UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10746
THE JONES GROUP INC.
(Exact name of registrant as specified in its charter)
Pennsylvania | 06-0935166 |
1411 Broadway | 10018 |
(212) 642-3860
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] | Accelerated filer [ ] |
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock | Outstanding at April 26, 2012 |
THE JONES GROUP INC.
Index | Page No. | |
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Consolidated Balance Sheets March 31, 2012, April 2, 2011 and December 31, 2011 | 3 | |
Consolidated Statements of Operations Fiscal Quarters ended March 31, 2012 and April 2, 2011 | 4 | |
Consolidated Statements of Comprehensive Income Fiscal Quarters ended March 31, 2012 and April 2, 2011 | 5 | |
Consolidated Statements of Changes in Equity Fiscal Quarters ended March 31, 2012 and April 2, 2011 | 6 | |
Consolidated Statements of Cash Flows Fiscal Quarters ended March 31, 2012 and April 2, 2011 | 7 | |
Notes to Consolidated Financial Statements | 8 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 25 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 32 | |
Item 4. Controls and Procedures | 33 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 34 | |
Item 2. Issuer Purchases of Equity Securities | 34 | |
Item 5. Other Information | 34 | |
Item 6. Exhibits | 35 | |
Signatures | 36 | |
Exhibit Index | 37 |
DEFINITIONS
As used in this Report, unless the context requires otherwise, "Jones," "our," "us" and "we" means The Jones Group Inc. and consolidated subsidiaries, "GRI" means GRI Group Limited, "FASB" means the Financial Accounting Standards Board, "ASC" means the "FASB Accounting Standards Codification™", "ASU" means "Accounting Standards Update" and "SEC" means the United States Securities and Exchange Commission.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES GROUP INC.CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
March 31, 2012 | April 2, 2011 | December 31, 2011 | ||||||||
ASSETS | (Unaudited | ) | (Unaudited | ) | ||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 147.1 | $ | 306.5 | $ | 238.8 | ||||
Accounts receivable | 458.6 | 506.4 | 339.6 | |||||||
Inventories, primarily finished goods | 473.0 | 452.6 | 491.1 | |||||||
Prepaid and refundable income taxes | - | 0.5 | 11.9 | |||||||
Deferred taxes | 34.6 | 31.3 | 26.4 | |||||||
Loan to unconsolidated affiliate | 10.0 | - | 10.0 | |||||||
Prepaid expenses and other current assets | 44.6 | 39.0 | 37.7 | |||||||
Total current assets | 1,167.9 | 1,336.3 | 1,155.5 | |||||||
Property, plant and equipment, at cost, less accumulated depreciation and amortization of $596.6, $570.0 and $605.4 | 273.0 | 245.0 | 271.4 | |||||||
Goodwill | 258.5 | 161.8 | 255.3 | |||||||
Other intangibles, at cost, less accumulated amortization | 900.9 | 725.0 | 897.4 | |||||||
Investment in and loan to unconsolidated affiliate | 36.2 | 42.6 | 35.6 | |||||||
Other assets | 98.7 | 94.8 | 100.1 | |||||||
Total assets | $ | 2,735.2 | $ | 2,605.5 | $ | 2,715.3 | ||||
LIABILITIES AND EQUITY | ||||||||||
Current liabilities: | ||||||||||
Current portion of long-term debt and capital lease obligations | $ | 2.1 | $ | 1.9 | $ | 2.0 | ||||
Current portion of acquisition consideration payable | 228.3 | 21.9 | 194.1 | |||||||
Accounts payable | 244.7 | 177.1 | 236.2 | |||||||
Income taxes payable | 11.5 | 0.2 | 1.4 | |||||||
Accrued employee compensation and benefits | 29.1 | 30.7 | 45.3 | |||||||
Accrued expenses and other current liabilities | 96.2 | 93.6 | 101.0 | |||||||
Total current liabilities | 611.9 | 325.4 | 580.0 | |||||||
Long-term debt | 832.4 | 809.6 | 831.4 | |||||||
Obligations under capital leases | 22.8 | 24.7 | 23.3 | |||||||
Deferred taxes | 74.9 | 14.0 | 73.4 | |||||||
Income taxes payable | 0.5 | 6.4 | 6.7 | |||||||
Acquisition consideration payable | 5.8 | 193.5 | 17.7 | |||||||
Other noncurrent liabilities | 93.1 | 71.0 | 93.4 | |||||||
Total liabilities | 1,641.4 | 1,444.6 | 1,625.9 | �� | ||||||
Commitments and contingencies | - | - | - | |||||||
Equity: | ||||||||||
Preferred stock, $.01 par value - shares authorized 1.0; none issued | - | - | - | |||||||
Common stock, $.01 par value - shares authorized 200.0; issued 82.1, 87.5 and 81.0 | 0.8 | 0.9 | 0.8 | |||||||
Additional paid-in capital | 526.9 | 545.2 | 521.8 | |||||||
Retained earnings | 586.2 | 620.0 | 596.2 | |||||||
Accumulated other comprehensive loss | (20.3 | ) | (5.4 | ) | (29.6 | ) | ||||
Total Jones stockholders' equity | 1,093.6 | 1,160.7 | 1,089.2 | |||||||
Noncontrolling interest | 0.2 | 0.2 | 0.2 | |||||||
Total equity | 1,093.8 | 1,160.9 | 1,089.4 | |||||||
Total liabilities and equity | $ | 2,735.2 | $ | 2,605.5 | $ | 2,715.3 |
See accompanying notes to consolidated financial statements
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THE JONES GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(ALL AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Fiscal Quarter Ended | ||||||||||||
March 31, 2012 | April 2, 2011 | |||||||||||
Net sales | $ | 923.4 | $ | 949.0 | ||||||||
Licensing income | 12.3 | 12.1 | ||||||||||
Other revenues | 0.3 | 0.2 | ||||||||||
Total revenues | 936.0 | 961.3 | ||||||||||
Cost of goods sold | 592.5 | 630.6 | ||||||||||
Gross profit | 343.5 | 330.7 | ||||||||||
Selling, general and administrative expenses | 303.3 | 269.5 | ||||||||||
Operating income | 40.2 | 61.2 | ||||||||||
Interest income | 0.2 | 0.2 | ||||||||||
Interest expense and financing costs | 42.9 | 21.3 | ||||||||||
Equity in income of unconsolidated affiliate | 0.9 | 1.3 | ||||||||||
(Loss) income before (benefit) provision for income taxes | (1.6 | ) | 41.1 | |||||||||
(Benefit) provision for income taxes | (0.6 | ) | 15.5 | |||||||||
Net (loss) income | (1.0 | ) | 25.9 | |||||||||
Less: income attributable to noncontrolling interest | 0.2 | 0.2 | ||||||||||
(Loss) income attributable to Jones | $ | (1.2 | ) | $ | 25.7 | |||||||
(Loss) earnings per common share attributable to Jones | ||||||||||||
Basic | $ | (0.01 | ) | $ | 0.30 | |||||||
Diluted | (0.01 | ) | 0.30 | |||||||||
Weighted average shares outstanding | ||||||||||||
Basic | 76.1 | 82.2 | ||||||||||
Diluted | 76.1 | 83.4 | ||||||||||
Dividends declared per share | $ | 0.05 | $ | 0.05 |
See accompanying notes to consolidated financial statements
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THE JONES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(ALL AMOUNTS IN MILLIONS)
Fiscal Quarter Ended | |||||||||||||
March 31, 2012 | April 2, 2011 | ||||||||||||
Net (loss) income | $ | (1.0 | ) | $ | 25.9 | ||||||||
Other comprehensive income: | |||||||||||||
Change in fair value of cash flow hedges, net of $0.1 and $0.2 tax benefit | (0.1 | ) | (0.4 | ) | |||||||||
Reclassification adjustment for hedge gains and losses included in net (loss) income, net of $0.1 tax benefit | - | 0.1 | |||||||||||
Foreign currency translation adjustments | 9.4 | 3.3 | |||||||||||
Total other comprehensive income | 9.3 | 3.0 | |||||||||||
Comprehensive income | $ | 8.3 | $ | 28.9 |
See accompanying notes to consolidated financial statements
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THE JONES GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(ALL AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Number of common shares outstanding | Total equity | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Non-controlling interest | ||||||||||||||
Balance, January 1, 2011 | 86.4 | $ | 1,138.3 | $ | 0.9 | $ | 541.9 | $ | 603.8 | $ | (8.4 | ) | $ | 0.1 | ||||||
Comprehensive income | - | 28.9 | - | - | 25.7 | 3.0 | 0.2 | |||||||||||||
Issuance of restricted stock to employees, net of forfeitures | 1.8 | - | - | - | - | - | - | |||||||||||||
Amortization of restricted stock | - | 8.2 | - | 8.2 | - | - | - | |||||||||||||
Distributions to noncontrolling interest | - | (0.1 | ) | - | - | - | - | (0.1 | ) | |||||||||||
Tax effects from vesting of restricted stock | - | 1.0 | - | 1.0 | - | - | - | |||||||||||||
Tax effects of expired employee stock options | - | (1.1 | ) | - | (1.1 | ) | - | - | - | |||||||||||
Repurchase of common shares | (0.7 | ) | (10.0 | ) | - | (4.8 | ) | (5.2 | ) | - | - | |||||||||
Dividends on common stock ($0.05 per share) | - | (4.4 | ) | - | - | (4.4 | ) | - | - | |||||||||||
Other | - | 0.1 | - | - | 0.1 | - | - | |||||||||||||
Balance, April 2, 2011 | 87.5 | $ | 1,160.9 | $ | 0.9 | $ | 545.2 | $ | 620.0 | $ | (5.4 | ) | $ | 0.2 | ||||||
Balance, January 1, 2012 | 81.0 | $ | 1,089.4 | $ | 0.8 | $ | 521.8 | $ | 596.2 | $ | (29.6 | ) | $ | 0.2 | ||||||
Comprehensive income | - | 8.3 | - | - | (1.2 | ) | 9.3 | 0.2 | ||||||||||||
Issuance of restricted stock to employees, net of forfeitures | 2.1 | - | - | - | - | - | - | |||||||||||||
Amortization of restricted stock | - | 9.3 | - | 9.3 | - | - | - | |||||||||||||
Distributions to noncontrolling interest | - | (0.2 | ) | - | - | - | - | (0.2 | ) | |||||||||||
Tax effects from vesting of restricted stock | - | 1.4 | - | 1.4 | - | - | - | |||||||||||||
Tax effects of expired employee stock options | - | (1.3 | ) | - | (1.3 | ) | - | - | - | |||||||||||
Repurchase of common shares | (1.0 | ) | (9.2 | ) | - |
| (4.3 | ) | (4.9 | ) | - | - | ||||||||
Dividends on common stock ($0.15 per share) | - | (3.9 | ) | - | - | (3.9 | ) | - | - | |||||||||||
Balance, March 31, 2012 | 82.1 | $ | 1,093.8 | $ | 0.8 | $ | 526.9 | $ | 586.2 | $ | (20.3 | ) | $ | 0.2 |
See accompanying notes to consolidated financial statements
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THE JONES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(ALL AMOUNTS IN MILLIONS)
Fiscal Quarter Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net (loss) income | $ | (1.0 | ) | $ | 25.9 | |||
Adjustments to reconcile net (loss) income to net cash used in operating activities, net of acquisitions: | ||||||||
Amortization of restricted stock | 9.3 | 8.2 | ||||||
Depreciation and other amortization | 22.5 | 18.5 | ||||||
Impairment losses | 0.4 | 1.6 | ||||||
Adjustments to acquisition consideration payable | 24.6 | 8.7 | ||||||
Equity in income of unconsolidated affiliate | (0.9 | ) | (1.3 | ) | ||||
Deferred taxes | (9.5 | ) | 9.7 | |||||
Fair value adjustments related to interest rate swaps and cap | 1.6 | 2.2 | ||||||
Other items, net | (2.6 | ) | 0.4 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (117.5 | ) | (159.8 | ) | ||||
Inventories | 20.8 | 13.9 | ||||||
Prepaid expenses and other current assets | (6.6 | ) | (6.7 | ) | ||||
Other assets | (0.6 | ) | (3.8 | ) | ||||
Accounts payable | 7.4 | (36.4 | ) | |||||
Income taxes payable/prepaid income taxes | 14.9 | 18.4 | ||||||
Accrued expenses and other current liabilities | (22.0 | ) | (21.7 | ) | ||||
Acquisition consideration payable | (0.3 | ) | (4.5 | ) | ||||
Other liabilities | (0.3 | ) | (10.1 | ) | ||||
Total adjustments | (58.8 | ) | (162.7 | ) | ||||
Net cash used in operating activities | (59.8 | ) | (136.8 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (18.2 | ) | (32.9 | ) | ||||
Other | (0.2 | ) | - | |||||
Net cash used in investing activities | (18.4 | ) | (32.9 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Issuance of 6.875% Senior Notes due 2019 | - | 300.0 | ||||||
Debt issuance costs | - | (6.4 | ) | |||||
Dividends paid | (4.0 | ) | (4.3 | ) | ||||
Repurchases of common stock | (8.9 | ) | (10.0 | ) | ||||
Payments of acquisition consideration payable | (2.0 | ) | (4.2 | ) | ||||
Other items, net | 1.5 | 1.0 | ||||||
Net cash (used in) provided by financing activities | (13.4 | ) | 276.1 | |||||
EFFECT OF EXCHANGE RATES ON CASH | (0.1 | ) | (0.7 | ) | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (91.7 | ) | 105.7 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING | 238.8 | 200.8 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 147.1 | $ | 306.5 |
See accompanying notes to consolidated financial statements
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THE JONES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Jones Group Inc. and its subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes thereto included within our Annual Report on Form 10-K.
In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 2012.
Distribution costs. Our cost of sales may not be comparable to those of other entities, since some entities include all of the costs associated with their distribution functions in cost of sales while we include these costs in selling, general and administrative ("SG&A") expenses. Distribution costs included in SG&A expenses for the fiscal quarters ended March 31, 2012 and April 2, 2011 were $23.6 million and $25.1 million, respectively.
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
(In millions, except per share amounts) | Fiscal Quarter Ended | |||||||||||
March 31, 2012 | April 2, 2011 | |||||||||||
Net (loss) income | $ | (1.0 | ) | $ | 25.9 | |||||||
Less: income attributable to noncontrolling interest | 0.2 | 0.2 | ||||||||||
(Loss) income attributable to Jones | (1.2 | ) | 25.7 | |||||||||
Less: (loss) income allocated to participating securities | (0.2 | ) | 0.8 | |||||||||
(Loss) income available to common stockholders of Jones | $ | (1.0 | ) | $ | 24.9 | |||||||
Weighted average shares outstanding - basic | 76.1 | 82.2 | ||||||||||
Effect of dilutive employee restricted stock | - | 1.2 | ||||||||||
Weighted average shares outstanding - diluted | 76.1 | 83.4 | ||||||||||
(Loss) earnings per common share attributable to Jones | ||||||||||||
Basic | $ | (0.01 | ) | $ | 0.30 | |||||||
Diluted | (0.01 | ) | 0.30 |
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ACQUISITIONS
KG Group Holdings Limited
On June 2, 2011, we acquired 100% of the equity interests in KG Group Holdings Limited ("Kurt Geiger"), a privately-held wholesaler and retailer of luxury footwear and accessories, for $150.0 million in cash and the assumption of $174.1 million of debt, which was immediately repaid following the transaction. Kurt Geiger markets products under four of its own brands - Kurt Geiger, KG by Kurt Geiger, Carvela and Miss KG - and over 100 other luxury brands in more than 200 retail locations, including concessions in Europe's leading department stores, including Harrods, Selfridges, Liberty, House of Fraser, Fenwick John Lewis and Brown Thomas, as well as company-operated stores.
Approximately $10.2 million of the purchase price payable to certain selling shareholders who are senior managers of Kurt Geiger has been rolled over into 5% Loan Notes (the "Loan Notes"), which are payable in approximately four years and are subject to forfeiture in the event of termination of employment under certain circumstances. This amount will be recorded as compensation expense over the term of the Loan Notes and is not reported as a component of the cost of the acquisition.
We pursued the acquisition of Kurt Geiger to increase our international presence and further extend our reach into the designer footwear business. Kurt Geiger will serve as our hub in Europe. Kurt Geiger's wholesale footwear business is reported in our international wholesale segment and its retail business is reported in our international retail segment.
The following table summarizes the fair values of the assets acquired and liabilities assumed from Kurt Geiger on June 2, 2011.
(In millions) | Weighted-average amortization life (in months) | Fair Value | ||||
Cash | $ | 6.9 | ||||
Accounts receivable | 19.7 | |||||
Inventories | 55.1 | |||||
Other current assets | 9.5 | |||||
Property, plant and equipment | 27.0 | |||||
Intangible assets: | ||||||
Trademarks - nonamortized | 95.1 | |||||
Trademarks - amortized | 120 | 0.1 | ||||
Goodwill | 99.3 | |||||
Customer relationships | 232 | 125.7 | ||||
Order backlog | 9 | 2.8 | ||||
Favorable lease agreements | 99 | 6.8 | ||||
Total assets acquired | 448.0 | |||||
Accounts payable | 30.6 | |||||
Other current liabilities | 28.5 | |||||
Long-term debt | 174.1 | |||||
Unfavorable lease agreements | 100 | 0.2 | ||||
Deferred taxes | 64.6 | |||||
Total liabilities assumed | 298.0 | |||||
Total purchase price | $ | 150.0 |
The gross contractual accounts receivable acquired from Kurt Geiger was $19.8 million.
The acquisition resulted in the recognition of $99.3 million of goodwill, which is not expected to be deductible for tax purposes. Goodwill largely consists of expected synergies resulting from the leveraging of the combined networks of partners, infrastructure and strong department store relationships to expand product distribution worldwide, as well as the acquired assembled workforce, which does not qualify as an amortizable intangible asset, and the potential for product extensions, such as apparel.
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The following table provides pro forma total revenues and results of operations for the fiscal quarter ended April 2, 2011 as if Kurt Geiger had been acquired on January 1, 2010. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense on intangible assets acquired from Kurt Geiger resulting from the fair valuation of assets acquired. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Kurt Geiger. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed at the indicated dates, nor are they indicative of the future operating results of the combined companies.
(In millions, except per share amounts) | Fiscal Quarter Ended April 2, 2011 | ||||||||
Total revenues | $ | 1,036.3 | |||||||
Net income | 19.2 | ||||||||
Earnings per common share attributable to Jones | |||||||||
Basic | $ | 0.22 | |||||||
Diluted | 0.22 |
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) | March 31, 2012 | April 2, 2011 | December 31, 2011 | ||||||
Trade accounts receivable | $ | 495.0 | $ | 544.9 | $ | 367.9 | |||
Allowances for doubtful accounts, returns, discounts and co-op advertising | (36.4 | ) | (38.5 | ) | (28.3 | ) | |||
$ | 458.6 | $ | 506.4 | $ | 339.6 |
Due to our 25% ownership interest in GRI, GRI is deemed to be a related party. Included in accounts receivable are amounts due from GRI in the amount of $20.0 million, $18.2 million and $19.7 million at March 31, 2012, April 2, 2011 and December 31, 2011, respectively. Net revenues from GRI amounted to $17.9 million and $14.5 million for the fiscal quarters ended March 31, 2012 and April 2, 2011, respectively. On April 23, 2009, we converted $10.0 million of the outstanding GRI accounts receivable to a three-year interest-bearing convertible note. This note was repaid on April 20, 2012.
ACCRUED RESTRUCTURING COSTS
Jewelry
During 2009, we decided to discontinue the domestic manufacturing, product development and sourcing activities of our jewelry business, and also announced the closing of our jewelry distribution center during 2010. We accrued $0.2 million of lease termination costs in the fiscal quarter ended April 2, 2011. These costs are reported as SG&A expenses in the domestic wholesale footwear and accessories segment.
The details of the jewelry restructuring accruals are as follows:
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(In millions) | One-time termination benefits | Lease obligations | Total jewelry restructuring | |||||||||
Balance, January 1, 2011 | $ | 1.3 | $ | 2.3 | $ | 3.6 | ||||||
Additions | - | 0.2 | 0.2 | |||||||||
Payments and reductions | (1.2 | ) | (0.5 | ) | (1.7 | ) | ||||||
Balance, April 2, 2011 | $ | 0.1 | $ | 2.0 | $ | 2.1 | ||||||
Balance, January 1, 2012 | $ | - | $ | 1.5 | $ | 1.5 | ||||||
Payments and reductions | - | (0.1 | ) | (0.1 | ) | |||||||
Balance, March 31, 2012 | $ | - | $ | 1.4 | $ | 1.4 |
The net accrual of $2.1 million at April 2, 2011 is reported as $0.6 million of accrued expenses and other current liabilities and $1.5 million of other noncurrent liabilities. The net accrual of $1.4 million at March 31, 2012 is reported as $0.4 million of accrued expenses and other current liabilities and $1.0 million of other noncurrent liabilities.
Texas Warehouse
On December 1, 2009, we announced the closing of warehouse facilities in Socorro, Texas. We accrued $3.4 million of termination benefits and associated employee costs for 220 employees. We also recorded $7.4 million of lease obligation costs relating to the warehouse. These costs are reported as SG&A expenses in the domestic wholesale jeanswear segment. The closing was substantially completed by the end of April 2010.
The details of the Texas warehouse restructuring accruals are as follows:
(In millions) | Lease obligations | |||||||||||
Balance, January 1, 2011 | $ | 4.1 | ||||||||||
Payments and reductions | (1.1 | ) | ||||||||||
Balance, April 2, 2011 | $ | 3.0 | ||||||||||
Balance, January 1, 2012 | $ | 0.9 | ||||||||||
Payments and reductions | (0.1 | ) | ||||||||||
Balance, March 31, 2012 | $ | 0.8 |
The net accruals of $3.0 million and $0.8 million at April 2, 2011 and March 31, 2012, respectively, are reported as accrued expenses and other current liabilities.
Retail Stores
We continue to review our domestic retail operations for underperforming locations. As a result of this review, we have decided to close retail locations that no longer provide strategic benefits. During the first fiscal quarters of 2012 and 2011, we closed 41 and 40 locations, respectively, and we anticipate closing additional locations in 2012. Total termination benefits and associated employee costs are expected to be $10.0 million for approximately 2,164 employees, including both store employees and administrative support personnel. We recorded $0.6 million and $0.8 million of employee termination costs in the fiscal quarters ended April 2, 2011 and March 31, 2012, respectively. In connection with our decision to close these stores, we reviewed the associated long-term assets for impairments. As a result of this review, we recorded $1.2 million and $0.4 million of impairment losses during the fiscal quarters ended April 2, 2011 and March 31, 2012, respectively, on leasehold improvements and furniture and fixtures located in the stores to be closed. These costs are reported as SG&A expenses in our domestic retail segment.
The details of the retail store restructuring accruals are as follows:
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(In millions) | One-time termination benefits | |||||||||||
Balance, January 1, 2011 | $ | 2.2 | ||||||||||
Additions | 0.6 | |||||||||||
Payments and reductions | (1.5 | ) | ||||||||||
Balance, April 2, 2011 | $ | 1.3 | ||||||||||
Balance, January 1, 2012 | $ | 1.3 | ||||||||||
Additions | 0.8 | |||||||||||
Payments and reductions | (1.0 | ) | ||||||||||
Balance, March 31, 2012 | $ | 1.1 |
The net accruals of $1.3 million at April 2, 2011 and $1.1 million at March 31, 2012 are reported as accrued expenses and other current liabilities.
GOODWILL
The following table presents, by segment and in total, the carrying amount of goodwill for the fiscal quarters ended April 2, 2011 and March 31, 2012. There were no changes in the carrying amounts in the fiscal quarter ended April 2, 2011.
(In millions) | Domestic Wholesale Sportswear | Domestic Wholesale Jeanswear | Domestic Wholesale Footwear & Accessories | Domestic Retail | International Wholesale | International Retail | Total | ||||||||||||||
Balance, April 2, 2011 | |||||||||||||||||||||
Goodwill | $ | 46.7 | $ | 519.2 | $ | 859.8 | $ | 120.6 | $ | 68.5 | $ | - | $ | 1,614.8 | |||||||
Accumulated impairment losses | - | (519.2 | ) | (813.2 | ) | (120.6 | ) | - | - | (1,453.0 | ) | ||||||||||
Net goodwill | $ | 46.7 | $ | - | $ | 46.6 | $ | - | $ | 68.5 | $ | - | $ | 161.8 | |||||||
Balance, December 31, 2011 | |||||||||||||||||||||
Goodwill | $ | 46.7 | $ | 519.2 | $ | 859.8 | $ | 120.6 | $ | 111.6 | $ | 50.4 | $ | 1,708.3 | |||||||
Accumulated impairment losses | - | (519.2 | ) | (813.2 | ) | (120.6 | ) | - | - | (1,453.0 | ) | ||||||||||
Net goodwill | 46.7 | - | 46.6 | - | 111.6 | 50.4 | 255.3 | ||||||||||||||
Foreign currency translation effects | - | - | - | - | 1.5 | 1.7 | 3.2 | ||||||||||||||
Balance, March 31, 2012 | |||||||||||||||||||||
Goodwill | 46.7 | 519.2 | 873.0 | 120.6 | 113.1 | 52.1 | 1,711.5 | ||||||||||||||
Accumulated impairment losses | - | (519.2 | ) | (813.2 | ) | (120.6 | ) | - | - | (1,453.0 | ) | ||||||||||
Net goodwill | $ | 46.7 | $ | - | $ | 59.8 | $ | - | $ | 113.1 | $ | 52.1 | $ | 258.5 |
FAIR VALUES
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Subtopic 820-10 outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. We are permitted to choose to measure many financial instruments and certain other items at fair value, although we did not elect the fair value measurement option for any of our financial assets or liabilities. Our financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:
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- Level 1 - inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;
- Level 2 - inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and
- Level 3 - unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing assets or liabilities based on the best information available.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We have certain financial assets and liabilities that are required to be measured at fair value. These include:
- the assets and liabilities of The Jones Group Inc. Deferred Compensation Plan (the "Rabbi Trust"), which represent deferred employee compensation invested in mutual funds and which fall within Level 1 of the fair value hierarchy;
- deferred director fees, which represent phantom units of our common stock that have a fair value based on the market price of our common stock and which fall within Level 1 of the fair value hierarchy;
- foreign currency forward contracts, which have fair values calculated by comparing foreign exchange forward rates to the contract rates discounted at our incremental borrowing rate, which fall within Level 2 of the fair value hierarchy;
- interest rate swap and cap contracts, which have fair values calculated by comparing current yield curves and LIBOR rates to the stated contract rates adjusted for estimated risk of counterparty nonperformance, which fall within Level 2 of the fair value hierarchy;
- long-term debt that is hedged by interest rate swaps as a fair-value hedge, calculated by comparing current yield curves and LIBOR rates to the stated contract rates of the associated interest rate swaps, which falls within Level 2 of the fair value hierarchy; and
- consideration liabilities recorded as a result of the acquisition of Moda Nicola International, LLC ("Moda") and Stuart Weitzman Holdings, LLC ("SWH"), which have fair values based on our projections of financial results and cash flows for the acquired business and a discount factor based on our weighted average cost of capital, and which fall within Level 3 of the fair value hierarchy.
In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis at April 2, 2011, December 31, 2011 and March 31, 2012.
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(In millions) | ||||||||||||
Description | Classification | Total Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||
April 2, 2011: | ||||||||||||
Rabbi Trust assets | Prepaid expenses and other current assets | $ | 9.6 | $ | 9.6 | $ | - | $ | - | |||
Interest rate cap | Other long-term assets | 1.2 | - | 1.2 | - | |||||||
Total assets | $ | 10.8 | $ | 9.6 | $ | 1.2 | $ | - | ||||
Rabbi Trust liabilities | Accrued employee compensation and benefits | $ | 9.6 | $ | 9.6 | $ | - | $ | - | |||
Canadian Dollar - U.S. Dollar forward contracts | Accrued expenses and other current liabilities | 0.8 | - | 0.8 | - | |||||||
Interest rate swaps | Other long-term liabilities | 2.4 | - | 2.4 | - | |||||||
Deferred director fees | Accrued expenses and other current liabilities | 1.1 | 1.1 | - | - | |||||||
Acquisition consideration | Current portion of acquisition consideration payable | 21.9 | - | - | 21.9 | |||||||
5.125% Senior Notes due 2014 | Long-term debt | 258.4 | - | 258.4 | - | |||||||
Hedged portion of 6.875% Senior Notes due 2019 | Long-term debt | 151.3 | - | 151.3 | - | |||||||
Acquisition consideration | Acquisition consideration payable, net of current portion | 192.0 | - | - | 192.0 | |||||||
Total liabilities | $ | 637.5 | $ | 10.7 | $ | 412.9 | $ | 213.9 | ||||
December 31, 2011: | ||||||||||||
Rabbi Trust assets | Prepaid expenses and other current assets | $ | 7.5 | $ | 7.5 | $ | - | $ | - | |||
Interest rate swaps | Other long-term assets | 5.5 | - | 5.5 | - | |||||||
Interest rate cap | Other long-term assets | 0.2 | - | 0.2 | - | |||||||
Canadian Dollar - U.S. Dollar forward contracts | Prepaid expenses and other current assets | 0.1 | - | 0.1 | - | |||||||
Total assets | $ | 13.3 | $ | 7.5 | $ | 5.8 | $ | - | ||||
Rabbi Trust liabilities | Accrued employee compensation and benefits | $ | 7.5 | $ | 7.5 | $ | - | $ | - | |||
Deferred director fees | Accrued expenses and other current liabilities | 0.2 | 0.2 | - | - | |||||||
Acquisition consideration | Current portion of acquisition consideration payable | 192.7 | - | - | 192.7 | |||||||
5.125% Senior Notes due 2014 | Long-term debt | 263.0 | - | 263.0 | - | |||||||
Acquisition consideration | Acquisition consideration payable, net of current portion | 17.7 | - | - | 17.7 | |||||||
Total liabilities | $ | 481.1 | $ | 7.7 | $ | 263.0 | $ | 210.4 | ||||
March 31, 2012: | ||||||||||||
Rabbi Trust assets | Prepaid expenses and other current assets | $ | 8.5 | $ | 8.5 | $ | - | $ | - | |||
Interest rate swaps | Other long-term assets | 5.9 | - | 5.9 | - | |||||||
Interest rate cap | Other long-term assets | 0.1 | - | 0.1 | - | |||||||
Total assets | $ | 14.5 | $ | 8.5 | $ | 6.0 | $ | - | ||||
Rabbi Trust liabilities | Accrued employee compensation and benefits | $ | 8.5 | $ | 8.5 | $ | - | $ | - | |||
Interest rate swaps | Other long-term liabilities | 0.3 | - | 0.3 | - | |||||||
Canadian Dollar - U.S. Dollar forward contracts | Accrued expenses and other current liabilities | 0.1 | - | 0.1 | - | |||||||
Deferred director fees | Accrued expenses and other current liabilities | 0.2 | 0.2 | - | - | |||||||
Acquisition consideration | Current portion of acquisition consideration payable | 226.9 | - | - | 226.9 | |||||||
5.125% Senior Notes due 2014 | Long-term debt | 262.6 | - | 262.6 | - | |||||||
Hedged portion of 6.875% Senior Notes due 2019 | Long-term debt | 151.3 | - | 151.3 | - | |||||||
Acquisition consideration | Acquisition consideration payable, net of current portion | 5.8 | - | - | 5.8 | |||||||
Total liabilities | $ | 655.7 | $ | 8.7 | $ | 414.3 | $ | 232.7 |
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The following table presents the changes in Level 3 contingent consideration liability for the fiscal three months ended April 2, 2011 and March 31, 2012.
(In millions) | Acquisition of Moda | Acquisition of SWH | Total Acquisition Consideration Payable | |||||||||
Beginning balance, January 1, 2011 | $ | 22.9 | $ | 191.0 | $ | 213.9 | ||||||
Payments | - | (8.7 | ) | (8.7 | ) | |||||||
Total adjustments included in earnings | (0.2 | ) | 8.9 | 8.7 | ||||||||
Balance, April 2, 2011 | $ | 22.7 | $ | 191.2 | $ | 213.9 | ||||||
Beginning balance, January 1, 2012 | $ | 14.8 | $ | 195.6 | $ | 210.4 | ||||||
Payments | - | (2.3 | ) | (2.3 | ) | |||||||
Total adjustments included in earnings | (3.1 | ) | 27.7 | 24.6 | ||||||||
Balance, March 31, 2012 | $ | 11.7 | $ | 221.0 | $ | 232.7 |
The following table represents quantitative information about the Level 3 contingent consideration liability measurements at March 31, 2012.
(In millions) | Fair Value at March 31, 2012 | Valuation technique | Unobservable inputs | Range (Weighted Average) | ||
Acquisition of Moda | $ | 11.7 | Discounted projection of financial results | Net sales growth | -31% - +26% (7.4%) | |
Gross margin multiplier | 1.75 - 1.50 (1.71) | |||||
Discount rate | 11.7% | |||||
Acquisition of SWH | $ | 221.0 | Discounted projection of financial results and future cash flow | EBITDA (1) growth | -15% - +26% (5.5%) | |
EBITDA (1) multiplier | 8.0 - 9.0 (8.5) | |||||
Discount rate | 11.7% |
(1) - Adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined in the acquisition agreement.
The valuation processes for the contingent consideration liabilities are based on the associated acquisition agreements. Our inputs include probability-weighted projections of financial results and cash flows for the acquired business and a discount rate based on our weighted average cost of capital. We internally calculate the estimated liability using projected financial information provided by the operating divisions.
The significant unobservable inputs used in the fair value measurement of the Moda contingent consideration liability are net sales growth, a gross margin multiplier (as defined in the acquisition agreement) and a discount factor. An increase in the net sales or gross margin multiplier inputs would increase the fair value of the liability, while an increase in the discount rate would decrease the fair value of the liability. There is no interrelationship between the unobservable inputs. Changes in the fair value of the Moda contingent consideration liability are reported as adjustments to SG&A expenses in the domestic wholesale sportswear segment.
The significant unobservable inputs used in the fair value measurement of the SWH contingent consideration liability are probability-weighted projected EBITDA growth, the EBITDA multiplier (as defined in the acquisition agreement) and a discount rate. An increase to the EBITDA growth or multiplier would increase the fair value of the liability, while an increase in the discount rate would decrease the fair value of the liability. The EBITDA multiplier is based on the achieved level of EBITDA. There is no interrelationship between the discount rate to the other unobservable inputs. Changes in the fair value of the contingent consideration liability for SWH are reported as adjustments to interest expense.
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In accordance with the fair value hierarchy described above, the following table shows the fair value of our non-financial assets and liabilities that were required to be measured at fair value on a nonrecurring basis at April 2, 2011 and March 31, 2012, and the total losses recorded as a result of the remeasurement process.
(In millions) | Fair Value Measurements Using | |||||||||||||
Description | Carrying Value | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total losses recorded for the fiscal three months | |||||||||
At April 2, 2011: | ||||||||||||||
Property and equipment | $ | - | $ | - | $ | - | $ | - | $ | 1.2 | ||||
Transportation equipment | 0.6 | 0.6 | - | - | 0.4 | |||||||||
At March 31, 2012: | ||||||||||||||
Property and equipment | - | - | - | - | 0.4 |
During the fiscal quarters ended April 2, 2011 and March 31, 2012, property and equipment utilized in our retail operations with a carrying amount of $1.2 million and $0.4 million, respectively, were written down to a fair value of zero, primarily as a result of our decision to close underperforming retail locations. These losses were recorded as SG&A expenses in the domestic retail segment. We consider long-term assets utilized in a retail location to be impaired when a pattern of operating losses at the location indicate that future operating losses are probable and that the resulting cash flows will not be sufficient to recover the carrying value of the associated long-term assets. During the fiscal quarter ended April 2, 2011, we determined that certain transportation equipment with a carrying value of $1.0 million had a fair value of $0.6 million based on quoted market prices. The loss of $0.4 million was recorded as SG&A expenses in the licensing, other and eliminations segment.
Financial Instruments
As a result of our global operating and financing activities, we are exposed to changes in interest rates and foreign currency exchange rates which may adversely affect results of operations and financial condition. In seeking to minimize the risks and/or costs associated with such activities, we manage exposure to changes in interest rates and foreign currency exchange rates through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The instruments eligible for utilization include forward, option and swap agreements. We do not use financial instruments for trading or other speculative purposes. At March 31, 2012, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total notional value of US$15.2 million at a weighted-average exchange rate of 1.00 maturing through November 2012.
At March 31, 2012, April 2, 2011 and December 31, 2011, the fair values of cash and cash equivalents, receivables and accounts payable approximated their carrying values due to the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures were valued using market comparable inputs. These inputs include broker quotes, quoted market prices, interest rates and exchange rates for the same or similar instruments. The fair value and related carrying amounts for items not disclosed elsewhere are as follows:
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(In millions) | March 31, 2012 | April 2, 2011 | December 31, 2011 | ||||||||||||||||
Fair Value Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Senior Notes, including hedged items recorded at fair value | 1 | $ | 822.4 | $ | 750.2 | $ | 809.4 | $ | 749.9 | $ | 821.7 | $ | 692.6 | ||||||
Other long-term debt, including current portion | 2 | 10.1 | 9.0 | 0.3 | 0.3 | 9.8 | 8.2 | ||||||||||||
Note receivable from GRI | 2 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | ||||||||||||
Other notes receivable | 2 | 1.7 | 1.5 | - | - | - | - |
Financial instruments expose us to counterparty credit risk for nonperformance and to market risk for changes in interest and currency rates. We manage exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor the amount of credit exposure. Our financial instrument counterparties are substantial investment or commercial banks with significant experience with such instruments.
CREDIT FACILITIES
We have a secured revolving credit agreement expiring on April 28, 2016 (the "Credit Facility") with several lending institutions to borrow an aggregate principal amount of up to $650 million. The terms and conditions of our Credit Facility provide for, among other things: (1) a $350 million U.S. commitment which may be drawn by the U.S. borrowers as revolving loans in U.S. Dollars or letters of credit in Canadian Dollars, U.S. Dollars, or an "LC Alternative Currency" (namely Euros, sterling, or any other currency acceptable to the lenders); and (2) a $300 million international commitment which may be drawn by the U.S. borrowers or by any Canadian or European borrowers as revolving loans or letters of credit in Canadian Dollars, U.S. Dollars, or an LC Alternative Currency. Up to the entire amount of the Credit Facility is available for cash borrowings, with an overall sublimit of up to $350 million for all letters of credit. All of the overall $350 million sublimit may be used for trade letters of credit; and within that overall sublimit, there are additional sublimits, including (but not limited to) $50 million for standby letters of credit and $150 million for letters of credit under the U.S. commitment denominated in an LC Alternative Currency.
Borrowings under the Credit Facility may be used to refinance certain existing indebtedness, to make certain investments (including acquisitions), and for general corporate purposes in the ordinary course of business. Such borrowings bear interest either based on the alternate base rate, as defined in the Credit Facility, or based on Eurocurrency rates, each with a margin that depends on the availability remaining under the Credit Facility. The Credit Facility contains customary events of default.
Availability under the Credit Facility is determined with reference to a borrowing base consisting of a percentage of eligible inventory, accounts receivable, credit card receivables and licensee receivables, minus reserves determined by the joint collateral agents. At March 31, 2012, we had no cash borrowings and $20.7 million of letters of credit outstanding, and our remaining availability was $487.7 million. If availability under the Credit Facility falls below a stated level, we will be required to comply with a minimum fixed charge coverage ratio. The Credit Facility also contains affirmative and negative covenants that, among other things, will limit or restrict our ability to (1) incur indebtedness, (2) create liens, (3) merge, consolidate, liquidate or dissolve, (4) make investments (including acquisitions), loans or advances, (5) sell assets, (6) enter into sale and leaseback transactions, (7) enter into swap agreements, (8) make certain restricted payments (including dividends and other payments in respect of capital stock), (9) enter into transactions with affiliates, (10) enter into restrictive agreements, and (11) amend material documents. The Credit Facility is secured by a first priority lien on substantially all of our personal property.
SWH has a $1.5 million unsecured borrowing facility with a lending institution that expires on October 1, 2012 and is renewable on an annual basis, under which no cash borrowings and $1.1 million in
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letters of credit were outstanding at March 31, 2012. Cash borrowings under this facility bear interest based on either the prevailing prime rate or the prevailing LIBOR rate plus 300 basis points. SWH also has a €0.3 million variable-rate unsecured borrowing facility with a European lending institution that expires in March 2013 and is renewable on an annual basis, under which no amounts were outstanding at March 31, 2012.
LONG-TERM DEBT
In March 2011, we issued $300.0 million of 6.875% Senior Notes due 2019 (the "2019 Notes"). Net proceeds were $293.3 million, of which $45.0 million was used to repay amounts then outstanding under the Credit Facility. In connection with the issuance of the 2019 Notes, we have three outstanding interest rate swap transactions to effectively convert $150 million of the 2019 Notes to variable-rate debt. For more information, see "Derivatives."
DERIVATIVES
We recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Additionally, the fair value adjustments will affect either equity or net income, depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
Interest Rate Swaps and Cap
On December 14, 2010, we entered into three interest rate swap transactions to effectively convert the entire amount of our $250 million fixed-rate 5.125% Senior Notes due 2014 (the "2014 Notes") to variable-rate debt. Under the terms of the transactions, we are required to make semiannual variable-rate payments to the counterparties calculated based on three-month LIBOR rates (which are reset on the 15th day of each calendar quarter) plus 3.46%, and the counterparties are obligated to make semiannual fixed-rate payments to us of 5.125%. The swap transactions have an effective date of December 17, 2010 and a termination date of November 15, 2014, the date the 2014 Notes mature.
On March 3, 2011, we entered into three interest rate swap transactions to effectively convert $150 million of our 2019 Notes to variable-rate debt. Under the terms of the transactions, we were required to make semiannual variable-rate payments to the counterparties calculated based on three-month LIBOR rates (which are reset on the 15th day of each calendar quarter) plus 3.73%, and the counterparties were obligated to make semiannual fixed-rate payments to us of 6.875%. The swap transactions had an effective date of March 7, 2011 and a termination date of March 15, 2019, the date the 2019 Notes mature. On August 3, 2011 we de-designated the hedging relationship between the swaps and the 2019 Notes and received $8.1 million upon termination of the swaps. The related fair market valuation adjustment to the 2019 Notes will be amortized as a reduction of interest expense over the remaining life of the 2019 Notes.
On March 19, 2012, we entered into three interest rate swap transactions to effectively convert $150 million of our 2019 Notes to variable-rate debt. Under the terms of the transactions, we are required to make semiannual variable-rate payments to the counterparties calculated based on one-month LIBOR rates (which are reset on the 15th day of each calendar quarter) plus 5.195%, and the counterparties are obligated to make semiannual fixed-rate payments to us of 6.875%. The swap transactions have an effective date of March 21, 2012 and a termination date of March 15, 2019, the date the 2019 Notes mature.
We also have outstanding an interest rate cap that is used in conjunction with the interest rate swaps on the 2014 Notes to limit our floating rate exposure. The cap limits our three-month LIBOR rate exposure to 5.0%. The cap has a termination date of November 15, 2014.
The swap transactions were designated as hedges of the fair value of the related notes. The fair values of the swaps are recorded either as an asset or a liability, with changes in their fair values recorded through interest expense. The changes in fair value of the notes related to the hedged portion of the notes are also recorded through interest expense. As these changes in fair value will not exactly offset each
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other, the net effect on earnings represents the ineffectiveness of the hedging instruments. We evaluate effectiveness under the "long haul" method of accounting. The interest rate cap has not been designated as a hedging instrument; as a result, all changes in the fair value of the cap are recorded through interest expense.
We recorded net increases of $1.5 million and $2.1 million in interest expense related to the ineffectiveness of the swaps for the fiscal quarters ended March 31, 2012 and April 2, 2011, respectively. We recorded increases of $0.1 million in interest expense related to changes in the fair value of the cap during each of the fiscal quarters ended March 31, 2012 and April 2, 2011.
Foreign Currency Forward Contracts
We use foreign currency forward contracts for the specific purpose of hedging the exposure to variability in forecasted cash flows associated primarily with inventory purchases. Fair values of foreign currency forward contracts are calculated by comparing each agreement's contractual exchange rate with the currency exchange forward and spot rates at the reporting date.
We have outstanding forward contracts to exchange Canadian Dollars for U.S. Dollars. These contracts are designated as cash flow hedges, as the principal terms of the contracts are the same as the underlying forecasted foreign currency cash flows. Therefore, changes in the fair value of these forward contracts should be highly effective in offsetting changes in the expected foreign currency cash flows. Changes in the fair value of these contracts are recorded in accumulated other comprehensive income, net of related tax effects, with the corresponding asset or liability recorded in the balance sheet. Amounts recorded in accumulated other comprehensive income are reflected in current-period earnings when the hedged transaction affects earnings.
Since the foreign currency derivatives we use in our risk management strategies are highly effective hedges because all the critical terms of the derivative instruments match those of the hedged item, we record no ineffectiveness related to our cash flow hedges. If foreign currency exchange rates do not change from their March 31, 2012 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months will not be material.
The U.S. Dollar notional amounts of our Canadian Dollar - U.S. Dollar forward exchange contracts outstanding at March 31, 2012, April 2, 2011 and December 31, 2011 were $15.2 million, $15.9 million and $5.3 million, respectively.
Fair Values of Derivative Instruments
(In millions) | March 31, 2012 | April 2, 2011 | December 31, 2011 | ||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Derivatives designated as hedging instruments | |||||||||||||
Interest rate swap contracts | Other long-term assets | $ | 5.9 | Other long-term assets | $ | 5.5 | |||||||
Foreign exchange contracts | - | Prepaid expenses and other current assets | 0.1 | ||||||||||
Total derivative assets | $ | 5.9 | $ | 5.6 | |||||||||
Interest rate swap contracts | Other long-term liabilities | $ | 0.3 | Other long-term liabilities | $ | 2.4 | |||||||
Foreign exchange contracts | Accrued expenses and other current liabilities | 0.1 | Accrued expenses and other current liabilities | 0.8 | |||||||||
Total derivative liabilities | $ | 0.4 | $ | 3.2 | |||||||||
Derivatives not designated as hedging instruments | |||||||||||||
Interest rate cap contract | Other long-term assets | $ | 0.1 | Other long-term assets | $ | 1.2 | Other long-term assets | $ | 0.2 | ||||
Total derivative assets | $ | 0.1 | $ | 1.2 | $ | 0.2 |
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Effect of Derivatives on the Statement of Operations - Derivatives Designated as Hedging Instruments
(In millions) | Location of Pretax (Loss) due to Ineffectiveness Recognized in Income | Amount of Pretax (Loss) due to Ineffectiveness Recognized in Income | ||||||
Derivate type | Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | ||||||
Interest rate swap contracts | Interest expense | $ | (1.5 | ) | $ | (2.1 | ) |
(In millions) | Amount of Pretax (Loss) Recognized in Other Comprehensive Income | Amount of Pretax (Loss) Reclassified from Other Comprehensive Income into Income | |||||||
Derivative type | Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | Location of Pretax (Loss) Reclassified from Other Comprehensive Income into Income | Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 |
Canadian Dollar - U.S. Dollar forward contracts | $ | (0.1 | ) | $ | (0.6 | ) | Cost of sales | $ | - | $ | (0.2 | ) |
Effect of Derivatives on the Statement of Operations - Derivatives Not Designated as Hedging Instruments
(In millions) | Location of Pretax (Loss) Recognized in Income | Amount of Pretax (Loss) Recognized in Income | ||||||
Derivate type | Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | ||||||
Interest rate cap contract | Interest expense | $ | (0.1 | ) | $ | (0.1 | ) |
STATEMENT OF CASH FLOWS
Fiscal Quarter Ended | March 31, 2012 | April 2, 2011 | ||||
(In millions) | ||||||
Supplemental disclosures of cash flow information: | ||||||
Cash paid (received) during the period for: | ||||||
Interest | $ | 11.9 | $ | 6.6 | ||
Net income tax refunds | (8.9 | ) | (14.5 | ) | ||
Supplemental disclosures of non-cash investing and financing activities: | ||||||
Restricted stock issued to employees | 18.7 | 26.0 |
EQUITY METHOD INVESTMENTS
On June 20, 2008, we acquired a 10% equity interest in GRI, an international accessories and apparel brand management and retail-distribution network, for $20.2 million. On June 24, 2009, we increased our equity interest to 25% for an additional $15.2 million. The selling shareholders of GRI are entitled to receive an additional cash payment equaling 60% of the amount of GRI's fiscal year 2011 net income that exceeds a certain threshold. GRI is the exclusive licensee of several of our brands in Asia, including Nine West, Anne Klein New York, AK Anne Klein, Easy Spirit, Enzo Angiolini and Joan & David. GRI also distributes other women's apparel, shoes and accessory brands. See "Accounts Receivable" for additional information regarding GRI.
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PENSION PLANS
Components of Net Periodic Benefit Cost
(In millions) | Fiscal Quarter Ended | |||||||||||
March 31, 2012 | April 2, 2011 | |||||||||||
Interest cost | $ | 0.6 | $ | 0.7 | ||||||||
Expected return on plan assets | (0.7 | ) | (0.7 | ) | ||||||||
Amortization of net loss | 0.6 | 0.4 | ||||||||||
Net periodic benefit cost | $ | 0.5 | $ | 0.4 |
Employer Contributions
During the fiscal quarter ended March 31, 2012, we contributed $0.5 million to our defined benefit pension plan. We anticipate contributing a total of $6.5 million during 2012.
SEGMENT INFORMATION
We identify operating segments based on, among other things, differences in products sold and the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Our operations are comprised of six reportable segments: domestic wholesale sportswear, domestic wholesale jeanswear, domestic wholesale footwear and accessories, domestic retail, international wholesale and international retail. Segment revenues are generated from the sale of apparel, footwear and accessories through wholesale channels and our own retail locations. The wholesale segments include wholesale operations with third party department and other retail stores, the retail segments include operations by our own stores, concession locations and e-commerce web sites, and income and expenses related to trademarks, licenses and general corporate functions are reported under "licensing, other and eliminations."
We define segment income as operating income before net interest expense, goodwill impairment charges, gains or losses on sales of subsidiaries, equity in earnings of unconsolidated affiliates and income taxes. Sales and transfers between segments generally are recorded at cost and treated as transfers of inventory, which are not reviewed when evaluating segment performance. The wholesale segments allocate to the retail segments a portion of their SG&A costs related to the inventory transferred to those divisions where the retail operations benefit from those costs.
Summarized below are our revenues and income by reportable segment for the fiscal quarters ended March 31, 2012 and April 2, 2011. We are an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.
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(In millions) | Domestic Wholesale Sportswear | Domestic Wholesale Jeanswear | Domestic Wholesale Footwear & Accessories | Domestic Retail | International Wholesale | International Retail | Licensing, Other & Eliminations | Consolidated | |||||||||||||||||
For the fiscal quarter ended March 31, 2012 | |||||||||||||||||||||||||
Revenues | $ | 233.6 | $ | 184.8 | $ | 225.9 | $ | 128.1 | $ | 73.4 | $ | 77.9 | $ | 12.3 | $ | 936.0 | |||||||||
Segment income (loss) | $ | 23.2 | $ | 16.6 | $ | 18.4 | $ | (22.4 | ) | $ | 9.9 | $ | (4.9 | ) | $ | (0.6 | ) | 40.2 | |||||||
Net interest expense | (42.7 | ) | |||||||||||||||||||||||
Equity in income of unconsolidated affiliate | 0.9 | ||||||||||||||||||||||||
Loss before benefit for income taxes | $ | (1.6 | ) | ||||||||||||||||||||||
For the fiscal quarter ended April 2, 2011 | |||||||||||||||||||||||||
Revenues | $ | 268.7 | $ | 235.5 | $ | 220.6 | $ | 135.1 | $ | 79.0 | $ | 10.3 | $ | 12.1 | $ | 961.3 | |||||||||
Segment income (loss) | $ | 30.8 | $ | 28.0 | $ | 18.1 | $ | (22.9 | ) | $ | 9.3 | $ | (1.7 | ) | $ | (0.4 | ) | 61.2 | |||||||
Net interest expense | (21.1 | ) | |||||||||||||||||||||||
Equity in income of unconsolidated affiliate | 1.3 | ||||||||||||||||||||||||
Income before provision for income taxes | $ | 41.4 |
SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
Certain of our subsidiaries function as co-issuers (fully and unconditionally guaranteed on a joint and several basis) of the outstanding debt of The Jones Group Inc. ("Jones"), including Jones Apparel Group, USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings") and JAG Footwear, Accessories and Retail Corporation ("JAG Footwear").
The following condensed consolidating balance sheets, statements of operations, statements of consolidated comprehensive income and statements of cash flows for the "Issuers" (consisting of Jones and Jones USA, Jones Holdings, JAG Footwear, which are all our subsidiaries that act as co-issuers and co-obligors) and the "Others" (consisting of all of our other subsidiaries, excluding all obligor subsidiaries) have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones are not presented as Jones has no independent operations or assets. There are no contractual restrictions on distributions from Jones USA, Jones Holdings or JAG Footwear to Jones.
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Condensed Consolidating Balance Sheets
(In millions)
March 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||
Issuers | Others | Elim- inations | Cons- olidated | Issuers | Others | Elim- inations | Cons- olidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 113.2 | $ | 33.9 | $ | - | $ | 147.1 | $ | 195.8 | $ | 43.0 | $ | - | $ | 238.8 | |||||||||
Accounts receivable | 266.6 | 192.0 | - | 458.6 | 182.9 | 156.7 | - | 339.6 | |||||||||||||||||
Inventories | 279.5 | 194.7 | (1.2 | ) | 473.0 | 270.5 | 220.9 | (0.3 | ) | 491.1 | |||||||||||||||
Prepaid and refundable income taxes | 5.0 | 0.5 | (5.5 | ) | - | 5.3 | 4.9 | 1.7 | 11.9 | ||||||||||||||||
Deferred taxes | 21.2 | 13.4 | - | 34.6 | 13.2 | 13.2 | - | 26.4 | |||||||||||||||||
Prepaid expenses and other current assets | 22.3 | 32.3 | - | 54.6 | 21.5 | 26.2 | - | 47.7 | |||||||||||||||||
Total current assets | 707.8 | 466.8 | (6.7 | ) | 1,167.9 | 689.2 | 464.9 | 1.4 | 1,155.5 | ||||||||||||||||
Property, plant and equipment | 62.7 | 210.3 | - | 273.0 | 64.9 | 206.5 | - | 271.4 | |||||||||||||||||
Due from affiliates | - | 1,620.8 | (1,620.8 | ) | - | - | 1,604.4 | (1,604.4 | ) | - | |||||||||||||||
Goodwill | 46.7 | 211.8 | - | 258.5 | 46.7 | 208.6 | - | 255.3 | |||||||||||||||||
Other intangibles | 6.7 | 894.2 | - | 900.9 | 6.9 | 890.5 | - | 897.4 | |||||||||||||||||
Deferred taxes | 85.4 | - | (85.4 | ) | - | 80.6 | - | (80.6 | ) | - | |||||||||||||||
Investments in and loan to subsidiaries | 3,093.6 | 36.2 | (3,093.6 | ) | 36.2 | 3,047.9 | 35.6 | (3,047.9 | ) | 35.6 | |||||||||||||||
Other assets | 78.0 | 20.7 | - | 98.7 | 79.3 | 20.8 | - | 100.1 | |||||||||||||||||
Total assets | $ | 4,080.9 | $ | 3,460.8 | $ | (4,806.5 | ) | $ | 2,735.2 | $ | 4,015.5 | $ | 3,431.3 | $ | (4,731.5 | ) | $ | 2,715.3 | |||||||
LIABILITIES AND EQUITY | |||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||
Current portion of long-term debt and capital lease obligations | $ | - | $ | 2.1 | $ | - | $ | 2.1 | $ | - | $ | 2.0 | $ | - | $ | 2.0 | |||||||||
Current portion of acquisition consideration payable | 226.9 | 1.4 | - | 228.3 | 192.7 | 1.4 | - | 194.1 | |||||||||||||||||
Accounts payable | 164.4 | 80.3 | - | 244.7 | 139.7 | 96.5 | - | 236.2 | |||||||||||||||||
Income taxes payable | 25.6 | 11.6 | (25.7 | ) | 11.5 | 11.2 | 8.3 | (18.1 | ) | 1.4 | |||||||||||||||
Accrued expenses and other current liabilities | 65.4 | 59.9 | - | 125.3 | 79.0 | 67.3 | - | 146.3 | |||||||||||||||||
Total current liabilities | 482.3 | 155.3 | (25.7 | ) | 611.9 | 422.6 | 175.5 | (18.1 | ) | 580.0 | |||||||||||||||
Long-term debt | 832.3 | 0.1 | - | 832.4 | 831.3 | 0.1 | - | 831.4 | |||||||||||||||||
Obligations under capital leases | - | 22.8 | - | 22.8 | - | 23.3 | - | 23.3 | |||||||||||||||||
Income taxes payable | 0.5 | - | - | 0.5 | 6.7 | - | - | 6.7 | |||||||||||||||||
Deferred taxes | - | 166.3 | (91.4 | ) | 74.9 | - | 160.0 | (86.6 | ) | 73.4 | |||||||||||||||
Acquisition consideration payable | 5.8 | - | - | 5.8 | 17.7 | - | - | 17.7 | |||||||||||||||||
Due to affiliates | 1,620.8 | - | (1,620.8 | ) | - | 1,604.4 | - | (1,604.4 | ) | - | |||||||||||||||
Other | 69.1 | 24.0 | - | 93.1 | 67.7 | 25.7 | - | 93.4 | |||||||||||||||||
Total liabilities | 3,010.8 | 368.5 | (1,737.9 | ) | 1,641.4 | 2,950.4 | 384.6 | (1,709.1 | ) | 1,625.9 | |||||||||||||||
Equity: | |||||||||||||||||||||||||
Common stock and additional paid-in capital | 527.7 | 2,352.4 | (2,352.4 | ) | 527.7 | 522.6 | 2,352.4 | (2,352.4 | ) | 522.6 | |||||||||||||||
Retained earnings | 562.7 | 739.0 | (715.5 | ) | 586.2 | 572.1 | 704.3 | (680.2 | ) | 596.2 | |||||||||||||||
Accumulated other comprehensive (loss) income | (20.3 | ) | 0.7 | (0.7 | ) | (20.3 | ) | (29.6 | ) | (10.2 | ) | 10.2 | (29.6 | ) | |||||||||||
Total Jones stockholders' equity | 1,070.1 | 3,092.1 | (3,068.6 | ) | 1,093.6 | 1,065.1 | 3,046.5 | (3,022.4 | ) | 1,089.2 | |||||||||||||||
Noncontrolling interest | - | 0.2 | - | 0.2 | - | 0.2 | - | 0.2 | |||||||||||||||||
Total equity | 1,070.1 | 3,092.3 | (3,068.6 | ) | 1,093.8 | 1,065.1 | 3,046.7 | (3,022.4 | ) | 1,089.4 | |||||||||||||||
Total liabilities and equity | $ | 4,080.9 | $ | 3,460.8 | $ | (4,806.5 | ) | $ | 2,735.2 | $ | 4,015.5 | $ | 3,431.3 | $ | (4,731.5 | ) | $ | 2,715.3 |
Condensed Consolidating Statements of Operations
(In millions)
Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | |||||||||||||||||||||||
Issuers | Others | Elim- inations | Cons- olidated | Issuers | Others | Elim- inations | Cons- olidated | |||||||||||||||||
Net sales | $ | 570.6 | $ | 359.6 | $ | (6.8 | ) | $ | 923.4 | $ | 617.6 | $ | 336.2 | $ | (4.8 | ) | $ | 949.0 | ||||||
Licensing income | - | 12.3 | - | 12.3 | - | 12.1 | - | 12.1 | ||||||||||||||||
Other revenues | 0.3 | - | - | 0.3 | 0.2 | - | - | 0.2 | ||||||||||||||||
Total revenues | 570.9 | 371.9 | (6.8 | ) | 936.0 | 617.8 | 348.3 | (4.8 | ) | 961.3 | ||||||||||||||
Cost of goods sold | 377.3 | 218.9 | (3.7 | ) | 592.5 | 408.2 | 223.9 | (1.5 | ) | 630.6 | ||||||||||||||
Gross profit | 193.6 | 153.0 | (3.1 | ) | 343.5 | 209.6 | 124.4 | (3.3 | ) | 330.7 | ||||||||||||||
Selling, general and administrative expenses | 206.7 | 98.8 | (2.2 | ) | 303.3 | 220.7 | 52.1 | (3.3 | ) | 269.5 | ||||||||||||||
Operating (loss) income | (13.1 | ) | 54.2 | (0.9 | ) | 40.2 | (11.1 | ) | 72.3 | - | 61.2 | |||||||||||||
Net interest expense (income) and financing costs | 43.2 | (0.5 | ) | - | 42.7 | 22.6 | (1.5 | ) | - | 21.1 | ||||||||||||||
Equity in income of unconsolidated affiliate | - | 0.9 | - | 0.9 | - | 1.3 | - | 1.3 | ||||||||||||||||
(Loss) income before (benefit) provision for income taxes and equity in earnings of subsidiaries | (56.3 | ) | 55.6 | (0.9 | ) | (1.6 | ) | (33.7 | ) | 75.1 | - | 41.4 | ||||||||||||
(Benefit) provision for income taxes | (15.9 | ) | 15.7 | (0.4 | ) | (0.6 | ) | (5.9 | ) | 21.4 | - | 15.5 | ||||||||||||
Equity in earnings of subsidiaries | 39.9 | - | (39.9 | ) | - | 53.5 | - | (53.5 | ) | - | ||||||||||||||
Net (loss) income | (0.5 | ) | 39.9 | (40.4 | ) | (1.0 | ) | 25.7 | 53.7 | (53.5 | ) | 25.9 | ||||||||||||
Less: income attributable to noncontrolling interest | - | 0.2 | - | 0.2 | - | 0.2 | - | 0.2 | ||||||||||||||||
(Loss) income attributable to Jones | $ | (0.5 | ) | $ | 39.7 | $ | (40.4 | ) | $ | (1.2 | ) | $ | 25.7 | $ | 53.5 | $ | (53.5 | ) | $ | 25.7 |
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Condensed Consolidating Statements of Other Comprehensive Income
(In millions)
Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | ||||||||||||||||||||||||
Issuers | Others | Elim- inations | Cons- olidated | Issuers | Others | Elim- inations | Cons- olidated | ||||||||||||||||||
Net (loss) income | $ | (0.5 | ) | $ | 39.9 | $ | (40.4 | ) | $ | (1.0 | ) | $ | 25.7 | $ | 53.7 | $ | (53.5 | ) | $ | 25.9 | |||||
Other comprehensive income: | |||||||||||||||||||||||||
Change in fair value of cash flow hedges, net of tax | (0.1 | ) | (0.1 | ) | 0.1 | (0.1 | ) | (0.4 | ) | (0.4 | ) | 0.4 | (0.4 | ) | |||||||||||
Reclassification adjustment for hedge gains and losses included in net income, net of tax | - | - | - | - | 0.1 | 0.1 | (0.1 | ) | 0.1 | ||||||||||||||||
Foreign currency translation adjustments | 9.4 | 9.4 | (9.4 | ) | 9.4 | 3.3 | 3.3 | (3.3 | ) | 3.3 | |||||||||||||||
Total other comprehensive income | 9.3 | 9.3 | (9.3 | ) | 9.3 | 3.0 | 3.0 | (3.0 | ) | 3.0 | |||||||||||||||
Comprehensive income | $ | 8.8 | $ | 49.2 | $ | (49.7 | ) | $ | 8.3 | $ | 28.7 | $ | 56.7 | $ | (56.5 | ) | $ | 28.9 |
Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal Quarter Ended March 31, 2012 | Fiscal Quarter Ended April 2, 2011 | ||||||||||||||||||||||||
Issuers | Others | Elim- inations | Cons- olidated | Issuers | Others | Elim- inations | Cons- olidated | ||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (67.9 | ) | $ | 10.9 | $ | (2.8 | ) | $ | (59.8 | ) | $ | (145.0 | ) | $ | 18.8 | $ | (10.6 | ) | $ | (136.8 | ) | |||
Cash flows from investing activities: | |||||||||||||||||||||||||
Capital expenditures | (3.9 | ) | (14.3 | ) | - | (18.2 | ) | (18.2 | ) | (14.7 | ) | - | (32.9 | ) | |||||||||||
Other | - | (0.2 | ) | - | (0.2 | ) | - | - | - | - | |||||||||||||||
Net cash used in investing activities | (3.9 | ) | (14.5 | ) | - | (18.4 | ) | (18.2 | ) | (14.7 | ) | - | (32.9 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||||
Issuance of 6.875% Senior Notes due 2019 | - | - | - | - | 300.0 | - | - | 300.0 | |||||||||||||||||
Debt issuance costs | - | - | - | - | (6.4 | ) | - | - | (6.4 | ) | |||||||||||||||
Dividends paid | (4.0 | ) | (2.8 | ) | 2.8 | (4.0 | ) | (4.3 | ) | (10.6 | ) | 10.6 | (4.3 | ) | |||||||||||
Repurchase of common shares | (8.9 | ) | - | - | (8.9 | ) | (10.0 | ) | - | - | (10.0 | ) | |||||||||||||
Payments of acquisition consideration payable | - | (2.0 | ) | - | (2.0 | ) | - | (4.2 | ) | - | (4.2 | ) | |||||||||||||
Other items, net | 2.1 | (0.6 | ) | - | 1.5 | 1.5 | (0.5 | ) | - | 1.0 | |||||||||||||||
Net cash (used in) provided by financing activities | (10.8 | ) | (5.4 | ) | 2.8 | (13.4 | ) | 280.8 | (15.3 | ) | 10.6 | 276.1 | |||||||||||||
Effect of exchange rates on cash | - | (0.1 | ) | - | (0.1 | ) | - | (0.7 | ) | - | (0.7 | ) | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (82.6 | ) | (9.1 | ) | - | (91.7 | ) | 117.6 | (11.9 | ) | - | 105.7 | |||||||||||||
Cash and cash equivalents, beginning | 195.8 | 43.0 | - | 238.8 | 163.0 | 37.8 | - | 200.8 | |||||||||||||||||
Cash and cash equivalents, ending | $ | 113.2 | $ | 33.9 | $ | - | $ | 147.1 | $ | 280.6 | $ | 25.9 | $ | - | $ | 306.5 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information and analysis of our results of operations for the 13 week periods ended March 31, 2012 (hereinafter referred to as the "first fiscal quarter of 2012") and April 2, 2011 (hereinafter referred to as the "first fiscal quarter of 2011") and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.
Executive Overview
We design, contract for the manufacture of and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children and women's and men's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty stores, department stores and mass merchandisers, primarily in the United States, Canada and Europe. We also operate our own network of retail and factory outlet stores and several e-commerce web sites. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.
Retail Store Closings
We continue to review our domestic retail operations for underperforming locations. As a result of these reviews, we have decided to close retail locations that no longer provide strategic benefits. During the first fiscal quarters of 2012 and 2011, we closed 41 and 40 locations, respectively, and we anticipate closing additional locations in 2012. We accrued $0.8 million and $0.6 million of termination benefits and associated employee costs during the first fiscal quarters of 2012 and 2011, respectively. In connection with our decision to close these stores, we reviewed the associated long-term assets for impairments. As a result of these reviews, we recorded $0.4 million and $1.2 million of impairment losses in the first fiscal quarters of 2012 and 2011, respectively, on leasehold improvements and furniture and fixtures located in the stores to be closed. These costs are reported as selling, general and administrative ("SG&A") expenses in the domestic retail segment.
Critical Accounting Policies
Several of our accounting policies involve significant or complex judgements and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of goodwill, intangible assets with indefinite lives and acquisition consideration liabilities. Estimates related to accounts receivable and inventory affect all of our reportable segments. Estimates related to goodwill affect our domestic wholesale sportswear, domestic wholesale footwear and accessories, international wholesale and international retail segments. Estimates related to intangible assets with indefinite lives affect our domestic footwear and accessories, international wholesale, international retail and licensing, other and eliminations segments. Estimates related to other long-lived assets primarily affect our domestic and international retail segments. Estimates related to our acquisition consideration liabilities affect our domestic wholesale sportswear segment and our interest expense.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions given to our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.
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We test our goodwill and our indefinite-lived trademarks for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that could reduce the fair value of an asset below its carrying value. These tests utilize discounted cash flow models to estimate fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates, and material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trademark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv) projected long-term growth rates used in the derivation of terminal values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.
Acquisition consideration liabilities are recorded as a result of acquisitions, where a portion of the purchase price is payable at the end of a specific future period, with the amount of payment based on the financial results of the acquired business during that period. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the liabilities; (ii) gross margin or earnings before interest, taxes, depreciation and amortization ("EBITDA") multipliers as specified in the associated acquisition agreements; and (iii) estimated ranges of sales or EBITDA growth. Changes in our assumptions could materially impact our fair value estimates, and material gains and losses could result where the estimated fair value of these liabilities differ from their carrying amounts.
Results of Operations
Statements of Operations Stated in Dollars and as a Percentage of Total Revenues
(In millions) | Fiscal Quarter Ended | |||||||||
March 31, 2012 | April 2, 2011 | |||||||||
Net sales | $ | 923.4 | 98.7 | % | $ | 949.0 | 98.7 | % | ||
Licensing income | 12.3 | 1.3 | 12.1 | 1.3 | ||||||
Other revenues | 0.3 | 0.0 | 0.2 | 0.0 | ||||||
Total revenues | 936.0 | 100.0 | 961.3 | 100.0 | ||||||
Cost of goods sold | 592.5 | 63.3 | 630.6 | 65.6 | ||||||
Gross profit | 343.5 | 36.7 | 330.7 | 34.4 | ||||||
Selling, general and administrative expenses | 303.3 | 32.4 | 269.5 | 28.0 | ||||||
Operating income | 40.2 | 4.3 | 61.2 | 6.4 | ||||||
Net interest expense and financing costs | 42.7 | 4.6 | 21.1 | 2.2 | ||||||
Equity in income of unconsolidated affiliate | 0.9 | 0.1 | 1.3 |
| 0.1 | |||||
(Loss) income before (benefit) provision for income taxes | (1.6 | ) | (0.2 | ) | 41.4 | 4.3 | ||||
(Benefit) provision for income taxes | (0.6 | ) | (0.1 | ) | 15.5 | 1.6 | ||||
Net (loss) income | (1.0 | ) | (0.1 | ) | 25.9 | 2.7 | ||||
Less: income attributable to noncontrolling interest | 0.2 | 0.0 | 0.2 | 0.0 | ||||||
(Loss) income attributable to Jones | $ | (1.2 | ) | (0.1 | )% | $ | 25.7 | 2.7 | % |
Percentage totals may not add due to rounding.
Fiscal Quarter Ended March 31, 2012 Compared with Fiscal Quarter Ended April 2, 2011
Revenues. Total revenues for the first fiscal quarter of 2012 were $936.0 million, compared with $961.3 million for the first fiscal quarter of 2011, a decrease of 2.6%. Revenues by segment were as follows:
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(In millions) | First Fiscal Quarter of 2012 | First Fiscal Quarter of 2011 | Increase (Decrease | Percent Change | |||||||
Domestic wholesale sportswear | $ | 233.6 | $ | 268.7 | $ | (35.1 | ) | (13.1 | %) | ||
Domestic wholesale jeanswear | 184.8 | 235.5 | (50.7 | ) | (21.5 | ) | |||||
Domestic wholesale footwear and accessories | 225.9 | 220.6 | 5.3 | 2.4 | |||||||
Domestic retail | 128.1 | 135.1 | (7.0 | ) | (5.2 | ) | |||||
International wholesale | 73.4 | 79.0 | (5.6 | ) | (7.1 | ) | |||||
International retail | 77.9 | 10.3 | 67.6 | 656.3 | |||||||
Licensing and other | 12.3 | 12.1 | 0.2 | 1.7 | |||||||
Total revenues | $ | 936.0 | $ | 961.3 | $ | (25.3 | ) | (2.6 | %) |
Domestic wholesale sportswear revenues decreased $35.1 million, primarily due to decreased revenues in our Jones New York-related sportswear product lines, primarily due to reduced shipments to lower-performing retail doors, and our Le Suit and Kasper suit product lines due to lower full-price sales resulting from product performance at the retail level. These decreases were partially offset by initial shipments of our AK Anne Klein and Nine & Co. dress and Gloria Vanderbilt suit lines, as well as increased revenues in our Rachel Roy product line due to positive product performance at retail.
Domestic wholesale jeanswear revenues decreased $50.7 million, primarily due to reduced shipments of our l.e.i. product line (due to the product performance at the retail stores), our Gloria Vanderbilt and Erika product lines (primarily due to the change in retail strategy at one of our customers), our Bandolino product line (due to product performance at retail) and our Energie product line (due to the challenging retail climate in the moderate junior tops business as well as product assortment issues), partially offset by increased shipments of our Jessica Simpson and GLO Knits product lines due to positive product performance at retail.
Domestic wholesale footwear and accessories revenues increased $5.3 million, primarily due to increased shipments of our handbag and jewelry product lines (due to strong retail performance for our AK Anne Klein handbags and jewelry, Napier jewelry and Nine West handbags and jewelry), the initial launch of our B Brian Atwood footwear product line and increases in our Stuart Weitzman, AK Anne Klein, Enzo Angiolini, Circa Joan & David and Sam & Libby footwear product lines due to product performance at retail. These increases were partially offset by reduced shipments of our Mootsies Tootsies product line (due to the decision of a retail partner to exit the brand), our Nine West footwear product line (due to a decision to reduce the brand's penetration in the value channel) and our Bandolino and Boutique 9 footwear product lines, due to product performance at retail and the conversion of our children's footwear product lines to a licensed business.
Domestic retail revenues decreased $7.0 million. Revenue increases from a 1.1% increase in comparable store sales ($1.3 million) resulting from positive product performance were offset by a net $8.3 million reduction in revenues primarily related to our program to close underperforming locations. We began the current quarter with 672 retail locations and had a net decrease of 39 locations to end the quarter with 633 locations, compared with 723 locations at the end of the prior period. Our comparable footwear store sales increased 5.3% ($3.8 million), our comparable e-commerce business sales decreased 13.8% ($2.5 million) and our comparable apparel store sales were unchanged. Comparable stores are locations (including e-commerce sites) that have been open for a full year, are not scheduled to close in the current period and are not scheduled for an expansion or downsize by more than 25% or relocation to a different street or mall. The first fiscal quarter of 2012 also contained one fewer sales day than the first fiscal quarter of 2011.
International wholesale revenues decreased $5.6 million, primarily due to a $4.1 million decrease in our Nine West international business due to the timing of product shipments and the effect of the acquisition of KG Group Holdings ("Kurt Geiger"), where such revenues are now intercompany sales, partially offset by increased sales to our licensee in Asia and modest increases in South Africa and Mexico, a $3.2 million decrease in our Canadian business (including the discontinuation of a lower-
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margin program), a $2.8 million decrease in our Stuart Weitzman European business (primarily in Italy and the United Kingdom) and a $0.7 million reduction in our Jones New York shipments to Mexico. These decreases are partially offset by $5.2 million of sales from the acquisition of Kurt Geiger.
International retail revenues increased $67.6 million, primarily due to $63.5 million from the acquisition of Kurt Geiger and $3.8 million of initial sales of Jones New York products in our Spanish retail business (which began at the end of the first fiscal quarter of 2011), a $0.3 million increase in our Canadian and Stuart Weitzman European retail stores. We began the current quarter with 315 stores and had a net increase of five locations to end the quarter with 320 stores, compared with 97 locations at the end of the prior period.
Licensing and other revenues increased $0.2 million, primarily due to overall increased sales volume of our licensees.
Gross Profit. The gross profit margins were 36.7% and 34.4% for the first fiscal quarters of 2012 and 2011, respectively.
Domestic wholesale sportswear gross profit margins were 35.0% and 34.4% for the first fiscal quarters of 2012 and 2011, respectively. The increase was largely due to higher realized selling prices as well as lower levels of sales (with improved margins) to off-price retailers.
Domestic wholesale jeanswear gross profit margins were 26.3% and 26.1% for the first fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold.
Domestic wholesale footwear and accessories gross profit margins were 31.3% and 31.2% for the first fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to a reduction of sales to off-price retailers as well as price increases and lower product costs for our Stuart Weitzman brand, partially offset by higher levels of markdown assistance in our other footwear and accessories product lines.
Domestic retail gross profit margins were 50.3% and 48.3% for the first fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to lower levels of promotional activity and lower freight costs.
International wholesale gross profit margins were 33.8% and 32.5% for the first fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the acquisition of Kurt Geiger, the mix of products sold and changes in pricing strategies for our Canadian business (including the discontinuation of a lower-margin program).
International retail gross profit margins were 53.5% and 49.5% for the first fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold as a result of the acquisition of Kurt Geiger and lower levels of promotional activity for our Canadian retail stores.
Selling, General and Administrative Expenses. SG&A expenses were $303.3 million and $269.5 million in the first fiscal quarters of 2012 and 2011, respectively. The acquisition of Kurt Geiger added $35.9 million in SG&A expenses to the first fiscal quarter of 2012.
Domestic wholesale sportswear SG&A expenses decreased $3.0 million, primarily due to a $4.5 million reduction in advertising and marketing expenses, a $3.0 million reduction in acquisition consideration payable related to the acquisition of Moda Nicola International, LLC, a decrease of $1.1 million in samples expense due to the timing of the receipt of samples and a $1.1 million decrease in compensation expense due to reduced headcount. These decreases were offset by a $5.6 million increase in severance expense, a $0.4 million favorable use tax settlement in the prior period, a $0.4 million increase in rent expense due to new office space added in the current period and $0.3 million of other net increases.
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Domestic wholesale jeanswear SG&A expenses decreased $1.4 million, primarily due to a $2.8 million decrease in distribution expense resulting from a decrease in the number of units sold, $1.5 million reduction in compensation expense due to reduced headcount and a $0.6 million reduction in severance expense. These decreases were partially offset by a $0.8 million increase in samples expense, a $0.8 million increase in advertising expense, a $0.5 million favorable use tax settlement in the prior period, a $0.5 million increase in administrative expense and $0.9 million of other net increases.
Domestic wholesale footwear and accessories SG&A expenses increased $1.5 million, primarily due to a $1.7 million increase in marketing and advertising expenses, a $0.9 million increase in administrative expenses, a $0.6 million increase in showroom rent and occupancy expenses, a $0.4 million increase in distribution expense and a $0.3 million increase in severance expense. These increases are partially offset by a $1.1 million decrease in compensation expense and a $0.7 million reduction in professional fees and $0.6 million of other net decreases.
Domestic retail SG&A expenses decreased $1.4 million, primarily due to a $2.3 million reduction in occupancy and depreciation expenses, a $1.9 million reduction in salaries and benefits and a $0.6 million reduction in credit card fees as a result of operating fewer stores in the current period, as well as a $0.8 million decrease in store-related impairment losses from the prior period. These decreases were partially offset by $2.0 million for operating and rent expenses for new Stuart Weitzman locations, a $0.7 million increase in severance expense, a $0.8 million increase in other administrative expenses and $0.7 million of other net increases.
International wholesale SG&A expenses decreased $1.5 million, primarily due to a $2.1 million decrease in expenses in our Canadian business (due to $1.2 million in lower severance expense, $0.4 million in lower advertising expense, $0.1 million in favorable exchange rates and $0.4 million in other net reductions), a net $0.5 million decrease in our Nine West international business (primarily due to $0.6 million in severance expense in the prior period and decreased compensation expense of $0.2 million in the current period, offset by increases in advertising and product development expenses of $0.3 million) and a net $0.2 million of other net decreases. These decreases were partially offset by $1.3 million of expenses due to the acquisition of Kurt Geiger.
International retail SG&A expenses increased $39.8 million, primarily due to $36.9 million from the acquisition of Kurt Geiger, $2.2 million from a full quarter of our new Spanish retail business, and a net $0.6 million increase in expenses for our Canadian business (primarily due to higher administrative expenses) and $0.1 million of other net increases.
SG&A expenses for the licensing, other and eliminations segment decreased $0.2 million, primarily due to a $3.5 million effect of favorable exchange rate differences between the U.S. Dollar and the British Pound and Canadian Dollar, primarily related to intercompany accounts, and $0.1 million in other net decreases. These decreases were partially offset by a $2.3 million increase in compensation expense, primarily related to higher amortization of stock-based compensation, and $1.1 million reduction in advertising contribution payments from our licensees in the current period.
Operating Income. The resulting operating income for the first fiscal quarter of 2012 was $40.2 million, compared with $61.2 million for the first fiscal quarter of 2011, due to the factors described above.
Net Interest Expense. Net interest expense increased $21.6 million, primarily due to an $18.8 million increase in interest recorded on the Stuart Weitzman Holdings, LLC ("SWH") acquisition consideration liability (due to an increase in the estimated payments to be made under the acquisition agreement) and a $3.6 million increase resulting from the issuance of our 6.875% Senior Notes Due 2019 (the "2019 Notes") on March 7, 2011, partially offset by a net $0.6 million decrease in interest expense from our interest rate swaps and cap and $0.2 million of other net decreases.
Income Taxes. The effective income tax rate was 37.0% and 37.5% for the first fiscal quarters of 2012 and 2011, respectively. The decrease is primarily due to the impact of the foreign income tax differential in the first fiscal quarter of 2012 compared with the first fiscal quarter of 2011.
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Net (Loss) Income and (Loss) Earnings Per Share. Net loss was $1.0 million in the first fiscal quarter of 2012, compared with net income of $25.9 million in the first fiscal quarter of 2011. Diluted loss per share for the first fiscal quarter of 2012 was $0.01, compared with diluted earnings per share of $0.30 for the first fiscal quarter of 2011, with 8.8% fewer diluted shares outstanding.
Liquidity and Capital Resources
Our principal capital requirements have been for working capital needs, capital expenditures, dividend payments, acquisition funding and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations. We currently fund our operations primarily through cash generated by operating activities, and rely on our revolving credit facility for the issuance of trade letters of credit for the purchases of inventory and for cash borrowings as needed. As of March 31, 2012, total cash and cash equivalents were $147.1 million, a decrease of $91.7 million from the $238.8 million reported as of December 31, 2011.
Cash flows from operating activities used $59.8 million and $136.8 million in the first fiscal quarters of 2012 and 2011, respectively. The change from the prior period was primarily due to changes in working capital. Accounts receivable increased less in the current period primarily due to lower levels of wholesale shipments compared with the prior period. Accounts payable increased in the current period compared to a decrease in the prior period primarily due to the timing of inventory purchases and payments.
Cash flows from investing activities used $18.4 million and $32.9 million in the first fiscal quarters of 2012 and 2011, respectively, for the purchases of property and equipment in both periods.
Cash flows from financing activities used $13.4 million in the first fiscal quarter of 2012, primarily for repurchases of our common stock, the payment of dividends and principal payments on capitalized leases.
Cash flows from financing activities provided $276.1 million in the first fiscal quarter of 2011, primarily as the result of the issuance of our 2019 Notes. Uses of cash during this period were primarily for debt issuance and financing costs, the repurchase of our common stock and the payment of dividends.
In March 2011, we issued the 2019 Notes. Net proceeds were $293.3 million, of which $45.0 million was used to repay amounts then outstanding under our secured revolving credit agreement.
We repurchased approximately 1.0 million shares of our common stock for $8.9 million on the open market during the first fiscal quarter 2012 and 0.7 million shares of our common stock for $10.0 million on the open market during the first fiscal quarter 2011. As of March 31, 2012, $206.5 million of Board authorized repurchases was still available. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition.
We have a secured revolving credit agreement expiring on April 28, 2016 (the "Credit Facility") with several lending institutions to borrow an aggregate principal amount of up to $650 million. The terms and conditions of our Credit Facility provide for, among other things: (1) a $350 million U.S. commitment which may be drawn by the U.S. borrowers as revolving loans in U.S. Dollars or letters of credit in Canadian Dollars, U.S. Dollars, or an "LC Alternative Currency" (namely Euros, sterling, or any other currency acceptable to the lenders); and (2) a $300 million international commitment which may be drawn by the U.S. borrowers or by any Canadian or European borrowers as revolving loans or letters of credit in Canadian Dollars, U.S. Dollars, or an LC Alternative Currency. Up to the entire amount of the Credit Facility is available for cash borrowings, with an overall sublimit of up to $350 million for all letters of credit. All of the overall $350 million sublimit may be used for trade letters of credit; and within that overall sublimit, there are additional sublimits, including (but not limited to) $50 million for standby letters of credit and $150 million for letters of credit under the U.S. commitment denominated in an LC Alternative Currency.
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Borrowings under the Credit Facility may be used to refinance certain existing indebtedness, to make certain investments (including acquisitions), and for general corporate purposes in the ordinary course of business. Such borrowings bear interest either based on the alternate base rate, as defined in the Credit Facility, or based on Eurocurrency rates, each with a margin that depends on the availability remaining under the Credit Facility. The Credit Facility contains customary events of default.
Availability under the Credit Facility is determined with reference to a borrowing base consisting of a percentage of eligible inventory, accounts receivable, credit card receivables and licensee receivables, minus reserves determined by the joint collateral agents. At March 31, 2012, we had no cash borrowings and $20.7 million of letters of credit outstanding, and our remaining availability was $487.7 million. If availability under the Credit Facility falls below a stated level, we will be required to comply with a minimum fixed charge coverage ratio. The Credit Facility also contains affirmative and negative covenants that, among other things, will limit or restrict our ability to (1) incur indebtedness, (2) create liens, (3) merge, consolidate, liquidate or dissolve, (4) make investments (including acquisitions), loans or advances, (5) sell assets, (6) enter into sale and leaseback transactions, (7) enter into swap agreements, (8) make certain restricted payments (including dividends and other payments in respect of capital stock), (9) enter into transactions with affiliates, (10) enter into restrictive agreements, and (11) amend material documents. The Credit Facility is secured by a first priority lien on substantially all of our personal property.
SWH has a $1.5 million unsecured borrowing facility with a lending institution that expires on October 1, 2012 and is renewable on an annual basis, under which no cash borrowings and $1.1 million in letters of credit were outstanding at March 31, 2012. Cash borrowings under this facility bear interest based on either the prevailing prime rate or the prevailing LIBOR rate plus 300 basis points. SWH also has a €0.3 million variable-rate unsecured borrowing facility with a European lending institution that expires in March 2013 and is renewable on an annual basis, under which no amounts were outstanding at March 31, 2012.
On April 25, 2012, we announced that our Board of Directors had declared a quarterly cash dividend of $0.05 per share to all common stockholders of record as of May 11, 2012 for payment on May 25, 2012.
Economic Outlook
The uncertain economic and political environments have resulted in fluctuating consumer confidence. Rising energy, gasoline and other prices are reducing consumers' discretionary income. This may lead to reduced consumer spending, which could affect our net sales and our future profitability. Reduced consumer spending, combined with rising costs related to changes in foreign exchange rates, increasing labor costs (primarily in Asia), commodity prices and increasing transportation costs, may reduce our gross profit margins from present levels. We may be limited in our ability to increase our selling prices to offset rising costs. Should the consumer not accept higher retail prices for our products, these rising costs would have a material adverse effect on our business.
Our products are manufactured in many foreign countries, including China, Brazil, Spain and Italy. Due to the current and expected future economic relationship between the United States and China, we may experience increased risk related to changes in foreign currency exchange rates should China allow the Yuan to continue to rise in value against the Dollar. We may also experience increased risk related to changes in foreign currency rates between the Euro, British Pound and the Dollar due to economic conditions in Europe. Should either of these occur, increased production costs for our goods manufactured in China, Spain and Italy could result.
When adverse economic conditions exist in the United States or abroad, we may experience increased risk related to the collectibility of our accounts receivable, and we may increase our provision for doubtful accounts in the future should any of our wholesale customers experience significant financial difficulties. If such conditions lead to defaults that are individually or cumulatively significant, we could experience a material adverse impact on our financial condition, results of operations and/or liquidity.
The economic turmoil in the credit markets over the past several years and the negative effects of the economic environment on our business may negatively impact our ability to borrow funds in the future.
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However, we believe that available cash and cash equivalents, funds generated by operations and the Credit Facility will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our acquisition liabilities and commitments. Although there can be no assurances, we believe that the participating banks will be willing and able to loan funds to us in accordance with their legal obligations under the Credit Facility.
New Accounting Standards
There have been no new accounting standards issued by the FASB during 2012 through the date of this filing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
We are exposed to the impact of interest rate changes, foreign currency fluctuations, and changes in the market value of our fixed rate long-term debt. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes. The following quantitative disclosures were derived using quoted market prices, yields and theoretical pricing models obtained through independent pricing sources for the same or similar types of financial instruments, taking into consideration the underlying terms, such as the coupon rate, term to maturity and imbedded call options. Certain items such as lease contracts, insurance contracts, and obligations for pension and other post-retirement benefits were not included in the analysis. For further information see "Derivatives" and "Financial Instruments" in the Notes to Consolidated Financial Statements.
Interest Rates
Our primary interest rate exposures relate to the fair value of our fixed rate long-term debt and interest expense related to our revolving credit facility.
At March 31, 2012, the fair value of our fixed rate debt was $759.2 million. On that date, the potential decrease in fair value of our fixed rate long-term debt instruments resulting from a hypothetical 10% adverse change in interest rates was approximately $69.0 million.
Our primary interest rate exposures on variable rate credit facilities are with respect to United States and Canadian short-term rates. Cash borrowings under these facilities bear interest at rates that vary with changes in prevailing market rates. At March 31, 2012, we had $651.9 million in variable rate credit facilities, under which no cash borrowings and $21.8 million of letters of credit were outstanding.
At March 31, 2012, we had outstanding interest rate swaps to convert our $250 million 5.125% Senior Notes due 2014 (the "2014 Notes") and $150 million of our Senior Notes due 2019 (the "2019 Notes") to variable-rate debt.
Under the terms of the swap contracts related to the 2014 Notes, we are required to make semiannual variable-rate payments to the counterparties calculated based on three-month LIBOR rates (which are reset on the 15th day of each calendar quarter) plus 3.46%, and the counterparties are obligated to make semiannual fixed-rate payments to us of 5.125%. These swap transactions have a termination date of November 15, 2014, the date the 2014 Notes mature.
Under the terms of the swap contracts related to the 2019 Notes, we are required to make semiannual variable-rate payments to the counterparties calculated based on one-month LIBOR rates (which are reset on the 15th day of each calendar quarter) plus 5.195%, and the counterparties are obligated to make
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semiannual fixed-rate payments to us of 6.875%. The swap transactions have an effective date of March 21, 2012 and a termination date of March 15, 2019, the date the 2019 Notes mature.
We also have outstanding an interest rate cap that is used in conjunction with the interest rate swaps on the 2014 Notes to limit our floating rate exposure. The cap limits our three-month LIBOR rate exposure to 5.0%. The cap has a termination date of November 15, 2014.
At March 31, 2012, the fair value of the interest rate swaps was a net asset of $5.6 million and the fair value of the interest rate cap was an asset of $0.1 million.
Foreign Currency Exchange Rates
We are exposed to market risk related to changes in foreign currency exchange rates. Our products are primarily purchased from foreign manufacturers in pre-set United States Dollar prices, although we also purchase certain products in Euros and Pounds. We also have assets, liabilities and intercompany accounts denominated in certain foreign currencies that generate exchange gains and losses as exchange rates change. To date, we generally have not been materially adversely affected by fluctuations in exchange rates.
At March 31, 2012, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total notional value of US $15.2 million at a weighted-average exchange rate of $1.00 maturing through November 2012. The fair value of these contracts at March 31, 2012 was a $0.1 million unrealized loss. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to a financial instrument fails to perform its obligation. However, we do not expect the counterparty, which presently has a high credit rating, to fail to meet its obligations.
Item 4. Controls and Procedures
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are designed to provide and are effective in providing reasonable assurance in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective in ensuring that our financial statements are fairly presented in conformity with generally accepted accounting principles.
We have made changes to our internal controls and procedures over financial reporting to address the implementation of SAP, an enterprise resource planning ("ERP") system. SAP will integrate our operational and financial systems and expand the functionality of our financial reporting processes. We began the process of implementing SAP throughout The Jones Group Inc. and our consolidated subsidiaries during the fourth quarter of 2006. During the first fiscal quarter of 2012, no additional businesses were converted to this system. We have adequately controlled the transition to the new processes and controls, with no negative impact to our internal control environment. We expect to continue the implementation of this system to all locations over a multi-year period. As the phased implementation occurs, we will experience changes in internal control over financial reporting. We expect this ERP system to further advance our control environment by automating manual processes, improving management visibility and standardizing processes as its full capabilities are utilized.
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PART II. OTHER INFORMATION
We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.
Item 2. Issuer Purchase of Equity Securities
The following table sets forth the repurchases of our common stock for the fiscal quarter ended March 31, 2012.
Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
January 1, 2012 to January 28, 2012 | 745,201 | $9.14 | 745,201 | $208,596,986 |
January 29, 2012 to February 25, 2012 | 51,153 | $9.61 | 24,300 | $208,378,043 |
February 26, 2012 to March 31, 2012 | 200,000 | $9.61 | 200,000 | $206,455,763 |
Total | 996,354 | $9.26 | 969,501 | $206,455,763 |
We withheld 26,853 shares in February 2012 to cover withholding taxes on the vesting of employee restricted stock. The remainder of the purchases were made under a program announced on September 6, 2007 for $500.0 million. This program has no expiration date.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including:
- those associated with the effect of national, regional and international economic conditions;
- lowered levels of consumer spending resulting from a general economic downturn or lower levels of consumer confidence;
- the tightening of the credit markets and our ability to obtain capital on satisfactory terms;
- given the uncertain economic environment, the possible unwillingness of committed lenders to meet their obligations to lend to borrowers, in general;
- the performance of our products within the prevailing retail environment;
- customer acceptance of both new designs and newly-introduced product lines;
- our reliance on a few department store groups for large portions of our business;
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- our ability to identify acquisition candidates and, in a competitive environment for such acquisitions, acquire such businesses on reasonable financial and other terms;
- the integration of the organizations and operations of any acquired business into our existing organization and operations;
- consolidation of our retail customers;
- financial difficulties encountered by our customers;
- the effects of vigorous competition in the markets in which we operate;
- our ability to attract and retain qualified executives and other key personnel;
- our reliance on independent foreign manufacturers, including political instability in countries where contractors and suppliers are located;
- changes in the costs of raw materials, labor, advertising and transportation, including the impact such changes may have on the pricing of our products and the resulting impact on consumer acceptance of our products at higher price points;
- our ability to successfully implement new operational and financial information systems; and
- our ability to secure and protect trademarks and other intellectual property rights.
All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
See Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE JONES GROUP INC.
(Registrant)
Date: April 27, 2012 |
By /s/ Wesley R. Card
WESLEY R. CARD
Chief Executive Officer
By /s/ John T. McClain
JOHN T. McCLAIN
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. | Description of Exhibit |
3.1* | Amended and Restated By-Laws. |
31* | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32o | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS* | XBRL Instance Document. |
101.SCH* | XBRL Taxonomy Extension Schema. |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase. |
101.LAB* | XBRL Taxonomy Extension Label Linkbase. |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase. |
____________
* Filed herewith.
o Furnished herewith.
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