SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
----------------------------
[ ] 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: 1-10689
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LIZ CLAIBORNE, INC.
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(Exact name of registrant as specified in its
charter)
Delaware 13-2842791
- ----------------------------- ------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1441 Broadway, New York, New York 10018
- ------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(212) 354-4900
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(Registrant's telephone number, including area
code)
Indicate by check 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 .
--- ---
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at November 7, 2002 was 106,834,962.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 28, 2002
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 28, 2002, December 29, 2001
and September 29, 2001........................................................... 3
Condensed Consolidated Statements of Income for the Nine and Three Month Periods
Ended September 28, 2002 and September 29, 2001.................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 28, 2002 and September 29, 2001........................................ 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 31
Item 4. Controls and Procedures................................................................ 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 33
Item 5. Other Information...................................................................... 34
Item 6. Exhibits and Reports on Form 8-K....................................................... 34
SIGNATURES ....................................................................................... 35
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............................. 36
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
September 28, December 29, September 29,
2002 2001 2001
--------------- --------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 218,911 $ 127,635 $ 29,058
Marketable securities 37,618 32,993 25,027
Accounts receivable - trade, net 548,900 362,189 629,406
Inventories, net 476,361 487,923 546,104
Deferred income taxes 40,292 37,386 41,805
Other current assets 56,957 57,900 48,915
--------------- --------------- ---------------
Total current assets 1,379,039 1,106,026 1,320,315
--------------- --------------- ---------------
Property and Equipment - Net 372,200 352,001 349,790
Goodwill - Net 349,955 404,654 377,847
Intangibles - Net 136,283 50,459 53,684
Other Assets 22,139 38,115 32,393
--------------- --------------- ---------------
Total Assets $ 2,259,616 $ 1,951,255 $ 2,134,029
=============== =============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings 242 -- --
Accounts payable 220,113 236,906 229,524
Accrued expenses 261,912 199,772 162,844
Income taxes payable 33,369 10,636 42,745
--------------- --------------- ---------------
Total current liabilities 515,636 447,314 435,113
--------------- --------------- ---------------
Long-Term Debt 454,134 387,345 631,778
Other Non-Current Liabilities 129 15,000 15,000
Deferred Income Taxes 49,629 37,314 35,063
Commitments and Contingencies
Minority Interest 10,679 8,121 7,360
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- -- --
Common stock, $1 par value, authorized shares - 250,000,000,
issued shares - 176,437,234 176,437 176,437 176,437
Capital in excess of par value 97,920 89,266 89,662
Retained earnings 2,232,927 2,077,540 2,040,631
Unearned compensation expense (14,099) (16,507) (17,366)
Accumulated other comprehensive loss (23,792) (5,346) (15,835)
--------------- --------------- ---------------
2,469,393 2,321,390 2,273,529
Common stock in treasury, at cost, 69,786,416, 71,212,310
and 71,318,008 shares (1,239,984) (1,265,229) (1,263,814)
--------------- --------------- ---------------
Total stockholders' equity 1,229,409 1,056,161 1,009,715
--------------- --------------- ---------------
Total Liabilities and Stockholders' Equity $ 2,259,616 $ 1,951,255 $ 2,134,029
=============== =============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Nine Months Ended Three Months Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net Sales $ 2,723,610 $ 2,562,041 $ 1,041,200 $ 1,008,356
Cost of goods sold 1,547,239 1,507,611 583,558 585,027
--------------- --------------- --------------- ---------------
Gross Profit 1,176,371 1,054,430 457,642 423,329
Selling, general & administrative expenses 885,592 795,807 319,573 300,627
--------------- --------------- --------------- ---------------
Operating Income 290,779 258,623 138,069 122,702
Other expense - net (2,182) (2,735) (1,268) (449)
Interest expense - net (17,961) (20,610) (6,348) (8,798)
--------------- --------------- --------------- ---------------
Income Before Provision for Income Taxes 270,636 235,278 130,453 113,455
Provision for income taxes 97,429 84,700 46,963 40,844
--------------- --------------- --------------- ---------------
Net Income $ 173,207 $ 150,578 $ 83,490 $ 72,611
=============== =============== =============== ===============
Net Income per Weighted Average Share, Basic $1.64 $1.45 $0.79 $0.70
Net Income per Weighted Average Share, Diluted $1.62 $1.43 $0.78 $0.69
Weighted Average Shares, Basic 105,447 103,953 105,862 104,427
Weighted Average Shares, Diluted 107,035 105,076 107,329 105,502
Dividends Paid per Common Share $0.17 $0.17 $0.06 $0.06
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Nine Months Ended
-------------------------------
September 28, September 29,
2002 2001
--------------- ---------------
Cash Flows from Operating Activities:
Net income $ 173,207 $ 150,578
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 70,640 72,909
Deferred income taxes 8,373 15,742
Other - net 8,185 12,249
Change in current assets and liabilities, exclusive of acquisitions:
(Increase) in accounts receivable - trade (184,856) (299,903)
Decrease (increase) in inventories 24,151 (20,646)
Decrease in other current assets 6,405 7,822
(Decrease) increase in accounts payable (18,838) 5,866
Increase (decrease) in accrued expenses 21,592 (42,077)
Increase in income taxes payable 23,125 32,832
--------------- ---------------
Net cash provided by (used in) operating activities 131,984 (64,628)
--------------- ---------------
Cash Flows from Investing Activities:
Purchases of investment instruments (62) (58)
Purchases of property and equipment (65,939) (60,818)
Payments for acquisitions, net of cash acquired (26,517) (249,120)
Payments for in-store merchandise shops (7,602) (16,490)
Other - net 966 (3,107)
--------------- ---------------
Net cash used in investing activities (99,154) (329,593)
--------------- ---------------
Cash Flows from Financing Activities:
Proceeds from short-term debt 242 --
Proceeds from Eurobond issue -- 319,787
Commercial paper - net 34,540 36,528
Proceeds from exercise of common stock options 28,398 40,971
Dividends paid (17,819) (17,444)
Purchase of common stock -- (2,854)
--------------- ---------------
Net cash provided by financing activities 45,361 376,988
--------------- ---------------
Effect of Exchange Rate Changes on Cash 13,085 (729)
--------------- ---------------
Net Change in Cash and Cash Equivalents 91,276 (17,962)
Cash and Cash Equivalents at Beginning of Period 127,635 47,020
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 218,911 $ 29,058
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Liz Claiborne, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company") included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted from this report, as is permitted by such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K and the Company's Current Report on Form 8-K dated May 23, 2001, as
filed with the SEC on May 25, 2001 and amended on July 20, 2001. Results of
acquired companies are included in our operating results from the date of
acquisition, and, therefore, operating results on a period-to-period basis are
not comparable. Information presented as of December 29, 2001 is derived from
audited statements. Certain items previously reported in specific captions in
the accompanying financial statements have been reclassified to conform to the
current period's classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
2. SUBSEQUENT EVENT
On September 30, 2002, the Company acquired 100 percent of the equity interest
of Ellen Tracy Inc. and its related companies (collectively, "Ellen Tracy") for
a purchase price of approximately $180 million, including the assumption of
debt. Ellen Tracy, a privately held fashion apparel company, designs, wholesales
and markets women's sportswear. Based in New York City, Ellen Tracy sells its
products at price points which are somewhat higher than the Company's core
better-priced businesses, predominantly to select specialty stores and upscale
department stores. Brands include Ellen Tracy, Linda Allard Ellen Tracy and
Company Ellen Tracy. Ellen Tracy achieved net sales of approximately $171
million in 2001. Unaudited pro forma information related to this acquisition is
not included, as the impact of this transaction is not material to the
consolidated results of the Company.
3. ACQUISITIONS AND LICENSING COMMITMENTS
On July 9, 2002, the Company completed the purchase of 100 percent of the equity
interest of Mexx Canada, Inc., a privately held fashion apparel and accessories
company ("Mexx Canada"). Based in Montreal, Mexx Canada operates as a third
party distributor in Canada for the Company's Mexx business and, in 2001, had
sales of 83 million Canadian dollars (or approximately $54 million based on the
exchange rate in effect during that period). The total purchase price consisted
of: (a) an initial cash payment made at the closing date of $15.2 million; (b) a
second payment to be made at the end of the first quarter 2003 based on business
performance in 2002 (which, when combined with the initial cash payment, is
intended to approximate 72% of the total agreed-upon equity valuation of Mexx
Canada), currently expected to be approximately $14 million; and (c) a final
payment to be made in the form of an earnout with respect to the year ended
either 2004 or 2005, designed to equal 28% of the future value of Mexx Canada,
which value will be determined based on Mexx Canada's earnings and cash flow
performance. The selection of the measurement year for the earnout is at either
party's option. Unaudited pro forma information related to this acquisition is
not included, as the impact of this transaction is not material to the
consolidated results of the Company.
In June 2002, the Company consummated an exclusive license agreement with
Kellwood Company ("Kellwood") under which Kellwood was granted the license to
design, manufacture, market, sell and distribute men's dress shirts under the
Claiborne label in North America commencing with the Spring 2003 selling season.
The line, which will be produced by Kellwood's subsidiary, Smart Shirts Ltd., a
global manufacturer of men's shirts, was previously produced and sold by the
Company's Claiborne division. Under the agreement, Kellwood is obligated to pay
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
a royalty equal to a percentage of net sales of the Claiborne products. The
initial term of the license runs through December 31, 2005; the licensee has an
option to renew for two additional 3-year periods if certain sales thresholds
are met.
In May 2001, the Company completed the purchase of 100 percent of the equity
interest of Mexx Group B.V. ("Mexx"), a privately held fashion apparel company
incorporated and existing under the laws of The Netherlands, for a purchase
price of approximately 295 million Euros (or $255.1 million based on the
exchange rate in effect on such date), in cash at closing (including the
assumption of debt), plus an earnout designed to equal 28% of the future value
of Mexx, based on earnings and cash flow performance for years beginning with
2003, with any earnout payable at either party's option with respect to the year
ended 2003, 2004 or 2005. At such time, if any, it is determined likely to be
that an additional payment is due, the Company will record any contingent
payment as additional purchase price. Mexx designs and markets a wide range of
merchandise for women, men and children under the Mexx brand name. Mexx products
are sold via wholesale and retail formats in more than 40 countries in Europe,
the Asia Pacific region, Canada and the Middle East. The acquisition of Mexx,
included in operating results from the acquisition date, was accounted for using
the purchase method of accounting and, accordingly, the excess purchase price
over fair market value of the underlying net assets acquired of $139.1 million
was allocated to goodwill. The purchase price included an adjustment for
transaction fees associated with the acquisition and the estimated costs
associated with the closure of certain under-performing Mexx retail stores as
well as the elimination of certain other duplicate support functions within the
Mexx enterprise, which were decided prior to the consummation of the
transaction. The aggregate of the above items amounts to $32.6 million. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer being amortized as
of December 30, 2001. The fair market value of assets acquired was $179.2
million and liabilities assumed were $91.2 million.
The following unaudited pro forma information for 2001 assumes the Mexx
acquisition had occurred on December 31, 2000. The pro forma information, as
presented below, is not indicative of the results that would have been obtained
had the transaction occurred on December 31, 2000, nor is it indicative of the
Company's future results.
Nine Months Ended Three Months Ended
------------------------------ -------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
(Dollars in thousands except per share data) Actual Pro forma Actual Actual
- -------------------------------------------- --------------- -------------- --------------- ---------------
Net sales $ 2,723,610 $ 2,704,792 $ 1,041,200 $ 1,008,356
Net income 173,207 138,818 83,490 72,611
Basic earnings per share $1.64 $1.34 $0.79 $0.70
Diluted earnings per share $1.62 $1.32 $0.78 $0.69
The above amounts reflect adjustments for interest expense from additional
borrowings necessary to finance the acquisition, amortization of goodwill, and
income tax effect based upon an effective tax rate of 36%. The unaudited pro
forma information gives effect only to adjustments described above and does not
reflect management's estimate of any anticipated cost savings or other benefits
as a result of the acquisition.
In August 1999, March 2000 and April 2000, the Company consummated exclusive
license agreements with Kenneth Cole Productions, Inc. under which the Company
acts as a licensee for women's sportswear (in North America), women's socks and
belts (each in the United States), respectively, bearing certain Kenneth Cole
trademarks. In addition, in August 1999, the Company consummated the purchase of
1.0 million shares of Kenneth Cole Productions, Inc. Class A stock at a price of
$29 per share. As the result of a three-for-two stock split in March 2001, the
number of shares owned by the Company increased to 1.5 million shares. As of
June 30, 2001, the $29 million acquisition cost was recorded as a component of
Other current assets. Certain restrictions applicable to the Company's stock
ownership expired on August 24, 2001. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
September 29, 2001, this investment was classified as an available-for-sale
marketable security at fair market value with unrealized gains and losses net of
taxes reported as a component of Accumulated other comprehensive loss.
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation, changes in the spot value of Eurobonds designated as a net
investment hedge, changes in unrealized gains and losses on securities and
changes in the fair value of cash flow hedges. Total comprehensive income for
interim periods was as follows:
Nine Months Ended Three Months Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------- --------------- --------------- --------------- ---------------
Net income $ 173,207 $ 150,578 $ 83,490 $ 72,611
Other comprehensive income (loss), net of tax:
Foreign currency translation 13,085 (729) (2,895) (747)
Foreign currency translation of Eurobond (32,250) -- 4,531 --
Changes in unrealized gains (losses) on
securities 2,920 (7,450) (6,876) (7,097)
Changes in fair value of cash flow hedges (2,201) -- (1,193) --
--------------- --------------- --------------- ---------------
Total comprehensive income, net of tax: $ 154,761 $ 142,399 $ 77,057 $ 64,767
=============== =============== =============== ===============
5. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at
September 28, 2002, December 29, 2001 and September 29, 2001:
September 28, 2002
-----------------------------------------------------
Unrealized Estimated
--------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- ------------ ------------ ------------- -------------
Equity securities $ 29,000 $ 3,805 $ -- $ 32,805
Other holdings 8,661 -- (3,848) 4,813
------------ ------------ ------------- -------------
Total $ 37,661 $ 3,805 $ (3,848) $ 37,618
============ ============ ============= =============
December 29, 2001
-----------------------------------------------------
Unrealized Estimated
--------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- ------------ ------------ ------------- -------------
Equity securities $ 29,000 $ -- $ (2,705) $ 26,295
Other holdings 8,599 -- (1,901) 6,698
------------ ------------ ------------- -------------
Total $ 37,599 $ -- $ (4,606) $ 32,993
============ ============ ============= =============
September 29, 2001
-----------------------------------------------------
Unrealized Estimated
--------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- ------------ ------------ ------------- -------------
Equity securities $ 29,000 $ -- $ (10,025) $ 18,975
Other holdings 8,573 -- (2,521) 6,052
------------ ------------ ------------- -------------
Total $ 37,573 $ -- $ (12,546) $ 25,027
============ ============ ============= =============
For the nine months ended September 28, 2002 and September 29, 2001, there were
no realized gains on sales of available-for-sale securities. The net adjustments
to unrealized holding gains and losses on available-for-sale securities for the
nine months ended September 28, 2002 and September 29, 2001 were a gain of
$2,920,000 (net of $1,643,000 in taxes) and a loss of $7,450,000 (net of
$4,191,000 in taxes), respectively, which were included in Accumulated other
comprehensive loss.
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
September 28, December 29, September 29,
(Dollars in thousands) 2002 2001 2001
- ---------------------- --------------- --------------- ---------------
Raw materials $ 25,860 $ 29,649 $ 20,664
Work in process 7,140 7,061 3,536
Finished goods 443,361 451,213 521,904
--------------- --------------- ---------------
$ 476,361 $ 487,923 $ 546,104
=============== =============== ===============
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
September 28, December 29, September 29,
(Dollars in thousands) 2002 2001 2001
- ---------------------- --------------- --------------- ---------------
Land and buildings $ 144,299 $ 144,299 $ 143,282
Machinery and equipment 317,628 303,388 295,704
Furniture and fixtures 118,590 98,100 88,457
Leasehold improvements 223,380 198,446 201,965
--------------- --------------- ---------------
803,897 744,233 729,408
Less: Accumulated depreciation
and amortization 431,697 392,232 379,618
--------------- --------------- ---------------
$ 372,200 $ 352,001 $ 349,790
=============== =============== ===============
8. GOODWILL AND INTANGIBLES, NET
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets," which requires that goodwill and
intangible assets with indefinite useful lives are no longer to be amortized,
but will rather be tested at least annually for impairment. SFAS No. 142 also
requires that intangible assets with finite useful lives will continue to be
amortized over their respective useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions
of SFAS No. 142 effective December 30, 2001. As of September 28, 2002, the
Company has completed the transitional impairment tests required under SFAS No.
142 and no impairment was recognized.
The following tables disclose the carrying value of all the intangible assets:
September 28, 2002 December 29, 2001
--------------------------------------- ---------------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
(Dollars in thousands) Amount Amort. Net Amount Amort. Net
- ---------------------- ------------- ------------ ------------ ------------ ------------ -------------
Amortized intangible assets:
- ----------------------------
Licenses $ 42,849 $ (8,322) $ 34,527 $ 42,849 $ (5,530) $ 37,319
------------- ------------ ------------ ------------ ------------ -------------
Total $ 42,849 $ (8,322) $ 34,527 $ 42,849 $ (5,530) $ 37,319
============= ============ ============ ============ ============ =============
Unamortized intangible assets:
- ------------------------------
Trademarks $ 101,756 $ 13,140
------------ -------------
Total $ 101,756 $ 13,140
============ =============
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible amortization expense for the nine months ending September 28, 2002
and September 29, 2001 was $2.792 million and $2.867 million, respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In thousands)
Fiscal Year Amortization Expense
- -------------------------------------------------
2002 $3,722
2003 3,882
2004 4,057
2005 3,450
2006 2,382
The changes in carrying amount of goodwill for the nine months ended September
28, 2002 are as follows:
Wholesale Wholesale
(Dollars in thousands) Apparel Non-Apparel Total
- ---------------------- ------------- -------------- --------------
Balance December 29, 2001 $ 366,797 $ 37,857 $ 404,654
Acquisition of Mexx Canada* 25,053 -- 25,053
Reversal of unused provision (1,136) -- (1,136)
Earnout provision 10,000 -- 10,000
Reclassification to Trademarks (60,578) (28,038) (88,616)
------------- -------------- --------------
Balance September 28, 2002 $ 340,136 $ 9,819 $ 349,955
============= ============== ==============
* Pending finalization of purchase price allocation.
There is no goodwill recorded in our retail segment.
The following pro forma information presents the impact on net income and
earnings per share had SFAS No. 142 been effective for the nine and three-month
periods ended September 29, 2001.
Nine Months Ended Three Months Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
(Dollars in thousands except per share data) Actual Pro forma Actual Pro forma
--------------- --------------- --------------- ---------------
Net income, as reported $ 173,207 $ 150,578 $ 83,490 $ 72,611
Discontinued amortization of goodwill and
intangibles, net of tax -- 7,197 -- 3,076
--------------- --------------- --------------- ---------------
Net income, adjusted $ 173,207 $ 157,775 $ 83,490 $ 75,687
=============== =============== =============== ===============
Basic earnings per share, as reported $1.64 $1.45 $0.79 $0.70
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.07 -- 0.03
--------------- --------------- --------------- ---------------
Basic earnings per share, adjusted $1.64 $1.52 $0.79 $0.73
=============== =============== =============== ===============
Diluted earnings per share, as reported $1.62 $1.43 $0.78 $0.69
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.07 -- 0.03
--------------- --------------- --------------- ---------------
Diluted earnings per share, adjusted $1.62 $1.50 $0.78 $0.72
=============== =============== =============== ===============
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. OTHER MATTERS
In May 2001, the Company entered into an off-balance sheet financing arrangement
(commonly referred to as a "synthetic lease") to acquire various land and
equipment and construct buildings and real property improvements associated with
warehouse and distribution facilities in Ohio and Rhode Island. Each facility
has a lease term of five years, with renewal subject to the consent of the
lessor. The lessor under the operating lease arrangements is an independent
third-party limited partnership. The lessor has contributed equity in excess of
3.5% of the total value of the estimated aggregate cost to complete these
facilities, which is expected to be approximately $65 million. The leases
include guarantees by the Company for a substantial portion of the financing and
options to purchase the facilities at original cost; the maximum guarantee is
approximately $54 million. The Company selected this financing arrangement to
take advantage of the favorable financing rates such an arrangement afforded as
opposed to the rates available under alternative real estate financing options.
The lessor financed the acquisition of the facilities through funding provided
by third-party financial institutions. None of such financial institutions, nor
the lessor, has any affiliation or other relationship with the Company or any of
its employees, directors or affiliates, and the Company's transactions with the
lessor and such financial institutions are limited to the operating lease
agreements and the associated rent expense that will be included in Selling,
general & administrative expense in the Condensed Consolidated Statements of
Income.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the nine months ended
September 28, 2002.
The Company has not entered into any other off-balance sheet arrangements other
than normal operating leases.
10. DEBT
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan had two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The proceeds of the Bridge Loan were primarily used to finance the Company's
acquisition of Mexx on May 23, 2001 (see Note 3 of Notes to Condensed
Consolidated Financial Statements).
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date), of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
Interest on the Eurobonds is being paid on an annual basis until maturity. These
bonds are designated as a hedge of our net investment in Mexx (see Note 3 of
Notes to Condensed Consolidated Financial Statements).
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
expiring $500 million 364-day unsecured credit facility. This bank facility
includes a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
were scheduled to mature in November 2002 and November 2003, respectively,
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services, and may be either drawn upon or used as a liquidity facility
to support the issuance of A2/P2 rated commercial paper. Repayment of
outstanding balances of the 364-day facility can be extended for one year after
the maturity date. The Agreement has two borrowing options, an "Alternative Base
Rate" option, as defined in the Agreement, and a Eurodollar rate option with a
spread based on the Company's long-term credit rating. The
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Agreement contains certain customary covenants, including financial covenants
requiring the Company to maintain specified debt leverage and fixed charge
coverage ratios, and covenants restricting the Company's ability to, among other
things, incur indebtedness, grant liens, make investments and acquisitions, and
sell assets. The Company believes it is in compliance with such covenants. The
Agreement may be directly drawn upon, or used, to support the Company's $750
million commercial paper program, which is used from time to time to fund
working capital and other general corporate requirements. The Company's ability
to obtain funding through its commercial paper program is subject to, among
other things, the Company maintaining an investment-grade credit rating. At
September 28, 2002, the Company had approximately $73.0 million of commercial
paper outstanding, with a weighted average interest rate of 2.0% and $39.3
million of borrowings denominated in Euro at an interest rate of 3.9%. The
carrying amount of the Company's borrowings under the commercial paper program
approximate fair value because the interest rates are based on floating rates,
which are determined by prevailing market rates. The commercial paper is
classified as long-term debt as of September 28, 2002 as the Company intends to
refinance such obligations on a long-term basis and is able to do so.
On October 21, 2002, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the $500
million, 364-day unsecured credit facility scheduled to mature in November 2002,
and a $375 million, three-year bank revolving credit facility, replacing the
existing $250 million bank facility which was scheduled to mature in November
2003. The three-year facility includes a $75 million multi-currency revolving
credit line which permits the Company to borrow in U.S. dollars, Canadian
dollars and Euros. Repayment of outstanding balances of the 364-day facility can
be extended for one year after the maturity date. The Agreement has two
borrowing options, an "Alternative Base Rate" option, as defined in the
Agreement, and a Eurocurrency rate option with a spread based on the Company's
long-term credit rating. The Agreement contains certain customary covenants,
including financial covenants requiring the Company to maintain specified debt
leverage and fixed charge coverage ratios, and covenants restricting the
Company's ability to, among other things, incur indebtedness, grant liens, make
investments and acquisitions, and sell assets. The Company believes it is in
compliance with such covenants. The Agreement may be directly drawn upon, or
used, to support the Company's $750 million commercial paper program, which is
used from time to time to fund working capital and other general corporate
requirements. The Company's ability to obtain funding through its commercial
paper program is subject to, among other things, the Company maintaining an
investment-grade credit rating.
As of September 28, 2002, the Company had lines of credit aggregating $448
million, which were primarily available to cover trade letters of credit. At
September 28, 2002, December 29, 2001 and September 29, 2001, the Company had
outstanding trade letters of credit of $267 million, $228 million and $239
million, respectively. These letters of credit, which have terms ranging from
one to ten months, primarily collateralize the Company's obligations to third
parties for the purchase of inventory. The fair value of these letters of credit
approximates contract values.
11. CONTINGENCIES AND COMMITMENTS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position.
12. RESTRUCTURING CHARGE
In December 2001, the Company recorded a net restructuring charge of $15.1
million (pretax), representing a charge of $19.0 million, which consisted of
approximately $4.6 million for the closure of seven Specialty Retail stores, due
to a shift to a vertical format for one of our brands which requires positioning
in different locations and the elimination of our large "world" store concept,
and five Outlet stores, due to the elimination of two of our branded store
formats; $3.5 million for the closure of four of our division offices; $3.3
million associated with the strategic closure of two specific facilities; and
$7.6 million in severance-related costs associated with the elimination of
approximately 600 jobs, offset by the $3.9 million deemed no longer necessary of
the Company's previous restructuring liability originally recorded in December
2000. The remaining balance of the restructuring liability as of
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2002 was $8.3 million, all of which will require the outlay of
cash. The Company expects that these activities will be substantially completed
by December 2002.
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating and Occupancy
Store Closure Administrative Costs and Asset
(Dollars in millions) Costs Exit Costs Write Downs Total
- --------------------- ----------------- ------------------ ----------------- ------------------
Balance at December 29, 2001 $ 5.6 $ 7.8 $ 2.3 $ 15.7
Spending for nine months ended
September 28, 2002 (1.8) (3.6) (2.0) (7.4)
----------------- ------------------ ----------------- ------------------
Balance at September 28, 2002 $ 3.8 $ 4.2 $ 0.3 $ 8.3
================= ================== ================= ==================
13. CASH DIVIDENDS AND COMMON STOCK REPURCHASE
On October 10, 2002, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $0.05625 per share, to be
paid on December 9, 2002 to stockholders of record at the close of business on
November 18, 2002. As of November 8, 2002, the Company has $218.3 million
remaining in buyback authorization under its share repurchase program.
14. EARNINGS PER COMMON SHARE
The following is a reconciliation of the shares outstanding used in the
calculation of basic and diluted earnings per share:
Nine Months Ended Three Months Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
(Amounts in thousands) 2002 2001 2002 2001
- ---------------------- --------------- --------------- --------------- ---------------
Weighted average common shares outstanding 105,447 103,953 105,862 104,427
Effect of dilutive securities:
Stock options and restricted stock grants 1,588 1,123 1,467 1,075
--------------- --------------- --------------- ---------------
Weighted average common shares outstanding and
common share equivalents 107,035 105,076 107,329 105,502
=============== =============== =============== ===============
15. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the nine months ended September 28, 2002, the Company made income tax
payments of $56,851,000 and interest payments of $23,753,000. During the nine
months ended September 28, 2001, the Company made income tax payments of
$24,727,000 and interest payments of $21,364,000. Other non-cash activities in
the nine months ended September 28, 2002 include the tax benefit from the
exercise of stock options of $5.4 million, the reclassification of $15.0 million
from Other Non-Current Liabilities to Accrued expenses and a $10.0 million
liability included in Accrued expenses associated with a future payment related
to the Lucky Brand Dungarees, Inc. acquisition. Other non-cash activities in the
nine months ended September 29, 2001 include the tax benefit from the exercise
of stock options of $4.6 million.
16. SEGMENT REPORTING
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. The Wholesale Apparel segment consists of
women's and men's apparel designed and marketed worldwide under various
trademarks owned by the Company or licensed by the Company from third-party
owners, including wholesale sales of
14
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
women's, men's and children's apparel designed and marketed in Europe, Canada,
the Asia-Pacific Region and the Middle East under the Mexx brand names. The
Wholesale Non-Apparel segment consists of accessories, jewelry and cosmetics
designed and marketed worldwide under certain owned or licensed trademarks. The
Retail segment consists of our worldwide retail operations that sell most of
these apparel and non-apparel products to the public through our specialty
retail stores, outlet stores, and concession stores. As a result of the
Company's 2001 acquisition of Mexx, the Company also presents its results on a
geographic basis between Domestic (wholesale customers and Company specialty
retail and outlet stores based in the United States) and International
(wholesale customers and Company specialty retail, outlet and concession stores
based outside of the United States). The Company, as licensor, also licenses to
third parties the right to produce and market products bearing certain
Company-owned trademarks; the resultant royalty income is not allocated to any
of the specified operating segments, but is rather included in the line "Sales
from external customers" under the caption "Corporate/ Eliminations."
The Company evaluates performance and allocates resources based on operating
profits or losses. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in our
2001 Annual Report on Form 10-K. Intersegment sales are recorded at cost. There
is no intercompany profit or loss on intersegment sales, however, the wholesale
segments are credited with their proportionate share of the operating profit
generated by the Retail segment. The profit credited to the wholesale segments
from the Retail segment is eliminated in consolidation.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels. The
segments are each managed separately because they either manufacture and
distribute distinct products with different production processes or distribute
similar products through different distribution channels.
For the Nine Months Ended September 28, 2002
-------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------- ------------- -------------
NET SALES:
Sales from external customers $ 1,862,583 $ 348,174 $ 501,782 $ 11,071 $ 2,723,610
Intercompany sales 137,319 16,988 -- (154,307) --
------------- ------------- ------------- ------------- -------------
Total net sales $ 1,999,902 $ 365,162 $ 501,782 $ (143,236) $ 2,723,610
============= ============= ============= ============= =============
OPERATING INCOME:
Segment operating income from
external customers $ 221,162 $ 24,381 $ 40,347 $ 4,889 $ 290,779
Intercompany segment operating
income (loss) 25,561 7,780 -- (33,341) --
------------- ------------- ------------- ------------- -------------
Total operating income (loss) $ 246,723 $ 32,161 $ 40,347 $ (28,452) $ 290,779
============= ============= ============= ============= =============
For the Nine Months Ended September 29, 2001
-------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------- ------------- -------------
NET SALES:
Sales from external customers $ 1,787,893 $ 342,921 $ 421,921 $ 9,306 $ 2,562,041
Intercompany sales 152,903 18,250 -- (171,153) --
------------- ------------- ------------- ------------- -------------
Total net sales $ 1,940,796 $ 361,171 $ 421,921 $ (161,847) $ 2,562,041
============= ============= ============= ============= =============
OPERATING INCOME:
Segment operating income from
external customers $ 195,710 $ 19,705 $ 40,156 $ 3,052 $ 258,623
Intercompany segment operating
income (loss) 32,398 7,281 -- (39,679) --
------------- ------------- ------------- ------------- -------------
Total operating income (loss) $ 228,108 $ 26,986 $ 40,156 $ (36,627) $ 258,623
============= ============= ============= ============= =============
15
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended September 28, 2002
-------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------- ------------- -------------
NET SALES:
Sales from external customers $ 712,692 $ 145,848 $ 178,382 $ 4,278 $ 1,041,200
Intercompany sales 49,494 7,853 -- (57,347) --
------------- ------------- ------------- ------------- -------------
Total net sales $ 762,186 $ 153,701 $ 178,382 $ (53,069) $ 1,041,200
============= ============= ============= ============= =============
OPERATING INCOME:
Segment operating income (loss)
from external customers $ 100,471 $ 17,391 $ 17,644 $ 2,563 $ 138,069
Intercompany segment operating
income (loss) 8,838 3,202 -- (12,040) --
------------- ------------- ------------- ------------- -------------
Total operating income (loss) $ 109,309 $ 20,593 $ 17,644 $ (9,477) $ 138,069
============= ============= ============= ============= =============
For the Three Months Ended September 29, 2001
-------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------- ------------- -------------
NET SALES:
Sales from external customers $ 697,007 $ 141,929 $ 167,255 $ 2,165 $ 1,008,356
Intercompany sales 60,449 9,116 -- (69,565) --
------------- ------------- ------------- ------------- -------------
Total net sales $ 757,456 $ 151,045 $ 167,255 $ (67,400) $ 1,008,356
============= ============= ============= ============= =============
OPERATING INCOME:
Segment operating income (loss)
from external customers $ 88,226 $ 15,845 $ 17,987 $ 644 $ 122,702
Intercompany segment operating
income (loss) 12,722 3,245 -- (15,967) --
------------- ------------- ------------- ------------- -------------
Total operating income (loss) $ 100,948 $ 19,090 $ 17,987 $ (15,323) $ 122,702
============= ============= ============= ============= =============
September 28, September 29,
(Dollars in thousands) 2002 2001
- ---------------------- --------------- ---------------
SEGMENT ASSETS:
Wholesale Apparel $ 1,505,671 $ 1,663,499
Wholesale Non-Apparel 231,590 220,628
Retail 402,900 386,583
Corporate 243,201 192,926
Eliminations (123,746) (329,607)
--------------- ---------------
Total assets $ 2,259,616 $ 2,134,029
=============== ===============
GEOGRAPHIC DATA:
Nine Months Ended Three Months Ended
--------------------------------------------------------------
September 28, September 29, September 28, September 29,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------- --------------- -------------- --------------- ---------------
NET SALES:
Domestic sales $ 2,242,928 $ 2,287,995 $ 843,598 $ 843,066
International sales 480,682 274,046 197,602 165,290
--------------- -------------- --------------- ---------------
Total net sales $ 2,723,610 $ 2,562,041 $ 1,041,200 $ 1,008,356
=============== ============== =============== ===============
OPERATING INCOME:
Domestic operating income $ 254,010 $ 234,156 $ 118,984 $ 105,265
International operating income 36,769 24,467 19,085 17,437
--------------- -------------- --------------- ---------------
Total operating income $ 290,779 $ 258,623 $ 138,069 $ 122,702
=============== ============== =============== ===============
16
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, September 29,
(Dollars in thousands) 2002 2001
- ---------------------- --------------- ---------------
TOTAL ASSETS:
Domestic assets $ 1,682,379 $ 1,661,093
International assets 577,237 472,936
--------------- ---------------
Total assets $ 2,259,616 $ 2,134,029
=============== ===============
17. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss), depending on the timing and designated purpose of
the derivative. The impact on the Company's financial condition, results of
operations and cash flows, upon the adoption of these pronouncements, was
immaterial.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our European and Canadian entities and other specific
activities and the swapping of variable interest rate debt for fixed rate debt
in connection with the synthetic lease. These instruments are designated as cash
flow hedges and, in accordance with SFAS No. 133, effective changes in fair
value are included in Accumulated other comprehensive income (loss), net of
related tax effects, with the corresponding asset or liability recorded in the
balance sheet. The ineffective portion of the cash flow hedge, if any, is
recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
At September 28, 2002, the Company had entered into various Euro currency
options with a net notional amount of $131.0 million with maturity dates from
December 2002 through December 2003 with downside protection in 2002 at 0.9106
U.S. dollar per Euro and in 2003 of between 0.9180 and 0.9825 U.S. dollar per
Euro. At September 28, 2002, the Company had forward contracts maturing through
May 2003 to sell 26.7 million Euros, forward contracts maturing through October
2002 to sell 2.0 million Canadian dollars and forward contracts maturing through
November 2002 to sell 0.5 million British pounds. The aggregate U.S. dollar
value of the foreign exchange forward contracts was approximately $27.0 million
at September 28, 2002, as compared with approximately $34.6 million at December
29, 2001 and $63.9 million at September 29, 2001. Unrealized gains and losses
for outstanding foreign exchange forward contracts and currency options were not
material at September 28, 2002, December 29, 2001 and September 29, 2001.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the nine months ended
September 28, 2002.
The Company hedges its net investment position in Euros. To accomplish this, the
Company borrows directly in foreign currency and designates a portion of foreign
currency debt as a hedge of net investments. Under SFAS No. 133, changes in the
fair value of these instruments are immediately recognized in foreign currency
translation adjustment, a component of Accumulated other comprehensive income
(loss), to offset the change in the value of the net investment being hedged.
17
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet and other expected exposures. These derivative instruments do not qualify
as cash flow hedges under SFAS No. 133 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
18. NEW ACCOUNTING PRONOUNCEMENTS
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9 (formerly EITF Issue 00-25), "Accounting for
Consideration Given to a Customer or a Reseller of the Vendor's Products." This
issue addresses the recognition, measurement and income statement classification
of consideration from a vendor to a customer in connection with the customer's
purchase or promotion of the vendor's products. This consensus only impacted
revenue and expense classifications and did not change reported net income. In
accordance with the consensus reached, the Company adopted the required
accounting beginning December 30, 2001, the first day of fiscal year 2002, and
the impact of this required accounting does not have a material impact on the
revenue and expense classifications in the Company's Condensed Consolidated
Statements of Income.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of SFAS No. 144
effective December 30, 2001, and the adoption did not have a significant effect
on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company will adopt the provisions of SFAS No. 145
upon its effective date and does not expect it to have a material effect on
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of SFAS No. 146 on its results of operations and financial
position.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail.
o Wholesale Apparel consists of women's and men's apparel designed and
------------------
marketed worldwide under various trademarks owned by the Company or
licensed by the Company from third-party owners; this segment includes our
career (COLLECTION), casual (LIZSPORT, LIZWEAR and LIZ & CO.), bridge (DANA
BUCHMAN and ELLEN TRACY), large size (LIZ CLAIBORNE WOMAN), men's
(CLAIBORNE), moderate priced special markets (AXCESS, CRAZY HORSE, EMMA
JAMES, FIRST ISSUE, RUSS and VILLAGER), specialty apparel (SIGRID OLSEN),
premium denim (LUCKY BRAND DUNGAREES) and contemporary sportswear and dress
(LAUNDRY) businesses, as well as our licensed DKNY(R) JEANS, DKNY(R)
ACTIVE, and CITY DKNY(R) businesses and our licensed KENNETH COLE NEW YORK
and REACTION KENNETH COLE businesses. The Wholesale Apparel segment also
includes wholesale sales of women's, men's and children's apparel designed
and marketed in Europe, Canada, the Asia-Pacific Region and the Middle East
under the MEXX brand names.
o Wholesale Non-Apparel consists of accessories, jewelry and cosmetics
----------------------
designed and marketed worldwide under certain of the above listed and other
owned or licensed trademarks, including our MONET and TRIFARI labels.
o Retail consists of our worldwide retail operations that sell most of these
------
apparel and non-apparel products to the public through our 230 specialty
retail stores, 233 outlet stores, and 464 international concession stores
(where the retail selling space is either owned and operated by the
department store in which the retail selling space is located or leased and
operated by a third party, while, in each case, the Company owns the
inventory). This segment includes stores operating under the following
formats: MEXX, LUCKY BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH, DKNY(R)
JEANS, DANA BUCHMAN and MONET.
The Company, as licensor, also licenses to third parties the right to produce
and market products bearing certain Company-owned trademarks. The resultant
royalty income is not allocated to any of the specified operating segments, but
is rather included in the line "Sales from external customers" under the caption
"Corporate/ Eliminations" in Note 16 of Notes to Condensed Consolidated
Financial Statements.
As a result of our May 2001 acquisition of Mexx Group B.V. ("MEXX"), we also
present our results on the following geographic basis:
o Domestic: wholesale customers and Company specialty retail and outlet
---------
stores located in the United States, and
o International: wholesale customers and Company specialty retail and outlet
--------------
stores and concession stores located outside of the United States.
All data and discussion with respect to our specific segments included within
this "Management's Discussion and Analysis" is presented before applicable
intercompany eliminations. Please refer to Note 16 of Notes to Condensed
Consolidated Financial Statements.
In May 2001, we completed the acquisition of 100% of the equity interest of
MEXX, a privately held fashion apparel company, incorporated and existing under
the laws of The Netherlands. MEXX designs and markets a wide range of mid-price,
branded merchandise for women, men and children, targeting the 20-40 year old
modern, urban consumer. MEXX's products are sold via wholesale and retail
formats in more than 40 countries in Europe, the Asia-Pacific region, Canada and
the Middle East, and MEXX's core markets are the Benelux and Germanic regions.
Please refer to Note 3 of Notes to Condensed Consolidated Financial Statements
for a discussion of the MEXX acquisition.
MEXX's wholesale business, which accounted for approximately 71% of MEXX's total
net sales for each of fiscal years 2001 and 2000, consists of sales to
approximately 6,000 independent retail stores, 1,100 department store doors and
75 free standing MEXX franchise stores. MEXX's retail business, which accounted
for approximately 29% of MEXX's total net sales in fiscal years 2001 and 2000,
consists of 74 company owned and operated retail stores, 154 concession stores
and 23 outlet stores. MEXX operates at a higher Selling, general and
administrative expenses ("SG&A") rate than the Company average due to the fact
that MEXX's operations are geographically diverse and MEXX operates a relatively
large retail business, which is generally more expensive to operate than a
19
wholesale business. MEXX also has licensed a variety of its trademarks for use
on a number of non-apparel items, including fragrances, shoes, handbags, costume
jewelry and watches.
In June 2002, we consummated an exclusive license agreement with Kellwood
Company under which Kellwood was granted the license to design, manufacture,
market, sell and distribute men's dress shirts under the CLAIBORNE label in
North America commencing with the Spring 2003 selling season. The line, which
will be produced by Kellwood's subsidiary, Smart Shirts Ltd., a global
manufacturer of men's shirts, was previously produced and sold by the Company's
CLAIBORNE division. Under the agreement, Kellwood is obligated to pay a royalty
equal to a percentage of net sales of the CLAIBORNE products. The initial term
of the license runs through December 31, 2005; the licensee has an option to
renew for two additional 3-year periods if certain sales thresholds are met.
On July 9, 2002, we completed the purchase of 100 percent of the equity interest
of Mexx Canada, Inc., a privately held fashion apparel and accessories company
("MEXX Canada"). Based in Montreal, MEXX Canada operates as a third party
distributor in Canada for our MEXX business and, in 2001, had sales of 83
million Canadian dollars (or approximately $54 million based on the exchange
rate in effect during that period). The total purchase price consisted of: (a)
an initial cash payment made at the closing date of $15.2 million; (b) a second
payment at the end of the first quarter 2003 based on business performance in
2002 (which, when combined with the initial cash payment, is intended to
approximate 72% of the total agreed-upon equity valuation of Mexx Canada),
currently expected to be approximately $14 million; and (c) a final payment in
the form of an earnout, with respect to the year ended either 2004 or 2005
designed to equal 28% of the future implied equity value of MEXX Canada, which
value will be determined based on MEXX Canada's earnings and cash flow
performance. The selection of the measurement year for the earnout is at either
party's option. Unaudited pro forma information related to this acquisition is
not included, as the impact of this transaction is not material to our
consolidated results.
On September 30, 2002, we acquired 100 percent of the equity interest of Ellen
Tracy Inc. and related companies ("Ellen Tracy ") for a purchase price of
approximately $180 million, including the assumption of debt. Ellen Tracy, a
privately held fashion apparel company, designs, wholesales and markets women's
sportswear. Based in New York City, Ellen Tracy sells its products at price
points which are somewhat higher than the Company's core better-priced
businesses, predominantly to select specialty stores and upscale department
stores. Brands include ELLEN TRACY, LINDA ALLARD ELLEN TRACY and COMPANY ELLEN
TRACY. Ellen Tracy achieved net sales of approximately $171 million in 2001.
Unaudited pro forma information related to this acquisition is not included, as
the impact of this transaction is not material to the consolidated results of
the Company.
20
THREE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
- ------------------------------------------------------------------------------
29, 2001
- --------
The following table sets forth our operating results for the three months ended
September 28, 2002 compared to the three months ended September 29, 2001:
Three months ended Variance
----------------------------- -------------------
Dollars in millions September 28, September 29, $ %
2002 2001
-------------- -------------- --------- ---------
Net Sales $ 1,041.2 $ 1,008.4 $ 32.8 3.3%
Gross Profit 457.6 423.3 34.3 8.1%
Selling, general and
administrative expenses 319.5 300.6 18.9 6.3%
Operating Income 138.1 122.7 15.4 12.6%
Other (expense) income-net (1.3) (0.4) (0.9) 225.0%
Interest (expense) income-net (6.3) (8.8) 2.5 -28.4%
Provision for income taxes 47.0 40.9 6.1 14.9%
Net Income 83.5 72.6 10.9 15.0%
Net Sales
- ---------
Net sales for the third quarter of 2002 were $1,041.2 million, an increase of
$32.8 million, or 3.3% over net sales for the third quarter of 2001. Net Sales
results for our business segments are provided below:
Wholesale Apparel net sales increased $4.7 million, or 0.6%, to $762.2 million.
- -----------------
o The increase was primarily due to the following:
- $17.5 million sales increase in our MEXX business resulting from sales
growth in Europe; and
- The inclusion of $2.3 million of sales of our recently acquired MEXX
Canada business (acquired in July 2002).
o Sales in our core Casual business were nearly flat, reflecting planned unit
decreases in light of anticipated conservative buying patterns of our
retailer customers.
o The sales increases were partially offset by a sales decline of $9.5
million in our Special Markets business, due primarily to the
discontinuation of our MEG ALLEN brand.
o The remainder of our Wholesale Apparel businesses in aggregate experienced
a net decrease of approximately $5.6 million, reflecting decreases in our
Career and LIZ CLAIBORNE WOMAN businesses, reflecting in part last year's
higher sales level as a result of an aggressive liquidation of excess
inventory in 2001, resulting in lower unit volume. These decreases were
partially offset by increases in our DKNY(R) Men's, LUCKY BRAND DUNGAREES
and KENNETH COLE NEW YORK Women's businesses, due in each case to higher
unit volume and higher average unit selling prices reflecting stronger
demand.
Wholesale Non-Apparel net sales increased $2.7 million, or 1.8%, to $153.7
- ----------------------
million.
o The increase was due to an aggregate increase of $11.6 million in our
Jewelry and Handbags businesses, due in each case to higher unit volume and
higher average unit selling prices reflecting stronger demand. There was
also a very small increase in our Fashion Accessories business.
o These increases were partially offset by a sales decrease of $9.8 million
in our Cosmetics business, resulting from lower promotional sales,
mitigated by the inclusion of sales of our BORA BORA fragrance (launched in
August 2002).
21
Retail net sales increased $11.1 million, or 6.7%, to $178.4 million.
- ------
o The increase reflected the following:
- A $13.4 million increase in sales of our MEXX stores, due to a net
addition of eight MEXX specialty retail stores, nine outlet stores and
19 concession stores on a period-to-period basis;
- The inclusion of $5.0 million of sales from our 35 recently acquired
MEXX Canada stores (acquired in July 2002); and
- The addition of 18 new LUCKY BRAND DUNGAREES specialty retail stores
on a period-to-period basis.
o The increases were partially offset by the following comparable store sales
decreases (inclusive of our international stores):
- Approximate 10% decline in our outlet stores, reflecting last year's
higher sales level due to aggressive liquidation of excess inventory
last year; and
- Approximate 8% decline in our specialty retail stores, due primarily
to a general decline in traffic reflecting the challenging retail
environment.
We ended the quarter with a total of 233 outlet stores, 230 specialty retail
stores and 464 international concession stores.
International net sales increased $32.3 million, or 19.5% (to $197.6 million),
- -------------
due principally to a $30.9 million increase in sales of our MEXX business and
the inclusion of $7.3 million of sales of our MEXX Canada business (acquired in
July 2002). Domestic net sales were virtually flat, increasing slightly by $0.5
--------
million, or 0.1%, to $843.6 million.
Gross Profit
- ------------
Gross profit dollars increased $34.3 million, or 8.1%, in the third quarter of
2002 over the third quarter of 2001. Gross profit as a percent of net sales
(referred to as "gross profit rate") increased to 44.0% in 2002 from 42.0% in
2001. The increasing gross profit rate reflected improved Company-wide inventory
management (including continued improvement in the matching of our production
orders with our customer orders through the use of new systems and revamped
business processes) and continued lower unit sourcing costs, as a result of the
continued consolidation and optimization of our worldwide supplier base, in
combination with current favorable market conditions as a result of ongoing
excess offshore sourcing capacity. The Company's gross profit rate also
benefited from a higher proportion of full-priced sales in our Casual, Handbags,
Jewelry, DKNY(R) Men's, MONET and KENNETH COLE NEW YORK Women's businesses, and
sales growth in our MEXX business, which runs at a higher gross margin rate than
the Company average, reflecting the large retail component. These increases were
partially offset by lower gross profit rates in our Cosmetics, Special Markets
and DKNY(R) Women's businesses.
SG&A
- ----
SG&A increased $18.9 million, or 6.3%, in the third quarter of 2002 over the
third quarter of 2001. These expenses as a percent of net sales (referred to as
"SG&A rate") increased to 30.7% in 2002 from 29.8% in 2001. The SG&A rate
increase primarily reflected increased expenses in our relatively higher-cost
Retail segment, due to the increased proportion of sales represented by such
segment, reflecting, among other things, the opening of new MEXX Retail and
LUCKY BRAND DUNGAREES Specialty Retail stores. Also contributing to the SG&A
rate increase were the lower proportion of sales derived from our relatively
lower-cost Career, Special Markets and LIZ CLAIBORNE WOMAN businesses and higher
SG&A costs and rates in our DKNY(R) Women's and Handbags businesses. The
increase in our SG&A expense was partially mitigated by ongoing Company-wide
expense management and cost reduction initiatives and reduced goodwill
amortization as a result of the implementation of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangibles" (see Note 8 of Notes to Condensed Consolidated Financial
Statements), as well as lower SG&A costs and rates in our Casual, LIZ CLAIBORNE
WOMAN, MONET, LAUNDRY and LUCKY BRAND DUNGAREES Wholesale businesses.
Operating Income
- ----------------
As a result of the factors described above, operating income for the third
quarter of 2002 was $138.1 million, an increase of $15.4 million, or 12.6%, over
last year. Operating income as a percent of net sales increased to 13.3% in 2002
compared to 12.2% in 2001. Operating income by business segment is provided
below:
o Wholesale Apparel operating profit increased $8.4 million to $109.3 million
-----------------
(14.3% of net sales) in 2002 compared to $100.9 million (13.3% of net
sales) in 2001, principally reflecting increased profits in our Casual,
DKNY(R) Men's, KENNETH COLE NEW YORK Women's, LUCKY BRAND DUNGAREES,
LAUNDRY and DANA BUCHMAN businesses, and the inclusion of the profits from
our recently acquired MEXX Canada business, partially offset by reduced
profits in our DKNY(R) Women's, Special Markets, and Career businesses.
22
o Wholesale Non-Apparel operating profit increased $1.5 to $20.6 million
----------------------
(13.4% of net sales) in 2002 compared to $19.1 million (12.6% of net sales)
in 2001, principally due to increases in our Handbags and Jewelry
businesses, partially offset by reduced profits in our Cosmetics business,
reflecting reduced sales during the quarter.
o Retail operating profit decreased $0.4 million to $17.6 million (9.9% of
------
net sales) in 2002 compared to $18.0 million (10.8% of net sales) in 2001,
principally reflecting the decrease in comparable store sales and higher
operating expenses in our Outlet stores and LUCKY BRAND DUNGAREES Specialty
Retail stores due to the additional store base, partially offset by an
increase in profits from our MEXX Retail stores and the inclusion of
profits from our recently acquired MEXX Canada Retail stores
o Domestic operating profit increased by $13.7 million, or 13.0%, to $119.0
--------
million, due to the improvements gross profit discussed above.
International operating profit increased $1.7 million, or 9.8% (to $19.1
-------------
million) due to the inclusion of profits from our recently acquired MEXX
Canada business.
Net Other Expense
- -----------------
Net other expense in the third quarter of 2002 was $1.3 million, principally
comprised of minority interest expense (which relates to the 15% minority
interest in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in
Segrets, Inc.) and, to a lesser extent, other non-operating expenses, compared
to $0.4 million in 2001, comprised of minority interest expense, partially
offset by other non-operating income.
Net Interest Expense
- --------------------
Net interest expense in the third quarter of 2002 was $6.3 million, which was
principally comprised of interest expense on the Eurobond offering incurred to
finance our acquisition of MEXX, compared to $8.8 million in 2001, representing
interest expense on the Eurobond offering and commercial paper borrowings
incurred to finance our strategic initiatives including costs associated with
our acquisitions and capital expenditures.
Provision for Income Taxes
- --------------------------
The provision for income taxes third quarter reflected the fact that our income
tax rate remained unchanged at 36.0%.
Net Income
- ----------
Net income increased in the third quarter of 2002 to $83.5 million, or 8.0% of
net sales, from $72.6 million in the third quarter of 2001, or 7.2% of net
sales, due to the factors described above. Diluted earnings per common share
increased 13.0% to $0.78 in 2002, up from $0.69 in 2001. Our average diluted
shares outstanding increased by 1.8 million shares in the third quarter of 2002
on a period-to-period basis, to 107.3 million, as a result of the exercise of
stock options and the effect of dilutive securities. Since the end of 2001, we
have not purchased any additional shares under our buyback program. As of
November 8, 2002, we have $218.3 million remaining in buyback authorization
under our share repurchase program.
23
NINE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
- --------------------------------------------------------------------------------
2001
- ----
The following table sets forth our operating results for the nine months ended
September 28, 2002 compared to the nine months ended September 29, 2001:
Nine months ended Variance
----------------------------- -------------------
Dollars in millions September 28, September 29, $ %
2002 2001
-------------- -------------- --------- ---------
Net Sales $ 2,723.6 $ 2,562.0 $ 161.6 6.3%
Gross Profit 1,176.4 1,054.4 122.0 11.6%
Selling, general and
administrative expenses 885.6 795.8 89.8 11.3%
Operating Income 290.8 258.6 32.2 12.5%
Other (expense) income-net (2.2) (2.7) 0.5 -18.5%
Interest (expense) income-net (18.0) (20.6) 2.6 -12.6%
Provision for income taxes 97.4 84.7 12.7 15.0%
Net Income 173.2 150.6 22.6 15.0%
Net Sales
- ---------
Net sales for the nine months of 2002 were $2.724 billion, an increase of $162
million, or 6.3%, over net sales for the nine months of 2001. Net sales results
for our business segments are provided below:
Wholesale Apparel net sales increased $59.1 million, or 3.0%, to $2.000 billion.
- -----------------
o The increase principally reflected the following sales increases:
- $133.2 million resulting from the inclusion of a full nine months of
sales of MEXX, which was acquired in May 2001; and
- The inclusion of $2.3 million of sales of our recently acquired MEXX
Canada business.
o These increases were partially offset by a $43.7 million decrease in our
core Casual business. Approximately 75% of this decrease reflected planned
unit decreases in light of anticipated conservative buying patterns of our
retailer customers in the first half of the year, and the remainder of the
decrease was due to last year's higher sales levels as a result of an
aggressive liquidation of excess inventory in 2001.
o The remainder of our Wholesale Apparel businesses, in aggregate,
experienced a net decrease of approximately $32.7 million, reflecting
decreases in our Career, LIZ CLAIBORNE WOMAN, DANA BUCHMAN and Men's
Sportswear and Furnishings businesses, reflecting overall planned unit
decreases in light of anticipated conservative buying patterns of our
retailer customers in the first half of the year, as well as last year's
aforementioned excess inventory liquidation. These decreases were partially
offset by sales increases in our Special Markets and SIGRID OLSEN
businesses, due in each case to higher unit volume partially offset by
lower average unit selling prices due to the inclusion of more lower-priced
items in the product offerings; and in our LUCKY BRAND DUNGAREES and
DKNY(R)Men's businesses, due in each case to higher unit volume and higher
average unit selling prices reflecting stronger demand.
Wholesale Non-Apparel increased $4.0 million, or 1.1%, to $365.2 million.
- ---------------------
o The increase reflected a total gain of $18.0 million in our Jewelry and
Handbags businesses, due in each case to higher unit volume.
o These increases were partially offset by the following decreases:
- $9.6 million in our Cosmetics business, due to lower promotional
sales, partially offset by year-over-year sales increases in our BORA
BORA (launched in August 2002) and MAMBO (launched in August 2001)
fragrances; and
24
- The remainder of the decrease was in our Fashion Accessories business,
resulting from lower average unit selling prices due to product mix.
Retail net sales increased $79.9 million, or 18.9%, to $501.8 million.
- ------
o This reflected the following:
- $69.6 million of sales increases in our MEXX stores, resulting from
the inclusion of a full nine months of sales (MEXX was acquired in May
2001);
- The inclusion of $5.0 million of sales from our 35 recently acquired
MEXX Canada stores (acquired in July 2002); and
- The addition of 18 new stores on a period-to-period basis in our LUCKY
BRAND DUNGAREES Specialty Retail stores.
o The above increases were partially offset by the following comparable store
sales decreases due to a general decline in traffic reflecting the
challenging retail environment:
- Approximate 5% decline in our Outlet stores; and
- Approximate 8% decline in our Specialty Retail stores.
International net sales increased $206.7 million, or 75.4% (to $480.7 million),
- -------------
due principally to a $202.8 million increase in sales of MEXX sales, reflecting
the inclusion of a full nine months of sales, and, to a lesser extent, the
inclusion of $7.3 million sales from our recently acquired MEXX Canada business.
Domestic net sales declined by $45.1 million, or 2.0% (to $2,242.9 million), due
- --------
principally to conservative planning in the domestic portion of our Wholesale
Apparel segment resulting in lower sales of excess inventory.
Gross Profit
- ------------
Gross profit dollars increased $122.0 million, or 11.6%, in the first nine
months of 2002 over the first nine months of 2001. Gross profit as a percent of
net sales increased to 43.2% in 2002 from 41.2% in 2001. The increase in gross
profit rate reflected improved company-wide inventory management (including
continued improvement in the matching of our production orders with our customer
orders through the use of new systems and revamped business processes), improved
product performance at retail and continued lower unit sourcing costs as a
result of the continued consolidation and optimization of our worldwide supplier
base, in combination with current favorable market conditions as a result of
ongoing excess offshore sourcing capacity. The Company also benefited from a
higher proportion of full-priced sales in our Jewelry, Handbags, Casual, Special
Markets, LUCKY BRAND DUNGAREES Wholesale, LAUNDRY and DKNY(R) Men's businesses,
as well as the inclusion of a full nine months of results of MEXX, which runs at
a higher gross margin rate than the Company average, reflecting the large retail
component. These increases were partially offset by lower gross margins in our
Specialty Retail stores, Cosmetics, Career, Fashion Accessories, CLAIBORNE
Men's, DKNY(R) Women's, LIZ CLAIBORNE WOMAN and DANA BUCHMAN businesses.
SG&A
- ----
SG&A increased $89.8 million, or 11.3%, in 2002 over 2001. These expenses as a
percent of net sales increased to 32.5% in 2002 from 31.1% in 2001. These SG&A
dollar and rate increases were principally due to the inclusion of a full nine
months of the results of MEXX, which has a relatively higher SG&A rate than the
Company average due to the fact that MEXX operates a geographically diverse and
relatively large retail business, which is generally more expensive to operate
than a wholesale business. The increase also reflected the lower proportion of
sales derived from our relatively lower-cost Casual, Career and LIZ CLAIBORNE
WOMAN businesses, as well as the opening of new LUCKY BRAND DUNGAREES Specialty
Retail and Outlet stores. We also incurred higher SG&A costs and rates in our
Handbags and DKNY(R) Women's businesses. The increase in SG&A expense was
partially mitigated by ongoing Company-wide expense management and cost
reduction initiatives and reduced goodwill amortization as a result of the
implementation of SFAS No. 142, "Accounting for Goodwill and Other Intangibles,"
as well as lower SG&A costs and rates in our Jewelry, CLAIBORNE Men's, Special
Markets, LAUNDRY, KENNETH COLE NEW YORK Women's and Fashion Accessories
businesses.
Operating Income
- ----------------
As a result of the factors described above, operating income increased $32.2
million, or 12.5%, to $290.8 million in the first nine months of 2002 over the
first nine months of 2001. Operating income as a percent of net sales increased
to 10.7% in 2002 compared to 10.1% in 2001. Operating income by business segment
is provided below:
o Wholesale Apparel operating profit increased $18.6 million to $246.7
------------------
million (12.3% of net sales) in 2002 compared to $228.1 million (11.8% of
net sales) in 2001, principally reflecting the inclusion of a full nine
months of profits from MEXX and increased profits in our Casual, Special
Markets, SIGRID OLSEN
25
businesses, partially offset by reduced profits in our DKNY(R) Women's,
CLAIBORNE Men's and Career businesses.
o Wholesale Non-Apparel operating profit increased $5.2 million to $32.2
----------------------
million (8.8% of net sales) in 2002 compared to $27.0 million (7.5% of net
sales) in 2001, principally due to increases in our JEWELRY business,
partially offset by reduced profit dollars in our Cosmetics business.
o Retail operating profit was nearly flat with a $0.1 million increase to
------
$40.3 million (8.0% of net sales) in 2002 compared to $40.2 million (9.5%
of net sales) in 2001, principally reflecting the inclusion of a full nine
months of profits from the MEXX Retail stores, partially offset by reduced
comparable store sales and increased operating expenses from the additional
store base in our Outlet stores and LUCKY BRAND DUNGAREES Specialty Stores.
o International operating profit increased $12.3 million, or 50.3% (to $36.8
-------------
million) due to the inclusion of profits from our recently acquired MEXX
and MEXX Canada businesses. Domestic operating profit increased by $19.9
--------
million, or 8.5%, to $254.0 million, due to the improvements gross profit
discussed above.
Net Other Expense
- -----------------
Net other expense in the first nine months of 2002 was $2.2 million, principally
comprised of minority interest expense (which relates to the 15% minority
interest in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in
Segrets, Inc.), partially offset by other non-operating income, compared to $2.7
million in 2001, comprised of minority interest, partially offset by other
non-operating income.
Net Interest Expense
- --------------------
Net interest expense in the first nine months of 2002 was $18.0 million,
principally comprised of interest expense on the Eurobond offering incurred to
finance our acquisition of MEXX, compared to $20.6 million in 2001, representing
interest expense on commercial paper borrowings incurred to finance our
strategic initiatives including costs associated with our acquisitions and
capital expenditures and the Eurobond offering.
Provision for Income Taxes
- --------------------------
For the nine months our income tax rate remained unchanged in 2002 from 2001 at
36.0%.
Net Income
- ----------
Net income increased in 2002 to $173.2 million from $150.6 million in 2001 and
increased as a percent of net sales to 6.4% in 2002 from 5.9% in 2001, due to
the factors described above. Diluted earnings per common share increased 13.3%
to $1.62 in 2002 from $1.43 in 2001. Our average diluted shares outstanding
increased by 2.0 million shares in the nine months of 2002 on a period-to-period
basis, to 107.0 million, as a result of the exercise of stock options and the
effect of dilutive securities.
FORWARD OUTLOOK
- ---------------
The economic and retail environments continue to be uncertain and challenging.
Accordingly, we are proceeding prudently and conservatively in planning our
business going forward. Looking forward, for the fourth quarter of 2002, we are
optimistic that we can achieve a sales increase of 7 - 9% and EPS in the range
of $0.57 - $0.58, resulting in a sales increase for fiscal 2002 of 6.5 - 7% and
EPS for fiscal 2002 in the range of $2.19 - $2.20. For fiscal 2003, current
visibility indicates that we forecast a sales increase of 9 - 11% and EPS in the
range of $2.47 - $2.52, including EPS accretion in fiscal 2003 of $0.05 - $0.07
resulting from the Ellen Tracy acquisition. The foregoing forward-looking
statements are qualified in their entirety by the reference to the risks and
uncertainties set forth under the heading "STATEMENT REGARDING FORWARD-LOOKING
DISCLOSURE" below.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
Our primary ongoing cash requirements are to fund growth in working capital
(primarily accounts receivable and inventory) to support projected increased
sales, investment in the technological upgrading of our distribution centers and
information systems and other expenditures related to retail store expansion,
in-store merchandise shops and normal maintenance activities. In 2002 and 2001,
we also required cash to fund our acquisition program. Sources of liquidity to
fund ongoing cash requirements include cash flows from operations, cash and cash
equivalents, securities on hand, commercial paper program and bank lines of
credit; in 2001, we issued Euro-denominated bonds (the "Eurobonds") to fund our
acquisition of MEXX.
We ended the third quarter of 2002 with $256.5 million in cash and marketable
securities, compared to $160.6 million and $54.1 million at December 29, 2001
and September 29, 2001, respectively, and with $454.1 million of
26
debt outstanding compared to $387.3 million and $631.8 million at December 29,
2001 and September 29, 2001, respectively. This $29.1 million and $380.1 million
improvement in our debt net of cash position over the last nine and twelve
months, respectively, is attributable to the accumulation of approximately $180
million to cover anticipated purchase price payments in connection with our
September 30, 2002 acquisition of ELLEN TRACY and the differences in working
capital due to the factors discussed below.
Accounts receivable decreased $80.5 million, or 12.8%, at the end of third
quarter 2002 compared to the end of third quarter 2001, due to improvements made
in our days' sales outstanding as well as the timing of shipments made during
the quarter. Accounts receivable increased $186.7 million, or 51.6%, at
September 28, 2002 compared to December 29, 2001 due to the timing of shipments.
Inventories decreased $69.7 million, or 12.8%, at the end of third quarter 2002
compared to the end of third quarter 2001, and decreased $11.6 million, or 2.4%
at September 28, 2002 compared to December 29, 2001. These decreases are a
result of conservative planning and improved processes and procedures
implemented during the second half of 2001 to help adjust the flow of
replenishment product and seasonal essential programs into our warehouses. Our
average inventory turnover rate increased to 4.5 times for the 12-month period
ended September 28, 2002 from 3.9 times for the 12-month period ended December
29, 2001 and 4.0 times for the 12-month period ended September 29, 2001. The
Company continues to take a conservative approach to inventory management
through 2002.
Borrowings under our commercial paper and revolving credit facilities peaked at
$114.9 million during the first nine months of 2002; at September 28, 2002, our
borrowings under the these facilities were $112.3 million.
Net cash provided by operating activities was $132.0 million in the first nine
months of 2002, compared to $64.6 million used in 2001. This $196.6 million
change in cash flow was primarily due to $128.4 million use of cash for working
capital in 2002 compared to $316.1 million in 2001, driven primarily by
year-over-year changes in the accounts receivable, accrued expense, accounts
payable and inventory balances, as well as the increase in net income of $22.6
million in the first nine months of 2002 from the first nine months of 2001.
Net cash used in investing activities was $99.2 million in the first nine months
of 2002, compared to $329.6 million in 2001. The 2002 net cash used primarily
reflected capital and in-store merchandise shop expenditures of $73.5 million
and $26.5 million for the purchase of MEXX Canada; 2001 net cash used primarily
reflected $249.1 million in connection with the acquisitions for our MEXX and
MONET businesses, along with capital and in-store merchandise shop expenditures
of $77.3 million.
Net cash provided by financing activities was $45.4 million in the first nine
months of 2002, compared to $377.0 million in 2001. The $331.6 million year over
year decrease primarily reflected the issuance of $319.8 million of additional
long-term debt in 2001 to finance the May 2001 acquisition of MEXX and a
decrease of $12.6 million in net proceeds from the exercise of stock options.
Our anticipated capital expenditures for 2002 approximate $80 - $85 million, of
which $73.5 million has been expended through September 28, 2002. These
expenditures consisted primarily of in-store merchandise shops, the continued
technological upgrading and expansion of our management information systems and
distribution facilities (including certain building and equipment expenditures)
and the opening of stores. Capital expenditures and working capital cash needs
will be financed with net cash provided by operating activities and our
revolving credit, trade letter of credit and other credit facilities.
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan had two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The proceeds of the Bridge Loan were primarily used to finance the Company's
acquisition of MEXX on May 23, 2001 (see Note 3 of Notes to Condensed
Consolidated Financial Statements).
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date) of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
Interest on the Eurobonds is being paid on an annual basis until maturity. These
27
bonds are designated as a hedge of our net investment in Mexx (see Note 3 of
Notes to Condensed Consolidated Financial Statements).
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
expiring $500 million 364-day unsecured credit facility. This bank facility
includes a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
were scheduled to mature in November 2002 and November 2003, respectively,
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services, and may be either drawn upon or used as a liquidity facility
to support the issuance of A2/P2 rated commercial paper. Repayment of
outstanding balances of the 364-day facility can be extended for one year after
the maturity date. The Agreement has two borrowing options, an "Alternative Base
Rate" option, as defined in the Agreement, and a Eurodollar rate option with a
spread based on the Company's long-term credit rating. The Agreement contains
certain customary covenants, including financial covenants requiring the Company
to maintain specified debt leverage and fixed charge coverage ratios, and
covenants restricting the Company's ability to, among other things, incur
indebtedness, grant liens, make investments and acquisitions, and sell assets.
The Company believes it is in compliance with such covenants. The Agreement may
be directly drawn upon or used to support the Company's $750 million commercial
paper program, which is used from time to time to fund working capital and other
general corporate requirements. The Company's ability to obtain funding through
its commercial paper program is subject to, among other things, the Company
maintaining an investment-grade credit rating. At September 28, 2002, the
Company had approximately $73.0 million of commercial paper outstanding, with a
weighted average interest rate of 2.0% and $39.3 million of borrowings
denominated in Euro at an interest rate of 3.9%. The carrying amount of the
Company's borrowings under the commercial paper program approximate fair value
because the interest rates are based on floating rates, which are determined by
prevailing market rates. The commercial paper is classified as long-term debt as
of September 28, 2002 as the Company intends to refinance such obligations on a
long-term basis and is able to do so.
On October 21, 2002, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the $500
million, 364-day unsecured credit facility scheduled to mature in November 2002,
and a $375 million, three-year bank revolving credit facility, replacing the
existing $250 million bank facility which was scheduled to mature in November
2003. The three-year facility includes a $75 million multi-currency revolving
credit line which permits the Company to borrow in U.S. dollars, Canadian
dollars and Euros. Repayment of outstanding balances of the 364-day facility can
be extended for one year after the maturity date. The Agreement has two
borrowing options, an "Alternative Base Rate" option, as defined in the
Agreement, and a Eurocurrency rate option with a spread based on the Company's
long-term credit rating. The Agreement contains certain customary covenants,
including financial covenants requiring the Company to maintain specified debt
leverage and fixed charge coverage ratios, and covenants restricting the
Company's ability to, among other things, incur indebtedness, grant liens, make
investments and acquisitions, and sell assets. The Company believes it is in
compliance with such covenants. The Agreement may be directly drawn upon, or
used, to support the Company's $750 million commercial paper program, which is
used from time to time to fund working capital and other general corporate
requirements. The Company's ability to obtain funding through its commercial
paper program is subject to, among other things, the Company maintaining an
investment-grade credit rating.
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "synthetic lease") to acquire various
land and equipment and construct buildings and real property improvements
associated with warehouse and distribution facilities in Ohio and Rhode Island.
Each facility has a lease term of five years, with renewal subject to the
consent of the lessor. The lessor under the operating lease arrangements is an
independent third-party limited partnership, which has contributed equity in
excess of 3.5% of the total value of the estimated aggregate cost to complete
these facilities. The cost to complete these facilities is expected to be
approximately $65 million. The leases include guarantees by the Company for a
substantial portion of the financing and options to purchase the facilities at
original cost; the maximum guarantee is approximately $54 million. The Company
selected this financing arrangement to take advantage of the favorable financing
rates such an arrangement afforded as opposed to the rates available under
alternative real estate financing options. The lessor financed the acquisition
of the facilities through funding provided by third-party financial
institutions. The lessor has no affiliation or relationship with the Company or
any of its employees, directors or affiliates, and the Company's transactions
with the lessor are limited to the operating lease agreements and the associated
rent expense that will be included in Selling, general & administrative expense
in the Condensed Consolidated Statements of Income.
As of September 28, 2002, the Company had lines of credit aggregating $448
million, which were primarily available to cover trade letters of credit. At
September 28, 2002, December 29, 2001 and September 29, 2001, the
28
Company had outstanding trade letters of credit of $267 million, $228 million
and $239 million, respectively. These letters of credit, which have terms
ranging from one to ten months, primarily collateralize the Company's
obligations to third parties for the purchase of inventory. The fair value of
these letters of credit approximates contract values.
At September 28, 2002, the Company had entered into various Euro currency
options with a net notional amount of $131.0 million with maturity dates from
December 2002 through December 2003 with downside protection in 2002 at 0.9106
U.S. dollar per Euro and in 2003 of between 0.9180 and 0.9825 U.S. dollar per
Euro. At September 28, 2002, the Company had forward contracts maturing through
May 2003 to sell 26.7 million Euros, forward contracts maturing through October
2002 to sell 2.0 million Canadian dollars and forward contracts maturing through
November 2002 to sell 0.5 million British pounds. The aggregate U.S. dollar
value of the foreign exchange forward contracts was approximately $27.0 million
at September 28, 2002, as compared with approximately $34.6 million at December
29, 2001 and $63.9 million at September 29, 2001. Unrealized gains and losses
for outstanding foreign exchange forward contracts and currency options were not
material at September 28, 2002, December 29, 2001 and September 29, 2001.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the nine months ended
September 28, 2002.
The Company may be required to make additional payments in connection with its
acquisitions (see Note 3 of Notes to Condensed Consolidated Financial
Statements).
We anticipate that cash flows from our operations, commercial paper program and
bank and letter of credit facilities will be sufficient to fund our future
liquidity requirements and that we will be able to adjust the amounts available
under these facilities if necessary. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of the Company's products, which may impact the
Company's financial performance, maintenance of the Company's investment grade
credit rating, as well as interest rate and exchange rate fluctuations.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, are presented in the Notes to Consolidated Financial
Statements in our 2001 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable - trade, net, inventories,
accrued expenses and derivative instruments. In applying such policies
management must use some amounts that are based upon its informed judgments and
best estimates. Because of the uncertainty inherent in these estimates, actual
results could differ from estimates used in applying the critical accounting
policies. The Company is not aware of any reasonably likely events or
circumstances, which would result in different amounts being reported that would
materially affect its financial condition or results of operations.
Revenue Recognition
- -------------------
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title passes. Wholesale revenue is net
of returns, discounts and allowances. Discounts and allowances are recognized
when the related revenues are recognized. Retail store revenues are recognized
at the time of sale. Retail revenues are net of returns.
29
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers, which
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Consolidated Balance Sheets, is net of allowances and anticipated
discounts. An allowance for doubtful accounts is determined through analysis of
the aging of accounts receivable at the date of the financial statements,
assessments of collectibility based on historic trends and an evaluation of the
impact of economic conditions. An allowance for discounts is based on those
discounts relating to open invoices where trade discounts have been extended to
customers. Costs associated with potential returns of unsaleable products as
well as allowable customer markdowns and operational charge backs, net of
historical recoveries, are included as a reduction to net sales and are part of
the provision for allowances included in Accounts Receivable - Trade, Net. These
provisions result from divisional seasonal negotiations as well as historic
deduction trends net of historic recoveries and the evaluation of current market
conditions.
Inventories
- -----------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons fashion
product. Market value of distressed inventory is valued based on historical
sales trends for this category of inventory of our individual product lines, the
impact of market trends and economic conditions, and the value of current orders
in house relating to the future sales of this type of inventory.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on statistical trends, open contractual
obligations, and estimates based on projections and current requirements.
Derivative Instruments and Foreign Currency Risk Management Programs
- --------------------------------------------------------------------
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss), depending on the timing and designated purpose of
the derivative. The impact on the Company's financial condition, results of
operations and cash flows, upon the adoption of these pronouncements, was
immaterial.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our European and Canadian entities and other specific
activities and the swapping of variable interest rate debt for fixed rate debt
in connection with the synthetic lease. These instruments are designated as cash
flow hedges and, in accordance with SFAS No. 133, effective changes in fair
value are included in Accumulated other comprehensive income (loss), net of
related tax effects, with the corresponding asset or liability recorded in the
balance sheet. The ineffective portion of the cash flow hedge, if any, is
recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
The Company hedges its net investment position in Euros. To accomplish this, the
Company borrows directly in foreign currency and designates a portion of foreign
currency debt as a hedge of net investments. Under SFAS No. 133, changes in the
fair value of these instruments are immediately recognized in foreign currency
translation adjustment, a component of Accumulated other comprehensive income
(loss), to offset the change in the value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet and other expected exposures. These derivative instruments do not qualify
as cash flow hedges under SFAS No. 133 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
30
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases,
and in oral statements made by, or with the approval of, authorized personnel
that relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations or
level of business for 2002, or any other future period, including those herein
under the heading "Future Outlook" or otherwise, are forward-looking statements
within the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Such statements, which are indicated by words or phrases such as
"intend," "anticipate," "plan," "anticipate," "estimate," "project," "management
expects," "the Company believes," "we are optimistic that we can," "current
visibility indicates that we forecast" or "currently envisions" and similar
phrases are based on current expectations only, and are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Included among the factors that could cause actual results to
materially differ are risks with respect to the following:
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
The apparel and related product markets are highly competitive, both within the
United States and abroad. The Company's ability to compete successfully within
the marketplace depends on a variety of factors, including:
o The current challenging retail and macroeconomic environment, including the
levels of consumer confidence and discretionary spending, and levels of
customer traffic within department stores, malls and other shopping and
selling environments;
o The Company's ability to effectively anticipate, gauge and respond to
changing consumer demands and tastes, across multiple product lines,
shopping channels and geographies;
o The Company's ability to translate market trends into appropriate, saleable
product offerings relatively far in advance, while minimizing excess
inventory positions, including the Company's ability to correctly balance
the level of its fabric and/or merchandise commitments with actual customer
orders;
o Consumer and customer demand for, and acceptance and support of, Company
products (especially by the Company's largest customers) which are in turn
dependent, among other things, on product design, quality, value and
service;
o The ability of the Company, especially through its sourcing, logistics and
technology functions, to operate within substantial production and delivery
constraints, including risks associated with the possible failure of the
Company's unaffiliated manufacturers to manufacture and deliver products in
a timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices or applicable laws or regulations;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o Risks associated with the Company's dependence on sales to a limited number
of large department store customers, including risks related to customer
requirements for vendor margin support, and those related to extending
credit to customers, risks relating to retailers' buying patterns and
purchase commitments for apparel products in general and the Company's
products specifically;
o The Company's ability to respond to the strategic and operational
initiatives of its largest customers, as well as to the introduction of new
products or pricing changes by its competitors; and
o The Company's ability to obtain sufficient retail floor space and to
effectively present products at retail.
Economic, Social and Political Factors
- -----------------------------------------
Also impacting the Company and its operations are a variety of economic, social
and political factors, including the following:
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where the Company sells or sources its products, including
the levels of consumer confidence and discretionary spending, consumer
income growth, personal debt levels, rising energy costs and energy
shortages, and fluctuations in foreign currency exchange rates, interest
rates and stock market volatility;
o Changes in social, political, legal and other conditions affecting foreign
operations;
o Risks of increased sourcing costs, including costs for materials and labor;
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees;
o Work stoppages by any Company suppliers or service providers, such as, for
example, the recent West Coast port workers lock-out;
31
o The enactment of new legislation or the administration of current
international trade regulations, or executive action affecting
international textile agreements, including the United States' reevaluation
of the trading status of certain countries, and/or retaliatory duties,
quotas or other trade sanctions, which, if enacted, would increase the cost
of products purchased from suppliers in such countries; and
o Risks related to the Company's ability to establish, defend and protect its
trademarks and other proprietary rights and other risks relating to
managing intellectual property issues.
Risks Associated with Acquisitions and the Entry into New Markets
- -----------------------------------------------------------------
The Company, as part of its growth strategy, reviews from time to time its
possible entry into new markets, either through acquisitions, internal
development activities, or licensing. The entry into new markets (including the
development and launch of new product categories and product lines), is
accompanied by a variety of risks inherent in any such new business venture,
including the following:
o Risks that the new market activities may require methods of operations and
marketing and financial strategies different from those employed in the
Company's other businesses;
o Certain new businesses may be lower margin businesses and may require the
Company to achieve significant cost efficiencies. In addition, new markets,
product categories, product lines and businesses may involve buyers, store
customers and/or competitors different from the Company's historical
buyers, customers and competitors;
o Possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of an acquired business;
o Risks that projected or satisfactory level of sales, profits and/or return
on investment for an acquired business will not be generated;
o Risks involving the Company's ability to retain and appropriately motivate
key personnel of the acquired business;
o Risks that expenditures required for capital items or working capital will
be higher than anticipated;
o Risks associated with unanticipated events and unknown or uncertain
liabilities;
o Uncertainties relating to the Company's ability to successfully integrate
an acquisition, maintain product licenses, or successfully launch new
products and lines; and
o With respect to businesses where the Company acts as licensee, the risks
inherent in such transactions, including compliance with terms set forth in
the applicable license agreements, including among other things the
maintenance of certain levels of sales, and the public perception and/or
acceptance of the licensor's brands or other product lines, which are not
within the Company's control.
Reference is also made to the other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices as are set forth in our 2001 Annual Report on Form 10-K,
including, without limitation, those set forth under the heading
"Business-Competition; Certain Risks."
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which may adversely affect its financial position,
results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through the use of fixed rate financial instruments and, when
deemed appropriate, through the use of interest rate derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes. However, the Company, from time to time, may use interest
rate derivative financial instruments to help manage its exposure to interest
rate movements and reduce borrowing costs. Our objective for holding interest
rate derivative instruments is to decrease the volatility of earnings and cash
flow associated with fluctuation in these rates.
We finance our capital needs through available cash and marketable securities,
operating cash flow, letter of credit, commercial paper issuances, synthetic
lease and bank revolving credit facilities and other credit facilities. Our
commercial paper program, floating rate bank revolving credit facility and bank
lines expose us to market risk for changes in interest rates. We believe that
our Eurobond offering and the interest rate swap agreements, which are fixed
rate obligations, partially mitigate the risks with respect to variable interest
rates given that, as a general matter,
32
fixed rate debt reduces the risk of potentially higher variable rates. We
anticipate using interest rate hedging instruments to further mitigate such
risks during 2002.
The acquisition of MEXX, which transacts business in foreign currencies, has
increased the Company's exposure to exchange rate fluctuations. We mitigate the
risks associated with changes in foreign currency rates through foreign exchange
forward contracts and average rate foreign currency options to hedge
transactions denominated in foreign currencies for periods of generally less
than one year and to hedge expected payment of transactions with our non-U.S.
subsidiaries, which now include MEXX. Gains and losses on any ineffective
portion of these contracts, which hedge specific foreign currency denominated
commitments, are recognized in the period in which the transaction affects
earnings.
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of the principal European countries
(other than the United Kingdom) in which the Company conducts business and
manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. Under the regulations
governing the transition to a single currency, there is a "no compulsion, no
prohibition" rule, which states that no one can be prevented from using the Euro
after January 1, 2002 and no one is obliged to use the Euro before July 2002. In
keeping with this rule, the Company is currently using the Euro for invoicing
and payments. The transition to the Euro did not have a material adverse effect
on the business or consolidated financial condition of the Company.
At September 28, 2002, the Company had $112 million of long-term floating rate
debt, representing 25% of our total long-term debt outstanding as of such date.
Our average variable rate borrowing for the nine months ended September 28, 2002
was $41 million, with an average interest rate of 2.60%. If the nine months'
average rate increased or decreased by 10%, our interest expense would have
changed by $0.1 million; accordingly, we do not believe that our exposure to
interest rate changes is material.
Reference is also made to our 2001 Annual Report on Form 10-K, under the heading
"Certain Interest Rate and Foreign Currency Risks."
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on Issue No. 01-9 (formerly EITF
Issue 00-25), "Accounting for Consideration Given to a Customer or a Reseller of
the Vendor's Products." This issue addresses the recognition, measurement and
income statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus only impacted revenue and expense classifications and did not
change reported net income. In accordance with the consensus reached, the
Company adopted the required accounting beginning December 30, 2001, the first
day of fiscal year 2002, and the impact of this required accounting does not
have a material impact on the revenue and expense classifications in the
Company's Condensed Consolidated Statements of Income.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of SFAS No. 144
effective December 30, 2001, and the adoption did not have a significant effect
on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company will adopt the provisions of SFAS No. 145
33
upon its effective date and does not expect it to have a material effect on
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of SFAS No. 146 on its results of operations or financial
position.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures as provided in Rule 13a-14 under the Securities Exchange Act of 1934,
as amended. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. There have
been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position. Please refer to Note 9 and Note 23 of Notes to Consolidated Financial
Statement in our 2001 Annual Report on Form 10-K.
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationship with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws (the "FLSA Action").
The Company sources products in Saipan but was not named as a defendant in the
actions. The Company and certain other apparel companies not named as defendants
were advised in writing, however, that they would be added as parties if a
consensual resolution of the complaint claims could not be reached. In the wake
of that notice, which was accompanied by a draft complaint, the Company entered
into settlement negotiations and subsequently entered into an agreement to
settle all claims that were or could have been asserted in the Federal or State
Court
34
Actions. To date, eighteen other apparel companies have also settled these
claims. As part of the settlement, the Company has since been named as a
defendant, along with certain other settling apparel companies, in a Federal
Court action styled Doe I, et al. v. Brylane, L.P. et al. (the "Brylane
Action"), initially brought in the United States District Court for the District
of Hawaii, that mirror portions of the larger State and Federal Actions but does
not include RICO and certain of the other claims alleged in those Actions. The
action filed against the Company will remain inactive unless the settlement is
not finally approved by the Federal Court. The agreements concluded by the
Company and other retailers are subject to federal court approval, which has
been delayed by virtue of the Hawaii District Court's June 23, 2000 decision to
transfer the Federal Action to Saipan. Plaintiffs petitioned the Ninth Circuit
Court of Appeals for the Writ of Mandamus reversing that ruling. On March 22,
2001, the Court of Appeals denied Plaintiff's petition, and the Federal Action
and the Brylane Action have been transferred to Saipan. The court in Saipan held
a hearing on February 14, 2002 on Plaintiffs' motions to certify the proposed
class and to preliminarily approve the settlement. On May 10, 2002, the court
issued an opinion and order granting preliminary approval of the settlement and
of similar settlements with certain other retailers and also certifying the
proposed class. The Ninth Circuit Court of Appeals subsequently denied the
non-settling defendants' petition for interlocutory review of the grant of class
certification. At the end of September 2002, plaintiffs and all of the factory
and retailer non-settling defendants other than Levi Strauss & Co. reached
agreement to settle the Federal Action, the State Court Action and the FLSA
action. At a hearing held on October 31, 2002, the Court granted conditional
preliminary approval of the September 2002 settlement and scheduled a Fairness
Hearing to be held on March 20, 2003, to determine whether to grant final
approval to the prior settlement agreements and the September 2002 settlement.
Under the terms of the Company's settlement agreement, if the settlement does
not receive final federal court approval, the Company will be entitled to a
refund of the entire settlement amount except for funds of up to $10,000 spent
on costs of notice. Because the litigation is at a preliminary stage, with
virtually no merits discovery having taken place, if the settlement is not
executed or is not finally approved by the federal court, we cannot at this
juncture determine the likelihood of a favorable or unfavorable outcome or the
magnitude of the latter if it were to occur. Although the outcome of any such
litigation cannot be determined with certainty, management is of the opinion
that the final outcome should not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 5. OTHER INFORMATION
During the quarterly period covered by this filing, the Audit Committee of the
Company's Board of Directors approved the engagement of the Company's external
auditors to perform certain non-audit services to assist management in its
compliance with certain regulatory and compliance matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(z)(i)* Three Year Revolving Credit Agreement, dated as of October
21, 2002, among Registrant, various lending parties and
JPMorgan Chase Bank (as administrative agent).
10(z)(ii)*364-Day Revolving Credit Agreement, dated as of October 21,
2002, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent).
99.1* Certification of Chief Executive Officer Pursuant to Section
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer Pursuant to Section
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K dated September 30, 2002 was filed with
the SEC on October 1, 2002 by the Company relating to the acquisition
of Ellen Tracy Inc. and subsidiaries.
* Filed herewith.
35
SIGNATURES
- ----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DATE: November 12, 2002
LIZ CLAIBORNE, INC. LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
----------------------------- -------------------------------------
MICHAEL SCARPA ELAINE H. GOODELL
Senior Vice President - Vice President - Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(Principal financial officer) (Principal accounting officer)
36
LIZ CLAIBORNE, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Paul R. Charron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Paul R. Charron
- ---------------------------
Paul R. Charron
Chairman of the Board and Chief Executive Officer
37
CERTIFICATION
I, Michael Scarpa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Michael Scarpa
- ---------------------------
Michael Scarpa
Senior Vice President, Chief Financial Officer