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UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended July 1, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from __________ to __________ Commission File Number 1-10746 JONES APPAREL GROUP, INC.
WASHINGTON, D.C. 20549
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
Pennsylvania |
06-0935166 |
250
Rittenhouse Circle |
19007 |
(215) 785-4000
(Registrant's telephone number,
including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] |
Accelerated filer [ ] |
Non-accelerated filer [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
of Common Stock |
Outstanding
at July 27, 2006 |
JONES APPAREL GROUP, INC.
Index |
Page No.
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PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Consolidated Balance Sheets July 1, 2006, July 2, 2005 and December 31, 2005 |
3 | |
Consolidated Statements of Income Fiscal Quarters and Six Months ended July 1, 2006 and July 2, 2005 |
4 | |
Consolidated Statements of Stockholders' Equity Fiscal Six Months ended July 1, 2006 and July 2, 2005 |
5 | |
Consolidated Statements of Cash Flows Fiscal Six Months ended July 1, 2006 and July 2, 2005 |
6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 25 | |
Item 4. Controls and Procedures | 26 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 26 | |
Item 1A. Risk Factors | 26 | |
Item 4. Submission of Matters to a Vote of Security Holders | 27 | |
Item 5. Other Information | 27 | |
Item 6. Exhibits | 28 | |
Signatures | 29 | |
Exhibit Index | 30 |
DEFINITIONS
As used in this Report, unless the context requires otherwise, "our," "us," "we" and "the Company" means Jones Apparel Group, Inc. and consolidated subsidiaries, "Sun" means Sun Apparel, Inc., "Nine West" means Nine West Footwear Corporation, "McNaughton" means McNaughton Apparel Group Inc., "Kasper" means Kasper, Ltd., "Maxwell" means Maxwell Shoe Company Inc., "Barneys" means Barneys New York, Inc., " Polo" means Polo Ralph Lauren Corporation, "SFAS" means Statement of Financial Accounting Standards and "SEC" means the United States Securities and Exchange Commission.
- 2 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones Apparel Group, Inc.July 1, 2006 |
July 2, 2005 |
December 31, 2005 |
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(Unaudited) | (Unaudited) | |||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $ 88.4 | $ 35.3 | $ 34.9 | |
Accounts receivable | 410.1 | 509.2 | 458.4 | |
Inventories | 585.7 | 661.7 | 650.0 | |
Deferred taxes | 54.0 | 57.7 | 52.5 | |
Prepaid expenses and other current assets | 74.8 | 80.0 | 88.5 | |
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TOTAL CURRENT ASSETS | 1,213.0 | 1,343.9 | 1,284.3 | |
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $494.3, $459.6 and $472.2 | 337.6 | 309.9 | 312.1 | |
GOODWILL | 1,740.5 | 2,100.6 | 2,097.3 | |
OTHER INTANGIBLES, at cost, less accumulated amortization | 824.7 | 831.0 | 827.5 | |
OTHER ASSETS | 50.2 | 55.7 | 56.6 | |
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$ 4,166.0 | $ 4,641.1 | $ 4,577.8 | ||
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LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Short-term borrowings | $ - | $ 123.3 | $ 129.5 | |
Current portion of long-term debt and capital lease obligations | 3.9 | 357.8 | 227.8 | |
Accounts payable | 266.7 | 282.0 | 256.5 | |
Income taxes payable | 51.8 | 41.0 | 54.2 | |
Accrued employee compensation | 43.7 | 45.9 | 50.9 | |
Accrued expenses and other current liabilities | 103.2 | 114.9 | 117.6 | |
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TOTAL CURRENT LIABILITIES | 469.3 | 964.9 | 836.5 | |
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NONCURRENT LIABILITIES: | ||||
Long-term debt | 752.7 | 752.5 | 752.6 | |
Obligations under capital leases | 37.9 | 38.6 | 37.2 | |
Deferred taxes | 189.8 | 167.7 | 175.9 | |
Other | 115.9 | 91.4 | 109.2 | |
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TOTAL NONCURRENT LIABILITIES | 1,096.3 | 1,050.2 | 1,074.9 | |
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TOTAL LIABILITIES | 1,565.6 | 2,015.1 | 1,911.4 | |
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COMMITMENTS AND CONTINGENCIES | - | - | - | |
STOCKHOLDERS' EQUITY: | ||||
Preferred stock, $.01 par value - shares authorized 1.0; none issued | - | - | - | |
Common stock, $.01 par value - shares authorized 200.0; issued 152.5, 151.1 and 151.4 | 1.5 | 1.5 | 1.5 | |
Additional paid-in capital | 1,290.7 | 1,255.9 | 1,269.4 | |
Retained earnings | 2,461.5 | 2,321.8 | 2,426.2 | |
Accumulated other comprehensive loss | (4.0) | (6.6) | (6.5) | |
Treasury stock, 39.7, 32.8 and 35.5 shares, at cost | (1,149.3) | (946.6) | (1,024.2) | |
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TOTAL STOCKHOLDERS' EQUITY | 2,600.4 | 2,626.0 | 2,666.4 | |
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$ 4,166.0 | $ 4,641.1 | $ 4,577.8 | ||
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See accompanying notes to consolidated financial statements
- 3 -
Fiscal Quarter Ended
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Fiscal Six Months Ended
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July 1, 2006 | July 2, 2005 | July 1, 2006 | July 2, 2005 | |||
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Net sales | $ 1,059.7 | $ 1,165.4 | $ 2,259.9 | $ 2,500.4 | ||
Licensing income (net) | 9.7 | 11.0 | 21.6 | 25.2 | ||
Service income | 4.7 | - | 7.9 | - | ||
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Total revenues | 1,074.1 | 1,176.4 | 2,289.4 | 2,525.6 | ||
Cost of goods sold | 667.7 | 741.9 | 1,432.7 | 1,592.4 | ||
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Gross profit | 406.4 | 434.5 | 856.7 | 933.2 | ||
Selling, general and administrative expenses | 336.6 | 329.1 | 656.2 | 669.5 | ||
Loss on sale of Polo Jeans Company business | - | - | 45.1 | - | ||
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Operating income | 69.8 | 105.4 | 155.4 | 263.7 | ||
Interest income | 1.8 | 0.3 | 2.8 | 0.8 | ||
Interest expense and financing costs | (13.9) | (18.2) | (30.1) | (37.6) | ||
Equity in earnings of unconsolidated affiliates | 0.9 | 0.9 | 1.8 | 1.8 | ||
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Income before provision for income taxes | 58.6 | 88.4 | 129.9 | 228.7 | ||
Provision for income taxes | 22.0 | 33.6 | 69.3 | 86.9 | ||
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Income before cumulative effect of change in accounting principle | 36.6 | 54.8 | 60.6 | 141.8 | ||
Cumulative effect of change in accounting for share-based payments, net of tax | - | - | 1.9 | - | ||
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Net income | $ 36.6 | $ 54.8 | $ 62.5 | $ 141.8 | ||
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Earnings per share | ||||||
Basic | ||||||
Income before cumulative effect of change in accounting principle | $0.33 | $0.46 | $0.54 | $1.18 | ||
Cumulative effect of change in accounting for share-based payments, net of tax | - | - | 0.02 | - | ||
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Basic earnings per share | $0.33 | $0.46 | $0.56 | $1.18 | ||
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Diluted | ||||||
Income before cumulative effect of change in accounting principle | $0.32 | $0.46 | $0.53 | $1.17 | ||
Cumulative effect of change in accounting for share-based payments, net of tax | - | - | 0.02 | - | ||
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Basic earnings per share | $0.32 | $0.46 | $0.55 | $1.17 | ||
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Weighted average common shares and share equivalents outstanding | ||||||
Basic | 111.3 | 118.9 | 112.3 | 120.0 | ||
Diluted | 113.5 | 120.2 | 114.5 | 121.4 | ||
Dividends declared per share | $0.12 | $0.10 | $0.24 | $0.20 |
See accompanying notes to consolidated financial statements
- 4 -
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(All amounts in millions except per share data)
Number of common shares outstanding |
Total stock- holders' equity |
Common stock |
Additional paid-in capital |
Retained earnings |
Accumu- lated other compre- hensive income (loss) |
Treasury stock |
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Balance, January 1, 2005 | 122.2 | $ 2,653.9 | $ 1.5 | $ 1,236.4 | $ 2,204.2 | $ 0.8 | $ (789.0) | |||||||
Fiscal six months ended July 2, 2005: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 141.8 | - | - | 141.8 | - | - | |||||||
Change in fair value of cash flow hedges, net of $1.6 tax | - | (2.4) | - | - | - | (2.4) | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.9 tax | - | (1.4) | - | - | - | (1.4) | - | |||||||
Foreign currency translation adjustments | - | (3.6) | - | - | - | (3.6) | - | |||||||
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Total comprehensive income | 134.4 | |||||||||||||
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Issuance of restricted stock to employees, net of forfeitures | 0.6 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 9.5 | - | 9.5 | - | - | - | |||||||
Exercise of employee stock options | 0.4 | 8.9 | - | 8.9 | - | - | - | |||||||
Excess tax benefits from share-based payment arrangements | - | 1.1 | - | 1.1 | - | - | - | |||||||
Dividends on common stock ($0.20 per share) | - | (24.2) | - | - | (24.2) | - | - | |||||||
Treasury stock acquired | (4.9) | (157.6) | - | - | - | - | (157.6) | |||||||
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Balance, July 2, 2005 | 118.3 | $ 2,626.0 | $ 1.5 | $ 1,255.9 | $ 2,321.8 | $ (6.6) | $ (946.6) | |||||||
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Balance, January 1, 2006 |
115.9 |
$ 2,666.4 |
$ 1.5 |
$ 1,269.4 |
$ 2,426.2 |
$ (6.5) |
$ (1,024.2) |
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Fiscal six months ended July 1, 2006: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 62.5 | - | - | 62.5 | - | - | |||||||
Change in fair value of cash flow hedges, net of $1.2 tax | - | 1.5 | - | - | - | 1.5 | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.9 tax | - | (1.3) | - | - | - | (1.3) | - | |||||||
Foreign currency translation adjustments | - | 2.3 | - | - | - | 2.3 | - | |||||||
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Total comprehensive income | 65.0 | |||||||||||||
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Issuance of restricted stock to employees, net of forfeitures | 0.5 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 9.3 | - | 9.3 | - | - | - | |||||||
Exercise of employee stock options | 0.6 | 13.3 | - | 13.3 | - | - | - | |||||||
Excess tax benefits from share-based payment arrangements | - | 1.8 | - | 1.8 | - | - | - | |||||||
Dividends on common stock ($0.24 per share) | - | (27.2) | - | - | (27.2) | - | - | |||||||
Cumulative effect of change in accounting for share-based payments | - | (3.1) | - | (3.1) | - | - | - | |||||||
Treasury stock acquired | (4.2) | (125.1) | - | - | - | - | (125.1) | |||||||
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Balance, July 1, 2006 | 112.8 | $ 2,600.4 | $ 1.5 | $ 1,290.7 | $ 2,461.5 | $ (4.0) | $ (1,149.3) | |||||||
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See accompanying notes to consolidated financial statements
- 5 -
Fiscal Six Months Ended
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July 1, 2006 | July 2, 2005 | |||
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CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net income | $ 62.5 | $ 141.8 | ||
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Adjustments to reconcile net income to net cash provided by operating activities, net of sale of Polo Jeans Company business: | ||||
Loss on sale of Polo Jeans Company business | 45.1 | - | ||
Cumulative effect of change in accounting for share-based payments | (3.1) | - | ||
Depreciation and amortization | 50.2 | 51.8 | ||
Equity in earnings of unconsolidated affiliates | (1.8) | (1.8) | ||
Provision for losses on accounts receivable | 0.8 | 1.3 | ||
Deferred taxes | 10.6 | 29.6 | ||
Other | 1.3 | (0.5) | ||
Changes in operating assets and liabilities: | ||||
Accounts receivable | 47.9 | (62.5) | ||
Inventories | 35.1 | 1.9 | ||
Prepaid expenses and other current assets | 15.5 | (12.0) | ||
Other assets | 2.3 | 4.2 | ||
Accounts payable | 9.9 | 20.6 | ||
Income taxes payable | (2.4) | 10.9 | ||
Accrued expenses and other liabilities | (12.8) | (33.2) | ||
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Total adjustments | 198.6 | 10.3 | ||
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Net cash provided by operating activities | 261.1 | 152.1 | ||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Net proceeds from sale of Polo Jeans Company business | 350.6 | - | ||
Capital expenditures | (64.9) | (37.6) | ||
Payments relating to acquisition of Barneys | - | (4.1) | ||
Acquisition of intangibles | - | (0.1) | ||
Other | 0.1 | 0.3 | ||
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Net cash provided by (used in) investing activities | 285.8 | (41.5) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Net (repayments) borrowings under credit facilities | (129.5) | 54.0 | ||
Redemption at maturity of 7.875% Senior Notes | (225.0) | - | ||
Principal payments on capital leases | (2.3) | (2.5) | ||
Debt issuance costs | - | (0.4) | ||
Purchases of treasury stock | (125.1) | (155.6) | ||
Dividends paid | (27.2) | (24.2) | ||
Proceeds from exercise of employee stock options | 13.3 | 8.9 | ||
Excess tax benefits from share-based payment arrangements | 1.8 | - | ||
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Net cash used in financing activities | (494.0) | (119.8) | ||
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EFFECT OF EXCHANGE RATES ON CASH | 0.6 | (0.5) | ||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 53.5 | (9.7) | ||
CASH AND CASH EQUIVALENTS, BEGINNING | 34.9 | 45.0 | ||
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CASH AND CASH EQUIVALENTS, ENDING | $ 88.4 | $ 35.3 | ||
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See accompanying notes to consolidated financial statements
- 6 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes thereto included within our Annual Report on Form 10-K.
In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to conform prior year data with the current presentation. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 2006.
SALE OF POLO JEANS COMPANY BUSINESS
In October 1995, we acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (collectively, the "Lauren License"), which were to expire on December 31, 2006. In May 1998, we acquired an exclusive license to manufacture and market women's dresses, shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Ralph by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (the "Ralph License"). The Ralph License was scheduled to end on December 31, 2003.
During the course of the discussions concerning the Ralph License, Polo asserted that the expiration of the Ralph License would cause the Lauren License agreements to end on December 31, 2003, instead of December 31, 2006. We believed that this was an improper interpretation and that the expiration of the Ralph License did not cause the Lauren License to end.
On June 3, 2003, we announced that our discussions with Polo regarding the interpretation of the Lauren License had reached an impasse and that, as a result, we had filed a complaint in the New York State Supreme Court against Polo and its affiliates and our former President, Jackwyn Nemerov. The complaint alleged that Polo breached the Lauren License agreements by claiming that the license ends at the end of 2003. The complaint also alleged that Ms. Nemerov breached the confidentiality and non-compete provisions of her employment agreement with us. Additionally, Polo was alleged to have induced Ms. Nemerov to breach her employment agreement and Ms. Nemerov was alleged to have induced Polo to breach the Lauren License agreements. We asked the court to enter a judgment for compensatory damages of $550 million, as well as punitive damages, and to enforce the confidentiality and non-compete provisions of Ms. Nemerov's employment agreement.
These matters were resolved by settlement dated January 22, 2006, which closed on February 3, 2006. In connection with this settlement, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We received gross proceeds of $355.0 million in connection with the sale and the settlement. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.
- 7 -
We recorded a pre-tax loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold and a pre-tax gain of $100.0 million related to the litigation settlement. Approximately $3.7 million in state and local taxes have been accrued related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we do not expect to be realizable and, as a result, we increased our deferred tax valuation allowance to offset the deferred tax benefit recorded as a result of the combined loss.
Long-lived assets included in the sale include $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $69.3 million for the fiscal quarter ended July 2, 2005 and $23.9 million and $157.6 million for the fiscal six months ended July 1, 2006 and July 2, 2005, respectively.
STOCK-BASED EMPLOYEE COMPENSATION
Prior to January 1, 2003, pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based Compensation," we had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock options had been measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, we had only recognized compensation expense for options awarded to employees at below-market prices, with the expense recognized over the vesting period of the options. Effective January 1, 2003, we adopted the fair value method of accounting for employee stock options for all options granted after December 31, 2002 pursuant to the "prospective method" set forth in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under this approach, the fair value of the option on the date of grant (as determined by the Black-Scholes-Merton option pricing model) was amortized to compensation expense over the option's vesting period.
In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based Payment" (hereinafter referred to as "SFAS No. 123R"), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. We adopted SFAS No. 123R on January 1, 2006 using the modified prospective application option. As a result, the compensation cost for the portion of awards we granted before January 1, 2006 for which the requisite service had not been rendered and that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered. In addition, the adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a pretax gain of $3.1 million on January 1, 2006, which is reported as a cumulative effect of a change in accounting principle. We are also required to change the amortization period for employees eligible to retire from the period over which the awards vest to the period from the grant date to the date the employee is eligible to retire. The adoption of SFAS No. 123R will not have a material effect on our results of operations or our financial position. Concurrently with the adoption of SFAS No. 123R, we have shifted the composition of our share-based compensation awards towards the use of restricted shares and away from the use of employee stock options.
Both the share-based employee compensation cost included in the determination of net income as reported and the share-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. These pro forma amounts may not be representative of future disclosures, since the fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. At July 1, 2006, total compensation cost related to unvested awards not yet recognized was $29.4 million, which is expected to be amortized over a weighted-average period of 24 months.
- 8 -
Fiscal Quarter Ended
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Fiscal Six Months Ended
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(In millions except per share data) | July 1, 2006 | July 2, 2005 | July 1, 2006 | July 2, 2005 | |
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Net income - as reported | $ 36.6 | $ 54.8 | $ 62.5 | $ 141.8 | |
Add: stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported | 3.6 | 3.1 | 5.8 | 5.9 | |
Deduct: stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value-based method had been applied to all awards | (3.6) | (3.7) | (5.8) | (7.0) | |
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Net income - pro forma | $ 36.6 | $ 54.2 | $ 62.5 | $ 140.7 | |
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Basic earnings per share | |||||
As reported | $0.33 | $0.46 | $0.56 | $1.18 | |
Pro forma | $0.33 | $0.46 | $0.56 | $1.17 | |
Diluted earnings per share | |||||
As reported | $0.32 | $0.46 | $0.55 | $1.17 | |
Pro forma | $0.32 | $0.45 | $0.55 | $1.16 |
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
Fiscal Quarter Ended
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Fiscal Six Months Ended
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(In millions except per share amounts) | July 1, 2006 | July 2, 2005 | July 1, 2006 | July 2, 2005 | |
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Basic | |||||
Net income | $ 36.6 | $ 54.8 | $ 62.5 | $ 141.8 | |
Weighted average common shares outstanding | 111.3 | 118.9 | 112.3 | 120.0 | |
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|
|
||
Basic earnings per share | $ 0.33 | $ 0.46 | $ 0.56 | $ 1.18 | |
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||
Diluted | |||||
Net income | $ 36.6 | $ 54.8 | $ 62.5 | $ 141.8 | |
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|
||
Weighted average common shares outstanding | 111.3 | 118.9 | 112.3 | 120.0 | |
Effect of dilutive securities: | |||||
Employee stock options and restricted stock | 2.2 | 1.3 | 2.2 | 1.4 | |
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||
Weighted average common shares and share equivalents outstanding | 113.5 | 120.2 | 114.5 | 121.4 | |
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||
Diluted earnings per share | $ 0.32 | $ 0.46 | $ 0.55 | $ 1.17 | |
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- 9 -
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) | July 1, 2006 |
July 2, 2005 |
December 31, 2005 |
Trade accounts receivable | $ 407.8 | $ 522.1 | $ 459.1 |
Credit card receivable | 36.1 | 32.3 | 40.5 |
Allowances for doubtful accounts, returns, discounts and co-op advertising | (33.8) | (45.2) | (41.2) |
|
|
|
|
$ 410.1 | $ 509.2 | $ 458.4 | |
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ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of McNaughton, Kasper and Maxwell, we assessed and formulated plans to restructure certain operations of each company. These plans involved the closure of distribution facilities and certain offices. The objectives of the plans were to eliminate unprofitable or marginally profitable lines of business and reduce overhead expenses.
In late 2003, we began to evaluate the need to broaden global sourcing capabilities to respond to the competitive pricing and global sourcing capabilities of our denim competitors, as the favorable production costs from non-duty/non-quota countries and the breadth of fabric options from Asia began to outweigh the benefits of Mexico's quick turn and superior laundry capabilities. The decision to expand global sourcing, combined with lower projected shipping levels of denim products for 2005, led us to begin a comprehensive review of our denim manufacturing during the fourth quarter of 2004. The result of this review was the development of a plan of reorganization of our Mexican operations to reduce costs associated with excess capacity.
On July 11, 2005, we announced that we had completed a comprehensive review of our denim manufacturing operations located in Mexico. The primary action plan arising from this review resulted in the closing of the laundry, assembly and distribution operations located in San Luis, Mexico (the "denim restructuring"). All manufacturing has been consolidated into existing operations in Durango and Torreon, Mexico. A total of 3,170 employees have been terminated as a result of the closure. We have undertaken a number of measures to assist affected employees, including severance and benefits packages. As a result of this consolidation, we expect that our manufacturing operations will perform more efficiently, thereby improving our operating performance.
In connection with the denim restructuring, we recorded $11.6 million of net pre-tax costs (of which $12.1 million was recorded in 2005 and $0.5 million was reversed in 2006), which includes $5.1 million of one-time termination benefits, $3.2 million of losses on the sale of property, plant and equipment, $2.2 million of contract termination costs and $1.1 million of legal and other associated costs. Of these amounts, $10.1 million were reported as cost of sales and $1.5 million were reported as a selling, general and administrative expense in the wholesale moderate apparel segment. The restructuring was substantially completed during the fiscal quarter ended April 1, 2006.
On May 15, 2006, we announced the closing of our Secaucus, New Jersey warehouse to reduce excess capacity. In connection with the closing, we expect to incur $2.7 million of one-time termination benefits and associated employee costs for an estimated 211 employees. Of this amount, $2.6 million was reported as a selling, general and administrative expense in the wholesale better apparel segment during the fiscal quarter ended July 1, 2006 and the remaining $0.1 million will be accrued in the fiscal quarter ending September 30, 2006. The restructuring will be substantially completed by the end of September 2006.
On May 30, 2006, we announced the closing of our Stein Mart leased shoe departments, effective early January 2007. In connection with the closing, we expect to incur $1.2 million of one-time termination benefits and associated employee costs for an estimated 533 employees, which is being accrued straight-line over the period
- 10 -
between the announcement and the projected closing date. Of this amount, $0.2 million was reported as a selling, general and administrative expense in the retail segment during the fiscal quarter ended July 1, 2006.
The accrual of restructuring costs and liabilities, of which $3.8 million is included in accrued expenses and other current liabilities and $1.4 million is included in other noncurrent liabilities, is as follows:
(In millions) |
Severance and other employee costs |
Closing and consolidation of facilities |
Denim restructuring |
Total
|
Balance, January 1, 2005 | $ 6.5 | $ 18.1 | $ - | $ 24.6 |
Net reversals | (0.6) | (1.4) | - | (2.0) |
Payments and reductions | (5.6) | (5.5) | - | (11.1) |
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|
|
Balance, July 2, 2005 | $ 0.3 | $ 11.2 | $ - | $ 11.5 |
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|
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Balance, January 1, 2006 | $ 3.4 | $ 2.1 | $ 2.5 | $ 8.0 |
Net additions (reversals) | 2.8 | - | (0.5) | 2.3 |
Payments and reductions | (2.9) | (0.4) | (1.8) | (5.1) |
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|
|
Balance, July 1, 2006 | $ 3.3 | $ 1.7 | $ 0.2 | $ 5.2 |
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|
Estimated severance payments and other employee costs of $3.3 million accrued at July 1, 2006 relate to one-time termination benefits for 747 employees at locations to be closed and continuing benefits for employees previously terminated. Employee groups affected (totaling an estimated 1,003 employees) include retail, administrative, warehouse and management personnel at locations closed.
The $0.6 million reversal in the fiscal six months ended July 2, 2005 represents $0.5 million of adjustments related to severance accruals for the Kasper and Maxwell acquisitions, which were recorded as reductions of goodwill, and $0.1 million related to the closing of the Mexican and El Paso production facilities, which was recorded as a reduction of selling, general and administrative expenses in the moderate wholesale apparel segment.
During the fiscal six months ended July 1, 2006 and July 2, 2005, $2.9 million and $5.6 million, respectively, of the reserve was utilized (relating to partial or full severance and related costs for 91 and 137 employees, respectively).
The $1.7 million accrued at July 1, 2006 for the consolidation of facilities relates to expected costs to be incurred, including lease obligations, for closing certain acquired facilities in connection with consolidating their operations into our other existing facilities. The $1.4 million reversal in the fiscal six months ended July 2, 2005 includes a $1.2 million adjustment related to the closing of an acquired Maxwell facility, which was recorded as a reduction of goodwill, and a $0.2 million reduction related to the final settlement of a previously recorded lease liability for a North Carolina facility, which was recorded as a reduction of selling, general and administrative expenses in the wholesale better apparel segment.
The details of the denim restructuring accruals are as follows:
(In millions) |
One-time termination benefits |
Contract termination costs |
Other associated costs |
Total denim restructuring |
Balance, January 1, 2006 | $ 0.4 | $ 1.6 | $ 0.5 | $ 2.5 |
Reversals | (0.2) | (0.3) | - | (0.5) |
Payments and reductions | (0.2) | (1.3) | (0.3) | (1.8) |
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Balance, July 1, 2006 | $ - | $ - | $ 0.2 | $ 0.2 |
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During the fiscal six months ended July 1, 2006, we settled all outstanding lease commitments for facilities we closed, resulting in a $0.3 million reversal, of which $0.2 million and $0.1 million was recorded as a reduction
- 11 -
of cost of sales and selling, general and administrative expenses, respectively, in the wholesale moderate apparel segment. During the fiscal six months ended July 1, 2006, $0.2 million of the termination benefits reserve was utilized (relating to costs for 18 employees) and $0.2 million of the accrual was reversed to cost of sales in the wholesale moderate apparel segment.
Our plans have not been finalized in all areas, and additional restructuring costs may result as we continue to evaluate and assess the impact of duplicate responsibilities, warehouses and office locations. We do not expect any final adjustments to be material. Any additional costs will be charged to operations in the period in which they occur.
INVENTORIES
Inventories are summarized as follows (in millions):
July 1, 2006 |
July 2, 2005 |
December 31, 2005 |
|
Raw materials | $ 12.3 | $ 18.8 | $ 16.6 |
Work in process | 25.2 | 42.3 | 17.7 |
Finished goods | 548.2 | 600.6 | 615.7 |
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$ 585.7 | $ 661.7 | $ 650.0 | |
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STATEMENT OF CASH FLOWS
Fiscal Six Months Ended: (In millions) |
July 1, 2006
|
July 2,
2005
|
Supplemental disclosures of cash flow information: | ||
Cash paid during the period for: | ||
Interest | $ 31.8 | $ 41.5 |
Net income tax payments | 59.5 | 44.3 |
Supplemental disclosures of non-cash investing and financing activities: | ||
Equipment acquired through capital lease financing | 3.9 | 0.5 |
Restricted stock issued to employees | 18.0 | 24.6 |
SEGMENT INFORMATION
We identify operating segments based on, among other things, the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Our operations are comprised of four reportable segments: wholesale better apparel, wholesale moderate apparel, wholesale footwear and accessories, and retail. Segment revenues are generated from the sale of apparel, footwear and accessories through wholesale channels and our own retail locations. The wholesale segments include wholesale operations with third party department and other retail stores, the retail segment includes operations by our own stores, and income and expenses related to trademarks, licenses and general corporate functions are reported under "other and eliminations." We define segment profit as operating income before net interest expense, equity in earnings of unconsolidated affiliates and income taxes. Summarized below are our revenues and income by reportable segment for the fiscal quarters and six month periods ended July 1, 2006 and July 2, 2005.
- 12 -
(In millions) | Wholesale Better Apparel |
Wholesale Moderate Apparel |
Wholesale Footwear & Accessories |
Retail |
Licensing, Other & Eliminations |
Consolidated |
For the fiscal quarter ended July 1, 2006 | ||||||
Revenues from external customers | $ 229.3 | $ 267.9 | $ 203.2 | $ 363.3 | $ 10.4 | $ 1,074.1 |
Intersegment revenues | 32.9 | 0.9 | 10.4 | - | (44.2) | - |
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Total revenues | 262.2 | 268.8 | 213.6 | 363.3 | (33.8) | 1,074.1 |
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|
|
Segment income | $ 20.1 | $ 23.6 | $ 8.3 | $ 33.1 | $ (15.3) | 69.8 |
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|
||
Net interest expense | (12.1) | |||||
Equity in earnings of unconsolidated affiliates | 0.9 | |||||
|
||||||
Income before provision for income taxes | $ 58.6 | |||||
|
||||||
For the fiscal quarter ended July 2, 2005 | ||||||
Revenues from external customers | $ 300.6 | $ 306.4 | $ 218.7 | $ 339.7 | $ 11.0 | $ 1,176.4 |
Intersegment revenues | 38.0 | - | 9.0 | - | (47.0) | - |
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|
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Total revenues | 338.6 | 306.4 | 227.7 | 339.7 | (36.0) | 1,176.4 |
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Segment income | $ 26.0 | $ 22.9 | $ 25.3 | $ 39.5 | $ (8.3) | 105.4 |
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Net interest expense | (17.9) | |||||
Equity in earnings of unconsolidated affiliates | 0.9 | |||||
|
||||||
Income before provision for income taxes | $ 88.4 | |||||
|
||||||
For the fiscal six months ended July 1, 2006 | ||||||
Revenues from external customers | $ 567.0 | $ 600.0 | $ 431.1 | $ 668.5 | $ 22.8 | $ 2,289.4 |
Intersegment revenues | 70.7 | 2.2 | 22.5 | - | (95.4) | - |
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|
|
Total revenues | 637.7 | 602.2 | 453.6 | 668.5 | (72.6) | 2,289.4 |
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|
Segment income | $ 86.7 | $ 64.1 | $ 38.6 | $ 37.6 | $ (26.5) | 200.5 |
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||
Loss on sale of Polo Jeans Company business | (45.1) | |||||
Net interest expense | (27.3) | |||||
Equity in earnings of unconsolidated affiliates | 1.8 | |||||
|
||||||
Income before provision for income taxes | $ 129.9 | |||||
|
||||||
For the fiscal six months ended July 2, 2005 | ||||||
Revenues from external customers | $ 729.3 | $ 661.5 | $ 486.4 | $ 623.2 | $ 25.2 | $ 2,525.6 |
Intersegment revenues | 72.9 | 2.8 | 21.1 | - | (96.8) | - |
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Total revenues | 802.2 | 664.3 | 507.5 | 623.2 | (71.6) | 2,525.6 |
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Segment income | $ 97.6 | $ 68.5 | $ 66.9 | $ 49.9 | $ (19.2) | 263.7 |
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Net interest expense | (36.8) | |||||
Equity in earnings of unconsolidated affiliates | 1.8 | |||||
|
||||||
Income before provision for income taxes | $ 228.7 | |||||
|
DERIVATIVES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," subsequently amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (as amended, hereinafter referred to as "SFAS 133"), establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires us to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income, depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. At July 1, 2006, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total of US $23.0 million through May 2007, US $36.0 million for Euros through October 2007 and US $1.25 million for British Pounds through September 2007.
We recorded amortization of net gains resulting from the termination of interest rate swaps and locks of $2.3 million and $3.6 million during the fiscal six months ended July 1, 2006 and July 2, 2005, respectively, as a reduction of interest expense. We reclassified $0.1 million and $1.3 million of net losses from foreign currency exchange contracts to cost of sales during the fiscal six months ended July 1, 2006 and July 2, 2005, respectively.
- 13 -
There has been no material ineffectiveness related to our foreign currency exchange contracts as the instruments are designed to be highly effective in offsetting losses and gains on transactions being hedged. If foreign currency exchange rates do not change from their July 1, 2006 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months will not be material. The actual amounts that will be reclassified to earnings over the next 12 months could vary, however, as a result of changes in market conditions.
PENSION PLANS
Components of Net Periodic Benefit Cost
Fiscal
Quarter Ended
|
Fiscal
Six Months Ended
|
||||
(In millions) |
July
1, 2006
|
July
2, 2005
|
July
1, 2006
|
July
2, 2005
|
|
Interest cost | $ 0.5 | $ 0.5 | $ 1.1 | $ 1.1 | |
Expected return on plan assets | (0.4) | (0.5) | (1.0) | (0.9) | |
Amortization of net loss | 0.2 | 0.3 | 0.5 | 0.5 | |
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Net periodic benefit cost | $ 0.3 | $ 0.3 | $ 0.6 | $ 0.7 | |
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NEW ACCOUNTING STANDARDS
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an amendment of FASB Statements No. 133 and 140," which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will have no impact on our results of operations or our financial position.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 will have no impact on our results of operations or our financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on our results of operations or our financial position.
- 14 -
SUPPLEMENTAL SUMMARIZED FINANCIAL INFORMATION
Certain of our subsidiaries function as co-issuers of the outstanding debt of Jones Apparel Group, Inc. ("Jones"), including Jones Apparel Group USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings"), Nine West and Jones Retail Corporation ("Jones Retail")(collectively, including Jones, the "Issuers"). Each subsidiary co-issuer is 100% owned, directly or indirectly, by Jones.
The following condensed consolidating balance sheets, statements of income and statements of cash flows for the Issuers and our other subsidiaries have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones are not presented as Jones has no independent operations or assets. There are no contractual restrictions on distributions from Jones USA, Jones Holdings, Nine West or Jones Retail to Jones.
Condensed Consolidating Balance Sheets
(In millions)
July
1, 2006
|
December
31, 2005
|
|||||||||
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
|||
ASSETS | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | $ 66.6 | $ 21.8 | $ - | $ 88.4 | $ 20.3 | $ 14.6 | $ - | $ 34.9 | ||
Accounts receivable - net | 175.3 | 234.8 | - | 410.1 | 178.8 | 279.6 | - | 458.4 | ||
Inventories | 276.4 | 315.9 | (6.6) | 585.7 | 282.4 | 374.6 | (7.0) | 650.0 | ||
Prepaid and refundable income taxes | 2.3 | 6.6 | (8.9) | - | 1.5 | 6.5 | (8.0) | - | ||
Deferred taxes | 25.0 | 29.0 | - | 54.0 | 17.7 | 35.6 | (0.8) | 52.5 | ||
Prepaid expenses and other current assets | 33.8 | 41.0 | - | 74.8 | 45.7 | 42.8 | - | 88.5 | ||
|
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|
|
|
|
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|
|||
TOTAL CURRENT ASSETS | 579.4 | 649.1 | (15.5) | 1,213.0 | 546.4 | 753.7 | (15.8) | 1,284.3 | ||
Property, plant and equipment - net | 134.1 | 203.5 | - | 337.6 | 133.6 | 178.5 | - | 312.1 | ||
Due from affiliates | 56.3 | 777.9 | (834.2) | - | 63.5 | 624.8 | (688.3) | - | ||
Goodwill | 1,456.2 | 284.3 | - | 1,740.5 | 1,784.3 | 313.0 | - | 2,097.3 | ||
Other intangibles - net | 166.8 | 657.9 | - | 824.7 | 166.8 | 660.7 | - | 827.5 | ||
Investments in subsidiaries | 2,286.9 | - | (2,286.9) | - | 2,205.2 | - | (2,205.2) | - | ||
Other assets | 29.9 | 22.4 | (2.1) | 50.2 | 30.7 | 27.4 | (1.5) | 56.6 | ||
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|
|
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|||
$ 4,709.6 | $ 2,595.1 | $ (3,138.7) | $ 4,166.0 | $ 4,930.5 | $ 2,558.1 | $ (2,910.8) | $ 4,577.8 | |||
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|||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Short-term borrowings | $ - | $ - | $ - | $ - | $ 129.5 | $ - | $ - | $ 129.5 | ||
Current portion of long-term debt and capital lease obligations | 1.4 | 2.5 | - | 3.9 | 226.6 | 1.2 | - | 227.8 | ||
Accounts payable | 126.3 | 140.4 | - | 266.7 | 118.4 | 138.1 | - | 256.5 | ||
Income taxes payable | 59.3 | 14.0 | (21.5) | 51.8 | 54.9 | 17.8 | (18.5) | 54.2 | ||
Deferred taxes | - | - | - | - | 0.9 | - | (0.9) | - | ||
Accrued expenses and other current liabilities | 77.5 | 69.4 | - | 146.9 | 78.5 | 90.0 | - | 168.5 | ||
|
|
|
|
|
|
|
|
|||
TOTAL CURRENT LIABILITIES | 264.5 | 226.3 | (21.5) | 469.3 | 608.8 | 247.1 | (19.4) | 836.5 | ||
|
|
|
|
|
|
|
|
|||
NONCURRENT LIABILITIES: | ||||||||||
Long-term debt | 749.2 | 3.5 | - | 752.7 | 749.2 | 3.4 | - | 752.6 | ||
Obligations under capital leases | 11.9 | 26.0 | - | 37.9 | 12.5 | 24.7 | - | 37.2 | ||
Deferred taxes | 12.7 | 168.0 | 9.1 | 189.8 | 10.7 | 158.0 | 7.2 | 175.9 | ||
Due to affiliates | 777.9 | 56.3 | (834.2) | - | 624.8 | 63.5 | (688.3) | - | ||
Other | 44.1 | 71.8 | - | 115.9 | 38.0 | 71.2 | - | 109.2 | ||
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|
|
|
|
|
|
|
|||
TOTAL NONCURRENT LIABILITIES | 1,595.8 | 325.6 | (825.1) | 1,096.3 | 1,435.2 | 320.8 | (681.1) | 1,074.9 | ||
|
|
|
|
|
|
|
|
|||
TOTAL LIABILITIES | 1,860.3 | 551.9 | (846.6) | 1,565.6 | 2,044.0 | 567.9 | (700.5) | 1,911.4 | ||
|
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|
|
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|
|||
STOCKHOLDERS' EQUITY: | ||||||||||
Common stock and additional paid-in capital | 1,292.2 | 1,589.7 | (1,589.7) | 1,292.2 | 1,270.9 | 1,631.1 | (1,631.1) | 1,270.9 | ||
Retained earnings | 2,710.4 | 451.1 | (700.0) | 2,461.5 | 2,646.3 | 360.0 | (580.1) | 2,426.2 | ||
Accumulated other comprehensive income (loss) | (4.0) | 2.4 | (2.4) | (4.0) | (6.5) | (0.9) | 0.9 | (6.5) | ||
Treasury stock | (1,149.3) | - | - | (1,149.3) | (1,024.2) | - | - | (1,024.2) | ||
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|
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|
|||
TOTAL STOCKHOLDERS' EQUITY | 2,849.3 | 2,043.2 | (2,292.1) | 2,600.4 | 2,886.5 | 1,990.2 | (2,210.3) | 2,666.4 | ||
|
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|
|
|
|
|
|
|||
$ 4,709.6 | $ 2,595.1 | $ (3,138.7) | $ 4,166.0 | $ 4,930.5 | $ 2,558.1 | $ (2,910.8) | $ 4,577.8 | |||
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|
|
|
|
|
-15 -
Condensed Consolidating Statements of Income
(In millions)
Fiscal
Quarter Ended July 1, 2006
|
Fiscal
Quarter Ended July 2, 2005
|
|||||||||
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
|||
Net sales | $ 541.8 | $ 533.5 | $ (15.6) | $ 1,059.7 | $ 557.4 | $ 626.9 | $ (18.9) | $ 1,165.4 | ||
Licensing income (net) | - | 9.7 | - | 9.7 | - | 11.0 | - | 11.0 | ||
Service income | - | 4.7 | - | 4.7 | - | - | - | - | ||
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|
|
|
|
|
|
|
|||
Total revenues | 541.8 | 547.9 | (15.6) | 1,074.1 | 557.4 | 637.9 | (18.9) | 1,176.4 | ||
Cost of goods sold | 324.9 | 356.0 | (13.2) | 667.7 | 333.5 | 423.4 | (15.0) | 741.9 | ||
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|||
Gross profit | 216.9 | 191.9 | (2.4) | 406.4 | 223.9 | 214.5 | (3.9) | 434.5 | ||
Selling, general and administrative expenses | 225.7 | 113.7 | (2.8) | 336.6 | 193.1 | 139.5 | (3.5) | 329.1 | ||
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Operating income (loss) | (8.8) | 78.2 | 0.4 | 69.8 | 30.8 | 75.0 | (0.4) | 105.4 | ||
Net interest (expense) income and financing costs | (14.5) | 2.4 | - | (12.1) | (19.0) | 1.1 | - | (17.9) | ||
Equity in earnings of unconsolidated affiliates | 0.1 | 0.9 | (0.1) | 0.9 | 0.1 | 0.6 | 0.2 | 0.9 | ||
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Income (loss) before provision for income taxes and equity in earnings of subsidiaries | (23.2) | 81.5 | 0.3 | 58.6 | 11.9 | 76.7 | (0.2) | 88.4 | ||
Provision for income taxes | (6.3) | 28.1 | 0.2 | 22.0 | 6.3 | 28.3 | (1.0) | 33.6 | ||
Equity in earnings of subsidiaries | 53.5 | - | (53.5) | - | 57.9 | - | (57.9) | - | ||
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Net income | $ 36.6 | $ 53.4 | $ (53.4) | $ 36.6 | $ 63.5 | $ 48.4 | $ (57.1) | $ 54.8 | ||
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Fiscal
Six Months Ended July 1, 2006
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Fiscal
Six Months Ended July 2, 2005
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Issuers
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Others
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Eliminations
|
Cons- olidated |
Issuers
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Others
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Eliminations
|
Cons- olidated |
|||
Net sales | $ 1,121.4 | $ 1,172.0 | $ (33.5) | $ 2,259.9 | $ 1,182.5 | $ 1,357.9 | $ (40.0) | $ 2,500.4 | ||
Licensing income (net) | - | 21.6 | - | 21.6 | - | 25.2 | - | 25.2 | ||
Service income | - | 7.9 | - | 7.9 | - | - | - | - | ||
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Total revenues | 1,121.4 | 1,201.5 | (33.5) | 2,289.4 | 1,182.5 | 1,383.1 | (40.0) | 2,525.6 | ||
Cost of goods sold | 675.2 | 782.7 | (25.2) | 1,432.7 | 710.8 | 908.9 | (27.3) | 1,592.4 | ||
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Gross profit | 446.2 | 418.8 | (8.3) | 856.7 | 471.7 | 474.2 | (12.7) | 933.2 | ||
Selling, general and administrative expenses | 414.1 | 248.0 | (5.9) | 656.2 | 387.4 | 290.0 | (7.9) | 669.5 | ||
Loss on sale of Polo Jeans Company business | 22.8 | 22.3 | - | 45.1 | - | - | - | - | ||
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Operating income | 9.3 | 148.5 | (2.4) | 155.4 | 84.3 | 184.2 | (4.8) | 263.7 | ||
Net interest (expense) income and financing costs | (32.2) | 4.9 | - | (27.3) | (38.8) | 2.0 | - | (36.8) | ||
Equity in earnings of unconsolidated affiliates | 0.3 | 2.0 | (0.5) | 1.8 | 0.2 | 0.9 | 0.7 | 1.8 | ||
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Income (loss) before provision for income taxes and equity in earnings of subsidiaries | (22.6) | 155.4 | (2.9) | 129.9 | 45.7 | 187.1 | (4.1) | 228.7 | ||
Provision for income taxes | 6.7 | 63.2 | (0.6) | 69.3 | 20.9 | 68.5 | (2.5) | 86.9 | ||
Equity in earnings of subsidiaries | 118.6 | - | (118.6) | - | 119.2 | - | (119.2) | - | ||
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Income before cumulative effect of change in accounting principle | 89.3 | 92.2 | (120.9) | 60.6 | 144.0 | 118.6 | (120.8) | 141.8 | ||
Cumulative effect of change in accounting for share-based payments, net of tax | 1.9 | - | - | 1.9 | - | - | - | - | ||
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Net income | $ 91.2 | $ 92.2 | $ (120.9) | $ 62.5 | $ 144.0 | $ 118.6 | $ (120.8) | $ 141.8 | ||
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Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal
Six Months Ended July 1, 2006
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Fiscal
Six Months Ended July 2, 2005
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Issuers
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Others
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Eliminations
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Cons- olidated |
Issuers
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Others
|
Eliminations
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Cons- olidated |
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Net cash provided by operating activities | $ 215.1 | $ 47.0 | $ (1.0) | $ 261.1 | $ 138.4 | $ 13.7 | $ - | $ 152.1 | ||
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Cash flows from investing activities: | ||||||||||
Net proceeds from sale of Polo Jeans Company business | 344.1 | 6.5 | - | 350.6 | - | - | - | - | ||
Capital expenditures | (20.3) | (44.6) | - | (64.9) | (19.4) | (18.2) | - | (37.6) | ||
Payments relating to acquisitions | - | - | - | - | (4.1) | - | - | (4.1) | ||
Other (net) | 0.1 | - | - | 0.1 | 0.1 | 0.1 | - | 0.2 | ||
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Net cash provided by (used in) investing activities | 323.9 | (38.1) | - | 285.8 | (23.4) | (18.1) | - | (41.5) | ||
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Cash flows from financing activities: | ||||||||||
Net (repayments) borrowings under credit facilities | (129.5) | - | - | (129.5) | 54.0 | - | - | 54.0 | ||
Redemption at maturity of 7.875% Senior Notes | (225.0) | - | - | (225.0) | - | - | - | - | ||
Debt issuance costs | - | - | - | - | (0.4) | - | - | (0.4) | ||
Principal payments on capital leases | (1.0) | (1.3) | - | (2.3) | (1.6) | (0.9) | - | (2.5) | ||
Purchases of treasury stock | (125.1) | - | - | (125.1) | (155.6) | - | - | (155.6) | ||
Dividends paid | (27.2) | (1.0) | 1.0 | (27.2) | (24.2) | - | - | (24.2) | ||
Proceeds from exercise of employee stock options | 13.3 | - | - | 13.3 | 8.9 | - | - | 8.9 | ||
Excess tax benefits from share-based payment arrangements | 1.8 | - | - | 1.8 | - | - | - | - | ||
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Net cash used in financing activities | (492.7) | (2.3) | 1.0 | (494.0) | (118.9) | (0.9) | - | (119.8) | ||
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Effect of exchange rates on cash | - | 0.6 | - | 0.6 | - | (0.5) | - | (0.5) | ||
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Net increase (decrease) in cash and cash equivalents | 46.3 | 7.2 | - | 53.5 | (3.9) | (5.8) | - | (9.7) | ||
Cash and cash equivalents, beginning | 20.3 | 14.6 | - | 34.9 | 12.3 | 32.7 | - | 45.0 | ||
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Cash and cash equivalents, ending | $ 66.6 | $ 21.8 | $ - | $ 88.4 | $ 8.4 | $ 26.9 | $ - | $ 35.3 | ||
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- 16 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information and analysis of our results of operations for the 13 and 26 week periods ended July 1, 2006 (hereinafter referred to as the "second fiscal quarter of 2006" and the "first fiscal six months of 2006," respectively) and the 13 and 26 week periods ended July 2, 2005 (hereinafter referred to as the "second fiscal quarter of 2005"and the "first fiscal six months of 2005," respectively), and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.
Executive Overview
We design, contract for the manufacture of, manufacture and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.
During the first fiscal six months of 2006, the following significant events took place:
Sale of Polo Jeans Company Business
On January 22, 2006, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We also entered into a settlement and release agreement with Polo to settle the pending litigation between the respective parties, including our former President, upon closing. Gross proceeds of the transactions, which closed on February 3, 2006, were $355.0 million. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.
We recorded a pre-tax loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold and a pre-tax gain of $100.0 million related to the litigation settlement. Approximately $3.7 million in state and local taxes have been accrued related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we do not expect to be realizable and, as a result, we increased our deferred tax valuation allowance to offset the deferred tax benefit recorded as a result of the combined loss.
Long-lived assets included in the sale included $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $69.3 million for the fiscal quarter ended July 2, 2005 and $23.9 million and $157.7 million for the fiscal six months ended July 1, 2006 and July 2, 2005, respectively.
- 17 -
Strategic Review
We have completed a strategic review of our operating infrastructure to improve profitability and to ensure we are properly positioned for the long-term benefit of our shareholders. By proactively reviewing our infrastructure, systems and operating processes at a time when the industry is undergoing consolidation and change, we plan to eliminate redundancies and improve our overall cost structure and margin performance.
Supply Chain Management
General and Administrative Areas
The reviews have been completed, and we estimate that the implementation and execution of the initiatives underway will be substantially completed by mid-2008. We are targeting annual savings of approximately $100 million once all the initiatives have been implemented. The costs associated with the review and the ultimate capital expenditures and execution expenses (including severance and fees) related to the initiatives that are derived are expected to fall in a range of $70 million to $80 million. As of July 1, 2006, we have spent a total of $34.8 million.
Stock-Based Employee Compensation
Prior to January 1, 2003, pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based Compensation," we had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock options had been measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, we had only recognized compensation expense for options awarded to employees at below-market prices, with the expense recognized over the vesting period of the options. Effective January 1, 2003, we adopted the fair value method of accounting for employee stock options for all options granted after December 31, 2002 pursuant to the "prospective method" set forth in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under this approach, the fair value of the option on the date of grant (as determined by the Black-Scholes-Merton option pricing model) was amortized to compensation expense over the option's vesting period.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment
- 18 -
transactions with employees except for equity instruments held by employee share ownership plans. We adopted SFAS No. 123R on January 1, 2006 using the modified prospective application option. As a result, the compensation cost for the portion of awards we granted before January 1, 2006 for which the requisite service had not been rendered and that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered. In addition, the adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a pretax gain of $3.1 million on January 1, 2006, which is reported as a cumulative effect of a change in accounting principle. We are also required to change the amortization period for employees eligible to retire from the period over which the awards vest to the period from the grant date to the date the employee is eligible to retire. The adoption of SFAS No. 123R will not have a material effect on our results of operations or our financial position. Concurrently with the adoption of SFAS No. 123R, we have shifted the composition of our share-based compensation awards towards the use of restricted shares and away from the use of employee stock options.
Restructuring
On May 15, 2006, we announced the closing of our Secaucus, New Jersey warehouse to reduce excess capacity. In connection with the closing, we expect to incur $2.7 million of one-time termination benefits and associated employee costs for an estimated 211 employees. Of this amount, $2.6 million was reported as a selling, general and administrative expense in the wholesale better apparel segment during the second fiscal quarter of 2006, and the remaining $0.1 million will be accrued in the fiscal quarter ending September 30, 2006. The restructuring will be substantially completed by the end of September 2006.
On May 30, 2006, we announced the closing of our Stein Mart leased shoe departments, effective early January 2007. In connection with the closing, we expect to incur $1.2 million of one-time termination benefits and associated employee costs for an estimated 533 employees, which is being accrued straight-line over the period between the announcement and the projected closing date. Of this amount, $0.2 million was reported as a selling, general and administrative expense in the retail segment during the second fiscal quarter of 2006.
Critical Accounting Policies
Several of our accounting policies involve significant judgements and uncertainties. The policies with the greatest potential effect on our results of operations and financial position include the estimated collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the estimated fair values of both our goodwill and intangible assets with indefinite lives.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.
We utilize independent third-party appraisals to estimate the fair values of both our goodwill and our intangible assets with indefinite lives. These appraisals are based on projected cash flows and interest rates; should interest rates or our future cash flows differ significantly from the assumptions used in these projections, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts.
- 19 -
RESULTS OF OPERATIONS
Statements of Income Stated in Dollars and as a Percentage of Total Revenues
(In millions) |
Fiscal
Quarter Ended
|
Fiscal
Six Months Ended
|
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July
1, 2006
|
July
2, 2005
|
July
1, 2006
|
July
2, 2005
|
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Net sales | $ 1,059.7 | 98.7% | $ 1,165.4 | 99.1% | $ 2,259.9 | 98.7% | $ 2,500.4 | 99.0% | |||
Licensing income (net) | 9.7 | 0.9% | 11.0 | 0.9% | 21.6 | 0.9% | 25.2 | 1.0% | |||
Service income | 4.7 | 0.4% | - | - | 7.9 | 0.3% | - | - | |||
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Total revenues | 1,074.1 | 100.0% | 1,176.4 | 100.0% | 2,289.4 | 100.0% | 2,525.6 | 100.0% | |||
Cost of goods sold | 667.7 | 62.2% | 741.9 | 63.1% | 1,432.7 | 62.6% | 1,592.4 | 63.1% | |||
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Gross profit | 406.4 | 37.8% | 434.5 | 36.9% | 856.7 | 37.4% | 933.2 | 36.9% | |||
Selling, general and administrative expenses | 336.6 | 31.3% | 329.1 | 28.0% | 656.2 | 28.7% | 669.5 | 26.5% | |||
Loss on sale of Polo Jeans Company business | - | - | - | - | 45.1 | 2.0% | - | - | |||
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Operating income | 69.8 | 6.5% | 105.4 | 9.0% | 155.4 | 6.8% | 263.7 | 10.4% | |||
Net interest expense | (12.1) | (1.1%) | (17.9) | (1.5%) | (27.3) | (1.2%) | (36.8) | (1.5%) | |||
Equity in earnings of unconsolidated affiliates | 0.9 | 0.1% | 0.9 | 0.1% | 1.8 | 0.1% | 1.8 | 0.1% | |||
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Income before provision for income taxes | 58.6 | 5.5% | 88.4 | 7.5% | 129.9 | 5.7% | 228.7 | 9.1% | |||
Provision for income taxes | 22.0 | 2.0% | 33.6 | 2.9% | 69.3 | 3.0% | 86.9 | 3.4% | |||
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Income before cumulative effect of change in accounting principle | 36.6 | 3.4% | 54.8 | 4.7% | 60.6 | 2.6% | 141.8 | 5.6% | |||
Cumulative effect of change in accounting for share-based payments, net of tax | - | - | - | - | 1.9 | 0.1% | - | - | |||
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Net income | $ 36.6 | 3.4% | $ 54.8 | 4.7% | $ 62.5 | 2.7% | $ 141.8 | 5.6% | |||
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Percentage totals may not add due to rounding.
Fiscal Quarter Ended July 1, 2006 Compared to Fiscal Quarter Ended July 2, 2005
Revenues. Total revenues for the second fiscal quarter of 2006 were $1.07 billion compared to $1.18 billion for the second fiscal quarter of 2005, a decrease of 8.7%.
Revenues by segment were as follows:
(In millions) |
Second Fiscal Quarter of 2006 |
Second Fiscal Quarter of 2005 |
Increase/ (Decrease) |
Percent Change |
Wholesale better apparel | $ 229.3 | $ 300.6 | $(71.3) | (23.7%) |
Wholesale moderate apparel | 267.9 | 306.4 | (38.5) | (12.6%) |
Wholesale footwear and accessories | 203.2 | 218.7 | (15.5) | (7.1%) |
Retail | 363.3 | 339.7 | 23.6 | 6.9% |
Other | 10.4 | 11.0 | (0.6) | (5.5%) |
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Total revenues | $ 1,074.1 | $ 1,176.4 | $ (102.3) | (8.7%) |
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Wholesale better apparel revenues decreased primarily due to the sale of the Polo Jeans Company business ($68.7 million of the decrease) and the discontinuance of our Easy Spirit apparel line. Decreases in shipments of our Jones New York Sport and Jones New York Signature product lines were offset by increased shipments of our Nine West apparel product line.
Wholesale moderate apparel revenues decreased primarily due to decreased shipments of our l.e.i., Nine & Co., A|Line, Norton McNaughton, Bandolino, Joneswear, and Joneswear Jeans product lines (primarily to J.C. Penney Company, Inc., Sears Holding Corporation and Kohl's Corporation). These decreases were partially offset by
- 20 -
increased shipments of our Erika and GLO product lines and shipments of the new private label Duckhead product line.
Wholesale footwear and accessories revenues decreased due to decreased shipments of our Nine West accessory and costume jewelry product lines and our Enzo Angiolini and Easy Spirit footwear product lines (primarily to Federated Department Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino, l.e.i. and licensed Tommy Hilfiger costume jewelry product lines, partially offset by increased shipments of our Anne Klein footwear product line.
Retail revenues increased primarily due to a 3.1% increase in comparable store sales. We began the second fiscal quarter of 2006 with 1,060 retail locations and had a net increase of 12 locations during the quarter to end the quarter with 1,072 locations.
Revenues for the second fiscal quarter of 2006 also include $4.7 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $3.2 million was recorded in the wholesale better apparel segment, $0.8 million was recorded in the wholesale moderate apparel segment and $0.7 million was recorded in the licensing and other segment.
Gross Profit. The gross profit margin increased to 37.8% in the second fiscal quarter of 2006 compared to 36.9% in the second fiscal quarter of 2005.
Wholesale better apparel gross profit margins were 37.4% and 35.9% for the second fiscal quarters of 2006 and 2005, respectively. The increase was due to lower levels of sales to off-price retailers and lower levels of air freight partially offset by reduced sales of higher-margin Polo Jeans Company products as a result of the sale of the Polo Jeans Company business.
Wholesale moderate apparel gross profit margins were 24.6% and 23.8% for the second fiscal quarters of 2006 and 2005, respectively. The increase was a result of lower levels of sales to off-price retailers and improved margins in our l.e.i. product line, partially offset by higher levels of air freight.
Wholesale footwear and accessories gross profit margins were 28.9% and 30.1% for the second fiscal quarters of 2006 and 2005, respectively. The decrease was a result of lower net sales in the higher-margin wholesale jewelry business, higher levels of sales to off-price retailers, markdowns related to the discontinuance of the licensed Tommy Hilfiger jewelry line in the current period and writedowns of excess inventory in our direct selling jewelry and accessory business.
Retail gross profit margins were 50.9% and 51.4% for the second fiscal quarters of 2006 and 2005, respectively. The decrease was the result of a higher level of promotional activity in our footwear and accessories stores and increased sales in our lower-margin Barneys stores in the current period.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses of $336.6 million in the second fiscal quarter of 2006 represented an increase of $7.5 million from the $329.1 million reported for the second fiscal quarter of 2005. The increase is primarily due to $2.6 million recorded in the wholesale better apparel segment in the current period related to the closing of the Secaucus warehouse and $10.0 million recorded in the wholesale footwear and accessories segment related to the termination of a former executive officer and the settlement of litigation concerning a license agreement, offset by reductions due to the sale of the Polo Jeans Company business, headcount reductions as a result of the strategic review and lower levels of advertising in the current period. SG&A expenses for the second fiscal quarter of 2006 also included $2.6 million in the retail segment and $0.9 million recorded in the licensing, other and eliminations segment related to the termination of the former executive officer. SG&A expenses for the second fiscal quarter of 2005 included approximately $3.1 million recorded in the wholesale better apparel segment as a result of an arbitration award to a former employee.
- 21 -
Operating Income. The resulting operating income for the second fiscal quarter of 2006 of $69.8 million decreased $35.6 million from the $105.4 million for the second fiscal quarter of 2005, due to the factors described above.
Net Interest Expense. Net interest expense was $12.1 million in the second fiscal quarter of 2006 compared to $17.9 million in the second fiscal quarter of 2005. The decrease was primarily the result of lower average borrowings and the redemption at maturity of our 7.875% Senior Notes during the second fiscal quarter of 2006.
Provision for Income Taxes. The effective income tax rate was 37.5% for the second fiscal quarter of 2006 and 38.0% for the second fiscal quarter of 2005. The difference was primarily driven by a decrease in the state and local effective tax rate.
Net Income and Earnings Per Share. Net income was $36.6 million in the second fiscal quarter of 2006, a decrease of $18.2 million from the net income of $54.8 million earned in the second fiscal quarter of 2005. Diluted earnings per share for the second fiscal quarter of 2006 was $0.32 compared to $0.46 for the second fiscal quarter of 2005, on 5.6% fewer shares outstanding.
Fiscal Six Months Ended July 1, 2006 Compared to Fiscal Quarter Ended July 2, 2005
Revenues. Total revenues for the first fiscal six months of 2006 were $2.29 billion compared to $2.53 billion for the first fiscal six months of 2005, a decrease of 9.4%.
Revenues by segment were as follows:
(In millions) |
First Fiscal Six Months of 2006 |
First Fiscal Six Months of 2005 |
Increase/ (Decrease) |
Percent Change |
Wholesale better apparel | $ 567.0 | $ 729.3 | $(162.3) | (22.3%) |
Wholesale moderate apparel | 600.0 | 661.5 | (61.5) | (9.3%) |
Wholesale footwear and accessories | 431.1 | 486.4 | (55.3) | (11.4%) |
Retail | 668.5 | 623.2 | 45.3 | 7.3% |
Other | 22.8 | 25.2 | (2.4) | (9.5%) |
|
|
|
|
|
Total revenues | $ 2,289.4 | $ 2,525.6 | $ (236.2) | (9.4%) |
|
|
|
|
Wholesale better apparel revenues decreased primarily due to the sale of the Polo Jeans Company business ($133.7 million of the decrease) and the discontinuance of our Easy Spirit apparel line. Decreases in shipments of our Jones New York Sport, Jones New York Signature, Kasper and Albert Nipon product lines were partially offset by increased shipments of our Nine West apparel product line.
Wholesale moderate apparel revenues decreased primarily due to decreased shipments of our l.e.i., Nine & Co., Norton McNaughton, A|Line, Bandolino, Energie, Joneswear, Erika and Joneswear Jeans product lines (primarily to J.C. Penney Company, Inc., Sears Holding Corporation and Kohl's Corporation). These decreases were partially offset by increased shipments of our GLO product line and shipments of several new product lines, including the C.L.O.T.H.E.S. and the private label Latina and Duckhead product lines.
Wholesale footwear and accessories revenues decreased due to decreased shipments of our Nine West accessory and costume jewelry product lines and our Enzo Angiolini and Easy Spirit footwear product lines (primarily to Federated Department Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino, l.e.i. and licensed Tommy Hilfiger costume jewelry product lines.
Retail revenues increased primarily due to a 3.3% increase in comparable store sales. We began the first fiscal six months of 2006 with 1,086 retail locations and had a net decrease of 14 locations during the period to end the period with 1,072 locations.
- 22 -
Revenues for the first fiscal six months of 2006 also include $7.9 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $5.3 million was recorded in the wholesale better apparel segment, $1.4 million was recorded in the wholesale moderate apparel segment and $1.2 million was recorded in the licensing and other segment.
Gross Profit. The gross profit margin increased to 37.4% in the first fiscal six months of 2006 compared to 36.9% in the first fiscal six months of 2005.
Wholesale better apparel gross profit margins were 38.6% and 36.4% for the first fiscal six months of 2006 and 2005, respectively. The increase was due to lower levels of sales to off-price retailers partially offset by reduced sales of higher-margin Polo Jeans Company products as a result of the sale of the Polo Jeans Company business.
Wholesale moderate apparel gross profit margins were 24.8% and 26.0% for the first fiscal six months of 2006 and 2005, respectively. The decrease was a result of higher levels of sales to off-price retailers, higher levels of air freight and excess capacity in our Mexican manufacturing operations.
Wholesale footwear and accessories gross profit margins were 30.0% and 31.1% for the first fiscal six months of 2006 and 2005, respectively. The decrease was a result of lower net sales in the higher-margin wholesale jewelry business, higher levels of sales to off-price retailers, markdowns related to the discontinuance of the licensed Tommy Hilfiger jewelry line in the current period and writedowns of excess inventory in our direct selling jewelry and accessory business.
Retail gross profit margins were 49.7% and 50.7% for the first fiscal six months of 2006 and 2005, respectively. The decrease was the result of a higher level of promotional activity in our footwear and accessories stores and increased sales in our lower-margin Barneys stores in the current period.
Selling, General and Administrative Expenses. SG&A expenses of $656.2 million in the first fiscal six months of 2006 represented a decrease of $13.3 million from the $669.5 million reported for the first fiscal six months of 2005. The decrease is primarily due to the sale of the Polo Jeans Company business, headcount reductions as a result of the strategic review and lower levels of advertising in the current period, offset by $2.6 million recorded in the wholesale better apparel segment in the current period related to the closing of the Secaucus warehouse and $10.0 million recorded in the wholesale footwear and accessories segment related to the termination of a former executive officer and the settlement of litigation concerning a license agreement. SG&A expenses for the first fiscal six months of 2006 also included $2.6 million in the retail segment and $0.9 million recorded in the licensing, other and eliminations segment related to the termination of the former executive officer. SG&A expenses for the first fiscal six months of 2005 included approximately $3.1 million recorded in the wholesale better apparel segment as the result of an arbitration award to a former employee.
Operating Income. The resulting operating income for the first fiscal six months of 2006 of $155.4 million decreased $108.3 million from the $263.7 million for the first fiscal six months of 2005, due to the factors described above and the loss on the sale of the Polo Jeans Company business.
Net Interest Expense. Net interest expense was $27.3 million in the first fiscal six months of 2006 compared to $36.8 million in the first fiscal six months of 2005. The decrease was primarily the result of lower average borrowings during the first fiscal six months of 2006 and the redemption at maturity of our 7.875% Senior Notes during the second fiscal quarter of 2006.
Provision for Income Taxes. The effective income tax rate was 53.0% for the first fiscal six months of 2006 and 38.0% for the first fiscal six months of 2005. The difference was primarily driven by the net tax effects associated with the sale of the Polo Jeans Company business and the litigation settlement. Without the effects of the Polo Jeans Company sale and litigation settlement, the effective tax rate for the first fiscal six months of 2006 was 37.5%.
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Cumulative Effect of Change in Accounting for Share-Based Payment. The adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures of unvested employee stock options and restricted stock as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a gain of $1.9 million (net of $1.2 million in taxes) on January 1, 2006 as a cumulative effect of a change in accounting principle.
Net Income and Earnings Per Share. Net income was $62.5 million in the first fiscal six months of 2006, a decrease of $79.3 million from the net income of $141.8 million earned in the first fiscal six months of 2005. Diluted earnings per share for the first fiscal six months of 2006 was $0.55 compared to $1.17 for the first fiscal six months of 2005, on 5.7% fewer shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund acquisitions, pay dividends, working capital needs, capital expenditures and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations and expansion. As of July 1, 2006, total cash and cash equivalents were $88.4 million, an increase of $53.5 million from the $34.9 million reported as of December 31, 2005.
Operating activities provided $261.1 million and $152.1 million in the first fiscal six months of 2006 and 2005, respectively. The difference was primarily due to a decrease in accounts receivable in the current period compared to an increase in the prior period, primarily as a result of lower wholesale sales in the current period, including the effects of the sale of the Polo Jeans Company business.
Investing activities provided $285.8 million and used $41.5 million in the first fiscal six months of 2006 and 2005, respectively. The increase in the current period was primarily due to cash received from the sale of the Polo Jeans Company business.
Financing activities used $494.0 million in the first fiscal six months of 2006, primarily to redeem at maturity our outstanding 7.875% Senior Notes on June 15, 2006, to repay amounts outstanding under our Senior Credit Facilities, to repurchase our common stock and to pay dividends to our common shareholders.
Financing activities used $119.8 million in the first fiscal six months of 2005. Borrowings under our Senior Credit Facilities were offset by repurchases of our common stock and the payment of dividends to our common shareholders.
We repurchased $125.1 million of our common stock on the open market during the first fiscal six months of 2006 and $157.6 million during the first fiscal six months of 2005. As of July 1, 2006, a total of $1.2 billion had been expended under announced programs to acquire up to $1.4 billion of such shares. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition. Proceeds from the issuance of common stock to our employees exercising stock options amounted to $13.3 million and $8.9 million in the first fiscal six months of 2006 and 2005, respectively.
At July 1, 2006, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for a $1.0 billion five-year revolving credit facility that expires in June 2009 and a $750.0 million five-year revolving credit facility that expires in May 2010. At July 1, 2006, $274.7 million was outstanding under the credit facility that expires in June 2009 (comprised solely of outstanding letters of credit), and no amounts were outstanding under the credit facility that expires in May 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require us to satisfy both a coverage ratio of earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents and a net worth maintenance covenant, as well as other restrictions, including
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(subject to exceptions) limitations on our ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers and pay dividends.
At July 1, 2006, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
On July 19, 2006, Moody's lowered our senior long term debt rating to Baa3 from Baa2. The rating remains under review for a further possible downgrade. A further downgrade of our debt rating by Moody's or a downgrade of our debt rating by Standard & Poor's could increase the interest rates charged under our Senior Credit Facilities and could impact our ability to access capital markets in the future.
On July 26, 2006, we announced that the Board of Directors had declared a quarterly cash dividend of $[0.12] per share to all common stockholders of record as of August 11, 2006 for payment on August 25, 2006.
We have two joint ventures with HCL Technologies Limited to provide us with computer consulting, programming and associated support services. As of July 1, 2006, we have committed to purchase $5.25 million in services from these joint venture companies through June 30, 2007.
We also have a joint venture with Sutton Developments Pty. Ltd. ("Sutton") to operate retail locations in Australia. We have unconditionally guaranteed up to $7.0 million of borrowings under the joint venture's uncommitted credit facility and up to $0.4 million of presettlement risk associated with foreign exchange transactions. Sutton is required to reimburse us for 50% of any payments made under these guarantees. At July 1, 2006, the outstanding balance subject to these guarantees was approximately $0.7 million.
We believe that funds generated by operations, proceeds from the issuance of notes, the Senior Credit Facilities and the Canadian line of credit will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our contingent liabilities and commitments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes.
The primary interest rate exposures on floating rate financing arrangements are with respect to United States and Canadian short-term interest rates. We had approximately $1.75 billion in variable rate credit facilities at July 1, 2006.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to a financial instrument fails to perform its obligation. However, we do not expect the counterparties, which presently have high credit ratings, to fail to meet their obligations.
For further information see "Derivatives" in the Notes to Consolidated Financial Statements.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.
Changes in Internal Control Over Financial Reporting
We are in the process of implementing SAP, an enterprise resource planning ("ERP") system, throughout Jones Apparel Group, Inc. and our consolidated subsidiaries. SAP will integrate our operational and financial systems and expand the functionality of our financial reporting processes. During the second half of 2006, we expect to begin the implementation phase, which we expect to roll out to all locations over a multi-year period. As the phased roll out occurs, we will experience changes in internal control over financial reporting each quarter. We believe that we are adequately controlling the transition to the new processes and controls and that there should be no negative impact to our internal control environment. We expect this ERP system to further advance our control environment by automating manual processes, improving management visibility and standardizing processes as its full capabilities are utilized.
There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.
Our board of directors is exploring possible strategic alternatives concerning the Company. There can be no assurance that any such transaction will occur. The opportunity to pursue such a transaction and the terms of any such transaction will depend, in part, on factors that are beyond our control, including market conditions and the outlook for our business.
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Item 4. Submission of Matters to a Vote of Security Holders
The 2006 Annual Meeting of Stockholders was held on May 23, 2006. The proposals submitted to the vote of the stockholders and the results of the votes were as follows:
For | Against | Withheld | Abstain | Broker Non-Votes |
|||
Election of Directors | |||||||
Peter Boneparth | 94,595,260 | * | 5,140,683 | * | * | ||
Sidney Kimmel | 94,372,236 | * | 5,363,707 | * | * | ||
Howard Gittis | 90,642,968 | * | 9,092,975 | * | * | ||
Anthony F. Scarpa | 97,902,424 | * | 1,833,519 | * | * | ||
Matthew H. Kamens | 93,500,941 | * | 6,235,002 | * | * | ||
J. Robert Kerrey | 84,466,858 | * | 15,269,085 | * | * | ||
Ann N. Reese | 95,267,058 | * | 4,468,885 | * | * | ||
Gerald C. Crotty | 94,901,919 | * | 4,834,024 | * | * | ||
Lowell W. Robinson | 97,902,876 | * | 1,833,067 | * | * | ||
Allen I. Questrom | 97,654,009 | * | 2,081,934 | * | * | ||
Ratification of the selection of BDO Seidman, LLP as our independent registered public accountants for 2006 | 95,473,504 | 3,733,105 | * | 529,334 | * |
_____________
*Not Applicable
Statement Regarding Forward-looking Disclosure
This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including:
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All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
See Exhibit Index.
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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.
JONES APPAREL GROUP, INC.
(Registrant)
Date: July 28, 2006 |
By
/s/ Peter Boneparth |
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EXHIBIT INDEX
Exhibit No. |
Description of Exhibit
|
31* | Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32o | Certifications of Chief Executive Officer 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. |
____________
* Filed herewith.
o Furnished herewith.
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EXHIBIT 31
CERTIFICATIONS
I, Peter Boneparth, President and Chief Executive Officer, certify that:
1. | I have reviewed this quarterly
report on Form 10-Q of Jones Apparel Group, Inc.; |
|
2. | Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. | Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. | The registrant's other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have: |
|
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this report is being prepared; |
||
(b) Designed such internal control over
financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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; |
||
(c) Evaluated the effectiveness of the
registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and |
||
(d) Disclosed in this report any change in
the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and |
||
5. | The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions): |
|
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and |
||
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 28, 2006 |
|
/s/ Peter Boneparth Peter Boneparth President and Chief Executive Officer |
I, Efthimios P. Sotos, Chief Financial Officer, certify that:
1. | I have reviewed this quarterly
report on Form 10-Q of Jones Apparel Group, Inc.; |
|
2. | Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. | Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. | The registrant's other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have: |
|
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this report is being prepared; |
||
(b) Designed such internal control over
financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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; |
||
(c) Evaluated the effectiveness of the
registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and |
||
(d) Disclosed in this report any change in
the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and |
||
5. | The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions): |
|
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and |
||
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 28, 2006 |
|
/s/ Efthimios P. Sotos Efthimios P. Sotos Chief Operating and Financial Officer |
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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
I, Peter Boneparth, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Jones Apparel Group, Inc. on Form 10-Q for the fiscal quarter ended July 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Jones Apparel Group, Inc.
By: /s/ Peter Boneparth
Name: Peter Boneparth
Title: President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to Jones Apparel Group, Inc. and will be retained by Jones Apparel Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
I, Efthimios P. Sotos, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Jones Apparel Group, Inc. on Form 10-Q for the fiscal quarter ended July 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Jones Apparel Group, Inc.
By: /s/ Efthimios P. Sotos
Name: Efthimios P. Sotos
Title: Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Jones Apparel Group, Inc. and will be retained by Jones Apparel Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.