SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 30, 2005
Commission File Number 1-14770
PAYLESS SHOESOURCE, INC.
| DELAWARE | 43-1813160 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
| 3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS | 66607-2207 | |
| (Address of principal executive offices) | (Zip Code) |
(785) 233-5171
(Registrant’s telephone number,
including area code)
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 and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES þ NO o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value
67,387,723 shares as of June 3, 2005
PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in millions)
| April 30, | May 1, | January 29, | ||||||||||
| 2005 | 2004 | 2005 | ||||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ | 303.3 | $ | 121.3 | $ | 289.6 | ||||||
Marketable securities, available for sale |
— | 4.0 | 5.0 | |||||||||
Restricted cash |
2.0 | 33.5 | 3.0 | |||||||||
Inventories |
383.9 | 422.2 | 345.3 | |||||||||
Current deferred income taxes |
20.9 | 16.7 | 21.9 | |||||||||
Other current assets |
56.9 | 64.9 | 56.6 | |||||||||
Current assets of discontinued operations |
4.8 | 27.4 | 8.5 | |||||||||
Total current assets |
771.8 | 690.0 | 729.9 | |||||||||
Property and Equipment: |
||||||||||||
Land |
8.3 | 8.0 | 8.0 | |||||||||
Buildings and leasehold improvements |
662.8 | 682.5 | 673.3 | |||||||||
Furniture, fixtures and equipment |
522.8 | 504.2 | 509.8 | |||||||||
Property under capital leases |
3.8 | 4.6 | 3.8 | |||||||||
Total property and equipment |
1,197.7 | 1,199.3 | 1,194.9 | |||||||||
Accumulated depreciation and amortization |
(785.8 | ) | (777.4 | ) | (772.6 | ) | ||||||
Property and equipment, net |
411.9 | 421.9 | 422.3 | |||||||||
Favorable leases, net |
20.8 | 26.9 | 21.7 | |||||||||
Deferred income taxes |
35.6 | 33.7 | 36.4 | |||||||||
Goodwill |
5.9 | 5.9 | 5.9 | |||||||||
Other assets |
23.1 | 21.7 | 23.5 | |||||||||
Noncurrent assets of discontinued operations |
— | 28.2 | 0.1 | |||||||||
Total Assets |
$ | 1,269.1 | $ | 1,228.3 | $ | 1,239.8 | ||||||
LIABILITIES AND SHAREOWNERS’ EQUITY |
||||||||||||
Current Liabilities: |
||||||||||||
Current maturities of debt |
$ | 1.5 | $ | 0.9 | $ | 0.3 | ||||||
Notes payable |
2.0 | 33.5 | 3.0 | |||||||||
Accounts payable |
169.8 | 126.5 | 160.3 | |||||||||
Accrued expenses |
158.2 | 140.1 | 159.7 | |||||||||
Current liabilities of discontinued operations |
5.0 | 6.0 | 15.0 | |||||||||
Total current liabilities |
336.5 | 307.0 | 338.3 | |||||||||
Long-term debt |
204.3 | 202.6 | 204.3 | |||||||||
Other liabilities |
95.8 | 85.8 | 93.6 | |||||||||
Noncurrent liabilities of discontinued operations |
— | 4.7 | — | |||||||||
Minority interest |
8.6 | 13.1 | 8.6 | |||||||||
Commitments and contingencies |
— | — | — | |||||||||
Total shareowners’ equity |
623.9 | 615.1 | 595.0 | |||||||||
Total Liabilities and Shareowners’ Equity |
$ | 1,269.1 | $ | 1,228.3 | $ | 1,239.8 | ||||||
See Notes to Condensed Consolidated Financial Statements.
2
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(dollars and shares in millions, except per share )
| 13 Weeks Ended | ||||||||
| April 30, 2005 | May 1, 2004 | |||||||
Net sales |
$ | 695.2 | $ | 692.3 | ||||
Cost of sales |
450.8 | 475.5 | ||||||
Gross margin |
244.4 | 216.8 | ||||||
Selling, general and administrative expenses |
196.7 | 188.4 | ||||||
Restructuring charges |
0.7 | — | ||||||
Operating profit from continuing operations |
47.0 | 28.4 | ||||||
Interest expense |
4.9 | 5.4 | ||||||
Interest income |
(1.7 | ) | (1.0 | ) | ||||
Earnings from continuing operations before
income taxes and minority interest |
43.8 | 24.0 | ||||||
Provision for income taxes |
12.5 | 8.0 | ||||||
Earnings from continuing operations before
minority interest |
31.3 | 16.0 | ||||||
Minority interest, net of income taxes |
0.4 | 1.9 | ||||||
Net earnings from continuing operations |
31.7 | 17.9 | ||||||
Loss from discontinued operations, net of
income taxes and minority interest |
(1.5 | ) | (3.8 | ) | ||||
Net earnings |
$ | 30.2 | $ | 14.1 | ||||
Diluted earnings per share |
||||||||
Earnings from continuing operations |
$ | 0.47 | $ | 0.26 | ||||
Loss from discontinued operations |
(0.02 | ) | (0.05 | ) | ||||
Diluted earnings per share |
$ | 0.45 | $ | 0.21 | ||||
Basic earnings per share |
||||||||
Earnings from continuing operations |
$ | 0.47 | $ | 0.26 | ||||
Loss from discontinued operations |
(0.02 | ) | (0.05 | ) | ||||
Basic earnings per share |
$ | 0.45 | $ | 0.21 | ||||
Diluted Weighted Average Shares Outstanding |
67.2 | 68.0 | ||||||
Basic Weighted Average Shares Outstanding |
67.1 | 67.9 | ||||||
See Notes to Condensed Consolidated Financial Statements.
3
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in millions)
| 13 Weeks Ended | ||||||||
| April 30, 2005 | May 1, 2004 | |||||||
Operating Activities: |
||||||||
Net earnings |
$ | 30.2 | $ | 14.1 | ||||
Loss from discontinued operation, net of
income taxes and minority interest |
(1.5 | ) | (3.8 | ) | ||||
Net earnings from continuing operations |
31.7 | 17.9 | ||||||
Adjustments for non-cash items included
in net earnings: |
||||||||
Loss on impairment of and disposal of assets |
2.4 | 2.8 | ||||||
Depreciation and amortization |
23.0 | 24.6 | ||||||
Amortization of deferred financing costs |
0.3 | 0.2 | ||||||
Amortization of unearned restricted stock |
0.2 | 0.2 | ||||||
Deferred income taxes |
1.7 | (0.8 | ) | |||||
Minority interest, net of income taxes |
(0.4 | ) | (1.9 | ) | ||||
Changes in working capital: |
||||||||
Inventories |
(38.7 | ) | (48.0 | ) | ||||
Other current assets |
(1.2 | ) | (4.1 | ) | ||||
Accounts payable |
8.3 | (3.0 | ) | |||||
Accrued expenses |
(1.5 | ) | 16.3 | |||||
Other assets and liabilities, net |
2.4 | 6.9 | ||||||
Net cash used in discontinued operations |
(7.7 | ) | (5.5 | ) | ||||
Cash flow provided by operating activities |
20.5 | 5.6 | ||||||
Investing Activities: |
||||||||
Capital expenditures |
(13.8 | ) | (26.2 | ) | ||||
Purchases of marketable securities |
— | (4.0 | ) | |||||
Sales of marketable securities |
5.0 | 10.0 | ||||||
Cash flow used in investing activities |
(8.8 | ) | (20.2 | ) | ||||
Financing Activities: |
||||||||
Repayment of notes payable |
(1.0 | ) | — | |||||
Restricted cash |
1.0 | — | ||||||
Issuance of debt |
1.2 | — | ||||||
Payment of deferred financing costs |
— | (0.1 | ) | |||||
Repayment of debt |
— | (0.3 | ) | |||||
Issuances of common stock |
0.7 | 0.3 | ||||||
Purchases of common stock |
(2.1 | ) | (0.7 | ) | ||||
Contributions by minority owners |
0.2 | — | ||||||
Cash flow used in financing activities |
— | (0.8 | ) | |||||
Effect of exchange rate changes on cash |
2.0 | — | ||||||
Increase (decrease) in cash and cash equivalents |
13.7 | (15.4 | ) | |||||
Cash and cash equivalents, beginning of year |
289.6 | 136.7 | ||||||
Cash and cash equivalents, end of period |
$ | 303.3 | $ | 121.3 | ||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 9.3 | $ | 9.8 | ||||
Income taxes |
$ | 5.3 | $ | (0.3 | ) | |||
See Notes to Condensed Consolidated Financial Statements.
4
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM RESULTS. These unaudited Condensed Consolidated Financial Statements of Payless ShoeSource, Inc., a Delaware corporation, and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission and should be read in conjunction with the Notes to the Consolidated Financial Statements (pages 33-66) in the Company’s 2004 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited Condensed Consolidated Financial Statements are fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based upon estimates for the entire year. The reporting period for operations in the Central American and South American Regions is a December 31 year-end. The Central American Region is composed of operations in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Trinidad & Tobago. The South American Region is composed of operations in Ecuador. The Company also has a 60-percent ownership interest in a Japanese joint venture. Japanese operations are reported on a December 31 year-end. The effects of the one-month lag for the operations in the Central and South American Regions and Japan are not significant to the Company’s financial position and results of operations. The results for the thirteen week period ended April 30, 2005, are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 28, 2006.
NOTE 2. RESTRUCTURING CHARGES. During the second quarter of 2004, the Company initiated a restructuring plan to build long-term shareowner value. The Company has substantially completed the restructuring, which included: 1) closing all Parade stores, 2) sale of Chile and Peru entities, 3) closing of 264 Payless ShoeSource stores, 4) ceasing all wholesale businesses with no significant growth opportunity and 5) eliminating approximately 200 management and administrative positions.
As part of the restructuring, during the first quarter of 2005 the Company recorded a charge of $2.9 million ($0.7 million relating to continuing operations and $2.2 million relating to discontinued operations) primarily related to contract termination costs in excess of original estimates.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of Parade, Peru, Chile and 26 Payless ShoeSource stores have been classified as discontinued operations in the Company’s condensed consolidated statements of earnings.
In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” employee severance, contract termination and other exit costs are recorded at their estimated fair value when they are incurred. Employee severance costs include estimates regarding the amount of severance payments made to certain terminated associates, and contract termination costs include estimates regarding the length of time required to sublease vacant space and expected recovery rates. Actual results could vary from these estimates.
The significant components of the restructuring charge incurred during the first quarter of 2005, and the status of the restructuring-related liabilities, which are included in accrued expenses ($4.9 million) and current liabilities of discontinued operations ($4.7 million) in the condensed consolidated balance sheets, are summarized below:
| Accrual Balance as of | Accrual Balance | |||||||||||||||||||||||
| Total Charges to | January 29, | 2005 Charges | as of | |||||||||||||||||||||
| (dollars in millions) | Date | 2005 | Costs Incurred | Accrual Adjustments | Cash Payments | April 30, 2005 | ||||||||||||||||||
Asset impairments and net
disposal losses |
$ | 34.7 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Employee severance costs |
9.4 | 4.2 | — | 0.1 | (1.8 | ) | 2.5 | |||||||||||||||||
Contract termination costs |
23.5 | 17.6 | — | 2.2 | (12.7 | ) | 7.1 | |||||||||||||||||
Other exit costs |
3.2 | — | 0.6 | — | (0.6 | ) | — | |||||||||||||||||
Total |
$ | 70.8 | $ | 21.8 | $ | 0.6 | $ | 2.3 | $ | (15.1 | ) | $ | 9.6 | |||||||||||
5
The Company expects that the payments of employee severance costs will be substantially completed by June 2007. The remaining contract termination obligations primarily relate to lease obligations for vacant space (certain lease terms extending through November 2013) resulting from the store closings.
The Payless and Parade stores located in Chile, Peru, Puerto Rico and Canada are components of the Payless International Segment. The Parade and Payless stores located in the United States are components of the Payless Domestic segment. The entire 2005 first quarter charge related to the Payless Domestic segment.
NOTE 3. DISCONTINUED OPERATIONS. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the results for the thirteen weeks ended April 30, 2005 and May 1, 2004 of operations for Parade, Peru, Chile and 26 Payless closed stores are presented as discontinued operations. The following is a summary of these results by segment:
Thirteen Weeks Ended April 30, 2005
| Payless | Payless | Payless | ||||||||||
| (dollars in millions) | Domestic | International | Consolidated | |||||||||
Net sales |
$ | — | $ | — | $ | — | ||||||
Loss from discontinued operations before income taxes |
(2.5 | ) | — | (2.5 | ) | |||||||
Benefit for income taxes |
(1.0 | ) | — | (1.0 | ) | |||||||
Loss from discontinued operations, net of income taxes |
$ | (1.5 | ) | $ | — | $ | (1.5 | ) | ||||
Thirteen Weeks Ended May 1, 2004
| Payless | Payless | Payless | ||||||||||
| (dollars in millions) | Domestic | International | Consolidated | |||||||||
Net sales |
$ | 27.1 | $ | 2.5 | $ | 29.6 | ||||||
Loss from discontinued operations before income taxes and minority interest |
(4.4 | ) | (1.7 | ) | (6.1 | ) | ||||||
(Benefit) provision for income taxes |
(1.8 | ) | 0.2 | (1.6 | ) | |||||||
Loss from discontinued operations before minority interest |
(2.6 | ) | (1.9 | ) | (4.5 | ) | ||||||
Minority interest, net of income taxes |
— | 0.7 | 0.7 | |||||||||
Loss from discontinued operations, net of income taxes and minority interest |
$ | (2.6 | ) | $ | (1.2 | ) | $ | (3.8 | ) | |||
Additionally, the condensed consolidated balance sheets include the assets of Parade, Peru, Chile and the 26 Payless closed stores presented as discontinued operations. As of April 30, 2005, May 1, 2004 and January 29, 2005, the current and non-current assets and liabilities of discontinued operations by financial reporting segment were as follows:
April 30, 2005
| Payless | Payless | Payless | ||||||||||
| (dollars in millions) | Domestic | International | Consolidated | |||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Current deferred income taxes |
$ | 4.2 | — | $ | 4.2 | |||||||
Other current assets |
0.6 | — | 0.6 | |||||||||
Total current assets of discontinued operations |
$ | 4.8 | $ | — | $ | 4.8 | ||||||
Liabilities |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 0.3 | $ | — | $ | 0.3 | ||||||
Accrued expenses |
4.7 | — | 4.7 | |||||||||
Total current liabilities of discontinued operations |
$ | 5.0 | $ | — | $ | 5.0 | ||||||
6
May 1, 2004
| Payless | Payless | Payless | ||||||||||
| (dollars in millions) | Domestic | International | Consolidated | |||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 0.2 | $ | 1.0 | $ | 1.2 | ||||||
Inventories |
19.3 | 2.9 | 22.2 | |||||||||
Current deferred income taxes |
0.2 | — | 0.2 | |||||||||
Other current assets |
2.5 | 1.3 | 3.8 | |||||||||
Total current assets of discontinued operations |
$ | 22.2 | $ | 5.2 | $ | 27.4 | ||||||
Property and equipment, net |
$ | 15.7 | $ | 6.7 | $ | 22.4 | ||||||
Favorable leases, net |
0.4 | — | 0.4 | |||||||||
Deferred income taxes |
2.4 | — | 2.4 | |||||||||
Other assets |
0.1 | 2.9 | 3.0 | |||||||||
Total non-current assets of discontinued operations |
$ | 18.6 | $ | 9.6 | $ | 28.2 | ||||||
Liabilities |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 2.6 | $ | 1.2 | $ | 3.8 | ||||||
Accrued expenses |
1.9 | 0.3 | 2.2 | |||||||||
Total current liabilities of discontinued operations |
$ | 4.5 | $ | 1.5 | $ | 6.0 | ||||||
Other liabilities |
$ | 4.7 | $ | — | $ | 4.7 | ||||||
Total non-current liabilities of discontinued operations |
$ | 4.7 | $ | — | $ | 4.7 | ||||||
January 29, 2005
| Payless | Payless | Payless | ||||||||||
| (dollars in millions) | Domestic | International | Consolidated | |||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Current deferred income taxes |
$ | 5.6 | $ | — | $ | 5.6 | ||||||
Other current assets |
2.9 | — | 2.9 | |||||||||
Total current assets of discontinued operations |
$ | 8.5 | $ | — | $ | 8.5 | ||||||
Other assets |
0.1 | — | 0.1 | |||||||||
Total non-current assets of discontinued operations |
$ | 0.1 | $ | — | $ | 0.1 | ||||||
Liabilities |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 0.2 | $ | — | $ | 0.2 | ||||||
Accrued expenses |
14.8 | — | 14.8 | |||||||||
Total current liabilities of discontinued operations |
$ | 15.0 | $ | — | $ | 15.0 | ||||||
NOTE 4. STOCK-BASED COMPENSATION. The Company follows the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock compensation awards under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25. APB Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of the Company’s plans are granted with an exercise price equal to the fair market value on the date of the grant.
SFAS 123, “Accounting for Stock-Based Compensation,” provides an alternative method of accounting for stock-based compensation, which establishes a fair value based method of accounting for employee stock options or similar equity instruments. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its 1996 and later option grants. The fair value is recognized over the option vesting period. The following table presents the effect on net earnings and earnings per share had the Company adopted the fair value based method of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation.”
7
(dollars in millions, except per share amounts)
| 13 Weeks Ended | ||||||||
| April 30, 2005 | ||||||||