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Notes to Consolidated Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Caleres, Inc., originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear company. The Company’s shares are traded under the “CAL” symbol on the New York Stock Exchange.
The Company provides a broad offering of licensed, branded and private-label casual, dress and athletic footwear products to women, men and children. The footwear is sold at a variety of price points through multiple distribution channels both domestically and internationally. The Company currently operates
1,221
retail shoe stores in the United States, Canada, Guam and Italy, primarily under the Famous Footwear, Naturalizer and Allen Edmonds names. In addition, through its Brand Portfolio segment, the Company designs, sources and markets footwear to retail stores domestically and internationally, including national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs. In
2018
, approximately
65%
of the Company’s net sales were at retail, compared to
69%
in
2017
and
67%
in
2016
. Refer to Note 8 to the consolidated financial statements for additional information regarding the Company’s business segments.
The Company’s business is seasonal in nature due to consumer spending patterns with higher back-to-school and holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.
Noncontrolling Interests
Noncontrolling interests in the Company’s consolidated financial statements result from the accounting for noncontrolling interests in partially-owned consolidated subsidiaries or affiliates. The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company is a
51%
owner of the joint venture (“B&H Footwear”), with CBI owning the other
49%
. The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture arrangements. The Company consolidates B&H Footwear Company Limited into its consolidated financial statements. Net (loss) earnings attributable to noncontrolling interests represents the share of net earnings that are attributable to the B&H Footwear equity. Transactions between the Company and B&H Footwear have been eliminated in the consolidated financial statements.
Accounting Period
The Company’s fiscal year is the 52- or 53-week period ending the Saturday nearest to January 31. Fiscal years
2018
and
2016
, which included 52 weeks, ended on
February 2, 2019
and
January 28, 2017
, respectively. Fiscal year
2017
, which included 53 weeks, ended on
February 3, 2018
.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Receivables
The Company evaluates the collectibility of selected accounts receivable on a case-by-case basis and makes adjustments to the bad debt reserve for expected losses. The Company considers factors such as ability to pay, bankruptcy, credit ratings and payment history. For all other accounts, the Company estimates reserves for bad debts based on experience and past due status of the accounts. If circumstances related to customers change, estimates of recoverability are further adjusted. The Company recognized a provision for doubtful accounts of
$0.5 million
in
2018
,
$1.3 million
in
2017
and
$1.4 million
in
2016
.
Customer allowances represent reserves against our wholesale customers’ accounts receivable for margin assistance, product returns, customer deductions and co-op advertising allowances. The Company estimates the reserves needed for margin assistance by reviewing inventory levels on the retail floors, sell-through rates, historical dilution, current gross margin levels and other performance indicators of our major retail customers. Product returns and customer deductions are estimated using historical experience and anticipated future trends. Co-op advertising allowances are estimated based on customer agreements. The Company recognized a provision for customer allowances of
$54.2 million
in
2018
,
$51.1 million
in
2017
and
$45.2 million
in
2016
.
Customer discounts represent reserves against our accounts receivable for discounts that our wholesale customers may take based on meeting certain order, payment or return guidelines. The Company estimates the reserves needed for customer discounts based upon customer net sales and respective agreement terms. The Company recognized a provision for customer discounts of
$5.5 million
in
2018
,
$4.8 million
in
2017
and
$3.6 million
in
2016
.
Inventories
All inventories are valued at the lower of cost and net realizable value with approximately
88%
of consolidated inventories using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. If the first-in, first-out (“FIFO”) method had been used, consolidated inventories would have been
$3.3 million
and
$4.0 million
higher at
February 2, 2019
and
February 3, 2018
, respectively. Refer to Note 9 to the consolidated financial statements for further discussion.
The costs of inventory, inbound freight and duties, markdowns, shrinkage and royalty expense are classified in cost of goods sold. Costs of warehousing and distribution are classified in selling and administrative expenses and are expensed as incurred. Such warehousing and distribution costs totaled
$106.9 million
,
$89.7 million
and
$77.7 million
in
2018
,
2017
and
2016
, respectively. Costs of overseas sourcing offices and other inventory procurement costs are reflected in selling and administrative expenses and are expensed as incurred. Such sourcing and procurement costs totaled
$22.1 million
,
$23.1 million
and
$21.5 million
in
2018
,
2017
and
2016
, respectively.
The Company applies judgment in valuing inventories by assessing the net realizable value of inventories based on current selling prices. At the Famous Footwear segment and certain Brand Portfolio operations, markdowns are recognized when it becomes evident that inventory items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes the gross profit rates at Famous Footwear and, to a lesser extent, Brand Portfolio to be lower than the initial markup during periods when permanent price reductions are taken to clear product. Within certain other Brand Portfolio operations, markdown reserves reduce the carrying values of inventories to a level where, upon sale of the product, the Company will realize its normal gross profit rate. The Company believes these policies reflect the difference in operating models between the Famous Footwear and Brand Portfolio segments. Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The Brand Portfolio segment relies on permanent price reductions to clear slower-moving inventory.
Markdowns are recorded to reflect expected adjustments to sales prices. In determining markdowns, management considers current and recently recorded sales prices, the length of time the product is held in inventory and quantities of various product styles contained in inventory, among other factors. The ultimate amount realized from the sale of certain products could differ from management estimates. The Company performs physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjusts the recorded balance to reflect the results. The Company records estimated shrinkage between physical inventory counts based on historical results.
Computer Software Costs
The Company capitalizes certain costs in other assets, including internal payroll costs incurred in connection with the development or acquisition of software for internal use. Other assets on the consolidated balance sheets include
$16.4 million
and
$22.3 million
of computer software costs as of
February 2, 2019
and
February 3, 2018
, respectively, which are net of accumulated amortization of
$131.8 million
and
$123.0 million
as of the end of the respective periods. In addition, as further discussed below, the Company adopted ASU 2018-15 on a prospective basis in the third quarter of 2018 and capitalized
$0.5 million
of implementation costs for hosting arrangements in 2018.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided over the estimated useful lives of the assets or the remaining lease terms, where applicable, using the straight-line method.
Interest Expense
Capitalized Interest
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. The Company capitalized interest of
$0.2 million
in
2018
, related to the new company-operated Brand Portfolio warehouse facilities in California, with no corresponding interest capitalized in 2017. The Company capitalized interest of
$1.4 million
in 2016 related to its expansion and modernization project at its Lebanon, Tennessee distribution center.
Interest Expense
Interest expense includes interest for borrowings under both the Company’s short-term and long-term debt, net of amounts capitalized. Interest expense includes fees paid under the short-term revolving credit agreement for the unused portion of its line of credit. Interest expense also includes the amortization of deferred debt issuance costs and debt discount as well as the accretion of certain discounted noncurrent liabilities, including the mandatory purchase obligation from the acquisition of Blowfish Malibu, as further described in Note 2 to the consolidated financial statements.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. In accordance with Accounting Standards Codification (“ASC”),
Intangibles-Goodwill and Other (ASC Topic 350) Testing Goodwill for Impairment
, the Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the qualitative assessment, management believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. A fair value-based test is applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the fair value of the Company’s reporting units to the carrying value of those reporting units. This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of the reporting unit is determined using both a market approach and discounted cash flow analysis. The market approach method includes the use of multiples of comparable publicly-traded companies. The discounted cash flow approach estimates the fair value of the reporting unit using projected cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expense, capital expenditures and working capital requirements are based on the Company's internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting units directly resulting from the use of its assets in its operations. Assumptions that market participants may use are also considered. The estimate of the fair values of the Company's reporting units is based on the best information available to the Company's management as of the date of the assessment. During the third quarter of 2017, the Company adopted ASU 2017-04,
Simplifying the Test for Goodwill Impairment,
which eliminates the requirement to calculate the implied fair value of goodwill. Goodwill impairment is recorded if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit, not to exceed the carrying value of goodwill.
The Company performs its goodwill impairment assessment as of the first day of the fourth quarter of each fiscal year. The Company elected to perform the optional qualitative assessment for all reporting units except the Allen Edmonds reporting unit. A quantitative assessment was performed for the Allen Edmonds reporting unit. Based on the results of the goodwill impairment quantitative assessment, the Company determined that the carrying value of the Allen Edmonds reporting unit exceeded its fair value and during the fourth quarter of 2018, a non-cash impairment charge of
$38.0 million
was recorded for the impairment of goodwill of the Allen Edmonds reporting unit. Refer to Note 11 to the consolidated financial statements for further discussion.
The Company performs impairment tests on its indefinite-lived intangible assets as of the first day of the fourth quarter of each fiscal year unless events indicate an interim test is required. During 2018, a non-cash impairment charge of
$60.0 million
was recorded for the impairment of the Allen Edmonds indefinite-lived tradename. The impairment charge was primarily driven by a decline in projected revenues as a result of the Company's decision to change the brand's pricing structure to be less promotional in the future, as well as rising interest rates. Refer to Note 11 to the consolidated financial statements for further discussion. Definite-lived intangible assets, other than goodwill, are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present.
Investment in Nonconsolidated Affiliate
The Company has an investment in a nonconsolidated affiliate that is accounted for using the cost method. During 2016, the Company determined that the investment had an other-than-temporary decline in its fair value that exceeded its
$7.0 million
carrying value and recorded an impairment charge of
$7.0 million
, which is presented in restructuring and other special charges, net in the consolidated statements of earnings in 2016.
Self-Insurance Reserves
The Company is self-insured and/or retains high deductibles for a significant portion of its workers’ compensation, health, disability, cyber risk, general liability, automobile and property programs, among others. Liabilities associated with the risks that are retained by the Company are estimated by considering historical claims experience, trends of the Company and the industry and other actuarial assumptions. The estimated accruals for these liabilities could be affected if development of costs on claims differ from these assumptions and historical trends. Based on available information as of
February 2, 2019
, the Company believes it has provided adequate reserves for its self-insurance exposure. As of
February 2, 2019
and
February 3, 2018
, self-insurance reserves were
$11.6 million
and
$11.0 million
, respectively.
Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales are recorded, net of returns, allowances and discounts, when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company's right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. Reserves for projected merchandise returns, discounts and allowances are determined based on historical experience and current expectations. Revenue is recognized on license fees related to Company-owned brand-names, where the Company is the licensor, when the related sales of the licensee are made. The Company applies the guidance using the portfolio approach in ASC 606,
Revenue from Contracts with Customers,
because this methodology would not differ materially from applying the guidance to the individual contracts within the portfolio. The Company excludes sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.
Gift Cards
The Company sells gift cards to its consumers in its retail stores, through its Internet sites and at other retailers. The Company’s gift cards do not have expiration dates or inactivity fees. The Company recognizes revenue from gift cards when (i) the gift card is redeemed by the consumer or (ii) the likelihood of the gift card being redeemed by the consumer is remote (“gift card breakage”) and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines its gift card breakage rate based upon historical redemption patterns. The Company recognizes gift card breakage during the 24-month period following the sale of the gift card, according to the Company’s historical redemption pattern. Gift card breakage income is included in net sales in the consolidated statements of earnings and the liability established upon the sale of a gift card is included in other accrued expenses within the consolidated balance sheets. The Company recognized
$0.9 million
of gift card breakage in
2018
and
$1.7 million
in
2017
and
$0.7 million
in
2016
.
Loyalty Program
The Company maintains a loyalty program (“Rewards”) at Famous Footwear, through which consumers earn points toward savings certificates for qualifying purchases. Upon reaching specified point values, consumers are issued a savings certificate that may be redeemed for purchases at Famous Footwear. Savings certificates earned must be redeemed within stated expiration dates. In addition to the savings certificates, the Company also offers exclusive member discounts. The value of points and rewards earned by Famous Footwear’s Rewards program members are recorded as a reduction of net sales and a liability is established within other accrued expenses at the time the points are earned based on historical conversion and redemption rates. Approximately
76%
of net sales in the Famous Footwear segment were made to its Rewards members in both
2018
and 2017. As of
February 2, 2019
and
February 3, 2018
, the Company had a Rewards program liability of
$14.6 million
and
$8.1 million
, respectively, which is included in other accrued expenses on the consolidated balance sheets. As further discussed below and in Note 3 to the consolidated financial statements, the Company adopted Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
during the first quarter of 2018, which
had a significant impact on the Company's Rewards program liability.
Store Closing and Impairment Charges
The costs of closing stores, including lease termination costs, property and equipment write-offs and severance, as applicable, are recorded when the store is closed or when a binding agreement is reached with the landlord to close the store.
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The Company recorded asset impairment charges, primarily related to underperforming retail stores, of
$3.7 million
in
2018
,
$3.8 million
in
2017
and
$1.6 million
in
2016
.
Advertising and Marketing Expense
Advertising and marketing costs are expensed as incurred, except for the costs of direct response advertising that relate primarily to the production and distribution of the Company's catalogs and coupon mailers. Direct response advertising costs are capitalized and amortized over the expected future revenue stream, which is generally one to three months from the date the materials are mailed. External production costs of advertising are expensed when the advertising first appears in the media or in the store.
In addition, the Company participates in co-op advertising programs with certain of its wholesale customers. For those co-op advertising programs where the Company has validated the fair value of the advertising received, co-op advertising costs are reflected as advertising expense within selling and administrative expenses. Otherwise, co-op advertising costs are reflected as a reduction of net sales.
Total advertising and marketing expense was
$84.8 million
,
$83.6 million
and
$78.8 million
in
2018
,
2017
and
2016
, respectively. These costs were offset by co-op advertising allowances recovered by the Company’s retail business of
$7.6 million
,
$4.8 million
and
$4.1 million
in
2018
,
2017
and
2016
, respectively. Total co-op advertising costs reflected as a reduction of net sales were
$9.4 million
in
2018
,
$10.0 million
in
2017
and
$8.4 million
in
2016
. Total advertising costs attributable to future periods that are deferred and recognized as a component of prepaid expenses and other current assets were
$3.7 million
and
$4.0 million
at
February 2, 2019
and
February 3, 2018
, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of its assets and liabilities. The Company establishes valuation allowances if it believes that it is more-likely-than-not that some or all of its deferred tax assets will not be realized. The Company does not recognize a tax benefit unless it concludes that it is more-likely-than-not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in its judgment, is greater than
50%
likely to be realized. The Company records interest and penalties related to unrecognized tax positions within the income tax provision on the consolidated statements of earnings.
As further discussed in Note 7 to the consolidated financial statements, on
December 22, 2017
, the Tax Cuts and Jobs Act was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
35%
to
21%
effective
January 1, 2018
, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.
Operating Leases
The Company leases its store premises and certain office locations, distribution centers and equipment under operating leases. Approximately
one-half
of the leases entered into by the Company include options that allow the Company to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Some leases also include early termination options that can be exercised under specific conditions.
Contingent Rentals
Many of the leases covering retail stores require contingent rentals in addition to the minimum monthly rental charge based on retail sales volume. The Company records expense for contingent rentals during the period in which the retail sales volume exceeds the respective targets.
Construction Allowances Received From Landlords
At the time its retail facilities are initially leased, the Company often receives consideration from landlords to be applied against the cost of leasehold improvements necessary to open the store. The Company treats these construction allowances as a lease incentive. The allowances are recorded as a deferred rent obligation and amortized to income over the lease term as a reduction of rent expense. The allowances are reflected as a component of other accrued expenses and deferred rent on the consolidated balance sheets.
Straight-Line Rents and Rent Holidays
The Company records rent expense on a straight-line basis over the lease term for all of its leased facilities. For leases that have predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as deferred rent. At the time its retail facilities are leased, the Company is frequently not charged rent for a specified period of time, typically
30
to
60
days, while the store is being prepared for opening. This rent-free period is referred to as a rent holiday. The Company recognizes rent expense over the lease term, including any rent holiday, within selling and administrative expenses on the consolidated statements of earnings.
Pre-opening Costs
Pre-opening costs associated with opening retail stores, including payroll, supplies and facility costs, are expensed as incurred.
(Loss) Earnings Per Common Share Attributable to Caleres, Inc. Shareholders
The Company uses the two-class method to calculate basic and diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders. Unvested restricted stock awards are considered participating units because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. Under the two-class method, basic (loss) earnings per common share attributable to Caleres, Inc. shareholders is computed by dividing the net (loss) earnings attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. Diluted earnings per common share attributable to Caleres, Inc. shareholders is computed by dividing the net (loss) earnings attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares and potential dilutive securities outstanding during the year. Potential dilutive securities consist of outstanding stock options and contingently issuable shares for the Company's performance share awards. Refer to Note 4 to the consolidated financial statements for additional information related to the calculation of (loss) earnings per common share attributable to Caleres, Inc. shareholders.
Comprehensive (Loss) Income
Comprehensive (loss) income includes the effect of foreign currency translation adjustments, pension and other postretirement benefits adjustments and unrealized gains or losses from derivatives used for hedging activities.
Foreign Currency Translation Adjustment
For certain of the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings (loss) amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity. Transaction gains and losses are included in the consolidated statements of earnings.
Pension and Other Postretirement Benefits Adjustments
The Company determines the expense and obligations for retirement and other benefit plans using assumptions related to discount rates, expected long-term rates of return on invested plan assets, expected salary increases and certain employee-related factors. The Company determines the fair value of plan assets and benefit obligations as of the January 31 measurement date. The unrecognized portion of the gain or loss on plan assets is included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity and is recognized into the plans’ expense over time. Refer to additional information related to pension and other postretirement benefits in Note 6 and Note 16 to the consolidated financial statements.
Derivative Financial Instruments
The Company recognizes all derivative financial instruments as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. The Company evaluates its exposure to volatility in foreign currency rates and may enter into derivative transactions. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Refer to additional information related to derivative financial instruments in Note 14, Note 15 and Note 16 to the consolidated financial statements.
Litigation Contingencies
The Company is the defendant in several claims and lawsuits arising in the ordinary course of business. The Company believes any of these ordinary- course-of-business proceedings will not have a material adverse effect on the consolidated financial position or results of operations. The Company accrues its best estimate of the cost of resolution of these claims. Legal defense costs of such claims are recognized in the period in which the costs are incurred. Refer to Note 18 to the consolidated financial statements for a further description of commitments and contingencies.
Environmental Matters
The Company is involved in environmental remediation and ongoing compliance activities at several sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the facility. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. The Company's prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws to address conditions that may be identified in the future. Refer to Note 18 to the consolidated financial statements for a further description of specific properties.
Environmental expenditures relating to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or our commitment to a formal plan of action, and our estimates of cost are subject to change as new information becomes available. Costs of future expenditures for environmental remediation obligations are discounted to their present value in those situations requiring only continuing maintenance and monitoring based upon a schedule of fixed payments.
Business Combination Accounting
The Company allocates the purchase price of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date. The Company also identifies and estimates the fair values of intangible assets that should be recognized as assets apart from goodwill. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company typically engages third-party valuation specialists to assist in the estimation of fair values for intangible assets other than goodwill, inventory and fixed assets. The carrying values of acquired receivables and trade accounts payable have historically approximated their fair values at the business combination date. With respect to other acquired assets and liabilities, the Company uses all available information to make the best estimates of their fair values at the business combination date.
The Company’s purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s estimates, including assumptions regarding industry economic factors and business strategies.
Share-Based Compensation
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards and stock options. Additionally, share-based grants may be made to non-employee members of the Board of Directors in the form of restricted stock units (“RSUs”) payable in cash or the Company's common stock at no cost to the non-employee member of the Board of Directors. The Company accounts for share-based compensation in accordance with the fair value recognition provisions of ASC 718,
Compensation – Stock Compensation
, and ASC 505,
Equity
, which require all share-based payments to employees and members of the Board of Directors, including grants of employee stock options, to be recognized as expense in the consolidated financial statements based on their fair values. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Stock options generally vest over four years, with
25%
vesting annually and expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. Expense for restricted stock is based on the fair value of the restricted stock on the date of grant. Expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period, which is generally four years, and expense for graded-vesting grants is recognized ratably over the respective vesting periods. Expense for stock performance awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or units to be awarded on a straight-line basis over the respective term of the award, or individual vesting portion of an award. Expense for the initial grant of RSUs is recognized ratably over the one-year vesting period based upon the fair value of the RSUs, and for cash-equivalent RSUs, is remeasured at the end of each period. If any of the assumptions used in the Black-Scholes model or the anticipated number of shares to be awarded change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Refer to additional information related to share-based compensation in Note 16 to the consolidated financial statements.
Consolidated Statements of Cash Flows Supplemental Disclosures
The Company made federal, state and foreign tax payments, net of refunds, of
$21.3 million
,
$18.7 million
and
$16.9 million
in
2018
,
2017
and
2016
, respectively. Refer to Note 7 to the consolidated financial statements for further information regarding income taxes.
Cash payments of interest for the Company's borrowings under the its revolving credit agreement and long-term debt during
2018
,
2017
and
2016
were
$17.4 million
,
$16.5 million
and
$15.2 million
, respectively. Refer to Note 12 to the consolidated financial statements for further discussion regarding the Company's financing arrangements.
The change in investing activities included in liabilities was an increase (decrease) of
$10.7 million
,
$1.9 million
, and (
$8.3 million
) in 2018, 2017 and 2016, respectively.
Impact of Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
and subsequently issued several ASUs to clarify the implementation guidance in ASU 2014-09
.
Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the ASUs in the first quarter of 2018 using the modified retrospective method, which resulted in a cumulative-effect adjustment of
$4.8 million
to reduce retained earnings, with a corresponding
$6.4 million
increase to other accrued expenses and a
$1.6 million
decrease to deferred tax liabilities. Adoption of the standard has not significantly impacted the statement of earnings in 2018 and is not anticipated to significantly impact it on an ongoing basis. Refer to Note 3 to the consolidated financial statements for additional information.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory,
which requires recognition of the income tax effects of intercompany sales and intra-entity transfers of assets, other than inventory, when the transfer occurs. The ASU was adopted during the first quarter of 2018 using a modified retrospective approach, which resulted in a cumulative-effect adjustment to retained earnings of
$10.5 million
, with a corresponding
$5.4 million
reduction to an income tax asset and a
$5.1 million
increase to deferred tax liabilities.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The standard provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The ASU also narrows the definition of a business by requiring a set of assets to include an input and at least one substantive process that together significantly contribute to the ability to create outputs for it to be considered a business. The Company adopted the ASU on a prospective basis during the first quarter of 2018, which had no impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The ASU amended Accounting Standards Codification ("ASC") 715,
Compensation — Retirement Benefits
, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net periodic benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified
$12.3 million
and
$15.0 million
of non-service cost components of net periodic benefit income for 2017 and 2016, respectively, to other income, net in the consolidated statements of earnings. For 2018, the non-service cost component of net periodic benefit income of
$12.3 million
is presented as other income. Refer to Note 6 to the consolidated financial statements for additional information.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting
for Hedging Activities
, which amends the hedge accounting model in ASC 815 to better portray the economic results of an entity's risk management activities in its financial statements and simplifies the application of hedge accounting in certain situations. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted the ASU in the first quarter of 2018, which did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted the ASU in the third quarter of 2018 on a prospective basis, which did not have a material impact on the Company's consolidated financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, that amends certain disclosure requirements that are redundant or outdated. The rule expands the disclosure requirements for the analysis of shareholders' equity for interim financial statements. An analysis of the changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement, as well as the amount of dividends per share for each class of shares.
The final rule was effective on November 5, 2018. The Company adopted the rule in the fourth quarter of 2018 and the expanded interim disclosure requirements for changes in shareholders’ equity will be effective for the Company in the first quarter of 2019.
Impact of Prospective Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize most leases on the balance sheet. The FASB has subsequently issued ASUs with improvements to the guidance, including ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, which provides entities with an additional transition method to adopt the new standard. Under the new optional transition method, an entity initially applies Topic 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company will adopt the ASUs in the first quarter of 2019 using the optional transition method permitted by ASU 2018-11. The Company's accounting systems have been upgraded to comply with the requirements of the new standard and the Company will be implementing additional controls and changes to its processes upon adoption of the standard. The Company will be electing the package of practical expedients and the expedient to group lease and non-lease components as permitted by the ASU; however, the hindsight practical expedient will not be elected. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its consolidated balance sheets upon adoption in the first quarter of 2019 will result in a right-of-use asset of approximately
$0.7 billion
and operating lease liabilities of approximately
$0.8 billion
. The Company is still finalizing its transition entries, including the cumulative-effect adjustment to retained earnings related to the calculated impairment of the right-of-use asset as of the adoption date. Ongoing impairment charges related to underperforming retail stores are expected to be greater under the new standard due to the additional required right-of-use asset associated with each asset group. The Company does not expect the adoption of the ASU to have a material impact on its cash flows. Adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326)
, which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces today's "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The ASUs provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is adopted. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU in the first quarter of 2020 will not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-13 modifies disclosure requirements on fair value measurements, removing and modifying certain disclosures, while adding other disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-14,
Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20), Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.
The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-14 is not expected to have a material impact on the Company's financial statement disclosures.
2. ACQUISITIONS
Acquisition of Blowfish, LLC
On
July 6, 2018
, the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Blowfish, LLC ("
Blowfish Malibu
"), pursuant to which the Company acquired a controlling interest in Blowfish. The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula, as specified in the Purchase Agreement. The aggregate purchase price is estimated to be
$28.0 million
, including approximately
$9.0 million
preliminarily assigned to the mandatory purchase obligation, which will be paid upon settlement in 2021. The remaining
$19.0 million
(or
$16.8 million
, net of
$2.2 million
of cash received) was funded with cash. The preliminary estimate of the mandatory purchase obligation, which is recorded within other liabilities on the consolidated balance sheet, is presented on a discounted basis and is subject to remeasurement based on
the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments are recorded as interest expense. The operating results of Blowfish since July 6, 2018 have been included in the Company's consolidated financial statements within the Brand Portfolio segment.
Blowfish Malibu, which was founded in 2005, designs and sells women's and children's footwear that captures the fresh youthful spirit and casual living that is distinctively Southern California. Footwear is marketed under the "Blowfish" and "Blowfish Malibu" tradenames. The acquisition allows for continued expansion of the Company's overall business and provides additional exposure to the growing sneaker and casual lifestyle segment of the market.
The Brand Portfolio segment recognized
$1.7 million
(
$1.3 million
on an after-tax basis, or
$0.03
per diluted share) in incremental cost of goods sold in 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition-related costs of
$0.3 million
(
$0.3 million
on an after-tax basis, or
$0.01
per diluted share) in 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 5 to the consolidated financial statements for additional information related to the acquisition costs.
The assets and liabilities of Blowfish Malibu were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company allocated the purchase price as of the acquisition date, July 6, 2018, as follows:
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
July 6, 2018
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,207
|
|
|
Receivables
|
|
4,612
|
|
|
Inventories
|
|
6,400
|
|
|
Prepaid expense and other current assets
|
|
317
|
|
|
Total current assets
|
|
13,536
|
|
|
Other assets
|
|
520
|
|
|
Goodwill
|
|
4,957
|
|
|
Intangible assets
|
|
17,600
|
|
|
Property and equipment
|
|
112
|
|
|
Total assets
|
|
$
|
36,725
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Trade accounts payable
|
|
$
|
2,915
|
|
|
Other accrued expenses
|
|
5,739
|
|
|
Total current liabilities
|
|
8,654
|
|
|
Other liabilities
|
|
77
|
|
|
Total liabilities
|
|
8,731
|
|
|
Net assets
|
|
$
|
27,994
|
|
The Company's allocation of the purchase price was based on certain preliminary valuations and analyses. During the fourth quarter of 2018, the Company recorded immaterial purchase price allocation adjustments.
The Company’s purchase price allocation required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted
valuation techniques, including discounted cash flows (Level 3 fair value measurements). A third-party valuation specialist assisted the Company with its fair value estimates for inventory, intangible assets other than goodwill and the mandatory purchase obligation. The Company used all available information to make its best estimate of fair values at the acquisition date. The Company's allocation of purchase price was considered substantially complete as of February 2, 2019.
Goodwill and intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized, which is deductible for tax purposes, is primarily attributable to synergies and an assembled workforce. Refer to Note 11 to the consolidated financial statements for additional information regarding goodwill and intangible assets.
During the period from acquisition through February 2, 2019, Blowfish Malibu contributed
$15.2 million
of net sales and reported a net loss of
$1.5 million
. The loss reflects
$1.7 million
of incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the acquisition costs and incremental interest expense associated with the transaction.
Acquisition of Vionic
On
October 18, 2018
, the Company entered into an Equity and Asset Purchase Agreement (the "Agreement") with the equity holders of Vionic Group LLC and Vionic International LLC, and VCG Holdings Ltd., a Cayman Islands corporation (collectively, "
Vionic
"), pursuant to which the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC and certain related intellectual property from VCG Holdings Ltd for
$360.0 million
plus adjustments for cash and indebtedness, as defined in the Agreement. The aggregate purchase price is estimated to be
$360.7 million
(or
$352.7 million
, net of
$8.0 million
of cash received). The purchase was funded with borrowings from the Company's revolving credit agreement. The operating results of Vionic since October 18, 2018 have been included in the Company's consolidated financial statements within the Brand Portfolio segment.
Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends. As pioneers in foot health with a global team of experts behind the dual gender brand, Vionic brings a fresh perspective to stylish, supportive footwear, offering a vast selection of active, casual and dress styles, sandals and slippers. The acquisition of Vionic allows the Company to continue to expand its portfolio of brands and gives it additional access to the growing contemporary comfort footwear category.
The Brand Portfolio segment recognized
$8.9 million
(
$6.6 million
on an after-tax basis, or
$0.15
per diluted share) in incremental cost of goods sold in 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition and integration-related costs of
$4.5 million
(
$3.3 million
on an after-tax basis, or
$0.08
per diluted share) in 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 5 to the consolidated financial statements for additional information related to these costs.
Purchase Price Allocation
The assets and liabilities of Vionic were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company has preliminarily allocated the purchase price as of the acquisition date, October 18, 2018, as follows:
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
October 18, 2018
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,024
|
|
|
Receivables
|
|
32,319
|
|
|
Inventories
|
|
59,439
|
|
|
Prepaid expense and other current assets
|
|
3,346
|
|
|
Total current assets
|
|
103,128
|
|
|
Goodwill
|
|
148,537
|
|
|
Intangible assets
|
|
144,700
|
|
|
Property and equipment
|
|
6,864
|
|
|
Total assets
|
|
$
|
403,229
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Trade accounts payable
|
|
$
|
22,753
|
|
|
Other accrued expenses
|
|
16,245
|
|
|
Total current liabilities
|
|
38,998
|
|
|
Other liabilities - capital lease obligation
|
|
3,541
|
|
|
Total liabilities
|
|
42,539
|
|
|
Net assets
|
|
$
|
360,690
|
|
The allocation of the purchase price was based on certain preliminary valuations and analyses. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. The Company’s purchase price allocation required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows (Level 3 fair value measurements). A third-party valuation specialist assisted the Company with its preliminary fair value estimates for inventory and intangible assets other than goodwill. The Company used all available information to make its best estimate of fair values at the acquisition date and is still in the process of finalizing the fair value of inventories at the acquisition date.
Goodwill and intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized, which is deductible for tax purposes, is primarily attributable to synergies and an assembled workforce. Refer to Note 11 to the consolidated financial statements for additional information regarding goodwill and intangible assets.
Pro Forma Information
The table below illustrates the unaudited pro forma impact on operating results as if the acquisition had been completed as of the beginning of 2017. Prior to the acquisition, Vionic’s fiscal calendar ended on December 31 of each year. For purposes of the financial information presented, the Company has combined the operating results of the relevant calendar year for Vionic with the Company’s actual fiscal year. For example, the information presented in the 2017 column includes Vionic’s operations for the months of January through December.
|
|
|
|
|
|
|
|
|
|
|
($ thousands, except per share amounts)
|
2018
|
|
2017
|
|
|
Net sales
|
$
|
2,972,990
|
|
$
|
2,941,617
|
|
|
Net earnings attributable to Caleres, Inc.
|
5,432
|
|
83,800
|
|
|
Basic earnings per common share attributable to Caleres, Inc. shareholders
|
$
|
0.12
|
|
$
|
1.95
|
|
|
Diluted earnings per common share attributable to Caleres, Inc. shareholders
|
$
|
0.12
|
|
$
|
1.94
|
|
For purposes of the pro forma disclosures, the pro forma adjustments primarily include the following:
|
|
|
|
•
|
The elimination of material costs from 2018 that were directly attributable to the acquisition and have no continuing impact on operating results, including:
|
|
|
|
|
◦
|
the non-cash cost of goods sold impact of
$8.9 million
related to the fair value adjustment to the acquired inventory, and related tax effects; and
|
|
|
|
|
◦
|
transaction costs of
$4.5 million
, and related tax effects.
|
|
|
|
|
•
|
Amortization of acquired intangibles of
$7.9 million
and
$8.0 million
for 2018 and 2017, respectively.
|
|
|
|
|
•
|
Estimated interest expense on additional borrowings under the Company's revolving credit agreement at the Company's current interest rate of
3.75%
through 2017 and a rise in the interest rate to
4.5%
in the third quarter of 2018. Assumes paydown of the revolving credit agreement to
$330.0 million
in the fourth quarter of 2017 and gradual paydown to
$270.0 million
during 2018.
|
|
|
|
|
•
|
Tax impact of the change in tax status of Vionic and the tax impact of the pro forma adjustments based on the estimated statutory tax rate in effect during the respective periods. The tax effect of the pro forma interest expense adjustments for borrowings under the Company's revolving credit agreement was calculated at
25.74%
for 2018 and at
38.9%
for 2017, reflecting the Company's effective tax rates. The tax effect of the other pro forma adjustments for 2018 and 2017 was calculated utilizing an estimated effective tax rate of
28.0%
and
40.0%
, respectively.
|
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the Company completed the acquisition on the date assumed, nor is it necessarily indicative of the results of operations that may be expected in future periods.
During the period from the acquisition date through February 2, 2019, Vionic contributed
$45.3 million
of net sales and reported a net loss of approximately
$8.3 million
, primarily associated with the incremental cost of goods sold of
$8.9 million
related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the Company's acquisition costs and any incremental interest expense associated with the transaction.
Acquisition of Allen Edmonds
On
December 13, 2016
, the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with Apollo Investors, LLC (the "Seller") and Apollo Buyer Holding Company, Inc. (the "Holding Company"), pursuant to which the Company acquired all outstanding capital stock of
Allen Edmonds
("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was
$259.9 million
, net of cash received of
$0.7 million
. The purchase was funded with cash and funds available under the Company's revolving credit agreement. The operating results of Allen Edmonds since December 13, 2016 have been included in the Company’s consolidated financial statements within the Brand Portfolio segment.
During 2018 and 2017, the Company incurred integration and reorganization costs totaling
$5.8 million
(
$4.3 million
on an after-tax basis, or
$0.10
per diluted share and
$4.0 million
(
$2.6 million
on an after-tax basis, or
$0.06
per diluted share), respectively, related to the men's business, as further discussed in Note 5 to the consolidated financial statements, which were recorded as a component of restructuring and other special charges, net. During 2016, the Company incurred acquisition and integration costs of
$5.8 million
(
$5.0 million
on an after-tax basis, or
$0.11
per diluted share). In addition, the Brand Portfolio segment recognized
$4.9 million
(
$3.0 million
on an after-tax basis, or
$0.07
per diluted share) in cost of goods sold in 2017 and
$1.2 million
(
$0.7 million
on an after-tax basis, or
$0.02
per diluted share) in 2016 related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of
July 29, 2017
.
As further discussed in Note 11 to the consolidated financial statements, the Company recorded non-cash impairment charges of
$98.0 million
for the impairment of goodwill and the indefinite-lived tradename of the Allen Edmonds business.
3. REVENUES
Impact of Adoption of ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
On February 4, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Adoption of the standard resulted in a cumulative-effect adjustment to retained earnings of
$4.8 million
as of February 4, 2018 related to loyalty points issued under the Company's loyalty program ("Rewards") within the Famous Footwear segment. Topic 606 requires a deferral of revenue associated with loyalty points using a relative stand-alone selling price method rather than the incremental cost approach the Company used previously. The standard also requires the reclassification of the returns reserve from receivables to other accrued expenses and the reclassification of the return asset from inventories to prepaid expenses and other current assets in the consolidated balance sheets. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.
The impact of the adoption of Topic 606 on the consolidated balance sheet as of
February 2, 2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
($ thousands)
|
|
As reported
|
|
Balances without adoption of Topic 606
|
|
Effect of change
Higher/(Lower)
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
191,722
|
|
|
$
|
183,107
|
|
|
$
|
8,615
|
|
|
Inventories, net
|
|
683,171
|
|
|
690,655
|
|
|
(7,484
|
)
|
|
Prepaid and other current assets
|
|
66,479
|
|
|
59,132
|
|
|
7,347
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Income taxes
|
|
6,388
|
|
|
8,195
|
|
|
(1,807
|
)
|
|
Other accrued expenses
|
|
137,057
|
|
|
120,233
|
|
|
16,824
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
Retained earnings
|
|
519,346
|
|
|
524,263
|
|
|
(4,917
|
)
|
Adoption of the standard also required various changes that impacted the statement of earnings (loss). These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings (loss) to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the consolidated statement of earnings (loss) for 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
($ thousands)
|
|
As reported
|
|
Balances without the adoption of Topic 606
|
|
Effect of change
(Lower)/Higher
|
|
|
|
|
|
|
|
|
|
Statement of Earnings (Loss)
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,834,846
|
|
|
$
|
2,837,738
|
|
|
$
|
(2,892
|
)
|
|
Cost of goods sold
|
|
1,678,502
|
|
|
1,678,363
|
|
|
139
|
|
|
Gross profit
|
|
1,156,344
|
|
|
1,159,375
|
|
|
(3,031
|
)
|
|
Selling and administrative expenses
|
|
1,041,765
|
|
|
1,044,440
|
|
|
(2,675
|
)
|
|
Impairment of goodwill and intangible assets
|
|
98,044
|
|
|
98,044
|
|
|
—
|
|
|
Restructuring and other special charges, net
|
|
16,134
|
|
|
16,134
|
|
|
—
|
|
|
Operating earnings
|
|
$
|
401
|
|
|
$
|
757
|
|
|
$
|
(356
|
)
|
The adoption of Topic 606 had an immaterial impact on the Company's net loss or loss per share for 2018.
Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
($ thousands)
|
|
Famous Footwear
|
|
Brand Portfolio
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail stores
|
|
$
|
1,469,857
|
|
|
$
|
166,903
|
|
|
$
|
1,636,760
|
|
|
Landed wholesale
|
|
—
|
|
|
762,994
|
|
|
762,994
|
|
|
First-cost wholesale
|
|
—
|
|
|
94,734
|
|
|
94,734
|
|
|
E-commerce
|
|
136,327
|
|
|
186,599
|
|
|
322,926
|
|
|
Licensing and royalty
|
|
—
|
|
|
16,501
|
|
|
16,501
|
|
|
Other
(1)
|
|
624
|
|
|
307
|
|
|
931
|
|
|
Net sales
|
|
$
|
1,606,808
|
|
|
$
|
1,228,038
|
|
|
$
|
2,834,846
|
|
|
(1)
Includes breakage revenue from unredeemed gift cards.
|
Retail stores
The majority of the Company's revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company carries a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Rewards program include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases at Famous Footwear. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The Company has elected to adopt the practical expedient that allows entities to disregard the effect of the time value of money between payment for and receipt of goods when the sale does not include a financing element. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. Upon adoption of Topic 606 as of February 4, 2018, the Rewards program liability, included in other accrued expenses on the consolidated balance sheets, increased
$6.4 million
, from
$8.1 million
to
$14.5 million
.
Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many landed customers arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.
First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.
E-commerce
The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores, sales to online-only retailers and e-commerce sales from our wholesale customers' websites that are fulfilled on a drop-ship basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.
Licensing and royalty
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company's symbolic intellectual property, and revenue is therefore recognized over the license term. For royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee's sales occur. For royalty contracts that have guaranteed minimums, revenue
for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.
Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.
Information about significant contract balances from contracts with customers is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
Customer allowances and discounts
|
$
|
25,090
|
|
|
$
|
20,259
|
|
|
Rewards program liability
|
14,637
|
|
|
8,130
|
|
|
Returns reserve
|
13,841
|
|
|
8,332
|
|
|
Gift card liability
|
5,426
|
|
|
5,509
|
|
Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during 2018, the Rewards program liability increased
$14.2 million
due to purchases an
d
$6.4 million
due to the adoption of Topic 606 and decrease
d
$14.1 million
d
ue to expirations and redemptions. The change in the balance of the returns reserve is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018 and the acquisition of Vionic in October 2018, as further described in Note 2 to the consolidated financial statements.
4. EARNINGS (LOSS) PER SHARE
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company.
The following table sets forth the computation of basic and diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $ thousands, except per share amounts)
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
NUMERATOR
|
|
|
|
|
|
|
Net (loss) earnings
|
$
|
(5,481
|
)
|
|
$
|
87,231
|
|
|
$
|
66,086
|
|
|
Net loss (earnings) attributable to noncontrolling interests
|
40
|
|
|
(31
|
)
|
|
(428
|
)
|
|
Net earnings allocated to participating securities
|
—
|
|
|
(2,384
|
)
|
|
(1,750
|
)
|
|
Net (loss) earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
|
$
|
(5,441
|
)
|
|
$
|
84,816
|
|
|
$
|
63,908
|
|
|
|
|
|
|
|
|
|
DENOMINATOR
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per common share attributable to Caleres, Inc. shareholders
|
41,756
|
|
|
41,801
|
|
|
42,026
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
179
|
|
|
155
|
|
|
Denominator for diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders
|
41,756
|
|
|
41,980
|
|
|
42,181
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share attributable to Caleres, Inc. shareholders
|
$
|
(0.13
|
)
|
|
$
|
2.03
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders
|
$
|
(0.13
|
)
|
|
$
|
2.02
|
|
|
$
|
1.52
|
|
Options to purchase
16,667
and
63,915
shares of common stock in
2017
and
2016
, respectively, were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be antidilutive. There were
no
options to purchase shares excluded from the denominator in
2018
. Due to the Company's net loss attributable to Caleres, Inc. in 2018, the denominator for diluted loss per common share attributed to Caleres, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Caleres, Inc. shareholders.
The Company repurchased
1,465,649
,
225,000
and
900,000
shares during the years ended
February 2, 2019
,
February 3, 2018
and
January 28, 2017
, respectively, under the 2011 and 2018 publicly announced share repurchase programs, which permits repurchases of up to
2.5 million
shares in each program, as further discussed in Item 5,
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
. As of
February 2, 2019
, the Company has repurchased a total of
2.7 million
shares at a cost of
$77.8 million
.
5. RESTRUCTURING AND OTHER INITIATIVES, NET
Acquisition, Integration and Reorganization of Men's Brands
On
December 13, 2016
, the Company acquired the outstanding capital stock of Allen Edmonds, as further discussed in Note 2 to the consolidated financial statements. During 2018 and 2017, the Company incurred integration and reorganization costs, primarily for professional fees and severance, totaling
$5.8 million
(
$4.3 million
on an after-tax basis, or
$0.10
per diluted share) and
$4.0 million
(
$2.6 million
on an after-tax basis, or
$0.06
per diluted share), respectively, related to the men's business. These charges are presented in restructuring and other special charges in the consolidated statements of earnings (loss). Of the
$5.8 million
of costs in 2018,
$5.4 million
is included in the Brand Portfolio segment and
$0.4 million
is reflected within the Other category. Of the
$4.0 million
of costs in 2017,
$2.5 million
is reflected within the Other category and
$1.5 million
is included in the Brand Portfolio segment. During 2016, the Company incurred acquisition and integration-related costs totaling
$5.8 million
(
$5.0 million
on an after-tax basis, or
$0.11
per diluted share), of which
$5.2 million
was reflected within the Other category and
$0.6 million
was reflected within the Brand Portfolio segment. As of February 2, 2019 and February 3, 2018, restructuring reserves of
$1.7 million
and
$0.2 million
, respectively, were included in other accrued expenses on the consolidated balance sheets.
Acquisition and Integration-Related Costs
Vionic
On October 18, 2018, the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC. During 2018, the Company incurred acquisition and integration-related costs associated with the acquisition totaling
$4.5 million
(
$3.3 million
on an after-tax basis, or
$0.08
per diluted share), primarily for professional fees, which are reflected within the Other category and are presented as restructuring and other special charges, net in the consolidated statements of earnings (loss). As of February 2, 2019, restructuring reserves of
$0.5 million
were included in other accrued expenses on the consolidated balance sheets. Refer to further discussion of the acquisition in Note 2 to the consolidated financial statements.
Blowfish Malibu
On July 6, 2018, the Company acquired a controlling interest in Blowfish Malibu, as further discussed in Note 2 to the consolidated financial statements. The Company incurred acquisition and integration-related costs associated with the acquisition of Blowfish Malibu of
$0.3 million
(
$0.3 million
on an after-tax basis, or
$0.01
per diluted share) during 2018, which are presented as restructuring and other special charges, net in the consolidated statements of earnings (loss) and reflected within the Other category. As of February 2, 2019, restructuring reserves of
$0.1 million
were included in other accrued expenses on the consolidated balance sheet.
Logistics Transition
During the fourth quarter of 2018, the Company incurred costs of
$4.5 million
(
$3.3 million
on an after-tax basis, or
$0.08
per diluted share) associated with the transition from a third-party operated warehouse in Chino, California to new company-operated Brand Portfolio warehouse facilities in California, as well as the transition of the Allen Edmonds distribution center in Port Washington, Wisconsin to the Company's existing retail distribution center in Lebanon, Tennessee. These charges are presented as restructuring and other special charges within the Brand Portfolio segment.
Brand and Business Exits
During 2018, the Company incurred costs of
$2.4 million
(
$1.8 million
on an after-tax basis, or
$0.04
per diluted share) related to the decision to exit the Diane von Furstenberg ("DVF") and George Brown Bilt ("GBB") brands. Of these charges within the Brand Portfolio segment,
$1.8 million
primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable
value and is presented in cost of goods sold on the statements of earnings (loss), while the remaining
$0.6 million
is for severance and other related costs and presented in restructuring and other special charges.
During 2016, the Company incurred costs of
$4.2 million
(
$3.3 million
on an after-tax basis, or
$0.08
per diluted share) related to the planned exit of its international e-commerce business and other restructuring. Approximately
$2.6 million
represents severance and closure costs and were presented within restructuring and other special charges, net within the Brand Portfolio segment. The remaining
$1.6 million
, which was included in cost of goods sold within the Brand Portfolio segment, represents incremental inventory markdowns required to reduce the value of inventory to net realizable value.
Retail Operations Restructuring
During
2018 and 2017, the Company incurred costs, primarily for severance expense, of
$0.4 million
(
$0.3 million
on an after-tax basis, or
$0.01
per diluted share) and
$0.9 million
(
$0.6 million
on an after-tax basis, or
$0.02
per diluted share), respectively, related to restructuring of its retail operations, which are presented in restructuring and other special charges in the consolidated statements of earnings (loss). All of the costs for 2018 are presented within the Famous Footwear segment. Of the
$0.9 million
in charges for 2017,
$0.6 million
is reflected within the Famous Footwear segment,
$0.2 million
is reflected within the Other category and
$0.1 million
is included in the Brand Portfolio segment.
Impairment of Note Receivable
In conjunction with the 2014 sale of Shoes.com, the Company received a
$7.5 million
face value secured convertible note ("convertible note") at closing. On
January 27, 2017
, Shoes.com announced the business had ceased operating and would be working with creditors to liquidate. In conjunction with the announcement, the Company recorded an impairment charge of
$8.0 million
(
$4.9 million
on an after-tax basis, or
$0.11
per diluted share), comprised of the fair value of the convertible note of
$7.3 million
, and associated accounts receivable of
$0.7 million
. Of the
$8.0 million
in costs recorded in restructuring and other special charges, net during 2016,
$7.3 million
was reflected within the Other category and
$0.7 million
was reflected within the Brand Portfolio segment.
Impairment of Investment in Nonconsolidated Affiliate
During 2016, the Company determined that its
$7.0 million
in a nonconsolidated affiliate that was accounted for using the cost method had an other-than-temporary decline in its fair value that exceeded its carrying value. The Company recorded an impairment charge in 2016 of
$7.0 million
($7.0 million
on an after-tax basis, or
$0.16
per diluted share) in restructuring and other special charges, net, which was included in the Other category.
6. RETIREMENT AND OTHER BENEFIT PLANS
The Company sponsors pension plans in both the United States and Canada. The Company’s domestic pension plans cover substantially all United States employees. Under the domestic plans, salaried, management and certain hourly employees’ pension benefits are based on a two-rate formula applied to each year of service. Participants receive the larger of the accrued benefit as of
December 31, 2015
(based on service commencing at the date of hire and a
35
-year service cap and an average annual salary for the
five
highest consecutive years during the last
10
year period) and the benefit calculated under the current plan provisions using pay and service from the date of hire. Generally, under the current plan provisions, a participant receives credit for
one
year of service for each
365
days of employment as an eligible employee with the Company commencing after the employee's date of participation in the plan, up to
30
years. A service credit of
0.825%
is applied to that portion of the average annual salary for the last
10
years that does not exceed “covered compensation,” which is the
35
-year average compensation subject to FICA tax based on a participant’s year of birth, and a service credit of
1.425%
is applied to that portion of the average salary during those
10
years that exceeds said level. During 2017, the Company announced changes to the domestic qualified pension plan that became effective in January 2019. Except for grandfathered employees and certain hourly associates in the Company's retail divisions, final average compensation, taxable covered compensation and credit service for purposes of determining accrued pension benefits were frozen as of December 31, 2018.
As discussed in Note 2 to the consolidated financial statements, the Company acquired Blowfish Malibu on July 6, 2018. In conjunction with the acquisition, the Company acquired pension assets and assumed pension benefit obligations. These pension assets and benefit obligations were remeasured to reflect the funded status as of the date of the acquisition, which resulted in
$2.4 million
of acquired pension assets and
$2.0 million
of assumed benefit obligations.
The Company’s Canadian pension plans cover certain employees based on plan specifications. Under the Canadian plans, employees’ pension benefits are based on the employee’s highest consecutive
five
years of compensation during the
10
years before retirement. The Company’s funding policy for all plans is to make the minimum annual contributions required by applicable regulations. The Company also maintains an unfunded Supplemental Executive Retirement Plan (“SERP”).
In addition to providing pension benefits, the Company sponsors unfunded defined benefit postretirement life insurance plans that cover both salaried and hourly employees who became eligible for benefits by January 1, 1995. The life insurance plans provide coverage of up to
$20 thousand
dollars for qualifying retired employees.
Benefit Obligations
The following table sets forth changes in benefit obligations, including all domestic and Canadian plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
|
Benefit obligation at beginning of year
|
|
$
|
356,469
|
|
$
|
340,278
|
|
|
$
|
1,594
|
|
$
|
1,666
|
|
|
Service cost
|
|
8,995
|
|
9,705
|
|
|
—
|
|
—
|
|
|
Interest cost
|
|
14,236
|
|
14,948
|
|
|
59
|
|
68
|
|
|
Plan participants’ contribution
|
|
10
|
|
11
|
|
|
6
|
|
7
|
|
|
Plan amendments
|
|
254
|
|
(2,985
|
)
|
|
—
|
|
—
|
|
|
Actuarial (gain) loss
|
|
(21,541
|
)
|
18,505
|
|
|
(22
|
)
|
40
|
|
|
Benefits paid
|
|
(14,352
|
)
|
(13,703
|
)
|
|
(176
|
)
|
(187
|
)
|
|
Settlement gain
|
|
(3,656
|
)
|
—
|
|
|
—
|
|
—
|
|
|
Curtailments
|
|
—
|
|
(10,534
|
)
|
|
—
|
|
—
|
|
|
Foreign exchange rate changes
|
|
(230
|
)
|
244
|
|
|
—
|
|
—
|
|
|
Acquisitions
|
|
2,007
|
|
—
|
|
|
—
|
|
—
|
|
|
Benefit obligation at end of year
|
|
$
|
342,192
|
|
$
|
356,469
|
|
|
$
|
1,461
|
|
$
|
1,594
|
|
The accumulated benefit obligation for the United States pension plans was
$335.1 million
and
$346.9 million
as of
February 2, 2019
and
February 3, 2018
, respectively. The accumulated benefit obligation for the Canadian pension plans was
$3.8 million
and
$4.2 million
as of
February 2, 2019
and
February 3, 2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Weighted–average assumptions used to determine benefit obligations, end of year
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
|
Discount rate
|
|
4.35
|
%
|
4.00
|
%
|
|
4.35
|
%
|
4.00
|
%
|
|
Rate of compensation increase
|
|
3.00
|
%
|
3.00
|
%
|
|
N/A
|
|
N/A
|
|
As of
February 2, 2019
, the Company is using the RP-2014 Bottom Quartile tables, projected using generational scale MP-2018, an updated projection scale issued by the Society of Actuaries in 2018, grading to
0.75%
by 2034, to estimate the plan liabilities. Actuarial gains, related to the change in mortality projection scales, reduced the projected benefit obligation by approximately
$1.1 million
as of February 2, 2019.
The Company made certain amendments to the domestic qualified pension plan and the SERP, including certain changes to eligibility and service period requirements and changes to the benefit formula, including the calculation of participants' final average compensation. These plan amendments, which became effective in either January 2015 or January 2016, increased the pension liability by
$3.0 million
as of
February 3, 2018
. The plan amendment to freeze accrued pension benefits for the majority of pension plan participants, which became effective in January 2019, resulted in a curtailment that decreased the pension liability by
$10.5 million
as of February 3, 2018 and increased the net periodic benefit income for 2017 by
$2.2 million
.
Plan Assets
Pension assets are managed in accordance with the prudent investor standards of the Employee Retirement Income Security Act (“ERISA”). The plan’s investment objective is to earn a competitive total return on assets, while also ensuring plan assets are adequately managed to provide for future pension obligations. This results in the protection of plan surplus and is accomplished by matching the duration of the projected benefit obligation using leveraged fixed income instruments and, while maintaining an equity commitment, managing an equity overlay strategy. The overlay strategy is intended to protect the managed equity portfolios against adverse stock market environments. The Company delegates investment management of the plan assets to specialists in each asset class and regularly monitors manager performance and compliance with investment guidelines. The Company’s overall investment strategy is to achieve a mix of approximately
97%
of investments for long-term growth and
3%
for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers. The target allocations for plan assets for
2018
were
70%
equities and
30%
debt securities. Allocations may change periodically based upon changing market conditions. Equities did not include any Company stock at
February 2, 2019
or
February 3, 2018
.
Assets of the Canadian pension plans, which total approximately
$4.2 million
at
February 2, 2019
, were invested
55%
in equity funds,
42%
in bond funds and
3%
in money market funds. The Canadian pension plans did not include any Company stock as of
February 2, 2019
or
February 3, 2018
.
A financial instrument’s level within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Refer to further discussion on the fair value hierarchy in Note 15 to the consolidated financial statements. Following is a description of the pension plan investments measured at fair value, including the general classification of such investments pursuant to the valuation hierarchy.
|
|
|
|
•
|
Cash and cash equivalents include cash collateral and margin as well as money market funds. The fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency and therefore are classified within Level 1 of the fair value hierarchy.
|
|
|
|
|
•
|
Investments in U.S. government securities, mutual funds, real estate investment trusts, exchange-traded funds, corporate stocks - common, preferred securities and S&P 500 Index put and call options (traded on security exchanges) are classified within Level 1 of the fair value hierarchy because the fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency. Certain U.S. government securities are not traded on an exchange and are based on observable inputs that can be corroborated. Therefore, these investments are classified within Level 2 of the fair value hierarchy. Certain preferred securities were offered in a private placement. The fair value of these investments is based on unobservable prices and therefore, they are classified within Level 3 of the fair value hierarchy.
|
|
|
|
|
•
|
The alternative investment fund, with a fair value of
$13.2 million
and
$13.4 million
as of
February 2, 2019
and
February 3, 2018
, respectively, is an investment in a pool of long-duration domestic investment grade assets. This investment is valued at fair value based on vendor-quoted pricing for which inputs are observable and can be corroborated and therefore, are classified within Level 2 of the fair value hierarchy.
|
|
|
|
|
•
|
The unallocated insurance contract is valued at contract value, which approximates fair value; therefore, this contract is classified within Level 3 of the fair value hierarchy. The unallocated insurance contract fair value was
$0.1 million
as of both
February 2, 2019
and
February 3, 2018
.
|
The fair values of the Company’s pension plan assets at
February 2, 2019
by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 2, 2019
|
|
($ thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,312
|
|
|
$
|
17,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
U.S. government securities
|
|
87,455
|
|
|
14,155
|
|
|
73,300
|
|
|
—
|
|
|
Mutual fund
|
|
31,966
|
|
|
31,966
|
|
|
—
|
|
|
—
|
|
|
Real estate investment trusts
|
|
232
|
|
|
232
|
|
|
—
|
|
|
—
|
|
|
Exchange-traded funds
|
|
65,464
|
|
|
65,464
|
|
|
—
|
|
|
—
|
|
|
Corporate stocks - common
|
|
169,721
|
|
|
169,721
|
|
|
—
|
|
|
—
|
|
|
Preferred securities
|
|
639
|
|
|
404
|
|
|
—
|
|
|
235
|
|
|
S&P 500 Index options
|
|
(4,572
|
)
|
|
(4,572
|
)
|
|
—
|
|
|
—
|
|
|
Alternative investment fund
|
|
13,160
|
|
|
—
|
|
|
13,160
|
|
|
—
|
|
|
Unallocated insurance contract
|
|
73
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
Total
|
|
$
|
381,450
|
|
|
$
|
294,682
|
|
|
$
|
86,460
|
|
|
$
|
308
|
|
The fair values of the Company’s pension plan assets at
February 3, 2018
by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 3, 2018
|
|
($ thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,998
|
|
|
$
|
8,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
U.S. government securities
|
|
98,027
|
|
|
98,027
|
|
|
—
|
|
|
—
|
|
|
Mutual fund
|
|
41,344
|
|
|
41,344
|
|
|
—
|
|
|
—
|
|
|
Real estate investment trusts
|
|
1,412
|
|
|
1,412
|
|
|
—
|
|
|
—
|
|
|
Exchange-traded funds
|
|
68,362
|
|
|
68,362
|
|
|
—
|
|
|
—
|
|
|
Corporate stocks - common
|
|
175,928
|
|
|
175,928
|
|
|
—
|
|
|
—
|
|
|
Preferred securities
|
|
703
|
|
|
703
|
|
|
—
|
|
|
—
|
|
|
S&P 500 Index options
|
|
(1,186
|
)
|
|
(1,186
|
)
|
|
—
|
|
|
—
|
|
|
Alternative investment fund
|
|
13,412
|
|
|
—
|
|
|
13,412
|
|
|
—
|
|
|
Unallocated insurance contract
|
|
81
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
Total
|
|
$
|
407,081
|
|
|
$
|
393,588
|
|
|
$
|
13,412
|
|
|
$
|
81
|
|
The following table sets forth changes in the fair value of plan assets, including all domestic and Canadian plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Fair value of plan assets at beginning of year
|
$
|
407,081
|
|
|
$
|
361,956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
(13,677
|
)
|
|
58,106
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
3,847
|
|
|
450
|
|
|
170
|
|
|
180
|
|
|
Plan participants’ contributions
|
10
|
|
|
11
|
|
|
6
|
|
|
7
|
|
|
Benefits paid
|
(14,352
|
)
|
|
(13,703
|
)
|
|
(176
|
)
|
|
(187
|
)
|
|
Settlement gain
|
(3,656
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign exchange rate changes
|
(243
|
)
|
|
261
|
|
|
—
|
|
|
—
|
|
|
Acquisitions
|
2,440
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets at end of year
|
$
|
381,450
|
|
|
$
|
407,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded Status
The over-funded status as of
February 2, 2019
and
February 3, 2018
for pension benefits was
$39.3 million
and
$50.6 million
, respectively. The under-funded status as of
February 2, 2019
and
February 3, 2018
for other postretirement benefits was
$1.5 million
and
$1.6 million
, respectively.
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Prepaid pension costs (noncurrent assets)
|
$
|
47,826
|
|
|
$
|
62,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued benefit liabilities (current liability)
|
(1,663
|
)
|
|
(3,988
|
)
|
|
(242
|
)
|
|
(238
|
)
|
|
Accrued benefit liabilities (noncurrent liability)
|
(6,905
|
)
|
|
(7,975
|
)
|
|
(1,219
|
)
|
|
(1,356
|
)
|
|
Net amount recognized at end of year
|
$
|
39,258
|
|
|
$
|
50,612
|
|
|
$
|
(1,461
|
)
|
|
$
|
(1,594
|
)
|
The projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation in excess of plan assets, which includes only the Company’s SERP, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation Exceeds the Fair Value of Plan Assets
|
|
Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
|
|
|
|
|
|
|
|
($ thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
End of Year
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
8,565
|
|
|
$
|
11,959
|
|
|
$
|
8,565
|
|
|
$
|
11,959
|
|
|
Accumulated benefit obligation
|
7,291
|
|
|
10,956
|
|
|
7,291
|
|
|
10,956
|
|
|
Fair value of plan assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The accumulated postretirement benefit obligation exceeds assets for all of the Company’s other postretirement benefit plans.
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit income at
February 2, 2019
and
February 3, 2018
, and the expected amortization of the
February 2, 2019
amounts as components of net periodic benefit income for fiscal year
2019
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Components of accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
34,879
|
|
|
$
|
22,424
|
|
|
$
|
(558
|
)
|
|
$
|
(634
|
)
|
|
Net prior service credit
|
(3,266
|
)
|
|
(4,618
|
)
|
|
—
|
|
|
—
|
|
|
|
$
|
31,613
|
|
|
$
|
17,806
|
|
|
$
|
(558
|
)
|
|
$
|
(634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
|
|
2019
|
|
|
|
|
2019
|
|
|
Expected amortization, net of tax:
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain)
|
|
|
$
|
3,624
|
|
|
|
|
$
|
(116
|
)
|
|
Amortization of net prior service credit
|
|
|
(1,486
|
)
|
|
|
|
—
|
|
|
|
|
|
$
|
2,138
|
|
|
|
|
$
|
(116
|
)
|
Net Periodic Benefit Income
Net periodic benefit income for
2018
,
2017
and
2016
for all domestic and Canadian plans included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
($ thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Service cost
|
|
$
|
8,995
|
|
$
|
9,705
|
|
$
|
8,288
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Interest cost
|
|
14,236
|
|
14,948
|
|
15,275
|
|
|
59
|
|
68
|
|
76
|
|
|
Expected return on assets
|
|
(29,091
|
)
|
(27,589
|
)
|
(28,949
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
4,122
|
|
4,315
|
|
272
|
|
|
(125
|
)
|
(145
|
)
|
(163
|
)
|
|
Prior service credit
|
|
(1,567
|
)
|
(1,780
|
)
|
(1,840
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Settlement cost
|
|
324
|
|
—
|
|
259
|
|
|
—
|
|
—
|
|
—
|
|
|
Cost of contractual termination benefits
|
|
—
|
|
—
|
|
77
|
|
|
—
|
|
—
|
|
—
|
|
|
Curtailments
|
|
—
|
|
(2,165
|
)
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
Total net periodic benefit income
|
|
$
|
(2,981
|
)
|
$
|
(2,566
|
)
|
$
|
(6,618
|
)
|
|
$
|
(66
|
)
|
$
|
(77
|
)
|
$
|
(87
|
)
|
As further discussed in Note 1 to the consolidated financial statements, as a result of the adoption of ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
on a retrospective basis during the first quarter of 2018, the non-service cost components of net periodic benefit income are included in other income, net in the consolidated statements of earnings (loss). Service cost is included in selling and administrative expenses.
Weighted-average assumptions used to determine net periodic benefit income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Discount rate
|
|
4.00
|
%
|
4.40
|
%
|
4.70
|
%
|
|
4.00
|
%
|
4.40
|
%
|
4.70
|
%
|
|
Rate of compensation increase
|
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Expected return on plan assets
|
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
The net actuarial loss (gain) subject to amortization is amortized on a straight-line basis over the average future service of active plan participants as of the measurement date. The prior service credit is amortized on a straight-line basis over the average future service of active plan participants benefiting under the plan at the time of each plan amendment.
The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class.
Expected Cash Flows
Information about expected cash flows for all pension and postretirement benefit plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
($ thousands)
|
|
Funded Plan
|
|
SERP
|
|
Total
|
|
|
Other Postretirement Benefits
|
|
|
Employer Contributions
|
|
|
|
|
|
|
|
2019 expected contributions to plan trusts
|
|
$
|
97
|
|
$
|
—
|
|
$
|
97
|
|
|
$
|
—
|
|
|
2019 expected contributions to plan participants
|
|
—
|
|
1,699
|
|
1,699
|
|
|
247
|
|
|
2019 refund of assets (e.g. surplus) to employer
|
|
133
|
|
—
|
|
133
|
|
|
—
|
|
|
Expected Benefit Payments
|
|
|
|
|
|
|
|
2019
|
|
$
|
13,511
|
|
$
|
1,699
|
|
$
|
15,210
|
|
|
$
|
247
|
|
|
2020
|
|
14,308
|
|
1,276
|
|
15,584
|
|
|
217
|
|
|
2021
|
|
15,151
|
|
1,564
|
|
16,715
|
|
|
189
|
|
|
2022
|
|
15,818
|
|
1,335
|
|
17,153
|
|
|
164
|
|
|
2023
|
|
16,406
|
|
1,831
|
|
18,237
|
|
|
141
|
|
|
2024 – 2028
|
|
91,183
|
|
1,704
|
|
92,887
|
|
|
441
|
|
Defined Contribution Plans
The Company’s domestic defined contribution 401(k) plan covers salaried and certain hourly employees. Company contributions represent a partial matching of employee contributions, generally up to a maximum of
3.5%
of the employee’s salary and bonus. In January 2018, the Company announced certain changes to the Plan that became effective on January 1, 2019. For eligible salaried employees, the Company will make a core contribution of
1.5%
and a matching contribution of up to
3.0%
of the employee's contributions. In addition, the Company has the discretion to contribute up to an additional
2.0%
profit-sharing benefit based on the Company’s performance. The Company’s expense for this plan was
$4.4 million
in
2018
,
$3.9 million
in
2017
, and
$3.5 million
in
2016
.
The Company’s Canadian defined contribution plan covers certain salaried and hourly employees. The Company makes contributions for all eligible employees, ranging from
3%
to
5%
of the employee’s salary. In addition, eligible employees may voluntarily contribute to the plan. The Company’s expense for this plan was
$0.2 million
in both
2018
and 2016 and
$0.3 million
in
2017
.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to
50%
of base salary and
100%
of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan of
$7.3 million
and
$6.4 million
as of
February 2, 2019
and
February 3, 2018
, respectively, are presented in employee compensation and benefits in the accompanying consolidated balance sheets. The assets held by the trust of
$7.3 million
as of
February 2, 2019
and
$6.4 million
as of
February 3, 2018
are classified as trading securities within prepaid expenses and other current assets in the accompanying consolidated balance sheets, with changes in the deferred compensation charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan, whereby deferred compensation amounts are valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the fair value (as determined based on the average of the high and low prices) of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The PSUs are payable in cash based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair value at fiscal quarter-end on or following termination of the director’s service. The liabilities of the plan of
$2.4 million
as of
February 2, 2019
and
$2.3 million
as of
February 3, 2018
are based on
70,123
and
69,527
outstanding PSUs, respectively, and are presented in other liabilities in the accompanying consolidated balance sheets. Gains and losses
resulting from changes in the fair value of the PSUs are charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
7. INCOME TAXES
On
December 22, 2017
, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code ("IRC"). Changes included, but were not limited to, a corporate tax rate decrease from
35%
to
21%
effective January 1, 2018, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. In December 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 permitted provisional amounts to be recorded until December 2018. In accordance with SAB 118, the Company recorded a provisional income tax benefit of
$0.3 million
in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional income tax benefit was comprised of a
$24.6 million
deferred tax benefit for the remeasurement of deferred tax assets and liabilities to the
21%
rate at which they were expected to reverse, partially offset by a one-time tax expense on deemed repatriation of
$22.9 million
and
$1.4 million
deferred tax expense recorded in connection with IRC section 162(m) and other provisions in the Act. Certain states and other international jurisdictions also enacted changes to their tax statutes. During the fourth quarter of 2018, the Company completed its analysis of the impacts of the Act, as well as changes to state and other jurisdictions, and recorded an aggregate net tax benefit of
$3.9 million
associated with adjustments related to income tax reform across all jurisdictions.
The Act also includes the Global Intangibles Low-Taxed Income ("GILTI") provision, a new minimum tax on global intangible low-taxed income, the Base Erosion Anti-Avoidance ("BEAT"), a new tax for certain payments to foreign related parties and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income from the sale, lease or license of goods and services abroad. The Company has elected to account for the GILTI provision as a period cost in the year the taxes are incurred. During 2018, the Company recorded an income tax provision of
$0.6 million
related to the GILTI and FDII provisions of the Act.
The components of (loss) earnings before income taxes consisted of domestic earnings before income taxes of
$40.0 million
,
$78.2 million
and
$60.9 million
in
2018
,
2017
and
2016
, respectively. The Company's foreign loss before income taxes was
$45.8 million
in 2018, reflecting the impairment of the tradename and goodwill for the Allen Edmonds business, and foreign earnings before incomes taxes were
$44.5 million
and
$36.4 million
in
2017
and
2016
, respectively.
The components of income tax (benefit) provision on (loss) earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Federal
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,953
|
|
|
$
|
31,102
|
|
|
$
|
10,577
|
|
|
Deferred
|
|
4,451
|
|
|
(10,358
|
)
|
|
14,164
|
|
|
|
|
6,404
|
|
|
20,744
|
|
|
24,741
|
|
|
State
|
|
|
|
|
|
|
|
Current
|
|
(718
|
)
|
|
7,691
|
|
|
3,844
|
|
|
Deferred
|
|
1,284
|
|
|
913
|
|
|
(1,157
|
)
|
|
|
|
566
|
|
|
8,604
|
|
|
2,687
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
(7,243
|
)
|
|
6,127
|
|
|
3,740
|
|
|
Total income tax (benefit) provision
|
|
$
|
(273
|
)
|
|
$
|
35,475
|
|
|
$
|
31,168
|
|
The differences between the income tax (benefit) provision reflected in the consolidated financial statements and the amounts calculated at the federal statutory income tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Income taxes at statutory rate
(1)
|
|
$
|
(1,208
|
)
|
|
$
|
41,376
|
|
|
$
|
34,039
|
|
|
State income taxes, net of federal tax benefit
|
|
2,519
|
|
|
3,579
|
|
|
3,149
|
|
|
Foreign earnings taxed at lower rates
|
|
(4,210
|
)
|
|
(8,072
|
)
|
|
(8,404
|
)
|
|
Excess tax benefit related to share-based plans
|
|
(347
|
)
|
|
(1,265
|
)
|
|
—
|
|
|
Income tax reform, net benefit
|
|
(3,891
|
)
|
|
(294
|
)
|
|
—
|
|
|
GILTI and FDII provisions
|
|
613
|
|
|
—
|
|
|
—
|
|
|
Non-deductibility of goodwill impairment
|
|
7,989
|
|
|
—
|
|
|
—
|
|
|
Impairment of foreign tradename taxed at higher rate
|
|
(2,400
|
)
|
|
—
|
|
|
—
|
|
|
Valuation allowance release on state loss carryforwards
|
|
—
|
|
|
(100
|
)
|
|
—
|
|
|
Valuation allowance release on other tax carryforwards
|
|
—
|
|
|
—
|
|
|
(179
|
)
|
|
Valuation allowance for impairment of investment in nonconsolidated affiliate
|
|
—
|
|
|
—
|
|
|
2,450
|
|
|
Non-deductibility of acquisition costs
|
|
46
|
|
|
—
|
|
|
1,280
|
|
|
Settlement of federal and state audit matters
|
|
—
|
|
|
—
|
|
|
(945
|
)
|
|
Other
|
|
616
|
|
|
251
|
|
|
(222
|
)
|
|
Total income tax (benefit) provision
|
|
$
|
(273
|
)
|
|
$
|
35,475
|
|
|
$
|
31,168
|
|
|
(1) The federal statutory tax rate was 21.0% in 2018, 33.7% in 2017, and 35.0% in 2016.
|
In
2018
, the Company's effective tax rate was impacted by several factors, including the non-deductibility of the Company's goodwill impairment charge of
$38.0 million
. In addition, discrete tax benefits totaling
$5.9 million
were recognized in 2018, primarily reflecting adjustments associated with the Act and related actions for state and other international jurisdictions (in aggregate, "income tax reform"). In addition, our foreign earnings are generally subject to lower tax rates, and therefore a higher mix of foreign earnings generally results in a lower consolidated effective tax rate. If these discrete tax benefits and the impairment charges had not been recognized, the Company's effective tax rate would have been
22.3%
, which is lower than prior periods due to the lower statutory tax rates associated with income tax reform.
The other category of income tax provision principally represents the impact of expenses that are not deductible or partially deductible for federal income tax purposes, and adjustments in the amounts of deferred tax assets that are anticipated to be realized. In 2018, the other category includes a
$2.1 million
provision related to the 162(m) provisions related to the non-deductibility of certain executive compensation, partially offset by a
$1.3 million
benefit related to the Company's return-to-provision settlement for the 2017 tax year.
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
Employee benefits, compensation and insurance
|
|
$
|
14,599
|
|
|
$
|
10,011
|
|
|
Accrued expenses
|
|
14,936
|
|
|
12,122
|
|
|
Postretirement and postemployment benefit plans
|
|
327
|
|
|
401
|
|
|
Deferred rent
|
|
6,524
|
|
|
6,438
|
|
|
Accounts receivable reserves
|
|
7,350
|
|
|
5,105
|
|
|
Net operating loss (“NOL”) carryforward/carryback
|
|
6,714
|
|
|
7,540
|
|
|
Capital loss carryforward
|
|
14
|
|
|
1,450
|
|
|
Inventory capitalization and inventory reserves
|
|
3,339
|
|
|
3,058
|
|
|
Impairment of investment in nonconsolidated affiliate
|
|
1,470
|
|
|
1,470
|
|
|
Other
|
|
1,831
|
|
|
1,234
|
|
|
Total deferred tax assets, before valuation allowance
|
|
57,104
|
|
|
48,829
|
|
|
Valuation allowance
|
|
(4,199
|
)
|
|
(5,763
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
52,905
|
|
|
$
|
43,066
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
Retirement plans
|
|
$
|
(10,212
|
)
|
|
$
|
(13,071
|
)
|
|
LIFO inventory valuation
|
|
(42,427
|
)
|
|
(42,032
|
)
|
|
Capitalized software
|
|
(3,879
|
)
|
|
(4,141
|
)
|
|
Depreciation
|
|
(10,662
|
)
|
|
(1,786
|
)
|
|
Intangible assets
|
|
(24,763
|
)
|
|
(28,831
|
)
|
|
Other
|
|
(1,115
|
)
|
|
(1,567
|
)
|
|
Total deferred tax liabilities
|
|
(93,058
|
)
|
|
(91,428
|
)
|
|
Net deferred tax liability
|
|
$
|
(40,153
|
)
|
|
$
|
(48,362
|
)
|
As of
February 2, 2019
, the Company had various state and international net operating loss carryforwards totaling
$6.7 million
, with expiration dates between
2019
and
2038
. The Company's state net operating loss carryforwards have tax values totaling
$6.3 million
, for which the Company has recorded a valuation allowance of
$2.7 million
. The remaining net operating loss will be carried forward to future tax years. The Company also has a valuation allowance of
$1.5 million
related to the impairment of an investment in a nonconsolidated affiliate, as further described in Note 5 to the consolidated financial statements.
As of
February 2, 2019
,
no
deferred taxes have been provided on the accumulated unremitted earnings of the Company’s foreign subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Act. The Company periodically evaluates its foreign investment opportunities and plans, as well as its foreign working capital needs, to determine the level of investment required and, accordingly, determines the level of foreign earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings. If the Company’s unremitted foreign earnings were not considered indefinitely reinvested as of
February 2, 2019
, an immaterial amount of additional deferred taxes would have been provided.
Uncertain Tax Positions
ASC 740,
Income Taxes
, establishes a single model to address accounting for uncertain tax positions. The standard clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The standard also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had no unrecognized tax benefits as of February 2, 2019 or February 3, 2018.
For federal purposes, the Company’s tax years
2015
to
2017
(fiscal years ending
January 30, 2016
,
January 28, 2017
and
February 3, 2018
) remain open to examination. The Company also files tax returns in various foreign jurisdictions and numerous states for which various tax years are subject to examination. The Company does not expect any significant changes in its liability for uncertain tax positions during the next 12 months.
8. BUSINESS SEGMENT INFORMATION
The Company's reportable segments are Famous Footwear and Brand Portfolio.
The Famous Footwear segment is comprised of Famous Footwear and Famous.com. Famous Footwear operated
992
stores at the end of
2018
, primarily selling branded footwear for the entire family.
The Brand Portfolio segment is comprised of our branded footwear, our branded retail stores and e-commerce sites associated with those brands. This segment sources and markets licensed, branded and private-label footwear primarily to national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs as well as Company-owned Famous Footwear, Allen Edmonds, Naturalizer and Sam Edelman stores, and e-commerce businesses. The Brand Portfolio segment included
146
branded retail stores in the United States,
82
branded retail stores in Canada, and
one
branded retail store in Italy at the end of
2018
.
The Company’s Famous Footwear and Brand Portfolio reportable segments are operating units that are managed separately. An operating segment’s performance is evaluated and resources are allocated based primarily on operating earnings (loss). Operating earnings (loss) represents gross profit, less selling and administrative expenses, impairment of goodwill and intangible assets and restructuring and other special charges, net. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements. Intersegment sales are generally recorded at a profit to the selling segment. All intersegment earnings related to inventory on hand at the purchasing segment are eliminated against the earnings of the selling segment.
Corporate assets, administrative expenses and other costs and recoveries that are not allocated to the operating units are reported in the Other category.
Following is a summary of certain key financial measures for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
Famous Footwear
|
|
Brand Portfolio
|
|
Other
|
|
Total
|
|
|
Fiscal 2018
|
|
|
|
|
|
External sales
|
$
|
1,606,808
|
|
$
|
1,228,038
|
|
$
|
—
|
|
$
|
2,834,846
|
|
|
Intersegment sales
|
—
|
|
85,513
|
|
—
|
|
85,513
|
|
|
Depreciation and amortization
|
28,816
|
|
20,768
|
|
13,113
|
|
62,697
|
|
|
Amortization of debt issuance costs and debt discount
|
—
|
|
—
|
|
2,210
|
|
2,210
|
|
|
Operating earnings (loss)
|
85,268
|
|
(42,206
|
)
|
(42,661
|
)
|
401
|
|
|
Segment assets
|
502,507
|
|
1,211,008
|
|
125,053
|
|
1,838,568
|
|
|
Purchases of property and equipment
|
17,552
|
|
41,993
|
|
2,938
|
|
62,483
|
|
|
Capitalized software
|
351
|
|
814
|
|
3,251
|
|
4,416
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
External sales
|
$
|
1,637,627
|
|
$
|
1,147,957
|
|
$
|
—
|
|
$
|
2,785,584
|
|
|
Intersegment sales
|
—
|
|
85,124
|
|
—
|
|
85,124
|
|
|
Depreciation and amortization
|
29,990
|
|
16,873
|
|
17,207
|
|
64,070
|
|
|
Amortization of debt issuance costs and debt discount
|
—
|
|
—
|
|
1,761
|
|
1,761
|
|
|
Operating earnings (loss)
|
92,230
|
|
80,212
|
|
(44,759
|
)
|
127,683
|
|
|
Segment assets
|
500,862
|
|
814,508
|
|
174,045
|
|
1,489,415
|
|
|
Purchases of property and equipment
|
22,920
|
|
15,865
|
|
5,935
|
|
44,720
|
|
|
Capitalized software
|
483
|
|
232
|
|
5,743
|
|
6,458
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
External sales
|
$
|
1,590,065
|
|
$
|
989,323
|
|
$
|
—
|
|
$
|
2,579,388
|
|
|
Intersegment sales
|
—
|
|
91,415
|
|
—
|
|
91,415
|
|
|
Depreciation and amortization
|
27,832
|
|
11,028
|
|
17,271
|
|
56,131
|
|
|
Amortization of debt issuance costs and debt discount
|
—
|
|
—
|
|
1,726
|
|
1,726
|
|
|
Operating earnings (loss)
|
83,735
|
|
76,248
|
|
(63,991
|
)
|
95,992
|
|
|
Segment assets
|
526,555
|
|
838,328
|
|
110,390
|
|
1,475,273
|
|
|
Purchases of property and equipment
|
37,697
|
|
8,828
|
|
3,998
|
|
50,523
|
|
|
Capitalized software
|
3,468
|
|
50
|
|
5,521
|
|
9,039
|
|
Following is a reconciliation of operating earnings to (loss) earnings before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Operating earnings
|
|
$
|
401
|
|
|
$
|
127,683
|
|
|
$
|
95,992
|
|
|
Interest expense, net
|
|
(18,277
|
)
|
|
(17,325
|
)
|
|
(13,731
|
)
|
|
Loss on early extinguishment of debt
|
|
(186
|
)
|
|
—
|
|
|
—
|
|
|
Other income, net
|
|
12,308
|
|
|
12,348
|
|
|
14,993
|
|
|
(Loss) earnings before income taxes
|
|
$
|
(5,754
|
)
|
|
$
|
122,706
|
|
|
$
|
97,254
|
|
For geographic purposes, the domestic operations include the Company's domestic retail operations, the wholesale distribution of licensed, branded and private-label footwear to a variety of retail customers, including the Famous Footwear and Brand Portfolio stores, as well as the Company's e-commerce businesses.
The Company’s foreign operations consist of wholesale and retail operations primarily in the Far East, Canada and Italy. The Far East operations include first-cost transactions, where footwear is sold at foreign ports to customers who then import the footwear into the United States and other countries.
A summary of the Company’s net sales and long-lived assets by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net Sales
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,656,928
|
|
|
$
|
2,603,725
|
|
|
$
|
2,385,111
|
|
|
Far East
|
|
93,883
|
|
|
98,287
|
|
|
134,430
|
|
|
Canada
|
|
63,354
|
|
|
75,764
|
|
|
59,847
|
|
|
Latin America and other
|
|
20,681
|
|
|
7,808
|
|
|
—
|
|
|
Total net sales
|
|
$
|
2,834,846
|
|
|
$
|
2,785,584
|
|
|
$
|
2,579,388
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
United States
|
|
$
|
771,705
|
|
|
$
|
450,323
|
|
|
$
|
617,211
|
|
|
Europe
|
|
79,320
|
|
|
177,755
|
|
|
286
|
|
|
Canada
|
|
8,256
|
|
|
10,878
|
|
|
10,141
|
|
|
Far East
|
|
1,560
|
|
|
1,686
|
|
|
1,814
|
|
|
Other
|
|
1,280
|
|
|
1,984
|
|
|
2,076
|
|
|
Total long-lived assets
|
|
$
|
862,121
|
|
|
$
|
642,626
|
|
|
$
|
631,528
|
|
Long-lived assets consisted primarily of property and equipment, intangible assets, goodwill, prepaid pension costs and other noncurrent assets.
9. INVENTORIES
The Company's net inventory balance was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
February 2, 2019
|
|
February 3, 2018
|
|
|
Raw materials
|
$
|
19,128
|
|
$
|
17,531
|
|
|
Work-in-process
|
745
|
|
689
|
|
|
Finished goods
|
663,298
|
|
551,159
|
|
|
Inventories, net
|
$
|
683,171
|
|
$
|
569,379
|
|
As of
February 2, 2019
and
February 3, 2018
, the Company's inventory balance included
$1.5
million and
$1.4 million
, respectively, of product subject to a consignment arrangement with wholesale customers.
10. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
Land and buildings
|
|
$
|
58,337
|
|
|
$
|
49,621
|
|
|
Leasehold improvements
|
|
233,604
|
|
|
233,034
|
|
|
Technology equipment
|
|
49,120
|
|
|
53,070
|
|
|
Machinery and equipment
|
|
69,628
|
|
|
67,778
|
|
|
Furniture and fixtures
|
|
134,259
|
|
|
131,884
|
|
|
Construction in progress
|
|
34,139
|
|
|
7,425
|
|
|
Property and equipment
|
|
579,087
|
|
|
542,812
|
|
|
Allowances for depreciation
|
|
(348,303
|
)
|
|
(330,013
|
)
|
|
Property and equipment, net
|
|
$
|
230,784
|
|
|
$
|
212,799
|
|
Total assets financed under capital leases as of February 2, 2019 were
$3.1 million
. There were no assets financed under capital leases as of February 3, 2018.
Useful lives of property and equipment are as follows:
|
|
|
|
|
|
Buildings
|
5-30 years
|
|
Leasehold improvements
|
5-20 years
|
|
Technology equipment
|
2-7 years
|
|
Machinery and equipment
|
4-20 years
|
|
Furniture and fixtures
|
3-10 years
|
The Company recorded charges for impairment within selling and administrative expenses of
$3.7 million
,
$3.8 million
and
$1.6 million
in
2018
,
2017
and
2016
, respectively, primarily for leasehold improvements and furniture and fixtures in the Company’s retail stores. Fair value was based on estimated future cash flows to be generated by retail stores, discounted at a market rate of interest.
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. The Company capitalized interest of
$0.2 million
in
2018
related to the new company-operated Brand Portfolio warehouse facilities in California, with
no
corresponding interest capitalized in 2017. The Company capitalized interest of
$1.4 million
in 2016 related to its expansion and modernization project at its Lebanon, Tennessee distribution center.
11. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
Intangible Assets
|
|
|
|
|
Famous Footwear
|
$
|
2,800
|
|
|
$
|
2,800
|
|
|
Brand Portfolio
|
388,288
|
|
|
285,988
|
|
|
Total intangible assets
|
391,088
|
|
|
288,788
|
|
|
Accumulated amortization
|
(83,722
|
)
|
|
(76,701
|
)
|
|
Total intangible assets, net
|
307,366
|
|
|
212,087
|
|
|
Goodwill
|
|
|
|
|
Brand Portfolio
|
242,531
|
|
|
127,081
|
|
|
Total goodwill
|
242,531
|
|
|
127,081
|
|
|
Goodwill and intangible assets, net
|
$
|
549,897
|
|
|
$
|
339,168
|
|
As further described in Note 2 to the consolidated financial statements, the Company acquired Vionic on October 18, 2018. The preliminary allocation of the purchase price resulted in estimated incremental intangible assets of
$144.7 million
, consisting of trademarks and customer relationships of
$112.4 million
and
$32.3 million
, respectively, and incremental goodwill of
$148.5 million
. The trademark is being amortized on a straight-line basis over its useful life of
20
years. The customer relationship intangible is being amortized on an accelerated basis over its useful life of approximately
16
years. As a result, the Company anticipates a higher level of amortization in future periods as compared to historical periods. In addition, the Company acquired Blowfish Malibu on July 6, 2018. The allocation of the purchase price resulted in incremental intangible assets of
$17.6 million
, consisting of trademarks and customer relationships of
$11.1 million
and
$6.5 million
, respectively, and incremental goodwill of
$5.0 million
.
The Company's intangible assets as of
February 2, 2019
and
February 3, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
|
|
February 2, 2019
|
|
|
|
Estimated Useful Lives
|
|
Original Cost
|
|
|
Accumulated Amortization
|
|
|
Impairment
|
|
|
Net Carrying Value
|
|
|
Trademarks
|
|
15-40 years
|
|
$
|
288,788
|
|
|
$
|
81,961
|
|
|
$
|
—
|
|
|
$
|
206,827
|
|
|
Trademarks
|
|
Indefinite
|
|
118,100
|
|
|
—
|
|
|
60,000
|
|
|
58,100
|
|
|
Customer relationships
|
|
15-16 years
|
|
44,200
|
|
|
1,761
|
|
|
—
|
|
|
42,439
|
|
|
|
|
|
|
$
|
451,088
|
|
|
$
|
83,722
|
|
|
$
|
60,000
|
|
|
$
|
307,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
|
|
Estimated Useful Lives
|
|
Original Cost
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Value
|
|
|
Trademarks
|
|
15-40 years
|
|
$
|
165,288
|
|
|
$
|
76,296
|
|
|
$
|
88,992
|
|
|
Trademarks
|
|
Indefinite
|
|
118,100
|
|
|
—
|
|
|
118,100
|
|
|
Customer relationships
|
|
15 years
|
|
5,400
|
|
|
405
|
|
|
4,995
|
|
|
|
|
|
|
$
|
288,788
|
|
|
$
|
76,701
|
|
|
$
|
212,087
|
|
Amortization expense related to intangible assets was
$7.0
million in
2018
,
$4.1
million in
2017
and
$3.7
million in
2016
. The Company estimates
$13.1 million
of amortization expense related to intangible assets in
2019
,
$12.8 million
in 2020,
$12.7 million
in 2021,
$12.5 million
in 2022 and
$12.2 million
in 2023.
Goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate it might be impaired, using either the qualitative assessment or a quantitative fair value-based test, as further discussed in Note 1 to the consolidated financial statements. As a result of its annual goodwill impairment testing, the Company determined that the carrying value of the Allen Edmonds reporting unit exceeded its fair value and recorded
$38.0 million
in impairment charges during
2018
. The fair value of the reporting unit was determined using a discounted cash flow analysis with a discount rate of
11%
. The Company recorded no impairment charges in
2017
and
2016
.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The indefinite-lived intangible asset impairment reviews resulted in
$60.0 million
in impairment charges in 2018 associated with the Allen Edmonds trademark. The fair value of the Allen Edmonds trademark was determined using a discounted cash flow analysis with a discount rate of
12%
.
The Company's total non-cash goodwill and indefinite-lived intangible asset impairment charges in 2018, reflected within the Brand Portfolio segment, were
$98.0 million
(
$83.0 million
on an after-tax basis, or
$1.93
per diluted share). The impairment charges were attributable to a decline in projected revenues for Allen Edmonds as a result of the decision for the brand's pricing structure to be less promotional in the future. In addition, rising interest rates and less favorable operating results in 2018 contributed to the need for the impairment charges.
12. LONG-TERM AND SHORT-TERM FINANCING ARRANGEMENTS
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. On
December 18, 2014
, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement ("the Former Credit Agreement"), which was further amended on
July 20, 2015
to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Former Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC. Allen Edmonds and Vionic were joined to the Agreement as guarantors on
December 13, 2016
and
October 31, 2018
, respectively. After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement. On
January 18, 2019
, the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") to extend the maturity date to
January 18, 2024
and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to
$600.0 million
to an aggregate amount of up
to
$500.0 million
, with the option to increase by up to
$250.0 million
. The Credit Amendment also reduces upfront and unused borrowing fees, provides for less restrictive covenants and offers more flexibility.
Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.
Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of
10.0%
of the lesser of the Loan Cap and
$40.0 million
for three consecutive business days or an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for
30
consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for
30
consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i)
10.0%
of the lesser of the Loan Cap and (ii)
$40.0 million
, and the fixed charge coverage ratio is less than
1.0
to
1.0
, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of
February 2, 2019
.
The maximum amount of borrowings under the Credit Agreement at the end of any month was
$350.0 million
and
$260.0
million in
2018
and
2017
, respectively. As discussed further in Note 2 to the consolidated financial statements, the Company utilized the Credit Agreement in October 2018 to fund the Vionic acquisition. The average daily borrowings during the year were
$103.2 million
and
$93.5 million
in
2018
and
2017
, respectively, and the weighted-average interest rates approximated
3.9%
and
2.5%
in
2018
and
2017
, respectively. At
February 2, 2019
, the Company had
$335.0 million
borrowings outstanding and
$10.5 million
in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was
$154.5 million
at
February 2, 2019
.
$200 Million Senior Notes
On
July 27, 2015
, the Company issued
$200.0 million
aggregate principal amount of
6.25%
Senior Notes due 2023 (the "Senior Notes").
The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the Senior Notes is payable on
February 15
and
August 15
of each year. The Senior Notes will mature on
August 15, 2023
. The Company may redeem all or a part of the Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Notes indenture), if redeemed during the 12-month period beginning on
August 15
of the years indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
Percentage
|
|
|
2019
|
103.125
|
%
|
|
2020
|
101.563
|
%
|
|
2021 and thereafter
|
100.000
|
%
|
If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the Senior Notes at a purchase price equal to
101%
of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase.
The Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of February 2, 2019, the Company was in compliance with all covenants and restrictions relating to the Senior Notes.
Loss on Early Extinguishment of Debt
During 2018, the Company incurred a loss on early extinguishment of debt of
$0.2
million on the early extinguishment of the Former Credit Agreement prior to maturity.
13. LEASES
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. The minimum lease terms for the Company’s retail stores generally range from
five
to
10 years
. Approximately
45%
of the retail store leases contain renewal options for varying periods. The term of the manufacturing facility lease is
eight years
. The terms of the leases for office facilities and distribution centers range from
10
to
15
years with renewal options of
five
to
20 years
.
At the time its retail facilities are initially leased, the Company often receives consideration from landlords for a portion of the cost of leasehold improvements necessary to open the store, which are recorded as a deferred rent obligation and amortized to income over the lease term as a reduction of rent expense. In addition to minimum rental payments, certain of the retail store leases require contingent payments based on sales levels. The Company is also required to pay real estate taxes, maintenance and insurance which can vary year by year, and are therefore not included in the minimum rent payments below. A majority of the Company’s retail operating leases contain provisions that allow it to modify amounts payable under the lease or terminate the lease in certain circumstances, such as experiencing actual sales volume below a defined threshold and/or co-tenancy provisions associated with the facility.
The following is a summary of rent expense for operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Minimum rent
|
|
$
|
171,410
|
|
|
$
|
171,980
|
|
|
$
|
160,806
|
|
|
Contingent rent
|
|
671
|
|
|
513
|
|
|
470
|
|
|
Sublease income
|
|
(428
|
)
|
|
(1,705
|
)
|
|
(1,665
|
)
|
|
Total
|
|
$
|
171,653
|
|
|
$
|
170,788
|
|
|
$
|
159,611
|
|
Future minimum rent payments under noncancelable operating leases with an initial term of one year or more at
February 2, 2019
were as follows:
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
|
|
|
2019
|
|
$
|
173,891
|
|
|
2020
|
|
151,157
|
|
|
2021
|
|
125,629
|
|
|
2022
|
|
102,488
|
|
|
2023
|
|
84,036
|
|
|
Thereafter
|
|
212,774
|
|
|
Total minimum operating lease payments
(1)
|
|
$
|
849,975
|
|
(1) Minimum operating lease payments have not been reduced by minimum sublease rental income of
$0.5 million
due in the future under noncancelable sublease agreements.
14. RISK MANAGEMENT AND DERIVATIVES
General Risk Management
The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. The financial institutions are located throughout the world and the Company’s policy is designed to limit exposure to any one institution or geographic region. The Company’s periodic evaluations of the relative credit standing of these financial institutions are considered in the Company’s investment strategy.
The Company’s Brand Portfolio segment sells to national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs in the United States, Canada and approximately
70
other countries. Receivables arising from these sales are not collateralized. However, a portion is covered by documentary letters of credit. Credit risk is affected by conditions or occurrences within the economy and the retail industry. The Company maintains an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and historical trends.
Derivatives
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign-currency-denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions.
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major international financial institutions and have varying maturities through
January 2020
. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses and intercompany charges, as well as collections and payments.
The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company’s consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss ("OCL") and reclassified to earnings in the period that the hedged transaction is recognized in earnings.
As of
February 2, 2019
and
February 3, 2018
, the Company had forward contracts maturing at various dates through
January 2020
and
February 2019
, respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. $ equivalent in thousands)
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
Financial Instruments
|
|
|
|
|
|
Euro
|
|
$
|
13,383
|
|
|
$
|
21,223
|
|
|
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
|
|
15,196
|
|
|
16,874
|
|
|
Chinese yuan
|
|
4,507
|
|
|
12,058
|
|
|
New Taiwanese dollars
|
|
461
|
|
|
596
|
|
|
Other currencies
|
|
382
|
|
|
415
|
|
|
Total financial instruments
|
|
$
|
33,929
|
|
|
$
|
51,166
|
|
The classification and fair values of derivative instruments designated as hedging instruments included within the consolidated balance sheets as of
February 2, 2019
and
February 3, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
Fair Value
|
|
|
Balance Sheet Location
|
Fair Value
|
|
|
Foreign exchange forwards contracts:
|
|
|
|
|
|
|
|
February 2, 2019
|
Prepaid expenses and other current assets
|
|
$
|
159
|
|
|
Other accrued expenses
|
|
$
|
745
|
|
|
February 3, 2018
|
Prepaid expenses and other current assets
|
|
$
|
1,540
|
|
|
Other accrued expenses
|
|
$
|
542
|
|
During
2018
and
2017
, the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of earnings (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Foreign exchange forward contracts:
Income Statement Classification
(Losses) Gains - Realized
|
|
Loss
Recognized in
OCI on
Derivatives
|
|
|
Loss Reclassified
from Accumulated
OCL into Earnings
|
|
|
(Loss) Gain
Recognized in
OCI on
Derivatives
|
|
|
Gain (Loss) Reclassified
from Accumulated
OCL into Earnings
|
|
|
Net sales
|
|
$
|
(55
|
)
|
|
$
|
(6
|
)
|
|
$
|
(25
|
)
|
|
$
|
30
|
|
|
Cost of goods sold
|
|
(1,004
|
)
|
|
(58
|
)
|
|
1,144
|
|
|
171
|
|
|
Selling and administrative expenses
|
|
(822
|
)
|
|
(90
|
)
|
|
1,011
|
|
|
157
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
All of the gains and losses currently included within accumulated other comprehensive loss associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 1 and Note 15 to the consolidated financial statements.
15. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows:
|
|
|
|
•
|
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
•
|
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
|
|
|
|
|
•
|
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Measurement of Fair Value
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value.
Money Market Funds
The Company has cash equivalents primarily consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company's capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan Assets and Liabilities
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to
50%
of base salary and
100%
of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s consolidated statements of earnings (loss). The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company were previously granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU payable in cash is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). Additional information related to RSUs for non-employee directors is disclosed in Note 17 to the consolidated financial statements.
Derivative Financial Instruments
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 1 and Note 14 to the consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July 2018. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the Purchase Agreement (Level 3). Accretion of the mandatory purchase obligation and any fair value adjustments are recorded as interest expense. From the acquisition date of July 6,
2018
through February 2, 2019, an immaterial amount of accretion was recorded on the mandatory purchase obligation. The earnings projections and discount rate utilized in the estimate of the fair value of the mandatory purchase obligation require management judgment and are the assumptions to which the fair value calculation is the most sensitive. Refer to further discussion of the mandatory purchase obligation in Note 2 to the consolidated financial statements.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at
February 2, 2019
and
February 3, 2018
. The Company did not have any transfers between Level 1, Level 2 or Level 3 during
2018
or
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
($ thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Asset (Liability)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2019
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market funds
|
|
$
|
4,582
|
|
|
$
|
4,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Non-qualified deferred compensation plan assets
|
|
7,270
|
|
|
7,270
|
|
|
—
|
|
|
—
|
|
|
Non-qualified deferred compensation plan liabilities
|
|
(7,270
|
)
|
|
(7,270
|
)
|
|
—
|
|
|
—
|
|
|
Deferred compensation plan liabilities for non-employee directors
|
|
(2,364
|
)
|
|
(2,364
|
)
|
|
—
|
|
|
—
|
|
|
Restricted stock units for non-employee directors
|
|
(4,419
|
)
|
|
(4,419
|
)
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments, net
|
|
(586
|
)
|
|
—
|
|
|
(586
|
)
|
|
—
|
|
|
Mandatory purchase obligation - Blowfish Malibu
|
|
(9,245
|
)
|
|
—
|
|
|
—
|
|
|
(9,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2018
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market funds
|
|
$
|
53,106
|
|
|
$
|
53,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Non-qualified deferred compensation plan assets
|
|
6,445
|
|
|
6,445
|
|
|
—
|
|
|
—
|
|
|
Non-qualified deferred compensation plan liabilities
|
|
(6,445
|
)
|
|
(6,445
|
)
|
|
—
|
|
|
—
|
|
|
Deferred compensation plan liabilities for non-employee directors
|
|
(2,289
|
)
|
|
(2,289
|
)
|
|
—
|
|
|
—
|
|
|
Restricted stock units for non-employee directors
|
|
(4,343
|
)
|
|
(4,343
|
)
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments, net
|
|
998
|
|
|
—
|
|
|
998
|
|
|
—
|
|
Impairment Charges
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820,
Fair Value Measurement
. Long-lived assets held and used with a carrying amount of
$99.0 million
,
$112.5 million
and
$99.4 million
in
2018
,
2017
and
2016
, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, by segment, which were included in selling and administrative expenses for the respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Long-Lived Asset Impairment Charges
|
|
|
|
|
|
|
|
Famous Footwear
|
|
$
|
800
|
|
|
$
|
677
|
|
|
$
|
211
|
|
|
Brand Portfolio
|
|
2,865
|
|
|
3,098
|
|
|
1,375
|
|
|
Total long-lived asset impairment charges
|
|
$
|
3,665
|
|
|
$
|
3,775
|
|
|
$
|
1,586
|
|
During 2016, the Company recognized an impairment charge of
$7.0 million
(
$7.0 million
on an after-tax basis, or
$0.16
per diluted share) related to its cost method investment in a nonconsolidated affiliate. The impairment charge is included in restructuring and other special charges in the Company's consolidated statements of earnings (loss). Refer to Note 5 to the consolidated financial statements for additional information.
The Company performed its annual impairment tests of indefinite-lived intangible assets, which involves estimating the fair value using significant unobservable inputs (Level 3). As a result of its annual impairment testing, the Company recorded
$60.0 million
in impairment charges in 2018 related to the Allen Edmonds trademark, as further discussed in Note 1 and Note 11 to the consolidated financial statements. The Company did not record any impairment charges on intangible assets during
2017
or
2016
.
During 2018, the Company performed its annual impairment test of goodwill by completing an assessment at the reporting unit level, which involved estimating the fair value of its reporting units using significant unobservable inputs (Level 3). The quantitative and qualitative assessments performed in 2018 resulted in an impairment charge of
$38.0 million
. The quantitative and qualitative assessments performed in 2017 and 2016, respectively, resulted in no impairment charges. Refer to Note 1 and Note 11 to the consolidated financial statements for additional information related to the goodwill impairment tests.
Fair Value of the Company’s Other Financial Instruments
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.
The carrying amounts and fair values of the Company’s other financial instruments subject to fair value disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
|
|
|
Carrying Value
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
Fair Value
|
|
|
($ thousands)
|
|
|
|
Borrowings under revolving credit agreement
|
|
$
|
335,000
|
|
|
|
$
|
335,000
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Long-term debt
|
|
197,932
|
|
|
|
205,500
|
|
|
197,472
|
|
|
|
210,000
|
|
|
Total debt
|
|
$
|
532,932
|
|
|
|
$
|
540,500
|
|
|
$
|
197,472
|
|
|
|
$
|
210,000
|
|
The fair value of the borrowings under revolving credit agreement approximates its carrying value due to its short-term nature (Level 1). The fair value of the Company's long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).
16. SHAREHOLDERS' EQUITY
Stock Repurchase Program
On
August 25, 2011
and
December 14, 2018
, the Board of Directors approved stock repurchase programs (“2011 Program” and "2018 Program", respectively) authorizing the repurchase of up to
2.5 million
shares in each program of the Company’s outstanding common stock. The Company can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase programs do not have an expiration date. Repurchases of common stock are limited under the Company’s debt agreements. During
2018
, the Company repurchased
1,223,500
shares under the 2011 Program. In total,
2.5 million
shares have been repurchased under the 2011 Program and there are
no
additional shares authorized to be repurchased. In addition, during
2018
, the Company repurchased
242,149
shares under the 2018 program. There are
2.3
million shares remaining that are authorized to be repurchased under the 2018 Program as of
February 2, 2019
.
Repurchases Related to Employee Share-based Awards
During
2018
,
2017
and
2016
, employees tendered
145,357
,
141,713
and
205,569
shares, respectively, related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share repurchases are not considered a part of the Company’s publicly announced stock repurchase programs.
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss, net of tax, by component for
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
Foreign Currency Translation
|
|
|
Pension and Other Postretirement Transactions
(1)
|
|
|
Derivative Transactions
(2)
|
|
|
Accumulated Other Comprehensive (Loss) Income
|
|
|
Balance January 30, 2016
|
$
|
(900
|
)
|
|
$
|
(5,356
|
)
|
|
$
|
392
|
|
|
$
|
(5,864
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
1,092
|
|
|
(23,888
|
)
|
|
(1,255
|
)
|
|
(24,051
|
)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
(1,395
|
)
|
|
506
|
|
|
(889
|
)
|
|
Tax provision (benefit)
|
—
|
|
|
555
|
|
|
(185
|
)
|
|
370
|
|
|
Net reclassifications
|
—
|
|
|
(840
|
)
|
|
321
|
|
|
(519
|
)
|
|
Other comprehensive income (loss)
|
1,092
|
|
|
(24,728
|
)
|
|
(934
|
)
|
|
(24,570
|
)
|
|
Balance January 28, 2017
|
$
|
192
|
|
|
$
|
(30,084
|
)
|
|
$
|
(542
|
)
|
|
$
|
(30,434
|
)
|
|
Other comprehensive income before reclassifications
|
1,043
|
|
|
18,627
|
|
|
1,337
|
|
|
21,007
|
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
225
|
|
|
(357
|
)
|
|
(132
|
)
|
|
Tax (benefit) provision
|
—
|
|
|
(58
|
)
|
|
121
|
|
|
63
|
|
|
Net reclassifications
|
—
|
|
|
167
|
|
|
(236
|
)
|
|
(69
|
)
|
|
Other comprehensive income
|
1,043
|
|
|
18,794
|
|
|
1,101
|
|
|
20,938
|
|
|
Reclassification of stranded tax effects
|
—
|
|
|
(5,882
|
)
|
|
208
|
|
|
(5,674
|
)
|
|
Balance February 3, 2018
|
$
|
1,235
|
|
|
$
|
(17,172
|
)
|
|
$
|
767
|
|
|
$
|
(15,170
|
)
|
|
Other comprehensive loss before reclassifications
|
(1,173
|
)
|
|
(15,927
|
)
|
|
(1,497
|
)
|
|
(18,597
|
)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
2,754
|
|
|
154
|
|
|
2,908
|
|
|
Tax provision (benefit)
|
—
|
|
|
(710
|
)
|
|
(32
|
)
|
|
(742
|
)
|
|
Net reclassifications
|
—
|
|
|
2,044
|
|
|
122
|
|
|
2,166
|
|
|
Other comprehensive loss
|
(1,173
|
)
|
|
(13,883
|
)
|
|
(1,375
|
)
|
|
(16,431
|
)
|
|
Balance February 2, 2019
|
$
|
62
|
|
|
$
|
(31,055
|
)
|
|
$
|
(608
|
)
|
|
$
|
(31,601
|
)
|
|
(1) Amounts reclassified are included in other income, net. Refer to Note 6 to the consolidated financial statements for additional information related to pension and other postretirement benefits.
|
|
(2) Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense. Refer to Note 14 and Note 15 to the consolidated financial statements for additional information related to derivative financial instruments.
|
17. SHARE-BASED COMPENSATION
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards, restricted stock units and stock options.
ASC 718,
Compensation – Stock Compensation
, and ASC 505,
Equity
, require companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees over the requisite service period for each award. In certain limited circumstances, the Company’s incentive compensation plan provides for accelerated vesting of the awards, such as in the event of a change in control, qualified retirement, death or disability. The Company has a policy of issuing treasury shares in satisfaction of share-based awards.
Share-based compensation expense of
$13.8 million
,
$11.3 million
and
$7.7 million
was recognized in
2018
,
2017
and
2016
, respectively, as a component of selling and administrative expenses. The following table details the share-based compensation expense by plan for
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Expense for share-based compensation plans, net of forfeitures:
|
|
|
|
|
|
|
|
Restricted stock
|
|
$
|
10,925
|
|
|
$
|
7,657
|
|
|
$
|
5,858
|
|
|
Stock performance awards
|
|
1,741
|
|
|
3,508
|
|
|
1,829
|
|
|
Restricted stock units
|
|
1,091
|
|
|
66
|
|
|
—
|
|
|
Stock options
|
|
48
|
|
|
67
|
|
|
38
|
|
|
Total share-based compensation expense
|
|
$
|
13,805
|
|
|
$
|
11,298
|
|
|
$
|
7,725
|
|
In addition to the share-based compensation expense above, the Company recognized cash-based expense related to performance share units and cash awards granted under the performance share plans. In
2017
and
2016
, the Company recognized
$0.1 million
and
$2.9 million
, respectively, in expense for cash-based awards under the performance share plans. During the first quarter of
2017
, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.
The Company issued
320,522
,
293,470
and
203,066
shares of common stock in
2018
,
2017
and
2016
, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement.
The Company recognized excess tax benefits related to restricted stock vestings and dividends, performance share award vestings and stock options exercised of
$0.3 million
,
$1.3 million
and
$2.3 million
in
2018
,
2017
and
2016
, respectively. In accordance with ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which the Company adopted on a prospective basis during the first quarter of 2017, the Company recognized these excess tax benefits within the income tax provision in
2017
and
2018
, as further discussed in Note 1 to the consolidated financial statements. The excess tax benefits recognized in
2016
were reflected as an increase to additional paid-in capital.
Restricted Stock
Under the Company’s incentive compensation plans, restricted stock of the Company may be granted at no cost to certain officers, key employees and directors. Plan participants are entitled to cash dividends and voting rights for their respective shares. The restricted stock awards limit the sale or transfer of these shares during the requisite service period. Expense for restricted stock grants is recognized on a straight-line basis separately for each vesting portion of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock grants is the quoted market price for the Company’s common stock on the date of grant.
The following table summarizes restricted stock activity for
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Nonvested
Restricted Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
Nonvested at January 30, 2016
|
|
1,262,449
|
|
|
$19.55
|
|
Granted
|
|
402,100
|
|
|
27.55
|
|
|
Vested
|
|
(428,750
|
)
|
|
9.29
|
|
|
Forfeited
|
|
(107,750
|
)
|
|
24.24
|
|
|
Nonvested at January 28, 2017
|
|
1,128,049
|
|
|
25.85
|
|
|
Granted
|
|
392,812
|
|
|
27.07
|
|
|
Vested
|
|
(267,585
|
)
|
|
17.55
|
|
|
Forfeited
|
|
(78,475
|
)
|
|
29.26
|
|
|
Nonvested at February 3, 2018
|
|
1,174,801
|
|
|
27.92
|
|
|
Granted
|
|
427,083
|
|
|
31.88
|
|
|
Vested
|
|
(291,061
|
)
|
|
28.18
|
|
|
Forfeited
|
|
(61,600
|
)
|
|
28.77
|
|
|
Nonvested at February 2, 2019
|
|
1,249,223
|
|
|
$29.17
|
Of the
427,083
restricted shares granted during
2018
,
3,642
shares have a cliff-vesting term of
one
year,
413,941
shares have a graded-vesting term of
three
years, and
9,500
shares have a cliff-vesting term of
four
years. Of the
392,812
restricted shares granted during
2017
,
4,492
shares have a cliff-vesting term of one year,
12,000
shares have a graded-vesting term of
four
years and
376,320
shares have a cliff-vesting term of
four
years. Of the
402,100
restricted shares granted during
2016
,
45,000
shares have a graded-vesting term of
four
years and
357,100
shares have a cliff-vesting term of
four
years.
The total grant date fair value of restricted stock awards vested during the years ended
February 2, 2019
,
February 3, 2018
and
January 28, 2017
, was
$8.2 million
,
$4.7 million
and
$4.0 million
, respectively. As of
February 2, 2019
, the total remaining unrecognized compensation cost related to nonvested restricted stock grants was
$16.4 million
, which will be amortized over the weighted-average remaining requisite service period of
1.9 years
.
Performance Share Awards
Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which vest over a
three
-year service period. At the end of the vesting period, the employee will have earned an amount of shares between
0%
and
200%
of the targeted award, depending on the achievement of specified financial goals for the service period. If the awards are granted in units, the employee will be given an amount of cash ranging from
0%
to
200%
of the equivalent market value of the targeted award.
Expense for performance share awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or cash to be awarded on a straight-line basis for each vesting portion of the share award. The fair value of the performance share awards granted in units is the unadjusted quoted market price for the Company’s common stock on the date of grant. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.
The following table summarizes performance share award activity for
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Nonvested Performance Share Awards
at Target Level
|
|
|
Number of
Nonvested
Performance Share Awards
at Maximum Level
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
|
Nonvested at January 30, 2016
|
|
307,524
|
|
|
615,048
|
|
|
$27.14
|
|
Granted
|
|
159,000
|
|
|
318,000
|
|
|
26.64
|
|
|
Vested
|
|
(56,175
|
)
|
|
(112,350
|
)
|
|
17.00
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(7,850
|
)
|
|
(15,700
|
)
|
|
27.14
|
|
|
Nonvested at January 28, 2017
|
|
402,499
|
|
|
804,998
|
|
|
28.36
|
|
|
Granted
|
|
169,500
|
|
|
339,000
|
|
|
26.90
|
|
|
Vested
|
|
(160,372
|
)
|
|
(320,744
|
)
|
|
29.16
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(12,000
|
)
|
|
(24,000
|
)
|
|
27.46
|
|
|
Nonvested at February 3, 2018
|
|
399,627
|
|
|
799,254
|
|
|
27.45
|
|
|
Granted
|
|
155,000
|
|
|
310,000
|
|
|
31.84
|
|
Vested
|
|
(80,627
|
)
|
|
(161,254
|
)
|
|
30.12
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(16,167
|
)
|
|
(32,334
|
)
|
|
26.83
|
|
Nonvested at February 2, 2019
|
|
457,833
|
|
|
915,666
|
|
|
$28.49
|
As of
February 2, 2019
, the remaining unrecognized compensation cost related to nonvested performance share awards was
$3.9 million
, which will be recognized over the weighted-average remaining service period of
1.6 years
.
Stock Options
Stock options are granted to employees at exercise prices equal to the quoted market price of the Company’s stock at the date of grant. Stock options generally vest over
four years
and have a term of
10 years
. Compensation cost for all stock options is recognized over the requisite service period for each award. No dividends are paid on unexercised options. Expense for stock options is recognized on a straight-line basis separately for each vesting portion of the stock option award. The Company granted
no
stock options during
2018
,
2017
or 2016.
The following table summarizes stock option activity for
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding at February 3, 2018
|
|
81,042
|
|
|
$13.53
|
|
Exercised
|
|
(32,375
|
)
|
|
7.94
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
Canceled or expired
|
|
(6,000
|
)
|
|
11.77
|
|
|
Outstanding at February 2, 2019
|
|
42,667
|
|
|
$18.01
|
|
Exercisable at February 2, 2019
|
|
26,000
|
|
|
$10.85
|
As of
February 2, 2019
, there are
16,667
of nonvested options with a weighted-average grant date fair value of
$12.81
per share.
Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units (“RSUs”) payable in cash or common stock at no cost to the non-employee director. The RSUs are subject to a vesting requirement (usually one year), earn dividend equivalent units and are payable in cash or common stock on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. Dividend equivalents are paid on outstanding RSUs at the same rate as dividends on the Company’s common stock, are automatically re-invested in additional RSUs and vest immediately as of the payment date for the dividend. Expense related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value immediately. Gains and losses resulting from changes in the fair value of the RSUs payable in cash subsequent to the vesting period and through the settlement date are reported in the Company’s consolidated statements of earnings (loss).
During the fourth quarter of 2017, the Company converted
210,302
of its director RSUs payable in cash with a value of
$6.3 million
to RSUs payable in common stock. Refer to Note 6 and Note 15 to the consolidated financial statements for information regarding the deferred compensation plan for non-em
ployee directors.
The following table summarizes restricted stock unit activity for the year ended
February 2, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Accrued
(1)
|
|
Nonvested RSUs
|
|
|
|
|
Number of
Vested RSUs
|
|
|
Number of
Nonvested RSUs
|
|
|
Total Number
of RSUs
(2)
|
|
|
Total Number
of RSUs
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
February 3, 2018
|
|
339,245
|
|
|
50,720
|
|
|
389,965
|
|
|
373,059
|
|
|
$24.29
|
|
Granted
(3)
|
|
2,914
|
|
|
33,092
|
|
|
36,006
|
|
|
25,080
|
|
|
34.32
|
|
Vested
|
|
45,234
|
|
|
(45,234
|
)
|
|
—
|
|
|
14,973
|
|
|
27.87
|
|
Settled
|
|
(5,914
|
)
|
|
—
|
|
|
(5,914
|
)
|
|
(5,914
|
)
|
|
35.67
|
|
February 2, 2019
|
|
381,479
|
|
|
38,578
|
|
|
420,057
|
|
|
407,198
|
|
|
$28.70
|
|
(1)
|
Accrued RSUs include all fully vested awards and a pro-rata portion of nonvested awards based on the elapsed portion of the vesting period.
|
|
(2)
|
Total number of RSUs as of February 2, 2019 includes 245,463 RSUs payable in shares and 174,594 RSUs payable in cash.
|
|
(3)
|
Granted RSUs include 3,228 RSUs resulting from dividend equivalents paid on outstanding RSUs, of which 2,914 related to outstanding vested RSUs and 314 to outstanding nonvested RSUs.
|
The following table summarizes RSUs granted, vested and settled during
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands, except per unit amounts)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Weighted-average grant date fair value of RSUs granted
(1)
|
|
$
|
34.23
|
|
|
$
|
27.93
|
|
|
$
|
21.95
|
|
|
Fair value of RSUs vested
|
|
$
|
1,340
|
|
|
$
|
1,349
|
|
|
$
|
1,086
|
|
|
RSUs settled
|
|
5,914
|
|
|
10,356
|
|
|
52,524
|
|
|
(1)
|
Includes dividend equivalents granted on outstanding RSUs, which vest immediately.
|
The following table details the RSU compensation expense and the related income tax benefit for
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Compensation expense
|
|
$
|
287
|
|
|
$
|
1,645
|
|
|
$
|
2,459
|
|
|
Income tax benefit
|
|
(74
|
)
|
|
(620
|
)
|
|
(956
|
)
|
|
Compensation expense, net of income tax benefit
|
|
$
|
213
|
|
|
$
|
1,025
|
|
|
$
|
1,503
|
|
The aggregate fair value of RSUs outstanding and currently vested at
February 2, 2019
is
$12.4 million
and
$11.3 million
, respectively. The liabilities associated with the accrued RSUs totaled
$4.4 million
and
$4.3 million
as of
February 2, 2019
and
February 3, 2018
, respectively.
18. COMMITMENTS AND CONTINGENCIES
Environmental Remediation
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.
As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy workplan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company has submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one.
The cumulative expenditures for both on-site and off-site remediation through
February 2, 2019
were
$30.5 million
. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at
February 2, 2019
is
$9.7 million
, of which
$8.9 million
is recorded within other liabilities and
$0.8 million
is recorded within other accrued expenses. Of the total
$9.7 million
reserve,
$5.0 million
is for off-site remediation and
$4.7 million
is for on-site remediation. The liability for the on-site remediation was discounted at
4.8%
. On an undiscounted basis, the on-site remediation liability would be
$14.0 million
as of
February 2, 2019
. The Company expects to spend approximately
$0.5 million
in the next year,
$0.1 million
in each of the following four years and
$13.1 million
in the aggregate thereafter related to the on-site remediation.
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.
19. FINANCIAL INFORMATION FOR THE COMPANY AND ITS SUBSIDIARIES
The Company's Senior Notes are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under the Credit Agreement, as further discussed in Note 12 to the consolidated financial statements. The following table presents the condensed consolidating financial information for each of Caleres, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. Guarantors are
100%
owned by the Parent. On December 13, 2016, Allen Edmonds was joined to the Credit Agreement as a guarantor and on October 31, 2018, Vionic was joined to the Credit Agreement as a guarantor. After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Credit Agreement.
The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
AS OF FEBRUARY 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
|
Guarantors
|
|
|
|
Eliminations
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2
|
|
|
$
|
9,148
|
|
|
$
|
21,050
|
|
|
$
|
—
|
|
|
$
|
30,200
|
|
|
Receivables, net
|
130,684
|
|
|
32,319
|
|
|
28,719
|
|
|
—
|
|
|
191,722
|
|
|
Inventories, net
|
175,697
|
|
|
470,610
|
|
|
36,864
|
|
|
—
|
|
|
683,171
|
|
|
Prepaid expenses and other current assets
|
31,195
|
|
|
32,556
|
|
|
7,603
|
|
|
—
|
|
|
71,354
|
|
|
Intercompany receivable - current
|
190
|
|
|
42
|
|
|
15,279
|
|
|
(15,511
|
)
|
|
—
|
|
|
Total current assets
|
337,768
|
|
|
544,675
|
|
|
109,515
|
|
|
(15,511
|
)
|
|
976,447
|
|
|
Property and equipment, net
|
62,608
|
|
|
157,270
|
|
|
10,906
|
|
|
—
|
|
|
230,784
|
|
|
Goodwill and intangible assets, net
|
108,884
|
|
|
331,810
|
|
|
109,203
|
|
|
—
|
|
|
549,897
|
|
|
Other assets
|
68,707
|
|
|
11,824
|
|
|
909
|
|
|
—
|
|
|
81,440
|
|
|
Investment in subsidiaries
|
1,499,209
|
|
|
—
|
|
|
(24,838
|
)
|
|
(1,474,371
|
)
|
|
—
|
|
|
Intercompany receivable - noncurrent
|
597,515
|
|
|
578,821
|
|
|
762,281
|
|
|
(1,938,617
|
)
|
|
—
|
|
|
Total assets
|
$
|
2,674,691
|
|
|
$
|
1,624,400
|
|
|
$
|
967,976
|
|
|
$
|
(3,428,499
|
)
|
|
$
|
1,838,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
$
|
335,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
335,000
|
|
|
Trade accounts payable
|
146,400
|
|
|
130,670
|
|
|
39,228
|
|
|
—
|
|
|
316,298
|
|
|
Other accrued expenses
|
95,498
|
|
|
86,015
|
|
|
20,525
|
|
|
—
|
|
|
202,038
|
|
|
Intercompany payable - current
|
10,781
|
|
|
—
|
|
|
4,730
|
|
|
(15,511
|
)
|
|
—
|
|
|
Total current liabilities
|
587,679
|
|
|
216,685
|
|
|
64,483
|
|
|
(15,511
|
)
|
|
853,336
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
197,932
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
197,932
|
|
|
Other liabilities
|
105,689
|
|
|
41,149
|
|
|
5,027
|
|
|
—
|
|
|
151,865
|
|
|
Intercompany payable - noncurrent
|
1,149,338
|
|
|
115,114
|
|
|
674,165
|
|
|
(1,938,617
|
)
|
|
—
|
|
|
Total other liabilities
|
1,452,959
|
|
|
156,263
|
|
|
679,192
|
|
|
(1,938,617
|
)
|
|
349,797
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Caleres, Inc. shareholders’ equity
|
634,053
|
|
|
1,251,452
|
|
|
222,919
|
|
|
(1,474,371
|
)
|
|
634,053
|
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
1,382
|
|
|
—
|
|
|
1,382
|
|
|
Total equity
|
634,053
|
|
|
1,251,452
|
|
|
224,301
|
|
|
(1,474,371
|
)
|
|
635,435
|
|
|
Total liabilities and equity
|
$
|
2,674,691
|
|
|
$
|
1,624,400
|
|
|
$
|
967,976
|
|
|
$
|
(3,428,499
|
)
|
|
$
|
1,838,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net sales
|
$
|
888,234
|
|
|
$
|
1,975,219
|
|
|
$
|
237,607
|
|
|
$
|
(266,214
|
)
|
|
$
|
2,834,846
|
|
|
Cost of goods sold
|
619,120
|
|
|
1,157,558
|
|
|
124,037
|
|
|
(222,213
|
)
|
|
1,678,502
|
|
|
Gross profit
|
269,114
|
|
|
817,661
|
|
|
113,570
|
|
|
(44,001
|
)
|
|
1,156,344
|
|
|
Selling and administrative expenses
|
267,584
|
|
|
760,754
|
|
|
57,428
|
|
|
(44,001
|
)
|
|
1,041,765
|
|
|
Impairment of goodwill and intangible assets
|
—
|
|
|
—
|
|
|
98,044
|
|
|
—
|
|
|
98,044
|
|
|
Restructuring and other special charges, net
|
9,734
|
|
|
6,400
|
|
|
—
|
|
|
—
|
|
|
16,134
|
|
|
Operating (loss) earnings
|
(8,204
|
)
|
|
50,507
|
|
|
(41,902
|
)
|
|
—
|
|
|
401
|
|
|
Interest (expense) income
|
(19,048
|
)
|
|
(25
|
)
|
|
796
|
|
|
—
|
|
|
(18,277
|
)
|
|
Loss on early extinguishment of debt
|
(186
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(186
|
)
|
|
Other income (expense)
|
12,408
|
|
|
—
|
|
|
(100
|
)
|
|
—
|
|
|
12,308
|
|
|
Intercompany interest income (expense)
|
11,436
|
|
|
(11,494
|
)
|
|
58
|
|
|
—
|
|
|
—
|
|
|
(Loss) earnings before income taxes
|
(3,594
|
)
|
|
38,988
|
|
|
(41,148
|
)
|
|
—
|
|
|
(5,754
|
)
|
|
Income tax benefit (provision)
|
1,687
|
|
|
(7,719
|
)
|
|
6,305
|
|
|
—
|
|
|
273
|
|
|
Equity in loss of subsidiaries, net of tax
|
(3,534
|
)
|
|
—
|
|
|
(1,275
|
)
|
|
4,809
|
|
|
—
|
|
|
Net (loss) earnings
|
(5,441
|
)
|
|
31,269
|
|
|
(36,118
|
)
|
|
4,809
|
|
|
(5,481
|
)
|
|
Less: Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
—
|
|
|
(40
|
)
|
|
Net (loss) earnings attributable to Caleres, Inc.
|
$
|
(5,441
|
)
|
|
$
|
31,269
|
|
|
$
|
(36,078
|
)
|
|
$
|
4,809
|
|
|
$
|
(5,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net (loss) earnings
|
$
|
(5,441
|
)
|
|
$
|
31,269
|
|
|
$
|
(36,118
|
)
|
|
$
|
4,809
|
|
|
$
|
(5,481
|
)
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
(1,224
|
)
|
|
—
|
|
|
(1,224
|
)
|
|
Pension and other postretirement benefits adjustments
|
(13,663
|
)
|
|
—
|
|
|
(220
|
)
|
|
—
|
|
|
(13,883
|
)
|
|
Derivative financial instruments
|
(1,967
|
)
|
|
(38
|
)
|
|
630
|
|
|
—
|
|
|
(1,375
|
)
|
|
Other comprehensive loss from investment in subsidiaries
|
(801
|
)
|
|
—
|
|
|
—
|
|
|
801
|
|
|
—
|
|
|
Other comprehensive loss, net of tax
|
(16,431
|
)
|
|
(38
|
)
|
|
(814
|
)
|
|
801
|
|
|
(16,482
|
)
|
|
Comprehensive (loss) income
|
(21,872
|
)
|
|
31,231
|
|
|
(36,932
|
)
|
|
5,610
|
|
|
(21,963
|
)
|
|
Comprehensive loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(91
|
)
|
|
—
|
|
|
(91
|
)
|
|
Comprehensive (loss) income attributable to Caleres, Inc.
|
$
|
(21,872
|
)
|
|
$
|
31,231
|
|
|
$
|
(36,841
|
)
|
|
$
|
5,610
|
|
|
$
|
(21,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net cash provided by operating activities
|
$
|
21,220
|
|
|
$
|
84,546
|
|
|
$
|
23,823
|
|
|
$
|
—
|
|
|
$
|
129,589
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(34,583
|
)
|
|
(25,871
|
)
|
|
(2,029
|
)
|
|
—
|
|
|
(62,483
|
)
|
|
Capitalized software
|
(3,962
|
)
|
|
(454
|
)
|
|
—
|
|
|
—
|
|
|
(4,416
|
)
|
|
Acquisition of Blowfish Malibu, net of cash received
|
(16,792
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,792
|
)
|
|
Acquisition of Vionic, net of cash received
|
(352,666
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(352,666
|
)
|
|
Intercompany investing
|
(137
|
)
|
|
137
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net cash (used for) provided by investing activities
|
(408,140
|
)
|
|
(26,188
|
)
|
|
(2,029
|
)
|
|
—
|
|
|
(436,357
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
360,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
360,000
|
|
|
Repayments under revolving credit agreement
|
(25,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,000
|
)
|
|
Repayments of capital lease obligation
|
—
|
|
|
(406
|
)
|
|
—
|
|
|
—
|
|
|
(406
|
)
|
|
Dividends paid
|
(11,983
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,983
|
)
|
|
Debt issuance costs
|
(1,298
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,298
|
)
|
|
Acquisition of treasury stock
|
(43,771
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,771
|
)
|
|
Issuance of common stock under share-based plans, net
|
(4,372
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,372
|
)
|
|
Intercompany financing
|
87,257
|
|
|
(48,804
|
)
|
|
(38,453
|
)
|
|
—
|
|
|
—
|
|
|
Net cash (used for) provided by financing activities
|
360,833
|
|
|
(49,210
|
)
|
|
(38,453
|
)
|
|
—
|
|
|
273,170
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(249
|
)
|
|
—
|
|
|
(249
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
(26,087
|
)
|
|
9,148
|
|
|
(16,908
|
)
|
|
—
|
|
|
(33,847
|
)
|
|
Cash and cash equivalents at beginning of year
|
26,089
|
|
|
—
|
|
|
37,958
|
|
|
—
|
|
|
64,047
|
|
|
Cash and cash equivalents at end of year
|
$
|
2
|
|
|
$
|
9,148
|
|
|
$
|
21,050
|
|
|
$
|
—
|
|
|
$
|
30,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
AS OF FEBRUARY 3, 2018
|
|
|
|
|
|
|
Non- Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
26,089
|
|
|
$
|
—
|
|
|
$
|
37,958
|
|
|
$
|
—
|
|
|
$
|
64,047
|
|
|
Receivables, net
|
124,957
|
|
|
3,663
|
|
|
23,993
|
|
|
—
|
|
|
152,613
|
|
|
Inventories, net
|
146,068
|
|
|
394,438
|
|
|
28,873
|
|
|
—
|
|
|
569,379
|
|
|
Prepaid expenses and other current assets
|
26,284
|
|
|
30,456
|
|
|
8,394
|
|
|
(4,384
|
)
|
|
60,750
|
|
|
Intercompany receivable - current
|
521
|
|
|
74
|
|
|
9,250
|
|
|
(9,845
|
)
|
|
—
|
|
|
Total current assets
|
323,919
|
|
|
428,631
|
|
|
108,468
|
|
|
(14,229
|
)
|
|
846,789
|
|
|
Property and equipment, net
|
35,474
|
|
|
165,227
|
|
|
12,098
|
|
|
—
|
|
|
212,799
|
|
|
Goodwill and intangible assets, net
|
111,108
|
|
|
40,937
|
|
|
187,123
|
|
|
—
|
|
|
339,168
|
|
|
Other assets
|
76,317
|
|
|
13,610
|
|
|
732
|
|
|
—
|
|
|
90,659
|
|
|
Investment in subsidiaries
|
1,329,428
|
|
|
—
|
|
|
(23,565
|
)
|
|
(1,305,863
|
)
|
|
—
|
|
|
Intercompany receivable - noncurrent
|
774,588
|
|
|
520,362
|
|
|
704,810
|
|
|
(1,999,760
|
)
|
|
—
|
|
|
Total assets
|
$
|
2,650,834
|
|
|
$
|
1,168,767
|
|
|
$
|
989,666
|
|
|
$
|
(3,319,852
|
)
|
|
$
|
1,489,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
136,797
|
|
|
102,420
|
|
|
33,745
|
|
|
—
|
|
|
272,962
|
|
|
Other accrued expenses
|
65,817
|
|
|
74,006
|
|
|
21,758
|
|
|
(4,384
|
)
|
|
157,197
|
|
|
Intercompany payable - current
|
5,524
|
|
|
—
|
|
|
4,321
|
|
|
(9,845
|
)
|
|
—
|
|
|
Total current liabilities
|
208,138
|
|
|
176,426
|
|
|
59,824
|
|
|
(14,229
|
)
|
|
430,159
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
197,472
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
197,472
|
|
|
Other liabilities
|
101,784
|
|
|
35,574
|
|
|
5,464
|
|
|
—
|
|
|
142,822
|
|
|
Intercompany payable - noncurrent
|
1,425,951
|
|
|
98,610
|
|
|
475,199
|
|
|
(1,999,760
|
)
|
|
—
|
|
|
Total other liabilities
|
1,725,207
|
|
|
134,184
|
|
|
480,663
|
|
|
(1,999,760
|
)
|
|
340,294
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
Caleres, Inc. shareholders’ equity
|
717,489
|
|
|
858,157
|
|
|
447,706
|
|
|
(1,305,863
|
)
|
|
717,489
|
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
1,473
|
|
|
—
|
|
|
1,473
|
|
|
Total equity
|
717,489
|
|
|
858,157
|
|
|
449,179
|
|
|
(1,305,863
|
)
|
|
718,962
|
|
|
Total liabilities and equity
|
$
|
2,650,834
|
|
|
$
|
1,168,767
|
|
|
$
|
989,666
|
|
|
$
|
(3,319,852
|
)
|
|
$
|
1,489,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2018
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net sales
|
$
|
837,849
|
|
|
$
|
1,935,265
|
|
|
$
|
211,815
|
|
|
$
|
(199,345
|
)
|
|
$
|
2,785,584
|
|
|
Cost of goods sold
|
580,038
|
|
|
1,090,354
|
|
|
109,104
|
|
|
(162,561
|
)
|
|
1,616,935
|
|
|
Gross profit
|
257,811
|
|
|
844,911
|
|
|
102,711
|
|
|
(36,784
|
)
|
|
1,168,649
|
|
|
Selling and administrative expenses
|
246,208
|
|
|
771,027
|
|
|
55,600
|
|
|
(36,784
|
)
|
|
1,036,051
|
|
|
Restructuring and other special charges, net
|
3,942
|
|
|
756
|
|
|
217
|
|
|
—
|
|
|
4,915
|
|
|
Operating earnings
|
7,661
|
|
|
73,128
|
|
|
46,894
|
|
|
—
|
|
|
127,683
|
|
|
Interest (expense) income
|
(17,743
|
)
|
|
(14
|
)
|
|
432
|
|
|
—
|
|
|
(17,325
|
)
|
|
Other income
|
12,348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,348
|
|
|
Intercompany interest income (expense)
|
8,354
|
|
|
(8,813
|
)
|
|
459
|
|
|
—
|
|
|
—
|
|
|
Earnings before income taxes
|
10,620
|
|
|
64,301
|
|
|
47,785
|
|
|
—
|
|
|
122,706
|
|
|
Income tax provision
|
(24,963
|
)
|
|
(175
|
)
|
|
(10,337
|
)
|
|
—
|
|
|
(35,475
|
)
|
|
Equity in earnings (loss) of subsidiaries, net of tax
|
101,543
|
|
|
—
|
|
|
(1,619
|
)
|
|
(99,924
|
)
|
|
—
|
|
|
Net earnings
|
87,200
|
|
|
64,126
|
|
|
35,829
|
|
|
(99,924
|
)
|
|
87,231
|
|
|
Less: Net earnings attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
Net earnings attributable to Caleres, Inc.
|
$
|
87,200
|
|
|
$
|
64,126
|
|
|
$
|
35,798
|
|
|
$
|
(99,924
|
)
|
|
$
|
87,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2018
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net earnings
|
$
|
87,200
|
|
|
$
|
64,126
|
|
|
$
|
35,829
|
|
|
$
|
(99,924
|
)
|
|
$
|
87,231
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
1,116
|
|
|
—
|
|
|
1,116
|
|
|
Pension and other postretirement benefits adjustments
|
18,855
|
|
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
18,794
|
|
|
Derivative financial instruments
|
1,539
|
|
|
14
|
|
|
(452
|
)
|
|
—
|
|
|
1,101
|
|
|
Other comprehensive income from investment in subsidiaries
|
544
|
|
|
—
|
|
|
—
|
|
|
(544
|
)
|
|
—
|
|
|
Other comprehensive income, net of tax
|
20,938
|
|
|
14
|
|
|
603
|
|
|
(544
|
)
|
|
21,011
|
|
|
Comprehensive income
|
108,138
|
|
|
64,140
|
|
|
36,432
|
|
|
(100,468
|
)
|
|
108,242
|
|
|
Comprehensive income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
|
Comprehensive income attributable to Caleres, Inc.
|
$
|
108,138
|
|
|
$
|
64,140
|
|
|
$
|
36,328
|
|
|
$
|
(100,468
|
)
|
|
$
|
108,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2018
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net cash provided by operating activities
|
$
|
40,601
|
|
|
$
|
90,745
|
|
|
$
|
60,029
|
|
|
$
|
—
|
|
|
$
|
191,375
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(9,522
|
)
|
|
(31,159
|
)
|
|
(4,039
|
)
|
|
—
|
|
|
(44,720
|
)
|
|
Capitalized software
|
(5,950
|
)
|
|
(483
|
)
|
|
(25
|
)
|
|
—
|
|
|
(6,458
|
)
|
|
Intercompany investing
|
(20,224
|
)
|
|
197,929
|
|
|
(177,705
|
)
|
|
—
|
|
|
—
|
|
|
Net cash (used for) provided by investing activities
|
(35,696
|
)
|
|
166,287
|
|
|
(181,769
|
)
|
|
—
|
|
|
(51,178
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
454,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
454,000
|
|
|
Repayments under revolving credit agreement
|
(564,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(564,000
|
)
|
|
Dividends paid
|
(12,027
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,027
|
)
|
|
Acquisition of treasury stock
|
(5,993
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,993
|
)
|
|
Issuance of common stock under share-based plans, net
|
(3,816
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,816
|
)
|
|
Intercompany financing
|
129,021
|
|
|
(266,061
|
)
|
|
137,040
|
|
|
—
|
|
|
—
|
|
|
Net cash (used for) provided by financing activities
|
(2,815
|
)
|
|
(266,061
|
)
|
|
137,040
|
|
|
—
|
|
|
(131,836
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
354
|
|
|
—
|
|
|
354
|
|
|
Increase (decrease) in cash and cash equivalents
|
2,090
|
|
|
(9,029
|
)
|
|
15,654
|
|
|
—
|
|
|
8,715
|
|
|
Cash and cash equivalents at beginning of year
|
23,999
|
|
|
9,029
|
|
|
22,304
|
|
|
—
|
|
|
55,332
|
|
|
Cash and cash equivalents at end of year
|
$
|
26,089
|
|
|
$
|
—
|
|
|
$
|
37,958
|
|
|
$
|
—
|
|
|
$
|
64,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
|
|
FOR THE FISCAL YEAR ENDED JANUARY 28, 2017
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net sales
|
$
|
825,654
|
|
|
$
|
1,692,093
|
|
|
$
|
227,557
|
|
|
$
|
(165,916
|
)
|
|
$
|
2,579,388
|
|
|
Cost of goods sold
|
583,131
|
|
|
938,169
|
|
|
129,410
|
|
|
(133,313
|
)
|
|
1,517,397
|
|
|
Gross profit
|
242,523
|
|
|
753,924
|
|
|
98,147
|
|
|
(32,603
|
)
|
|
1,061,991
|
|
|
Selling and administrative expenses
|
227,149
|
|
|
690,292
|
|
|
57,757
|
|
|
(32,603
|
)
|
|
942,595
|
|
|
Restructuring and other special charges, net
|
15,333
|
|
|
433
|
|
|
7,638
|
|
|
—
|
|
|
23,404
|
|
|
Operating earnings
|
41
|
|
|
63,199
|
|
|
32,752
|
|
|
—
|
|
|
95,992
|
|
|
Interest (expense) income
|
(14,291
|
)
|
|
(9
|
)
|
|
569
|
|
|
—
|
|
|
(13,731
|
)
|
|
Other income
|
14,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,993
|
|
|
Intercompany interest income (expense)
|
8,888
|
|
|
(9,033
|
)
|
|
145
|
|
|
—
|
|
|
—
|
|
|
Earnings before income taxes
|
9,631
|
|
|
54,157
|
|
|
33,466
|
|
|
—
|
|
|
97,254
|
|
|
Income tax provision
|
(5,075
|
)
|
|
(20,084
|
)
|
|
(6,009
|
)
|
|
—
|
|
|
(31,168
|
)
|
|
Equity in earnings (loss) of subsidiaries, net of tax
|
61,102
|
|
|
—
|
|
|
(2,422
|
)
|
|
(58,680
|
)
|
|
—
|
|
|
Net earnings
|
65,658
|
|
|
34,073
|
|
|
25,035
|
|
|
(58,680
|
)
|
|
66,086
|
|
|
Less: Net earnings attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
428
|
|
|
—
|
|
|
428
|
|
|
Net earnings attributable to Caleres, Inc.
|
$
|
65,658
|
|
|
$
|
34,073
|
|
|
$
|
24,607
|
|
|
$
|
(58,680
|
)
|
|
$
|
65,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
|
|
FOR THE FISCAL YEAR ENDED JANUARY 28, 2017
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net earnings
|
$
|
65,658
|
|
|
$
|
34,073
|
|
|
$
|
25,035
|
|
|
$
|
(58,680
|
)
|
|
$
|
66,086
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
1,045
|
|
|
—
|
|
|
1,045
|
|
|
Pension and other postretirement benefits adjustments
|
(24,790
|
)
|
|
—
|
|
|
62
|
|
|
—
|
|
|
(24,728
|
)
|
|
Derivative financial instruments
|
181
|
|
|
—
|
|
|
(1,115
|
)
|
|
—
|
|
|
(934
|
)
|
|
Other comprehensive income from investment in subsidiaries
|
39
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
—
|
|
|
Other comprehensive loss, net of tax
|
(24,570
|
)
|
|
—
|
|
|
(8
|
)
|
|
(39
|
)
|
|
(24,617
|
)
|
|
Comprehensive income
|
41,088
|
|
|
34,073
|
|
|
25,027
|
|
|
(58,719
|
)
|
|
41,469
|
|
|
Comprehensive income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
381
|
|
|
—
|
|
|
381
|
|
|
Comprehensive income attributable to Caleres, Inc.
|
$
|
41,088
|
|
|
$
|
34,073
|
|
|
$
|
24,646
|
|
|
$
|
(58,719
|
)
|
|
$
|
41,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
FOR THE FISCAL YEAR ENDED JANUARY 28, 2017
|
|
|
|
|
|
|
Non-Guarantors
|
|
|
|
|
|
($ thousands)
|
Parent
|
|
Guarantors
|
|
|
Eliminations
|
|
Total
|
|
Net cash provided by operating activities
|
$
|
66,800
|
|
|
$
|
71,781
|
|
|
$
|
45,041
|
|
|
$
|
—
|
|
|
$
|
183,622
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(4,769
|
)
|
|
(41,606
|
)
|
|
(4,148
|
)
|
|
—
|
|
|
(50,523
|
)
|
|
Capitalized software
|
(5,521
|
)
|
|
(3,481
|
)
|
|
(37
|
)
|
|
—
|
|
|
(9,039
|
)
|
|
Acquisition cost, net of cash received
|
(259,932
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(259,932
|
)
|
|
Intercompany investing
|
(3,257
|
)
|
|
3,257
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net cash used for investing activities
|
(273,479
|
)
|
|
(41,830
|
)
|
|
(4,185
|
)
|
|
—
|
|
|
(319,494
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
623,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
623,000
|
|
|
Repayments under revolving credit agreement
|
(513,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(513,000
|
)
|
|
Dividends paid
|
(12,104
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,104
|
)
|
|
Acquisition of treasury stock
|
(23,139
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,139
|
)
|
|
Issuance of common stock under share-based plans, net
|
(4,188
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,188
|
)
|
|
Excess tax benefit related to share-based plans
|
2,251
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,251
|
|
|
Intercompany financing
|
126,858
|
|
|
(20,922
|
)
|
|
(105,936
|
)
|
|
—
|
|
|
—
|
|
|
Net cash provided by (used for) financing activities
|
199,678
|
|
|
(20,922
|
)
|
|
(105,936
|
)
|
|
—
|
|
|
72,820
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
233
|
|
|
—
|
|
|
233
|
|
|
(Decrease) increase in cash and cash equivalents
|
(7,001
|
)
|
|
9,029
|
|
|
(64,847
|
)
|
|
—
|
|
|
(62,819
|
)
|
|
Cash and cash equivalents at beginning of year
|
31,000
|
|
|
—
|
|
|
87,151
|
|
|
—
|
|
|
118,151
|
|
|
Cash and cash equivalents at end of year
|
$
|
23,999
|
|
|
$
|
9,029
|
|
|
$
|
22,304
|
|
|
$
|
—
|
|
|
$
|
55,332
|
|
20. QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial results (unaudited) for 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
($ thousands, except per share amounts)
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 Weeks)
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
632,142
|
|
|
$
|
706,612
|
|
|
$
|
775,829
|
|
|
$
|
720,263
|
|
|
Gross profit
|
274,921
|
|
|
293,101
|
|
|
310,610
|
|
|
277,712
|
|
|
Net earnings
(1)
|
17,180
|
|
|
23,611
|
|
|
29,155
|
|
|
(75,427
|
)
|
|
Net earnings attributable to Caleres, Inc.
(1)
|
17,212
|
|
|
23,646
|
|
|
29,153
|
|
|
(75,452
|
)
|
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to Caleres, Inc. shareholders
(2)
|
0.40
|
|
|
0.55
|
|
|
0.68
|
|
|
(1.83
|
)
|
|
Diluted earnings per common share attributable to Caleres, Inc. shareholders
(2)
|
0.40
|
|
|
0.55
|
|
|
0.67
|
|
|
(1.83
|
)
|
|
Dividends paid
|
0.07
|
|
|
0.07
|
|
|
0.07
|
|
|
0.07
|
|
|
Market value:
|
|
|
|
|
|
|
|
|
High
|
36.00
|
|
|
37.06
|
|
|
41.09
|
|
|
37.82
|
|
|
Low
|
27.10
|
|
|
32.18
|
|
|
31.84
|
|
|
26.63
|
|
(1) The fourth quarter of 2018 reflects impairment of goodwill and intangible assets of
$83.0 million
on an after-tax basis, as further described in Note 11 to the consolidated financial statements, the impact of amortization of the inventory fair value adjustments required for purchase accounting of
$6.1 million
on an after-tax basis, as further described in Note 2 to the consolidated financial statements, and several restructuring and other charges totaling
$4.7 million
, on an after-tax basis, as further described in Note 5 to the consolidated financial statements.
(2) EPS for the quarters may not sum to the annual amount as each period is computed on a discrete period basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
($ thousands, except per share amounts)
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(14 Weeks)
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
631,509
|
|
|
$
|
676,954
|
|
|
$
|
774,656
|
|
|
$
|
702,465
|
|
|
Gross profit
|
270,908
|
|
|
287,461
|
|
|
316,885
|
|
|
293,395
|
|
|
Net earnings (loss)
(1)
|
14,884
|
|
|
17,674
|
|
|
34,373
|
|
|
20,301
|
|
|
Net earnings (loss) attributable to Caleres, Inc.
(1)
|
14,902
|
|
|
17,595
|
|
|
34,387
|
|
|
20,316
|
|
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
(2)
|
0.35
|
|
|
0.41
|
|
|
0.80
|
|
|
0.47
|
|
|
Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
(2)
|
0.35
|
|
|
0.41
|
|
|
0.80
|
|
|
0.47
|
|
|
Dividends paid
|
0.07
|
|
|
0.07
|
|
|
0.07
|
|
|
0.07
|
|
|
Market value:
|
|
|
|
|
|
|
|
|
High
|
32.83
|
|
|
29.11
|
|
|
31.27
|
|
|
34.34
|
|
|
Low
|
24.86
|
|
|
24.45
|
|
|
22.39
|
|
|
26.54
|
|
(1) The first and second quarters of 2017 reflect the impact of amortization of the inventory fair value adjustment required for purchase accounting of
$1.9 million
and
$1.1 million
, respectively, on an after-tax basis, as further described in Note 2 to the consolidated financial statements and several restructuring and other charges totaling
$0.7 million
and
$1.9 million
, respectively, on an after-tax basis, as further described in Note 5 to the consolidated financial statements. The fourth quarter of 2017 reflects restructuring charges totaling
$0.6 million
, on an after-tax basis, as further described in Note 5 to the consolidated financial statements and the benefit of income tax reform of
$0.3 million
, as further described in Note 7 to the consolidated financial statements.
(2) EPS for the quarters may not sum to the annual amount as each period is computed on a discrete period basis.