UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
|
New York |
13-3131650 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
603 West 50th Street, New York, NY |
10019 |
|
(Address of principal executive offices) |
(Zip Code) |
(212) 265-1500
(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 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ( ) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer ( ) (Do not check if a smaller reporting company) Smaller reporting company ( ).
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 |
November 4, 2009 |
|
Class A Common Stock ($.01 par value) |
10,077,732 |
|
Class B Common Stock ($.01 par value) |
8,010,497 |
Kenneth Cole Productions, Inc.
Index to Form 10-Q
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
September 30, 2009 |
December 31, 2008 |
|
|
|
|
|
Assets |
|
|
|
Current assets: |
|
|
|
Cash and cash equivalents |
$ 50,036,000 |
$ 64,704,000 |
|
Due from factors |
1,610,000 |
9,190,000 |
|
Accounts receivable, net |
39,081,000 |
32,018,000 |
|
Inventories, net |
36,397,000 |
43,342,000 |
|
Prepaid expenses and other current assets |
5,026,000 |
2,738,000 |
|
Deferred taxes, net |
4,889,000 |
5,645,000 |
|
Total current assets |
137,039,000 |
157,637,000 |
|
|
|
|
|
Property and equipment, at cost, less accumulated |
|
|
|
depreciation and amortization |
61,374,000 |
57,790,000 |
|
Other assets: |
|
|
|
Intangible assets, net |
20,228,000 |
19,842,000 |
|
Deferred taxes, net |
38,381,000 |
33,541,000 |
|
Investments and other |
8,220,000 |
7,280,000 |
|
Deferred compensation plans’ assets |
40,819,000 |
37,345,000 |
|
Total other assets |
107,648,000 |
98,008,000 |
|
|
|
|
|
Total Assets |
$306,061,000 |
$313,435,000 |
See accompanying notes to condensed consolidated financial statements.
3
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
|
|
September 30, 2009 |
December 31, 2008 |
|
Liabilities and Shareholders’ Equity |
|
|
|
Current liabilities: |
|
|
|
Accounts payable and accrued expenses |
$ 44,869,000 |
$ 42,935,000 |
|
Other current liabilities |
6,734,000 |
11,669,000 |
|
Deferred income |
4,144,000 |
5,512,000 |
|
Total current liabilities |
55,747,000 |
60,116,000 |
|
|
|
|
|
Accrued rent and other long-term liabilities |
17,577,000 |
17,842,000 |
|
Deferred compensation plans’ liabilities |
39,060,000 |
35,715,000 |
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
Series A Convertible Preferred Stock, par value $1.00, 1,000,000 shares authorized, none outstanding |
-- |
-- |
|
Class A Common Stock, par value $.01, 40,000,000 shares authorized; 15,863,749 and 15,726,672 issued as of September 30, 2009 and December 31, 2008, respectively |
159,000 |
157,000 |
|
Class B Convertible Common Stock, par value $.01, 9,000,000 shares authorized; 8,010,497 issued and outstanding as of September 30, 2009 and December 31, 2008, respectively |
80,000 |
80,000 |
|
Additional paid-in capital |
107,088,000 |
103,318,000 |
|
Accumulated other comprehensive (loss)/income |
(24,000) |
650,000 |
|
Retained earnings |
211,295,000 |
220,478,000 |
|
|
318,598,000 |
324,683,000 |
|
Class A Common Stock in treasury, at cost, 5,855,550 shares as of September 30, 2009 and December 31, 2008, respectively |
(124,921,000) |
(124,921,000) |
|
Total shareholders’ equity |
193,677,000 |
199,762,000 |
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
$306,061,000 |
$313,435,000 |
See accompanying notes to condensed consolidated financial statements.
4
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, | |||
|
|
2009 |
2008 |
|
2009 |
2008 |
|
|
|
|
|
|
|
|
Net sales |
$ 93,336,000 |
$120,161,000 |
|
$272,458,000 |
$333,669,000 |
|
Royalty revenue |
10,416,000 |
11,947,000 |
|
28,569,000 |
32,087,000 |
|
Net revenues |
103,752,000 |
132,108,000 |
|
301,027,000 |
365,756,000 |
|
Cost of goods sold |
58,871,000 |
77,757,000 |
|
181,261,000 |
215,134,000 |
|
Gross profit |
44,881,000 |
54,351,000 |
|
119,766,000 |
150,622,000 |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
44,595,000 |
51,896,000 |
|
137,233,000 |
150,113,000 |
|
Operating income/(loss) |
286,000 |
2,455,000 |
|
(17,467,000) |
509,000 |
|
Interest income, net |
94,000 |
395,000 |
|
414,000 |
1,637,000 |
|
Impairment of investments |
(287,000) |
(3,282,000) |
|
(727,000) |
(4,114,000) |
|
Income/(loss) before (benefit from)/provision for income taxes |
93,000 |
(432,000) |
|
(17,780,000) |
(1,968,000) |
|
(Benefit from)/provision for income taxes |
(93,000) |
1,122,000 |
|
(6,532,000) |
831,000 |
|
Net income/(loss) |
$ 186,000 |
$ (1,554,000) |
|
$(11,248,000) |
$(2,799,000) |
|
|
|
|
|
|
|
|
Earnings/(loss) per share: |
|
|
|
|
|
|
Basic |
$0.01 |
$(0.09) |
|
$(0.63) |
$(0.15) |
|
Diluted |
$0.01 |
$(0.09) |
|
$(0.63) |
$(0.15) |
|
|
|
|
|
|
|
|
Dividends declared per share |
-- |
$0.09 |
|
-- |
$0.27 |
|
|
|
|
|
|
|
|
Shares used to compute earnings/(loss) per share: |
|
|
|
|
|
|
Basic |
18,018,000 |
17,903,000 |
|
17,954,000 |
18,604,000 |
|
Diluted |
18,423,000 |
17,903,000 |
|
17,954,000 |
18,604,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
|
|
Class A Common Stock |
Class B Common Stock |
Additional |
Accumulated Other |
|
Treasury Stock | ||||
|
|
Number of shares |
Amount |
Number of shares |
Amount |
Paid-in Capital |
Comprehensive Income/(Loss) |
Retained Earnings |
Number of Shares |
Amount |
Total |
|
Shareholders’ equity January 1, 2009 |
15,726,672 |
$157,000 |
8,010,497 |
$80,000 |
$103,318,000 |
$650,000 |
$220,478,000 |
(5,855,550) |
$(124,921,000) |
$199,762,000 |
|
Adjustment for non-credit component of impaired securities |
|
|
|
|
|
(2,298,000) |
2,298,000 |
|
|
-- |
|
Net loss |
|
|
|
|
|
|
(11,248,000) |
|
|
(11,248,000) |
|
Translation adjustment for foreign currency, net of taxes of $(206,000) |
|
|
|
|
|
355,000 |
|
|
|
355,000 |
|
Unrealized gain on available-for-sale securities, net of taxes of $(225,000) |
|
|
|
|
|
1,269,000 |
|
|
|
1,269,000 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
(9,624,000) |
|
Stock-based compensation expense |
|
|
|
|
5,263,000 |
|
|
|
|
5,263,000 |
|
Issuance of restricted stock and related tax benefits |
185,969 |
2,000 |
|
|
(1,142,000) |
|
|
|
|
(1,140,000) |
|
Shares surrendered by employees to pay taxes on restricted stock |
(69,704) |
|
|
|
(472,000) |
|
|
|
|
(472,000) |
|
Issuance of Class A Common Stock from Employee Stock Purchase Plan |
20,812 |
|
|
|
121,000 |
|
|
|
|
121,000 |
|
Prior year dividends associated with vesting of restricted stock |
|
|
|
|
|
|
(233,000) |
|
|
(233,000) |
|
Shareholders’ equity September 30, 2009 |
15,863,749 |
$159,000 |
8,010,497 |
$80,000 |
$107,088,000 |
$(24,000) |
$211,295,000 |
(5,855,550) |
$(124,921,000) |
$193,677,000 |
See accompanying notes to condensed consolidated financial statements.
6
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended September 30, | ||
|
|
2009 |
2008 | |
|
Cash flows used in operating activities |
|
| |
|
Net loss |
$(11,248,000) |
$(2,799,000) | |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
| |
|
Depreciation and amortization |
7,173,000 |
6,892,000 | |
|
Provision for doubtful accounts |
527,000 |
250,000 | |
|
Benefit from deferred taxes |
(6,417,000) |
(971,000) | |
|
Unrealized gain from available-for-sale securities |
(1,494,000) |
(296,000) | |
|
Writedown of investments |
727,000 |
4,114,000 | |
|
Stock-based compensation expense |
5,270,000 |
3,745,000 | |
|
Tax benefit from stock option exercises and restricted stock vestings |
(485,000) |
(917,000) | |
|
Changes in operating assets and liabilities: |
|
| |
|
Decrease/(increase) in due from factors |
7,580,000 |
(6,410,000) | |
|
Increase in accounts receivable |
(7,590,000) |
(1,851,000) | |
|
Decrease/(increase) in inventories |
6,945,000 |
(8,454,000) | |
|
Increase in prepaid expenses and other current assets |
(2,943,000) |
(1,281,000) | |
|
Decrease in other assets |
669,000 |
2,549,000 | |
|
Increase in accounts payable and accrued expenses |
1,934,000 |
5,368,000 | |
|
Decrease in deferred income and other current liabilities |
(6,032,000) |
(278,000) | |
|
Increase in income taxes payable |
-- |
39,000 | |
|
Increase/(decrease) in other long-term liabilities |
3,080,000 |
(556,000) | |
|
Net cash used in operating activities |
(2,304,000) |
(856,000) | |
|
Cash flows used in investing activities |
|
| |
|
Acquisition of property and equipment |
(10,493,000) |
(5,246,000) | |
|
Purchase of intangible assets |
(640,000) |
(3,387,000) | |
|
Net cash used in investing activities |
(11,133,000) |
(8,633,000) | |
|
Cash flows used in financing activities |
|
| |
|
Shares surrendered by employees to pay taxes on restricted stock |
(472,000) |
(774,000) | |
|
Excess tax benefit from stock options |
-- |
8,000 | |
|
Proceeds from exercise of stock options |
-- |
63,000 | |
|
Proceeds from employee stock purchase plan |
121,000 |
169,000 | |
|
Payments of financing costs |
(724,000) |
-- | |
|
Acquisition of treasury shares |
-- |
(24,376,000) | |
|
Prior year dividends associated with vesting of restricted stock |
(233,000) |
(163,000) | |
|
Dividends paid to shareholders |
-- |
(5,053,000) | |
|
Net cash used in financing activities |
(1,308,000) |
(30,126,000) | |
|
Effect of exchange rate changes on cash |
77,000 |
(46,000) | |
|
Net decrease in cash |
(14,668,000) |
(39,661,000) | |
|
Cash and cash equivalents, beginning of period |
64,704,000 |
90,653,000 | |
|
Cash and cash equivalents, end of period |
$ 50,036,000 |
$ 50,992,000 | |
|
Supplemental disclosures of cash flow information |
|
| |
|
Cash paid during the period for: |
|
| |
|
Interest |
$ 30,000 |
$ 30,000 | |
|
Income taxes, net |
$ 1,664,000 |
$ 3,628,000 | |
See accompanying notes to condensed consolidated financial statements.
7
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Kenneth Cole Productions, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain items contained in these financial statements are based on estimates. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements reflect all significant adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated.
Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
The Company’s consolidated Balance Sheet at December 31, 2008, as presented, was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain amounts in the Company’s previous financial statements have been reclassified to conform to the 2009 presentation. (See Note 7.)
2. Stock-Based Compensation
The Company has stock-based compensation plans under which directors, officers and other eligible employees receive stock options, restricted stock, and other equity-based awards.
Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant. Stock option grants expire within 10 years and generally vest on a graded basis within two to five years from the date of grant. Restricted stock unit awards generally vest on a graded basis over a two to four year period or cliff vest after three years. During the nine months ended September 30, 2009 and 2008, the Company granted 708,656 and 841,500 stock options, respectively. The Company granted 151,272 shares of restricted stock during the nine months ended September 30, 2009, as compared to 127,462 shares granted during the nine months ended September 30, 2008. Stock options outstanding and unvested restricted stock amounted to 2,900,186 and 463,081 shares, respectively, as of September 30, 2009.
8
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
2. Stock-Based Compensation (continued)
The following table summarizes the components of stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008, all of which is included in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations:
|
|
Three months ended September 30, |
Nine months ended September 30, | ||
|
| ||||
|
|
2009 |
2008 |
2009 (1) |
2008 |
|
Stock options |
$ 330,000 |
$ 277,000 |
$2,103,000 |
$ 637,000 |
|
Restricted stock units and employee stock purchase plan |
770,000 |
900,000 |
3,167,000 |
3,108,000 |
|
Total stock-based compensation expense |
$1,100,000 |
$1,177,000 |
$5,270,000 |
$3,745,000 |
(1) In the first quarter of 2009, the Company’s Chairman and CEO elected to receive 100% and 50%, respectively, of their 2008 annual bonuses in stock options in lieu of cash which amounted to $1,167,000 during the nine months ended September 30, 2009. These amounts were accrued within payroll expense as of December 31, 2008.
The fair value of stock options was estimated using the Black-Scholes option-pricing model. The following table summarizes the assumptions used to compute the weighted-average fair value of stock option grants for the three and nine months ended September 30, 2009 and 2008:
|
|
Three months ended September 30, |
Nine months ended September 30, | ||
|
| ||||
|
|
2009 |
2008 (1) |
2009 |
2008 (1) |
|
Weighted-average volatility |
61.2% |
-- |
55.0% |
38.4% |
|
Risk-free interest rate |
3.7% |
-- |
3.0% to 3.7% |
4.0% to 4.1% |
|
Weighted-average dividend yield |
0% |
-- |
0% |
2.4% |
|
Expected term |
3 years |
-- |
3-9 years |
4-9 years |
(1) No stock options were granted in the first and third quarters of 2008.
The weighted-average volatility for the current period was developed using historical volatility for periods equal to the expected term of the options. The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected term of the options on the grant date. The dividend yield is calculated by using the dividends declared per share and the Company’s stock price on the date of grant. The expected term of stock option grants was developed after considering vesting schedules, life of the option, historical experience and estimates of future exercise behavior patterns.
The fair value of restricted stock was calculated by multiplying the Company’s stock price on the date of grant by the number of shares granted and is being amortized on a straight-line basis over the vesting periods. Stock-based compensation is recognized for the number of awards that are ultimately expected to vest. As a result, for most awards, recognized stock compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates by employee classification. Estimated forfeitures will continue to be reassessed in subsequent periods and may change based on new facts and circumstances.
As of September 30, 2009, approximately $6.3 million of unrecognized stock compensation expense related to unvested stock options and restricted stock awards, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.1 years compared to approximately $10.1 million of unrecognized stock compensation expense as of September 30, 2008.
9
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
3.
Earnings/(loss) Per Share
Basic earnings/(loss) per share is calculated by dividing net income/(loss) by weighted-average common shares outstanding. Diluted earnings/(loss) per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities under the Company’s stock incentive plans. Dilutive securities, which include stock options and restricted stock, are determined under the treasury stock method by calculating the assumed proceeds available to repurchase stock using the weighted-average shares outstanding for the period. Stock options outstanding for the three months ended September 30, 2009 in an aggregate amount of 2,223,000 have been excluded in the diluted per share calculation as the impact would be antidilutive. Stock options and restricted stock outstanding for the nine months ended September 30, 2009 and for the three and nine months ended September 30, 2008 have been excluded in the diluted per share calculation as the impact would be antidilutive. Basic and diluted loss per common share consists of the following:
|
|
Three Months Ended |
Nine Months Ended | ||
|
|
September 30, 2009 |
September 30,2008 |
September 30, 2009 |
September 30, 2008 |
|
|
|
|
|
|
|
Weighted-average common |
|
|
|
|
|
shares outstanding |
18,018,000 |
17,903,000 |
17,954,000 |
18,604,000 |
|
Effect of dilutive securities: |
|
|
|
|
|
Restricted stock & employee stock purchase plan |
313,000 |
-- |
-- |
-- |
|
Stock options |
92,000 |
-- |
-- |
-- |
|
Weighted-average common |
|
|
|
|
|
shares outstanding and common |
|
|
|
|
|
share equivalents |
18,423,000 |
17,903,000 |
17,954,000 |
18,604,000 |
4.
Investments
The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying value may not be recoverable within a reasonable period of time. The fair value of the Company’s auction-rate securities (“marketable securities”), which have maturity dates ranging from 2025 to 2050, is determined from an independent third-party valuation. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security. In the Company’s evaluation of its investments it also considered its ability and intent to hold the investment until the market price recovers, the reasons for the decline in fair value, the duration of the decline in fair value and expected future performance. Based on this evaluation, the Company recorded an other-than temporary impairment of investments of $0.3 million and $0.7 million related to marketable securities during the three and nine months ended September 30, 2009, respectively. This charge is included within Impairment of investments in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2009. The Company also recorded a $0.2 million other-than-temporary impairment of marketable securities within Accumulated Other Comprehensive Loss for the non-credit component of marketable securities during the nine months ended September 30, 2009.
10
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
4.
Investments (continued)
The following table presents gross unrealized gains on, and estimated fair value of, the Company’s long-term investments as of September 30, 2009 and December 31, 2008:
|
|
|
|
September 30, 2009 | ||||
|
|
Historical Cost |
(2) Cost Basis |
Estimated Fair Value |
Other than Temporary Impairment (1) |
Gross Unrealized | ||
|
|
Gains |
Losses | |||||
|
Auction-rate securities |
$ 8,600,000 |
$4,358,000 |
$4,490,000 |
$(176,000) |
$ 308,000 |
-- | |
|
Equity securities |
5,338,000 |
717,000 |
2,261,000 |
-- |
1,544,000 |
-- | |
|
Total |
$13,938,000 |
$5,075,000 |
$6,751,000 |
$(176,000) |
$1,852,000 |
-- | |
(1) The non-credit portion of the other-than-temporary impairment related to auction rate securities is recorded in accumulated other comprehensive loss.
(2) The cost basis is historical cost less other-than-temporary impairment not reflected in other comprehensive loss.
|
|
|
|
December 31, 2008 | ||
|
|
Historical Cost |
Cost Basis |
Estimated Fair Value |
Gross Unrealized | |
|
|
Gains |
Losses | |||
|
Auction-rate securities |
$ 8,600,000 |
$5,085,000 |
$5,085,000 |
$ -- |
-- |
|
Equity securities |
5,338,000 |
717,000 |
899,000 |
182,000 |
-- |
|
Total |
$13,938,000 |
$5,802,000 |
$5,984,000 |
$182,000 |
-- |
During the quarter ended June 30, 2009, the Company recorded a balance sheet reclassification between Retained Earnings and Accumulated Other Comprehensive Loss of $2.3 million related to the non-credit component of previous writedowns of auction-rate securities in the Statements of Operations.
5.
Fair Value Measurement
The Company’s financial assets, measured at fair value on a recurring basis, were as follows:
|
|
Fair Value at September 30, 2009 |
Fair Value at December 31, 2008 |
Hierarchy |
|
Investments |
$ 2,261,000 |
$ 899,000 |
Level 1 |
|
Deferred compensation plans’ assets |
$35,944,000 |
$32,909,000 |
Level 2 |
|
Marketable Securities |
$ 4,490,000 |
$ 5,085,000 |
Level 3 |
A Level 1 hierarchy represents a fair value that is derived from unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. A Level 2 hierarchy represents a fair value that is derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 3 hierarchy represents a fair value that is derived from inputs that are unobservable or from observable inputs based on unobservable data in an inactive market.
11
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
5.
Fair Value Measurement (continued)
The following table presents the reconciliation of the beginning and ending fair value measurements of the Company’s Level 3 inputs, marketable securities, measured at fair value using observable inputs based on unobservable data in an inactive market for the nine months ended September 30, 2009:
|
Beginning balance at January 1, 2009 |
$5,085,000 |
|
Unrealized gains recorded in other comprehensive loss |
308,000 |
|
Impairment charge recorded in other comprehensive loss |
(176,000) |
|
Impairment charge included in Statement of Operations |
(727,000) |
|
Ending balance at September 30, 2009 |
$4,490,000 |
The Company recorded a $0.7 million writedown in its marketable securities, specifically auction-rate securities, within Impairment of investments in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2009.
6.
Comprehensive Income/Loss
Comprehensive income/loss is comprised of net income/loss, the effect of foreign currency translation and changes in unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended September 30, 2009 amounted to $645,000 as compared to $369,000 for the three months ended September 30, 2008. Comprehensive loss for the nine months ended September 30, 2009 and 2008 was $9,624,000 and $1,996,000, respectively.
7.
Segment Information
The Company has three reportable segments: Wholesale, Consumer Direct and Licensing. The Wholesale segment designs and sources a broad range of fashion footwear, handbags, accessories, and apparel and markets its products for sale to approximately 5,700 department and specialty store locations and to the Company’s Consumer Direct segment. The Consumer Direct segment markets a broad selection of the Company’s branded products, including licensee products, for sale directly to the consumer through its own channels of distribution, which include full-priced retail stores, Company Stores (“outlets”) and e-commerce (at website address www.kennethcole.com). The Licensing segment, through third-party licensee agreements, has evolved the Company from a footwear resource to a diverse lifestyle brand competing effectively in approximately 30 apparel and accessories categories for men, women and children. The Company maintains control over quality, brand image and distribution of licensees’ products. This segment primarily consists of royalties earned on the purchase and sale to foreign retailers, distributors, or to consumers in foreign countries and licensee sales to third parties of the Company’s trademarks and trade names. The Company’s reportable segments are business units that offer products to overlapping consumers through different channels of distribution. Each segment is managed separately, although planning, implementation and results across segments are reviewed internally by the executive management committee. The Company evaluates performance of each of its segments and allocates resources based on profit or loss before stock-based compensation expense, writedown of marketable securities, unallocated corporate overhead, and income taxes for each segment. Intersegment sales between the Wholesale and Consumer Direct segments are eliminated in consolidation.
12
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
7.
Segment Information (continued)
Financial information of the Company’s reportable segments is as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended | ||||||
|
|
September 30, 2009 |
|
September 30, 2009 | ||||||
|
|
|
Consumer |
|
|
|
|
Consumer |
|
|
|
|
Wholesale |
Direct |
Licensing |
Totals |
|
Wholesale |
Direct |
Licensing |
Totals |
|
Revenue from external customers |
$51,654 |
$41,682 |
$10,416 |
$103,752 |
|
$159,477 |
$112,981 |
$28,569 |
$301,027 |
|
Intersegment revenues |
8,135 |
-- |
-- |
8,135 |
|
24,448 |
-- |
-- |
24,448 |
|
Segment (loss)/income (1) |
(1,610) |
(4,491) |
8,500 |
2,399 |
|
(9,266) |
(20,956) |
22,916 |
(7,306) |
|
Segment assets (2) |
|
|
|
|
|
193,868 |
56,885 |
55,308 |
306,061 |
|
|
Three Months Ended |
|
Nine Months Ended | ||||||
|
|
September 30, 2008 |
|
September 30, 2008 | ||||||
|
|
|
Consumer |
|
|
|
|
Consumer |
|
|
|
|
Wholesale |
Direct |
Licensing |
Totals |
|
Wholesale |
Direct |
Licensing |
Totals |
|
Revenue from external customers |
$77,533 |
$42,628 |
$11,947 |
$132,108 |
|
$209,564 |
$124,105 |
$32,087 |
$365,756 |
|
Intersegment revenues |
10,240 |
-- |
-- |
10,240 |
|
30,742 |
-- |
-- |
30,742 |
|
Segment income/(loss) (1) |
924 |
(4,672) |
9,904 |
6,156 |
|
433 |
(13,303) |
24,937 |
12,067 |
|
Segment assets (2) |
|
|
|
|
|
210,872 |
56,921 |
63,531 |
331,324 |
_________________
(1)
Segment (loss)/income excludes stock-based compensation expense, writedown of marketable securities, unallocated corporate overhead and income taxes. In 2009, the Company reclassified the writedown of marketable securities from the Wholesale segment to an unallocated corporate charge. Amounts in 2008 have been reclassified to conform to the 2009 presentation.
(2)
The Wholesale segment includes corporate assets.
The reconciliation of the Company’s reportable segment revenues and loss are as follows (in thousands):
|
|
Three Months Ended |
Nine Months Ended | ||||||
|
|
|
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 | |||
|
|
Revenues |
|
|
|
| |||
|
|
Revenues for reportable segments |
$103,752 |
$132,108 |
$301,027 |
$365,756 | |||
|
|
Intersegment revenues |
8,135 |
10,240 |
24,448 |
30,742 | |||
|
|
Elimination of intersegment revenues |
(8,135) |
(10,240) |
(24,448) |
(30,742) | |||
|
|
Total consolidated revenues |
$103,752 |
$132,108 |
$301,027 |
$365,756 | |||
|
|
|
|
|
|
| |||
|
|
Income/(Loss) |
|
|
|
| |||
|
|
Total income/(loss) for reportable segments (1) |
$ 2,399 |
$ 6,156 |
$ (7,306) |
$ 12,067 | |||
|
|
Elimination of unallocated corporate overhead, stock-based compensation expense and writedown of marketable securities |
(2,306) |
(6,588) |
(10,474) |
(14,035) | |||
|
|
Total income/(loss) before income taxes |
$ 93 |
$ (432) |
$(17,780) |
$ (1,968) | |||
|
|
|
|
|
|
| |||
(1)
Total income/(loss) for reportable segments excludes stock-based compensation expense, writedown of marketable securities, unallocated corporate overhead and income taxes.
Revenues from international customers were approximately 7.1% and
4.3% of the Company’s consolidated revenues for the three months ended September
30, 2009 and 2008, respectively, and approximately 5.2% and 3.9% of the
Company’s consolidated revenues for the nine months ended September 30, 2009 and
September 30, 2008, respectively.
13
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
8.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company reviews its historical and projected taxable income quarterly and considers its prior period cumulative results and other available objective evidence to determine if it is more likely than not that the deferred tax assets will be realized. The Company currently has $43.3 million of net deferred tax assets as of September 30, 2009 inclusive of $12.4 million of net operating loss carryforwards that expire between 2028 and 2029 and valuation allowances of $3.1 million for unrealized tax losses on available for sale securities.
9.
Related Party Transactions
The Company had an exclusive license agreement with Iconix Brand Group, Inc. and its trademark holding company, IP Holdings, LLC (“Iconix”), to use the Bongo trademark in connection with the manufacture, sale and distribution of women’s, men’s and children’s footwear in certain territories. The Chairman and Chief Executive Officer of Iconix is the brother of the Company’s Chairman and Chief Creative Officer. The term of the agreement was through December 31, 2010. In April 2009, the Company terminated the agreement effective December 31, 2009 which eliminates any future obligation for 2010. Management believes that the license agreement with Iconix was entered into at arm’s length. The Company was obligated to pay Iconix a percentage of net sales based upon the terms of the agreement. The Company recorded approximately $10,000 of income related to an advertising allowance per the license agreement for the three months ended September 30, 2009. The Company recorded approximately $247,000 in aggregate royalty and advertising expense under the agreement for the nine months ended September 30, 2009. The Company recorded approximately $284,000 and $857,000 in aggregate royalty and advertising expense under the agreement for the three and nine months ended September 30, 2008, respectively.
The Company recorded expenses of approximately $49,000 and $255,000 for the three and nine months ended September 30, 2009, respectively, to a third-party aviation company which hires and uses an aircraft partially owned by Emack LLC, a company which is wholly owned by the Company’s Chairman and Chief Creative Officer. During the three and nine months ended September 30, 2008, the Company recorded expenses of approximately $161,000 and $427,000, respectively, for hire and use of aircraft partially owned by Emack LLC. Management believes that all transactions were made on terms and conditions similar to or more favorable than those available in the marketplace from unrelated parties.
10.
Common Stock Repurchase
No shares were repurchased by the Company during the three and nine months ended September 30, 2009. During the three months ended September 30, 2008, the Company repurchased 337,200 of its shares at an aggregate price of $4,409,000. During the nine months ended September 30, 2008, the Company repurchased 1,619,200 of its shares at an aggregate price of $24,376,000.
14
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
11.
Intangible Asset Purchase
In 2007, the Company acquired the Le Tigre trademark and other intellectual property associated with the Le Tigre brand from Le Tigre, LLC (the “Seller”). During 2008, pursuant to two amendments to the Asset Purchase Agreement, the Company paid the Seller an additional $5.5 million. The Company recorded the intellectual property in “Intangible Assets” on the accompanying Condensed Consolidated Balance Sheets at fair value. Based on an independent third party valuation, management allocated the majority of the $18.5 million paid as an indefinite lived intangible asset and a nominal amount as a finite lived intangible asset.
12.
New Accounting Pronouncement
Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the ASC became nonauthoritative. The Company’s accounting policies were not affected by the conversion to ASC.
13.
Subsequent Event
The Company evaluated subsequent events through November 6, 2009, the date the financial statements were issued and determined that there were no subsequent events to disclose except as follows:
On November 1, 2009, CIT Group Inc. (“CIT”) entered into a prepackaged plan of reorganization. The Company has a Receivables Management Agreement with The CIT Group/Commercial Services, Inc. (“Operating Sub”), an operating subsidiary of CIT. The Operating Sub acts as a collection agent for the Company’s assigned receivables without transfer of ownership and as a credit grantor for those receivables subject to credit approval. Customer payments for these receivables are remitted directly to a Company lockbox. Accordingly, the Company believes that the CIT reorganization plan has no direct exposure to the Company’s operations.
15
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
The statements contained in this report which are not historical facts, including, without limitation, statements that relate to future performance and/or statements regarding the Company’s anticipated results or level of business for 2009 or any other future period, may be deemed to constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, including, but not limited to, demand and competition for the Company’s products, the ability to enter into new licensee agreements, to maintain and renew existing licensing agreements, and to open new stores, changes in consumer preferences or fashion trends, events causing disruption in product shipment, change in import regulations, dependence on certain large customers, changes in the Company’s relationships with vendors and other resources, the launching or prospective development of new business initiatives, future licensee sales growth, gross margins, store expansion, renovation and openings, changes in distribution centers, and the implementation of management information systems. The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the Company’s reports and registration statements filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future results or otherwise.
Update on Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. There have been no changes to the Company’s significant accounting policies from the policies previously disclosed in the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 except the additional details described within the income tax policy below:
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are evaluated for future realization and reduced by a valuation allowance to the extent that management believes a portion will not be realized. The Company’s assessment of deferred tax assets is performed quarterly and many factors are considered when assessing the likelihood of future realization of deferred tax assets, including the recent earnings experience and expectations of future taxable income by taxing jurisdiction, the carryforward periods available for tax reporting purposes, tax planning strategies and other relevant factors. The actual realization of deferred tax assets may differ significantly from the amounts the Company has recorded.
The Company’s income taxes are routinely under audit by federal, state or local authorities. These audits include questioning of the timing and amount of deductions and the allocation of income among various tax jurisdictions. Based on its quarterly evaluations of tax positions, the Company believes it has appropriately accrued for probable exposures. To the extent the Company is required to pay amounts in excess of recorded income tax liabilities, the Company’s effective tax rate in a given financial statement period could be materially impacted. The Company also measures tax position taken or expected to be taken in a return and records them in the financial statements.
16
Overview
Kenneth Cole Productions, Inc. designs, sources and markets a broad range of fashion footwear, handbags and apparel and, through license agreements, designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole Reaction, Unlisted and Gentle Souls brand names. The Company also designs, sources and markets sportswear, footwear, handbags and other accessories under the Le Tigre brand name. In addition, the Company designs, develops and sources private label footwear and handbags for selected retailers. The Company’s products are targeted to appeal to fashion conscious consumers and reflect a metropolitan lifestyle uniquely associated with Kenneth Cole. These products include core basics that generally remain in demand from season to season and fashion products that are designed to establish or capitalize on market trends. The combination of core products and fashion styles provides freshness in assortments and maintains a fashion-forward image, while a multiple brand strategy helps diversify business risk.
The Company markets its products to approximately 5,700 department and specialty store locations, as well as through its Consumer Direct business, which includes full-priced retail stores, Company Stores (“outlets”) and e-commerce. The Company believes the diversity of its product offerings distinguishes the Company from its competitors in terms of product classifications (men’s, women’s and children’s footwear, handbags, apparel and accessories), prices (“bridge”, “better” and “moderate”) and styling. The Company believes the diversity of its product mix provides balance to its overall sales and increases opportunities in all channels of distribution.
The popularity of the Kenneth Cole brand names, including Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, among consumers has enabled the Company to expand its product offerings and channels of distribution through licensing agreements. The Company offers, through these agreements, a lifestyle collection of men’s product categories, including tailored clothing, dress shirts, dress pants, neckwear, outerwear, sleepwear, underwear, socks, belts, sunglasses, prescription eyewear, watches, fragrance, jewelry, luggage, business cases and small leather goods. Women’s product categories currently being sold pursuant to license agreements include sportswear, outerwear, swimwear, sleepwear, small leather goods, belts, sunglasses, prescription eyewear, watches, jewelry, fragrance and luggage. In addition, the Company licenses its children’s apparel.
Our opportunities for long-term growth are accompanied by challenges and risks, particularly in the current steep recessionary environment. Our results are dependent on consumer demand for our products and factors such as general economic and business conditions, unemployment rates, consumer credit availability, interest rate fluctuations, energy costs, geo political stability, retail traffic, tax law, stock market activity and other consumer impacting conditions. The recent unprecedented volatility that has disrupted capital and consumer markets has also reduced incomes and employment and reduced consumer confidence to levels that have not been seen in decades. Since fashion and fashion related products are viewed as discretionary spending, the economic environment has reduced customer spending dramatically. The Company cannot predict the duration of the current economic downturn. The macroeconomic environment and related factors could have a material adverse effect on the Company’s results of operations and financial condition.
The Company recorded net revenues of $103.8 million for the three months ended September 30, 2009. Diluted earnings per share was $0.01 for the three months ended September 30, 2009 as compared to a diluted loss per share of $(0.09) for the three months ended September 30, 2008. As of September 30, 2009, the Company had $50.0 million in cash and cash equivalents and no long-term debt.
17
Results of Operations
The following table sets forth the Company’s Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of net revenues for the three and nine months ended September 30, 2009 and September 30, 2008.
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, | ||||||
|
|
2009 |
2008 |
|
2009 |
2008 | ||||
|
Net sales |
$ 93,336 |
90.0% |
$120,161 |
91.0% |
|
$272,458 |
90.5% |
$333,669 |
91.2% |
|
Royalty revenue |
10,416 |
10.0 |
11,947 |
9.0 |
|
28,569 |
9.5 |
32,087 |
8.8 |
|
Net revenues |
103,752 |
100.0 |
132,108 |
100.0 |
|
301,027 |
100.0 |
365,756 |
100.0 |
|
Gross profit (1) |
44,881 |
43.3 |
54,351 |
41.1 |
|
119,766 |
39.8 |
150,622 |
41.2 |
|
Selling, general and administrative expenses |
44,595 |
43.0 |
51,896 |
39.3 |
|
137,233 |
45.6 |
150,113 |
41.1 |
|
Operating income/(loss) |
286 |
0.3 |
2,455 |
1.8 |
|
(17,467) |
(5.8) |
509 |
0.1 |
|
Interest income, net |
94 |
0.1 |
395 |
0.3 |
|
414 |
0.1 |
1,637 |
0.5 |
|
Impairment of investments |
(287) |
(0.3) |
(3,282) |
(2.5) |
|
(727) |
(0.2) |
(4,114) |
(1.2) |
|
Income/(loss) before income taxes |
93 |
0.1 |
(432) |
(0.4) |
|
(17,780) |
(5.9) |
(1,968) |
(0.6) |
|
Income tax (benefit)/expense |
(93) |
(0.1) |
1,122 |
0.8 |
|
(6,532) |
(2.2) |
831 |
0.2 |
|
Net income/(loss) |
$ 186 |
0.2% |
$(1,554) |
(1.2)% |
|
$(11,248) |
(3.7)% |
$(2,799) |
(0.8)% |
_______________________
(1)
Gross profit may not be comparable to other entities, since some entities include the costs related to their distribution network (receiving and warehousing) in cost of goods sold and other entities, similar to the Company, exclude these costs from gross profit, including them instead in a line item such as selling, general and administrative expenses.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
REVENUES: Net revenues decreased $28.3 million, or 21.5%, to $103.8 million for the three months ended September 30, 2009 from $132.1 million for the three months ended September 30, 2008. The decrease in revenues occurred in each of the Company’s business segments as further described below in the sections entitled “NET SALES” and “ROYALTY REVENUE”.
NET SALES: Wholesale net sales (excluding sales to the Company’s Consumer Direct business segment) decreased $25.9 million, or 33.4%, to $51.7 million for the three months ended September 30, 2009 from $77.6 million for the three months ended September 30, 2008. Over 70% of the decline was attributable to a decrease in our planned closures of the Company’s Tribeca and Bongo footwear lines, associated private label, and the planned reductions in the Company’s off-priced business. The remaining decline was attributable to a decrease in sales across primarily all of the Company’s wholesale businesses as a result of factors including retailer destocking, a challenging retail environment and continued stress in the macro-economic marketplace.
Net sales in the Company’s Consumer Direct segment decreased $0.9 million, or 2.2%, to $41.7 million for the three months ended September 30, 2009 from $42.6 million for the three months ended September 30, 2008. Sales associated with 18 net new stores opened since the close of the third quarter last year were offset by a comparable store sales decrease of 12.9%, or $4.7 million. Comparable stores are defined as new stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. The Company opened five Kenneth Cole Company Stores (“outlets”) during the three months ended September 30, 2009.
ROYALTY REVENUE: Royalty revenue decreased $1.5 million, or 12.8%, to $10.4 million for the three months ended September 30, 2009 from $11.9 million for the three months ended September 30, 2008. Approximately half of the decrease in royalty revenues was due to a reduction in licensee sales into the off-price channel, along with a decrease in contract initiation fees and the expectation that certain licensees will exceed their contractual minimums in the fourth quarter this year versus the third quarter last year.
18
GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, increased to 43.3% for the three months ended September 30, 2009 from 41.1% for the three months ended September 30, 2008. The increase, as a percentage of net revenues, was primarily the result of an increase in the Consumer Direct segment margins as the Company better manages its inventory and improves its product assortment, coupled with a revenue mix shifting to Consumer Direct and Licensing as a percentage of total revenues. The Consumer Direct segment, which operates at a higher gross profit level than the Wholesale segment, increased as a percentage of net revenues to 40.2% for the three months ended September 30, 2009 compared to 32.3% for the three months ended September 30, 2008, while the Wholesale segment, as a percentage of net revenues, decreased to 49.8% for the three months ended September 30, 2009 from 58.7% for the three months ended September 30, 2008. The revenues in the Licensing segment, which carries less cost of goods sold, as a percentage of revenues, increased to 10.0% for the three months ended September 30, 2009 compared to 9.0% for the three months ended September 30, 2008.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative (“SG&A”) expenses, including warehousing and receiving expenses, decreased $7.3 million to $44.6 million for the three months ended September 30, 2009 from $51.9 million for the three months ended September 30, 2008. The decrease in SG&A expenses was primarily attributable to a reduction in payroll and various cuts in discretionary spending offset by costs associated with new stores and other expenses associated with the Company’s strategic initiatives. Total SG&A expenses, as a percentage of revenues, were 43.0% and 39.3% for the three months ended September 30, 2009 and 2008, respectively. The increase was due to loss of leverage on the decline in sales in the Wholesale and Consumer Direct segments and the greater portion of revenues from the Consumer Direct segment which carries a higher SG&A expense level than the Wholesale and Licensing segments due primarily to store occupancy and payroll costs.
INTEREST INCOME, NET: Interest income, net decreased $0.3 million to approximately $0.1 million for the three months ended September 30, 2009 as compared to $0.4 million for the three months ended September 30, 2008. The decrease is primarily due to the Company’s lower interest rates.
IMPAIRMENT OF INVESTMENTS: The Company recorded an other-than-temporary impairment of auction-rate securities of approximately $0.3 million during the three months ended September 30, 2009 as compared to $3.3 million, of which $3.2 million related to an equity investment and $0.1 million related to auction-rate securities, during the three months ended September 30, 2008.
INCOME TAXES: The Company’s effective tax rate decreased to a 100.6% benefit for the three months ended September 30, 2009 from a provision of 259.7% for the three months ended September 30, 2008. The tax benefit is primarily a result of adjustments to the Company’s tax reserves for agreements with certain tax jurisdictions offset by the provision for the Company’s net income during the three months ended September 30, 2009. The Company currently has $43.3 million of net deferred tax assets as of September 30, 2009 inclusive of $12.4 million of net operating loss carryforwards that expire between 2028 and 2029 and valuation allowances of $3.1 million for unrealized tax losses on available for sale securities.
NET INCOME/(LOSS): As a result of the foregoing, the Company recorded net income of $0.2 million for the three months ended September 30, 2009 or 0.2% of net revenues compared to a net loss of $1.6 million or (1.2)% of net revenues for the three months ended September 30, 2008.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
REVENUES: Net revenues decreased $64.8 million, or 17.7%, to $301.0 million for the nine months ended September 30, 2009 from $365.8 million for the nine months ended September 30, 2008. The decrease in revenues occurred in each of the Company’s business segments as further described below in the sections entitled “NET SALES” and “ROYALTY REVENUE”.
19
NET SALES: Wholesale net sales (excluding sales to the Company’s Consumer Direct business segment) decreased $50.2 million, or 23.9%, to $159.4 million for the nine months ended September 30, 2009 from $209.6 million for the nine months ended September 30, 2008. The decrease was attributable to a decline in sales across primarily all of the Company’s wholesale businesses as a result of factors including retailer destocking, a challenging retail environment and continued stress in the macro-economic marketplace. In addition, the decline included the exiting of the Company’s Tribeca business and terminating its Bongo business.
Net sales in the Company’s Consumer Direct segment decreased $11.1 million, or 9.0%, to $113.0 million for the nine months ended September 30, 2009 from $124.1 million for the nine months ended September 30, 2008. Sales associated with 18 net new stores opened since the close of the third quarter last year were offset by a comparable store sales decreased 15.9%, or $17.0 million. Comparable stores are defined as new stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. The Company opened thirteen Kenneth Cole Company Stores (“outlets”) and closed three full-priced retail stores during the nine months ended September 30, 2009 as compared to opening seven Company Stores (“outlets”), opening two full-priced retail stores and closing eight full-priced retail stores during the nine months ended September 30, 2008.
ROYALTY REVENUE: Royalty revenue decreased $3.5 million, or 11.0%, to $28.6 million for the nine months ended September 30, 2009 from $32.1 million for the nine months ended September 30, 2008. The decrease in royalty revenues was primarily attributable to a reduction in contract initiation fees and a reduction in licensee sales into the off-price channel.
GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, decreased to 39.8% for the nine months ended September 30, 2009 from 41.2% for the nine months ended September 30, 2008. The decrease, as a percentage of net revenues, was primarily the result of a decrease in the Wholesale and Consumer Direct segment margins, partially offset by the revenue mix shifting to Consumer Direct and Licensing as a percentage of total revenues. The Consumer Direct segment, which operates at a higher gross profit level than the Wholesale segment, increased as a percentage of net revenues to 37.5% for the nine months ended September 30, 2009 compared to 33.9% for the nine months ended September 30, 2008, while the Wholesale segment, as a percentage of net revenues, decreased to 53.0% for the nine months ended September 30, 2009 from 57.3% for the nine months ended September 30, 2008. The revenues in the Licensing segment, which carries less cost of goods sold, increased as a percentage of revenues, to 9.5% for the nine months ended September 30, 2009 compared to 8.8% for the nine months ended September 30, 2008. The decrease in the Wholesale and Consumer Direct segment margins for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily due to a promotional and challenging retail environment and the macro-economic marketplace.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A expenses, including warehousing and receiving expenses, decreased $12.9 million to $137.2 million for the nine months ended September 30, 2009 from $150.1 million for the nine months ended September 30, 2008. The decrease in SG&A expenses was primarily attributable to a reduction in payroll and various cuts in discretionary spending offset by costs associated with new stores and other expenses associated with the Company’s strategic initiatives. Total SG&A expenses, as a percentage of revenues, were 45.6% and 41.1% for the nine months ended September 30, 2009 and 2008, respectively. The increase was due to loss of leverage on the decline in sales in the Wholesale and Consumer Direct segments and the greater portion of revenues from the Consumer Direct segment which carries a higher SG&A expense level than the Wholesale and Licensing segments due primarily to store occupancy and payroll costs.
INTEREST INCOME, NET: Interest income, net decreased $1.2 million to $0.4 million for the nine months ended September 30, 2009 as compared to $1.6 million for the nine months ended September 30, 2008. The decrease is primarily due to the Company’s lower average cash balances and lower interest rates.
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IMPAIRMENT OF INVESTMENTS: The Company recorded an other-than-temporary impairment of auction-rate securities of $0.7 million during the nine months ended September 30, 2009 as compared to $4.1 million, of which $3.2 million related to an equity investment and $0.9 million related to auction-rate securities, during the nine months ended September 30, 2008.
INCOME TAXES: The Company’s effective tax rate decreased to a 36.7% benefit for the nine months ended September 30, 2009 from a provision of 42.2% for the nine months ended September 30, 2008. The tax benefit is primarily a result of an increase in the Company’s net loss and for adjustments to the Company’s tax reserves for agreements with certain tax jurisdictions. The Company currently has $43.3 million of net deferred tax assets as of September 30, 2009 inclusive of $12.4 million of net operating loss carryforwards that expire between 2028 and 2029 and valuation allowances of $3.1 million for unrealized tax losses on available for sale securities.
NET LOSS: As a result of the foregoing, the Company recorded a net loss of $11.2 million for the nine months ended September 30, 2009 ((3.7%) of net revenues) compared to a loss of $2.8 million ((0.8%) of net revenues) for the nine months ended September 30, 2008.
New Accounting Pronouncement
Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the ASC became nonauthoritative. The Company’s accounting policies were not affected by the conversion to ASC.
Related Party Transactions
The Company has an exclusive license agreement with Iconix Brand Group, Inc. and its trademark holding company, IP Holdings, LLC (“Iconix”), to use the Bongo trademark in connection with the manufacture, sale and distribution of women’s, men’s and children’s footwear in certain territories. The Chairman and Chief Executive Officer of Iconix is the brother of the Company’s Chairman and Chief Creative Officer. The term of the agreement was through December 31, 2010. In April 2009, the Company terminated the agreement effective December 31, 2009 which eliminates any future obligation for 2010. Management believes that the license agreement with Iconix was entered into at arm’s length. The Company was obligated to pay Iconix a percentage of net sales based upon the terms of the agreement. The Company recorded approximately $10,000 of income related to an advertising allowance per the license agreement for the three months ended September 30, 2009. The Company recorded approximately $247,000 in aggregate royalty and advertising expense under the agreement for the nine months ended September 30, 2009. The Company recorded approximately $284,000 and $857,000 in aggregate royalty and advertising expense under the agreement for the three and nine months ended September 30, 2008, respectively.
The Company recorded expenses of approximately $49,000 and $255,000 for the three and nine months ended September 30, 2009, respectively, to a third-party aviation company which hires and uses an aircraft partially owned by Emack LLC, a company which is wholly owned by the Company’s Chairman and Chief Creative Officer. During the three and nine months ended September 30, 2008, the Company recorded expenses of approximately $161,000 and $427,000, respectively, for hire and use of aircraft partially owned by Emack LLC. Management believes that all transactions were made on terms and conditions similar to or more favorable than those available in the marketplace from unrelated parties.
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Liquidity and Capital Resources
As of September 30, 2009, the Company had $50.0 million in cash and cash equivalents, which consist primarily of government money market funds as compared to $51.0 million as of September 30, 2008. The Company uses cash from operations as the primary source of financing for its capital expenditures and seasonal requirements. Cash requirements vary from time to time as a result of the timing of the receipt of merchandise from suppliers, the delivery by the Company of merchandise to its wholesale customers and the level of inventory, accounts receivable and due from factors’ balances. At September 30, 2009 and December 31, 2008, working capital was $81.3 million and $97.5 million, respectively.
Cash used in operating activities was $2.3 million for the nine months ended September 30, 2009, compared to $0.9 million for the nine months ended September 30, 2008. The decrease in cash flows provided by operations is primarily attributable to a decrease in net income and the timings of receivables and payables.
Net cash used in investing activities totaled $11.1 million for the nine months ended September 30, 2009 compared to $8.6 million for the nine months ended September 30, 2008. The increase was primarily attributable to a $5.2 million increase in capital expenditures during the nine months ended September 30, 2009 compared to September 30, 2008. Included in capital expenditures for the nine months ended September 30, 2009 and 2008 were approximately $9.4 million and $3.5 million, respectively, for amounts associated with furniture, fixtures and leasehold improvements for existing and new stores. This was offset by a $2.7 million decrease in intangible asset purchases during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. During the nine months ended September 30, 2008, the Company paid $2.5 million for intangible assets as defined within the Le Tigre Asset Purchase Agreement Amendment.
Net cash used in financing activities was $1.3 million for the nine months ended September 30, 2009 compared to $30.1 million used in financing activities for the nine months ended September 30, 2008. The decrease was primarily attributable to no repurchases of treasury shares during the nine months ended September 30, 2009 as compared to $24.4 million used to repurchase 1,619,200 treasury shares during the nine months ended September 30, 2008. The Company also did not pay a quarterly dividend for the nine months ended September 30, 2009 compared to a $5.0 million quarterly dividend paid for the nine months ended September 30, 2008.
Through July 30, 2009, the Company had a revolving credit facility (the “Facility”) with various lenders, which provided up to $100.0 million to finance working capital requirements, letters of credit and other general corporate activities. During this period the Company had no borrowing availability under the Facility. On July 31, 2009, the Company amended the Facility (the “Amended Facility”) to convert it to a revolving senior secured asset based credit facility. Pursuant to the terms of the Amended Facility, the Company may borrow based on a percentage of receivables and inventory as defined, up to $60.0 million. As of September 30, 2009, the Company has $2.2 million of standby and commercial open letters of credit under the Amended Facility.
On November 1, 2009, CIT Group Inc. ("CIT") entered into a prepackaged plan of reorganization. The Company has a Receivables Management Agreement with The CIT Group/Commercial Services, Inc. (“Operating Sub”) whereby Operating Sub acts as a collection agent for the Company’s assigned receivables without transfer of ownership and as a credit grantor for those receivables subject to credit approval. Based on this agreement the Company records balances collected by Operating Sub as Accounts Receivable. Customer payments for these receivables are remitted directly to a Company lockbox. Accordingly, the Company believes that CIT’s reorganization plan has no direct exposure to the Company’s operations. Prior to executing the Receivables Management Agreement on November 7, 2008, the Company sold primarily all of its accounts receivable to its factors and recorded these receivables in Due from Factors.
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The Company believes that it will be able to satisfy its current expected cash requirements for 2009 with cash flow from operations and cash on hand. The Company did not have any off-balance sheet arrangements as of September 30, 2009.
The foregoing commentary should be considered to fall within the coverage of the “Safe Harbor Statement” under the Private Securities Litigation reform Act of 1995 included in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has marketable securities, specifically auction rate securities, that contain “double A” and “single A” rated debt obligations and a preferred share close end fund that are substantially all insured. All of the Company’s auction rate securities have failed at auction as a result of illiquidity and imbalance in order flow within the market. A failed auction is not an indication of an increased credit risk or a reduction in the underlying collateral; however, parties wishing to sell securities could not do so. Based on current market conditions, it is not known when or if the capital markets will come back into balance to achieve successful auctions for these securities. If these auctions continue to fail, it could result in the Company holding securities beyond their next scheduled auction reset dates and will limit the liquidity of these investments. Based on the Company’s expected operating cash flows, and other sources and uses of cash, the Company does not anticipate that the lack of liquidity on these investments will affect its ability to execute its current business plan. These assets have been classified as long-term in the Company’s Condensed Consolidated Balance Sheets and have been recorded at their fair value.
The Company is exposed to currency exchange rate risks with respect to its inventory transactions denominated in Euros. Business activities in various currencies expose the Company to the risk that the eventual net dollar cash flows from transactions with foreign suppliers denominated in foreign currencies may be adversely affected by changes in currency rates. The Company manages these risks by utilizing foreign exchange contracts. The Company does not enter into foreign currency transactions for speculative purposes. At September 30, 2009, the Company had no forward contracts outstanding.
The Company’s earnings may also be affected by changes in short-term interest rates as a result of borrowings that may be made under its credit facilities. A two or less percentage point increase in interest rates affecting the Company’s credit facilities would not have had a material effect on the Company’s operations.
The Company sources a significant amount of product from China and is subject to foreign currency exposure. If the Yuan is allowed to float freely against other foreign currency, a two percent change in exchange rates could have a material effect on the cost of future inventory purchases to be transacted by the Company.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report, and have concluded that the Company’s disclosure controls and procedures were effective and designed to ensure that all material information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
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Changes in internal control over financial reporting
There were no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1.
Legal Proceedings. None
Item 1A. Risk Factors. There have been no material changes during the quarterly period ended September 30, 2009 from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds. None
Item 3.
Defaults Upon Senior Securities. None
Item 4.
Submission of Matters to a Vote of Security Holders. None
Item 5.
Item 6.
Exhibits.
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31.1 |
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Kenneth Cole Productions, Inc.
Registrant
November 6, 2009
/s/ DAVID P. EDELMAN
David P. Edelman
Chief Financial Officer
25
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jill Granoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the 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 the report;
3. Based on my knowledge, the financial statements, and other financial information included in the 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 the 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 quarterly 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 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.
By:
/s/ JILL GRANOFF
--------------------------------------
Jill Granoff
Chief Executive Officer
Date: November 6, 2009
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David P. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kenneth Cole Productions, Inc.;
2. Based on my knowledge, the 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 the report;
3. Based on my knowledge, the financial statements, and other financial information included in the 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 the 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 quarterly 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 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.
By:
/s/ DAVID P. EDELMAN
----------------------------------------
David P. Edelman
Chief Financial Officer
Date: November 6, 2009
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jill Granoff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ JILL GRANOFF
Jill
Granoff
Chief Executive Officer
Kenneth Cole Productions, Inc
November
6, 2009
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kenneth Cole Productions, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Edelman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ DAVID P. EDELMAN
David
P. Edelman
Chief Financial Officer
Kenneth Cole Productions, Inc.
November 6, 2009