressed or implied in forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
---------------------------------------------------------------------
The Company does not hold financial instruments for trading purposes or engage
in currency speculation. The Company enters into foreign exchange forward
contracts from time to time to limit the currency risks primarily associated
with purchase obligations denominated in foreign currencies. Foreign exchange
contracts are generally for amounts not to exceed forecasted purchase
obligations or receipts and require the Company to exchange U.S. dollars for
foreign currencies at rates agreed to at the inception of the contracts. These
contracts are typically settled by actual delivery of goods or receipt of
funds. The effects of movements in currency exchange rates on these
instruments, which have not been significant, are recognized in earnings in
the period in which the purchase obligations are satisfied or funds are
received. As of May 31, 2005, the Company had entered into foreign exchange
contracts, aggregating approximately $4.1 million principally attributable to
approximately 1.2 million Canadian dollars related to anticipated U.S. dollar
collections by the Company's Canadian business in the next three months,
approximately 1.8 million Euros primarily related to inventory purchases in
the next six months, and approximately 80 million Japanese yen primarily
related to anticipated licensing revenues to be received in the next three
months.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of the variable rate borrowings
under its Credit Facility. Rates may fluctuate over time based on economic
conditions, and the Company could be subject to increased interest payments if
market interest rates rise rapidly. A 1% change in the effective interest rate
on the Company's anticipated borrowings under its Credit Facility would impact
annual interest expense by approximately $.7 million based on borrowings under
the Credit Facility at May 31, 2005. In the last three years, the Company has
not used derivative financial instruments to manage interest rate risk.
The Company's customers include major U.S. retailers (certain of which are
under common ownership and control), several of whom reported declines in
sales during various monthly periods in 2003 and 2004. The ten largest
customers represented approximately 55% of consolidated sales during fiscal
2004 with the largest customer representing approximately 23% of sales. A
decision by the controlling management of a group of stores or any other
significant customer, whether motivated by competitive conditions, financial
difficulties or otherwise, to decrease the amount of merchandise purchased
from the Company, or change their manner of doing business, could have a
material adverse effect on the Company's financial conditions and results of
operations.
Item 4 - Controls and Procedures
--------------------------------
(A) Evaluation of Disclosure Controls and Procedures. The Company's
management, under the supervision of and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Company's disclosure controls and procedures were
effective and were reasonably designed to ensure that all material information
relating to the Company required to be included in the Company's reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
(B) Changes in Internal Control Over Financial Reporting. There have
not been any changes in the Company's internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act during the Company's fiscal quarter ended May 31, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls. The Company's
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls or the Company's
internal controls will prevent all errors and all fraud.
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.
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.
Further, the design of disclosure controls and procedures and internal control
over financial reporting must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Part II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The annual meeting of the stockholders of the Registrant was held on April 13,
2005. The directors listed in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders dated February 24, 2005 were elected for one year terms
with voting for each as follows:
Withheld
Director For Authority
-------------------- -------------- ---------------
Michael F. Anthony 33,054,928 816,620
Jeffrey A. Cole 32,695,958 1,175,590
James P. Dollive 33,082,913 788,635
Raymond F. Farley 32,857,109 1,014,439
Elbert O. Hand 31,999,091 1,872,457
Dipak C. Jain 33,007,959 863,589
Homi B. Patel 32,903,100 968,448
Michael B. Rohlfs 33,054,189 817,359
Stuart L. Scott 32,877,033 994,515
The reappointment of PricewaterhouseCoopers LLP as the Company's independent
registered public accounting firm was ratified with 33,325,050 shares for,
325,112 opposed and 221,386 shares abstaining.
Item 5. Other Information
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(a) Entry into a Material Definitive Agreement.
On June 30, 2005, Hartmarx Corporation (the "Company") and Glenn R. Morgan,
executive vice president, chief financial officer and treasurer, entered into
a letter amendment amending the terms of that certain Amended and Restated
Employment Agreement Effective as of November 27, 2000 (the "Employment
Agreement") between the Company and Mr. Morgan.
The amendment to the Employment Agreement serves to extend the Agreement
Period (as therein defined) through December 31, 2005. In all other respects,
the Employment Agreement remains unchanged.
Mr. Morgan was elected to his current position in April 2001, and from September
1995 to April 2001, he served as executive vice president and chief financial
officer.
Item 6. Exhibits
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10-F-8 Letter Amendment dated June 30, 2005 to Employment
Agreement between the Company and Glenn R. Morgan.
31.1 Certification of Chairman, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) or 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Executive Vice President and Chief
Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chairman, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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.
HARTMARX CORPORATION
July 7, 2005 By /s/ GLENN R. MORGAN
--------------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
July 7, 2005 By /s/ ANDREW A. ZAHR
--------------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)